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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-37680
ELEVATE CREDIT, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 46-4714474 | |||||||
|
State or Other Jurisdiction of
Incorporation or Organization |
I.R.S. Employer Identification Number | |||||||
| 4150 International Plaza, | Suite 300 | |||||||||||||||||||
| Fort Worth, | TX | 76109 | ||||||||||||||||||
| Address of Principal Executive Offices | Zip Code | |||||||||||||||||||
| (817) | 928-1500 | |||||||||||||||||||
|
Registrant’s Telephone Number, Including Area Code
|
||||||||||||||||||||
| Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report | ||||||||||||||||||||
Securities registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Shares, $0.0004 par value | ELVT | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes | ☒ | No | ☐ | ||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
| Yes | ☒ | No | ☐ | ||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Non-accelerated filer | ☒ | ||||||||
| Accelerated filer | ☐ | Smaller reporting company | ☒ | ||||||||
| Emerging growth company | ☒ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class |
Outstanding at November 3, 2021
|
|||||||
| Common Shares, $0.0004 par value | 32,569,391 | |||||||
TABLE OF CONTENTS
| Part I - Financial Information | |||||||||||
| Item 1. | Financial Statements | ||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Part II - Other Information | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 6. | |||||||||||
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained throughout this Quarterly Report on Form 10-Q, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and "Risk Factors." Forward-looking statements include information concerning our strategy, future operations, future financial position, future revenues, projected expenses, margins, prospects and plans and objectives of management. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “seek,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
•our future financial performance, including our expectations regarding our revenue, cost of revenue, growth rate of revenue, cost of borrowing, credit losses, marketing costs, net charge-offs, gross profit or gross margin, operating expenses, operating margins, loans outstanding, credit quality, ability to generate cash flow and ability to achieve and maintain future profitability;
•the effects of the outbreak and continuation of the novel coronavirus ("COVID-19") on demand for our products, our business, our financial condition and results of operations, including as a result of the expansion of our payment flexibility program to provide temporary relief to certain customers, underwriting changes we and the bank originators we support are implementing to address credit risk associated with originations during the economic crisis created by the COVID-19 pandemic, and new legislation or other governmental responses to the pandemic;
•the availability of debt financing, funding sources and disruptions in credit markets;
•our ability to meet anticipated cash operating expenses and capital expenditure requirements, including our plans with respect to assessing minimum cash and liquidity requirements and implementing measures to ensure that our cash and liquidity position is maintained through the current economic cycle;
•anticipated trends, growth rates, seasonal fluctuations and challenges in our business and in the markets in which we operate;
•our ability to anticipate market needs and develop new and enhanced or differentiated products, services and mobile apps to meet those needs, and our ability to successfully monetize them;
•our expectations with respect to trends in our average portfolio effective annual percentage rate;
•our anticipated growth and growth strategies and our ability to effectively manage that growth;
•our anticipated expansion of relationships with strategic partners, including banks;
•customer demand for our product and our ability to respond to fluctuations in demand;
•our ability to attract potential customers and retain existing customers and our cost of customer acquisition;
•the ability of customers to repay loans;
•interest rates and origination fees on loans;
•the impact of competition in our industry and innovation by our competitors;
•our ability to attract and retain necessary qualified directors, officers and employees to expand our operations;
•our reliance on third-party service providers;
•our access to the automated clearing house system;
•the efficacy of our marketing efforts and relationships with marketing affiliates;
•our anticipated direct marketing costs and spending;
•the evolution of technology affecting our products, services and markets;
•continued innovation of our analytics platform, including releases of new credit models;
•our ability to prevent security breaches, disruption in service and comparable events that could compromise the personal and confidential information held in our data systems, reduce the attractiveness of the platform or adversely impact our ability to service loans;
4
•our ability to detect and filter fraudulent or incorrect information provided to us by our customers or by third parties;
•our ability to adequately protect our intellectual property;
•our compliance with applicable local, state, federal and foreign laws;
•our compliance with, and the effects on our business and results of operations from, current or future applicable regulatory developments and regulations, including developments or changes from the Consumer Financial Protection Bureau ("CFPB") and developments or changes in state law;
•regulatory developments or scrutiny by agencies regulating our business or the businesses of our third-party partners;
•public perception of our business and industry;
•the anticipated effect on our business of litigation or regulatory proceedings to which we or our officers are a party;
•the anticipated effect on our business of natural or man-made catastrophes;
•the increased expenses and administrative workload associated with being a public company;
•failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;
•our liquidity and working capital requirements;
•the estimates and estimate methodologies used in preparing our consolidated financial statements;
•the utility of non-GAAP financial measures;
•the future trading prices of our common stock and the impact of securities analysts’ reports on these prices;
•our anticipated development and release of certain products and applications and changes to certain products;
•our anticipated investing activity;
•trends anticipated to continue as our portfolio of loans matures; and
•any future repurchases under our share repurchase program, including the timing and amount of repurchases thereunder.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q, and in "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
5
|
Elevate Credit, Inc. and Subsidiaries
|
||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
| (Dollars in thousands except share amounts) |
September 30,
2021 |
December 31,
2020 |
||||||||||||
|
|
(unaudited) | |||||||||||||
|
ASSETS
|
||||||||||||||
|
Cash and cash equivalents*
|
$ | 79,979 | $ | 197,983 | ||||||||||
|
Restricted cash*
|
4,962 | 3,135 | ||||||||||||
|
Loans receivable, net of allowance for loan losses of $56,209 and $48,399, respectively*
|
479,621 | 374,832 | ||||||||||||
|
Prepaid expenses and other assets*
|
13,342 | 10,060 | ||||||||||||
|
Operating lease right of use assets
|
6,234 | 8,320 | ||||||||||||
|
Receivable from CSO lenders
|
— | 1,255 | ||||||||||||
|
Receivable from payment processors*
|
8,265 | 6,147 | ||||||||||||
|
Deferred tax assets, net
|
24,615 | 25,958 | ||||||||||||
|
Property and equipment, net
|
31,857 | 34,000 | ||||||||||||
|
Goodwill, net
|
6,776 | 6,776 | ||||||||||||
|
Intangible assets, net
|
231 | 1,133 | ||||||||||||
|
Total assets
|
$ | 655,882 | $ | 669,599 | ||||||||||
|
|
||||||||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||||||
|
Accounts payable and accrued liabilities (See Note 13)*
|
$ | 64,543 | $ | 52,252 | ||||||||||
|
Operating lease liabilities
|
9,909 | 11,952 | ||||||||||||
|
Other taxes payable
|
382 | — | ||||||||||||
|
Deferred revenue*
|
2,914 | 3,134 | ||||||||||||
|
Notes payable, net (See Note 5)*
|
435,818 | 438,403 | ||||||||||||
|
Total liabilities
|
513,566 | 505,741 | ||||||||||||
|
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 11)
|
||||||||||||||
|
STOCKHOLDERS’ EQUITY
|
||||||||||||||
|
Preferred stock; $0.0004 par value; 24,500,000 authorized shares; none issued and outstanding at September 30, 2021 and December 31, 2020.
|
— | — | ||||||||||||
|
Common stock; $0.0004 par value; 300,000,000 authorized shares; 44,960,438 and 44,960,438 issued; 32,548,437 and 37,954,138 outstanding, respectively
|
18 | 18 | ||||||||||||
|
Additional paid-in capital
|
204,197 | 200,433 | ||||||||||||
|
Treasury stock; at cost; 12,412,001 and 7,006,300 shares of common stock, respectively
|
(39,096) | (16,492) | ||||||||||||
|
Accumulated deficit
|
(22,803) | (20,101) | ||||||||||||
|
Total stockholders’ equity
|
142,316 | 163,858 | ||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 655,882 | $ | 669,599 | ||||||||||
* These balances include certain assets and liabilities of variable interest entities (“VIEs”) that can only be used to settle the liabilities of that respective VIE. All assets of the Company are pledged as security for the Company’s outstanding debt, including debt held by the VIEs. For further information regarding the assets and liabilities included in the Company's consolidated accounts, see Note 4—Variable Interest Entities.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
|
Elevate Credit, Inc. and Subsidiaries
|
||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands, except share and per share amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Revenues
|
$ | 112,835 | $ | 94,164 | $ | 287,108 | $ | 374,622 | ||||||||||||||||||
|
Cost of sales:
|
||||||||||||||||||||||||||
|
Provision for loan losses
|
54,903 | 13,164 | 103,098 | 133,216 | ||||||||||||||||||||||
|
Direct marketing costs
|
15,406 | 2,585 | 30,353 | 13,898 | ||||||||||||||||||||||
|
Other cost of sales
|
4,766 | 1,672 | 9,718 | 5,949 | ||||||||||||||||||||||
|
Total cost of sales
|
75,075 | 17,421 | 143,169 | 153,063 | ||||||||||||||||||||||
|
Gross profit
|
37,760 | 76,743 | 143,939 | 221,559 | ||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||
|
Compensation and benefits
|
20,445 | 23,921 | 58,038 | 64,239 | ||||||||||||||||||||||
|
Professional services
|
8,423 | 8,236 | 24,161 | 24,633 | ||||||||||||||||||||||
|
Selling and marketing
|
1,277 | 610 | 2,520 | 2,468 | ||||||||||||||||||||||
|
Occupancy and equipment
|
5,521 | 4,717 | 15,766 | 14,196 | ||||||||||||||||||||||
|
Depreciation and amortization
|
4,544 | 4,588 | 14,339 | 13,413 | ||||||||||||||||||||||
|
Other
|
656 | 590 | 2,242 | 2,568 | ||||||||||||||||||||||
|
Total operating expenses
|
40,866 | 42,662 | 117,066 | 121,517 | ||||||||||||||||||||||
|
Operating income (loss)
|
(3,106) | 34,081 | 26,873 | 100,042 | ||||||||||||||||||||||
|
Other expense:
|
||||||||||||||||||||||||||
|
Net interest expense (See Note 13)
|
(9,544) | (11,575) | (26,897) | (37,408) | ||||||||||||||||||||||
|
Non-operating income (loss)
|
(198) | (1,007) | 519 | (6,692) | ||||||||||||||||||||||
|
Total other expense
|
(9,742) | (12,582) | (26,378) | (44,100) | ||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes
|
(12,848) | 21,499 | 495 | 55,942 | ||||||||||||||||||||||
|
Income tax expense (benefit)
|
(1,843) | 4,883 | 1,829 | 15,311 | ||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
(11,005) | 16,616 | (1,334) | 40,631 | ||||||||||||||||||||||
|
Net income (loss) from discontinued operations
|
— | 4,465 | — | (15,908) | ||||||||||||||||||||||
|
Net income (loss)
|
$ | (11,005) | $ | 21,081 | $ | (1,334) | $ | 24,723 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Basic earnings per share
|
||||||||||||||||||||||||||
|
Continuing operations
|
$ | (0.33) | $ | 0.41 | $ | (0.04) | $ | 0.97 | ||||||||||||||||||
|
Discontinued operations
|
— | 0.11 | — | (0.38) | ||||||||||||||||||||||
|
Basic earnings (loss) per share
|
$ | (0.33) | $ | 0.52 | $ | (0.04) | $ | 0.59 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Diluted earnings per share
|
||||||||||||||||||||||||||
|
Continuing operations
|
$ | (0.33) | $ | 0.41 | $ | (0.04) | $ | 0.95 | ||||||||||||||||||
|
Discontinued operations
|
— | 0.11 | — | (0.37) | ||||||||||||||||||||||
|
Diluted earnings (loss) per share
|
$ | (0.33) | $ | 0.52 | $ | (0.04) | $ | 0.58 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Basic weighted average shares outstanding
|
33,786,968 | 40,230,256 | 34,841,624 | 41,856,894 | ||||||||||||||||||||||
|
Diluted weighted average shares outstanding
|
33,786,968 | 40,762,330 | 34,841,624 | 42,624,808 | ||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
|
Elevate Credit, Inc. and Subsidiaries
|
||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| (Dollars in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
|
Net income (loss)
|
$ | (11,005) | $ | 21,081 | $ | (1,334) | $ | 24,723 | ||||||||||||||||||
|
Other comprehensive income (loss), net of tax:
|
||||||||||||||||||||||||||
|
Foreign currency translation adjustment, net of tax of $0 for both the three months ended 2021 and 2020, and $0 and $(14) for the nine months ended 2021 and 2020, respectively
|
— | — | — | (2,061) | ||||||||||||||||||||||
|
Reclassification of Cumulative translation adjustment to Net loss from discontinued operations
|
— | — | — | 2,334 | ||||||||||||||||||||||
|
Reversal of Deferred tax asset associated with Cumulative translation adjustment
|
— | — | — | (1,369) | ||||||||||||||||||||||
|
Total other comprehensive income (loss), net of tax
|
— | — | — | (1,096) | ||||||||||||||||||||||
|
Total comprehensive income (loss)
|
$ | (11,005) | $ | 21,081 | $ | (1,334) | $ | 23,627 | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
|
Elevate Credit, Inc. and Subsidiaries
|
||
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
For the periods ended September 30, 2021 and 2020
| (Dollars in thousands except share amounts) | Preferred Stock |
Common Stock
|
Additional
paid-in capital |
Treasury Stock |
Accumulated
deficit |
Accumulated
other comprehensive income (loss) |
Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Balances at December 31, 2019
|
— | — | 43,676,826 | $ | 18 | $ | 193,061 | 768,910 | $ | (3,344) | $ | (34,342) | $ | 1,096 | $ | 156,489 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Share-based compensation -US
|
— | — | — | — | 2,748 | — | — | — | — | 2,748 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Share-based compensation -UK
|
— | — | — | — | 27 | — | — | — | — | 27 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Exercise of stock options, net
|
— | — | 34,185 | — | (51) | — | — | — | — | (51) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Vesting of restricted stock units, net
|
— | — | 28,913 | — | (314) | — | — | — | — | (314) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive loss:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment net of tax of $(14)
|
— | — | — | — | — | — | — | — | (2,003) | (2,003) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock acquired
|
— | — | (928,386) | — | — | 928,386 | (4,203) | — | — | (4,203) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock reissued for RSUs vesting
|
— | — | 188,961 | — | — | (188,961) | 830 | (830) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income from continuing operations
|
— | — | — | — | — | — | — | 7,922 | — | 7,922 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net loss from discontinued operations
|
— | — | — | — | — | — | — | (12,833) | — | (12,833) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Balances at March 31, 2020
|
— | — | 43,000,499 | $ | 18 | $ | 195,471 | 1,508,335 | $ | (6,717) | $ | (40,083) | $ | (907) | $ | 147,782 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Share-based compensation -US
|
— | — | — | — | 2,599 | — | — | — | — | 2,599 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Share-based compensation -UK
|
— | — | — | — | 18 | — | — | — | — | 18 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Vesting of restricted stock units, net
|
— | — | 171,020 | — | (253) | — | — | — | — | (253) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
ESPP shares issued
|
— | — | 280,584 | — | 353 | — | — | — | — | 353 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive loss:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment net of tax of $1,369
|
— | — | — | — | — | — | — | — | 907 | 907 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock acquired
|
— | — | (2,041,193) | — | — | 2,041,193 | (3,827) | — | — | (3,827) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock reissued for RSUs vesting
|
— | — | 596,257 | — | — | (596,257) | 2,589 | (2,589) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income from continuing operations
|
— | — | — | — | — | — | — | 16,093 | — | 16,093 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net loss from discontinued operations
|
— | — | — | — | — | — | — | (7,540) | — | (7,540) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Balances at June 30, 2020
|
|
— | — | 42,007,167 | $ | 18 | $ | 198,188 | 2,953,271 | $ | (7,955) | $ | (34,119) | $ | — | $ | 156,132 | |||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
|
Elevate Credit, Inc. and Subsidiaries
|
||
| (Dollars in thousands except share amounts) | Preferred Stock |
Common Stock
|
Additional
paid-in capital |
Treasury Stock |
Accumulated
deficit |
Accumulated
other comprehensive income (loss) |
Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Balances at June 30, 2020
|
— | — | 42,007,167 | $ | 18 | $ | 198,188 | 2,953,271 | $ | (7,955) | $ | (34,119) | $ | — | $ | 156,132 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Share-based compensation -US
|
— | — | — | — | 1,166 | — | — | — | — | 1,166 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Vesting of restricted stock units, net
|
— | — | — | — | (160) | — | — | — | — | (160) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive loss:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock acquired
|
— | — | (3,122,680) | — | — | 3,122,680 | (6,709) | — | — | (6,709) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock reissued for RSUs vesting
|
— | — | 198,407 | — | — | (198,407) | 889 | (889) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income from continuing operations
|
— | — | — | — | — | — | — | 16,616 | — | 16,616 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income from discontinued operations
|
— | — | — | — | — | — | — | 4,465 | — | 4,465 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Balances at September 30, 2020
|
— | — | 39,082,894 | $ | 18 | $ | 199,194 | 5,877,544 | $ | (13,775) | $ | (13,927) | $ | — | $ | 171,510 | ||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
|
Elevate Credit, Inc. and Subsidiaries
|
||
| (Dollars in thousands except share amounts) | Preferred Stock |
Common Stock
|
Additional
paid-in capital |
Treasury Stock |
Accumulated
deficit |
Accumulated
other comprehensive income (loss) |
Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Balances at December 31, 2020
|
— | — | 37,954,138 | $ | 18 | $ | 200,433 | 7,006,300 | $ | (16,492) | $ | (20,101) | $ | — | $ | 163,858 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Share-based compensation -US
|
— | — | — | — | 1,602 | — | — | — | — | 1,602 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock acquired
|
— | — | (2,480,741) | — | — | 2,480,741 | (10,813) | — | — | (10,813) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock reissued for RSUs vesting
|
— | — | 169,091 | — | (417) | (169,091) | 621 | (621) | — | (417) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock reissued for stock option exercise
|
— | — | 12,500 | — | — | (12,500) | 73 | (46) | — | 27 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income from continuing operations
|
— | — | — | — | — | — | — | 12,716 | — | 12,716 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Balances at March 31, 2021
|
— | — | 35,654,988 | $ | 18 | $ | 201,618 | 9,305,450 | $ | (26,611) | $ | (8,052) | $ | — | $ | 166,973 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Share-based compensation -US
|
— | — | — | — | 1,787 | — | — | — | — | 1,787 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock acquired
|
— | — | (2,339,085) | — | — | 2,339,085 | (7,954) | — | — | (7,954) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock reissued for RSUs vesting
|
— | — | 532,365 | — | (562) | (532,365) | 687 | (687) | — | (562) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock reissued for ESPP purchases
|
— | — | 149,613 | — | 207 | (149,613) | 246 | — | — | 453 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net loss from continuing operations
|
— | — | — | — | — | — | — | (3,045) | — | (3,045) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2021 |
|
— | — | 33,997,881 | $ | 18 | $ | 203,050 | 10,962,557 | $ | (33,632) | $ | (11,784) | $ | — | $ | 157,652 | |||||||||||||||||||||||||||||||||||||||||||||
|
Share-based compensation -US
|
— | — | — | — | 1,559 | — | — | — | — | 1,559 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock acquired
|
— | — | (1,566,474) | — | — | 1,566,474 | (5,686) | — | — | (5,686) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Treasury stock reissued for RSUs vesting
|
— | — | 117,030 | — | (412) | (117,030) | 222 | (14) | — | (204) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net loss from continuing operations
|
— | — | — | — | — | — | — | (11,005) | — | (11,005) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2021 |
|
— | — | 32,548,437 | $ | 18 | $ | 204,197 | 12,412,001 | $ | (39,096) | $ | (22,803) | $ | — | $ | 142,316 | |||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
11
|
Elevate Credit, Inc. and Subsidiaries
|
||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| (Dollars in thousands) | Nine Months Ended September 30, | ||||||||||
| 2021 | 2020 | ||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|||||||||||
|
Net income (loss)
|
$ | (1,334) | $ | 24,723 | |||||||
|
Less: Net loss from discontinued operations, net of tax
|
— | 15,908 | |||||||||
|
Net income (loss) from continuing operations
|
(1,334) | 40,631 | |||||||||
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|||||||||||
|
Depreciation and amortization
|
14,339 | 13,413 | |||||||||
|
Provision for loan losses
|
103,098 | 133,216 | |||||||||
|
Share-based compensation
|
4,948 | 6,513 | |||||||||
|
Amortization of debt issuance costs
|
540 | 515 | |||||||||
|
Amortization of loan premium
|
3,283 | 3,734 | |||||||||
|
Amortization of operating leases
|
(590) | (378) | |||||||||
|
Deferred income tax expense, net
|
1,343 | 14,178 | |||||||||
|
Non-operating (gain) loss
|
(519) | 6,692 | |||||||||
|
Changes in operating assets and liabilities:
|
|||||||||||
|
Prepaid expenses and other assets
|
(3,282) | (3,305) | |||||||||
|
Income taxes payable
|
382 | 1,156 | |||||||||
|
Receivables from payment processors
|
(2,118) | 3,470 | |||||||||
|
Receivables from CSO lenders
|
1,255 | 3,436 | |||||||||
|
Interest receivable
|
(22,982) | (30,417) | |||||||||
|
State and other taxes payable
|
— | (91) | |||||||||
|
Deferred revenue
|
(176) | (5,558) | |||||||||
|
Accounts payable and accrued liabilities
|
13,379 | (9,500) | |||||||||
|
Net cash provided by continuing operating activities
|
111,566 | 177,705 | |||||||||
|
Net cash provided by discontinued operating activities
|
— | 1,286 | |||||||||
|
Net cash provided by operating activities
|
111,566 | 178,991 | |||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||||
|
Loans receivable originated or participations purchased
|
(656,404) | (419,472) | |||||||||
|
Principal collections and recoveries on loans receivable
|
471,615 | 514,316 | |||||||||
|
Participation premium paid
|
(4,020) | (2,823) | |||||||||
|
Purchases of property and equipment
|
(11,903) | (12,867) | |||||||||
|
Proceeds from sale of intangible assets
|
1,250 | — | |||||||||
|
Net cash provided by (used in) continuing investing activities
|
(199,462) | 79,154 | |||||||||
|
Net cash provided by discontinued investing activities
|
— | 9,457 | |||||||||
|
Net cash provided by (used in) investing activities
|
(199,462) | 88,611 | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
12
|
Elevate Credit, Inc. and Subsidiaries
|
||
| Nine Months Ended September 30, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||
|
Proceeds from notes payable
|
$ | 109,500 | $ | 6,500 | ||||||||||
|
Payments of notes payable
|
(112,550) | (94,000) | ||||||||||||
|
Debt issuance costs paid
|
(75) | (253) | ||||||||||||
|
ESPP shares issued
|
453 | 354 | ||||||||||||
|
Common stock repurchased
|
(24,453) | (14,739) | ||||||||||||
|
Proceeds from stock option exercises
|
27 | 27 | ||||||||||||
|
Taxes paid related to net share settlement of equity awards
|
(1,183) | (804) | ||||||||||||
|
Net cash used in continuing financing activities
|
(28,281) | (102,915) | ||||||||||||
|
Net cash used in discontinued financing activities
|
— | (16,310) | ||||||||||||
|
Net cash used in financing activities
|
(28,281) | (119,225) | ||||||||||||
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
(116,177) | 148,377 | ||||||||||||
|
Change in cash, cash equivalents and restricted cash from discontinued operations
|
— | 5,567 | ||||||||||||
|
Change in cash, cash equivalents and restricted cash from continuing operations
|
(116,177) | 153,944 | ||||||||||||
|
Cash and cash equivalents, beginning of period
|
197,983 | 71,215 | ||||||||||||
|
Restricted cash, beginning of period
|
3,135 | 2,235 | ||||||||||||
|
Cash, cash equivalents and restricted cash, beginning of period
|
201,118 | 73,450 | ||||||||||||
|
|
||||||||||||||
|
Cash and cash equivalents, end of period
|
79,979 | 224,259 | ||||||||||||
|
Restricted cash, end of period
|
4,962 | 3,135 | ||||||||||||
|
Cash, cash equivalents and restricted cash, end of period
|
$ | 84,941 | $ | 227,394 | ||||||||||
|
|
||||||||||||||
|
Supplemental cash flow information:
|
||||||||||||||
|
Interest paid
|
$ | 26,939 | $ | 36,979 | ||||||||||
|
Taxes paid
|
$ | 148 | $ | 397 | ||||||||||
|
|
||||||||||||||
|
Non-cash activities:
|
||||||||||||||
|
CSO fees charged-off included in Deferred revenues and Loans receivable
|
$ | 38 | $ | 684 | ||||||||||
|
CSO fees on loans paid-off prior to maturity included in Receivable from CSO lenders and Deferred revenue
|
$ | 6 | $ | 42 | ||||||||||
|
Annual membership fee included in Deferred revenues and Loans receivable
|
$ | — | $ | 108 | ||||||||||
|
Reissuances of Treasury stock
|
$ | 1,530 | $ | 4,308 | ||||||||||
|
Impact of deferred tax asset included in Other comprehensive income
|
$ | — | $ | 1,354 | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
13
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three and nine months ended September 30, 2021 and 2020
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING CHANGES
Business Operations
Elevate Credit, Inc. (the “Company”) is a Delaware corporation. The Company provides technology-driven, progressive online credit solutions to non-prime consumers. The Company uses advanced technology and proprietary risk analytics to provide more convenient and more responsible financial options to its customers, who are not well-served by either banks or legacy non-prime lenders. The Company currently offers unsecured online installment loans, lines of credit and credit cards in the United States (the “US”). The Company’s products, Rise, Elastic and Today Card, reflect its mission of “Good Today, Better Tomorrow” and provide customers with access to competitively priced credit and services while helping them build a brighter financial future with credit building and financial wellness features. In the United Kingdom ("UK"), the Company previously offered unsecured installment loans via the internet through its wholly owned subsidiary, Elevate Credit International Limited, (“ECIL”) under the brand name of Sunny. On June 29, 2020, ECIL entered into administration in accordance with the provisions of the UK Insolvency Act 1986 and pursuant to a resolution of the board of directors of ECIL. The onset of Coronavirus Disease 2019 ("COVID-19") coupled with the lack of clarity within the UK regulatory environment led to the decision to place ECIL into administration. The management, business, affairs and property of ECIL have been placed into the direct control of the appointed administrators, KPMG LLP. Accordingly, the Company deconsolidated ECIL as of June 29, 2020 and presents ECIL's results as discontinued operations for all periods presented. See Note 12—Discontinued Operations for more information regarding the presentation of ECIL.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of September 30, 2021 and for the three and nine month periods ended September 30, 2021 and 2020 include the accounts of the Company, its wholly owned subsidiaries and variable interest entities ("VIEs") where the Company is the primary beneficiary. All significant intercompany transactions and accounts have been eliminated.
The unaudited condensed consolidated financial information included in this report has been prepared in accordance with accounting principles generally accepted in the US (“US GAAP”) for interim financial information and Article 10 of Regulation S-X and conform, as applicable, to general practices within the finance company industry. The principles for interim financial information do not require the inclusion of all the information and footnotes required by US GAAP for complete financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2020 in the Company's Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission ("SEC") on February 26, 2021. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. The Company's business is seasonal in nature so the results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year.
Reclassification of Accumulated Other Comprehensive Income to Net Income (Loss) from Discontinued Operations
For the nine months ended September 30, 2020, the Company reclassified a $2.3 million net loss from cumulative translation adjustments within Accumulated other comprehensive income to Net income (loss) from discontinued operations as part of the Company's loss on disposal related to the placement of ECIL into administration. In addition, a $1.4 million deferred tax benefit was reclassified to remove the associated deferred tax asset as part of this transaction.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
14
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
Significant items subject to such estimates and assumptions include the valuation of the allowance for loan losses, goodwill, long-lived and intangible assets, deferred revenues, contingencies, the income tax provision, valuation of share-based compensation, operating lease right of use assets, operating lease liabilities and the valuation allowance against deferred tax assets. The Company bases its estimates on historical experience, current data and assumptions that are believed to be reasonable. Actual results in future periods could differ from those estimates.
As the impact of the COVID-19 pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. These estimates and assumptions may change in future periods and will be recognized in the condensed consolidated financial statements as new events occur and additional information becomes known. To the extent the Company’s actual results differ materially from those estimates and assumptions, the Company's future financial statements could be affected.
Revenue Recognition
The Company recognizes consumer loan fees as revenues for each of the loan products it offers. Revenues on the Condensed Consolidated Statements of Operations include: finance charges, lines of credit fees, fees for services provided through CSO programs (“CSO fees”), and interest, as well as any other fees or charges permitted by applicable laws and pursuant to the agreement with the borrower. Other revenues also include marketing and licensing fees received from the originating lender related to the Elastic product and Rise bank-originated loans and from CSO fees related to the Rise product. Revenues related to these fees are recognized when the service is performed.
The Company accrues finance charges on installment loans on a constant yield basis over their terms. The Company accrues and defers fixed fees such as CSO fees and lines of credit fees when they are assessed and recognizes them to earnings as they are earned over the life of the loan. The Company accrues interest on credit cards based on the amount of the credit card balance outstanding and the related contractual interest rate. Credit card membership fees are amortized to revenue over the card membership period. Other credit card fees, such as late payment fees and returned payment fees, are accrued when assessed. The Company does not accrue finance charges and other fees on installment loans or lines of credit for which payment is greater than 60 days past due. Credit card interest charges are recognized based on the contractual provisions of the underlying arrangements and are not accrued when payment is past due more than 90 days. Installment loans and lines of credit are considered past due if a grace period has not been requested and a scheduled payment is not paid on its due date. Credit cards have a grace period of 25 days and are considered delinquent after the grace period. Payments received on past due loans are applied against the loan and accrued interest balance to bring the loan current. Payments are generally first applied to accrued fees and interest and then to the principal loan balance.
The spread of COVID-19 since March 2020 has created a global public health crisis that has resulted in unprecedented disruption to businesses and economies. In response to the pandemic's effects, and in accordance with federal and state guidelines, the Company expanded its payment flexibility programs for its customers, including payment deferrals. This program allows for a deferral of payments for an initial period of 30 to 60 days, and generally up to a maximum of 180 days on a cumulative basis. A customer will return to the normal payment schedule after the end of the deferral period with the extension of the maturity date equivalent to the deferral period, which is generally not to exceed an additional 180 days. In the third quarter of 2021, the Company no longer offered specific COVID-19 payment assistance programs, but continues to offer other payment flexibility programs if certain qualifications are met. The finance charges will continue to accrue at a lower effective interest rate over the expected term of the loan as adjusted for the deferral period provided (not to exceed an amount greater than the amount at which the borrower could settle the loan) or placed on non-accrual status.
The Company’s business is affected by seasonality, which can cause significant changes in portfolio size and profit margins from quarter to quarter. Although this seasonality does not impact the Company’s policies for revenue recognition, it does generally impact the Company’s results of operations by potentially causing an increase in its profit margins in the first quarter of the year and decreased margins in the second through fourth quarters.
15
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
Installment Loans, Lines of Credit and Credit Cards
Installment loans, lines of credit and credit cards, including receivables for finance charges, fees and interest, are unsecured and reported as Loans receivable, net of allowance for loan losses on the Condensed Consolidated Balance Sheets. Installment loans are multi-payment loans that require the pay-down of portions of the outstanding principal balance in multiple installments through the Rise brand. Line of credit accounts include customer cash advances made through the Elastic brand and the Rise brand in two states (which were discontinued in September 2020). Credit cards represent credit card receivable balances, uncollected billed interest and fees through the Today Card brand.
The Company offers Rise installment products directly to customers. Elastic lines of credit, Rise bank-originated installment loans and Today credit card receivables represent participation interests acquired from third-party lenders through a wholly owned subsidiary or by a VIE. Based on agreements with the third-party lenders, the VIEs pay a loan premium on the participation interests purchased. The loan premium is amortized over the expected life of the outstanding loan amount. See Note 4—Variable Interest Entities for more information regarding these participation interests in Rise and Elastic receivables.
The Company considers impaired loans as accounts over 60 days past due (for installment loans and lines of credit) or 120 days past due (for credit cards), or loans which become uncollectible based on information that the Company becomes aware of (e.g., receipt of customer bankruptcy notice). The impaired loans are charged-off at the time that they are deemed to be uncollectible.
A modification of finance receivable terms is considered a troubled debt restructuring ("TDR") if the borrower is experiencing financial difficulty and the Company grants a concession it would not otherwise have considered to a borrower. The Company typically considers TDRs to include all installment and line of credit loans that were modified by granting principal and interest forgiveness or by extension of the maturity date for more than 60 days as a part of a loss mitigation strategy.
On March 22, 2020, federal and state banking regulators issued a joint statement on working with customers affected by COVID-19 (the "Interagency Statement"). The Interagency Statement includes guidance on accounting for loan modifications. In accordance with the Interagency Statement, the Company, and the bank originators the Company supports, have elected to not recognize modified loans as TDRs if the borrower was both: 1) not more than 30 days past due as of March 1, 2020 (or at the requested modification date if originated on or after March 1, 2020); and 2) the modification stems from the effects of the COVID-19 outbreak. The modifications offered by the Company to borrowers that meet both qualifications may include short-term payment deferrals less than six months, interest or fee waivers, extensions of payment terms or delays in payment that are insignificant. If the borrower was not current at March 1, 2020, the Company offers similar modifications that are considered TDRs. This election is applicable from March 1, 2020 until the earlier of 60 days following the date the COVID-19 national emergency comes to an end or January 1, 2022. Effective July 1, 2021, the Company no longer offers specific COVID-19 payment assistance programs and no longer applies the TDR relief provision provided by the Interagency Statement. The Company, along with the bank originators it supports, continues to offer other payment flexibility programs if certain qualifications are met and will apply the TDR guidelines previously established.
Operating Segments
The Company determines operating segments based on how its chief operating decision-maker manages the business, including making operating decisions, deciding how to allocate resources and evaluating operating performance. The Company's chief operating decision-maker is its Chief Executive Officer, who reviews the Company's operating results monthly on a consolidated basis.
The Company has one reportable segment, which provides online financial services for non-prime consumers. The Company has aggregated all components of its business into a single reportable segment based on the similarities of the economic characteristics, the nature of the products and services, the distribution methods, the type of customers and the nature of the regulatory environments. With the disposal of ECIL, all of the Company's assets and revenue are in one geographic location, therefore, segment reporting based on geography has been discontinued.
Property and Equipment, net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. The following table summarizes the components of net property and equipment. In January 2021 and September 2021, certain assets were determined to be impaired in relation to subleases of facility space.
16
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
| (Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
|
Property and equipment, gross
|
$ | 127,731 | $ | 116,748 | ||||||||||
|
Accumulated depreciation and amortization
|
(95,874) | (82,748) | ||||||||||||
|
Property and equipment, net
|
$ | 31,857 | $ | 34,000 | ||||||||||
Goodwill and Indefinite Lived Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. In accordance with Accounting Standards Codification ("ASC") 350-20-35, Goodwill— Subsequent Measurement, the Company performs a quantitative approach method impairment review of goodwill and intangible assets with an indefinite life annually at October 1 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As a result of the recent global economic impact and uncertainty due to COVID-19, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment testing on the goodwill balances of its reporting units. The Company performed a detailed qualitative and quantitative assessment of each reporting unit and concluded that the goodwill associated with the previously consolidated UK reporting unit was impaired as the fair value of the UK reporting unit was less than its carrying amount. The impairment loss of $9.3 million was included in Loss from discontinued operations due to the deconsolidation of ECIL. While there was a decline in the fair value of the Elastic reporting unit at March 31, 2020, there was no impairment identified during the quantitative assessment. The Company completed its annual test as of October 1, 2020 and determined that there was no evidence of impairment of goodwill or indefinite lived intangible assets. The Company has $6.8 million of goodwill (all related to the Elastic reporting unit) remaining on the Condensed Consolidated Balance Sheets as of September 30, 2021.
Prior to the adoption of ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), the Company’s impairment evaluation of goodwill was already based on comparing the fair value of the Company’s reporting units to their carrying value. The adoption of ASU 2017-04 as of January 1, 2020 had no impact on the Company's evaluation procedures. The fair value of the reporting units is determined based on a weighted average of the income and market approaches. The income approach establishes fair value based on estimated future cash flows of the reporting units, discounted by an estimated weighted-average cost of capital developed using the capital asset pricing model, which reflects the overall level of inherent risk of the reporting units. The income approach uses the Company’s projections of financial performance for a six- to nine-year period and includes assumptions about future revenues growth rates, operating margins and terminal values. The market approach establishes fair value by applying cash flow multiples to the reporting units’ operating performance. The multiples are derived from other publicly traded companies that are similar but not identical to the Company from an operational and economic standpoint.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease right of use (“ROU”) assets and Operating lease liabilities on its Condensed Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of its leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The operating lease ROU asset may also include initial direct costs incurred and excludes any lease payments made and lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components. The lease and non-lease components are accounted for as a single lease component. In accordance with ASC 360-10-35, Property, Plant & Equipment— Subsequent Measurement, the Company evaluates its ROU assets along with its Property and equipment, net for impairment annually and between annual tests as needed based on changes in circumstances or other triggering events. During the first and third quarters of 2021, the Company entered into subleases for facility space, triggering impairment assessments. The Company determined both of the asset groups with the subleased ROU assets and related LHI were impaired. Total impairment losses for the asset groups of $198 thousand and $940 thousand for the three and nine months ended September 30, 2021, respectively, are included in Non-operating income (loss) in the Condensed Consolidated Statements of Operations.
17
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
Treasury Stock
The Company evaluates each stock repurchase transaction in the period in which it is completed. If the repurchase transaction is significantly in excess of the current market price at purchase, the Company will identify whether the price paid included payment for other agreements, rights, and privileges. Repurchase transactions that do not contain these elements or are not significantly in excess of the current market price at purchase are accounted for using the cost method. The Company anticipates using its treasury stock to fulfill certain employee stock compensation grants and settlements. The Company has elected to use a first in, first out ("FIFO") method for assigning share cost at reissuance. Any gain or loss in the stock value will be credited or charged to paid in capital upon subsequent reissuance of the shares, with losses in excess of previously recognized gains charged to retained earnings. The Company is not obligated to purchase or reissue any shares at any time in accordance with its previously disclosed share repurchase plan.
Recently Adopted Accounting Standards
In August 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The purpose of ASU 2018-15 is to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company elected to adopt this ASU prospectively as of January 1, 2020 and has implemented a control structure to identify cloud computing arrangements for appropriate accounting treatment similar to its procedures for right of use assets. At September 30, 2021 and December 31, 2020, the Company had net capitalized implementation costs associated with cloud computing arrangements of $2.6 million and $1.0 million, respectively, included in Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets. For the three and nine months ended September 30, 2021, the Company recognized $215.5 thousand and $365.4 thousand in amortization expense, respectively, within Occupancy and equipment in the Condensed Consolidated Statements of Operations. Amortization expense recognized in 2020 was immaterial. At adoption, ASU 2018-15 did not have a material impact on the Company's condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The purpose of ASU 2018-13 is to modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This guidance is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and requires both a prospective and retrospective approach to adoption based on amendment specifications. Early adoption of any removed or modified disclosures is permitted. Additional disclosures may be delayed until their effective date. The adoption of ASU 2018-13 at January 1, 2020 did not have a material impact on the Company's condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). The purpose of ASU 2017-04 is to simplify the subsequent measurement of goodwill. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This guidance is effective for public companies for goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company has adopted all of the amendments of ASU 2017-04 as of January 2020 with no impact to the Company's condensed consolidated financial statements. The Company used the simplified subsequent measurement requirements per ASU 2017-04 in its impairment analysis.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to COVID-19. Among other things, the CARES Act provides income tax relief inclusive of permitting NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has reviewed the tax relief provisions of the CARES Act regarding its eligibility and determined that the impact is likely to be insignificant with regard to its effective tax rate. Certain portions of the CARES Act were amended by the Consolidated Appropriations Act ("CAA") on December 27, 2020. The Company continues to monitor and evaluate its eligibility for the amended CARES Act tax relief provisions to identify any that may become applicable in the future.
18
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
On March 11, 2021, the American Rescue Plan Act ("ARP Act") was signed into law. The Company reviewed the tax relief provisions of the ARP Act, including the Company's eligibility for such provisions, and determined that the impact is likely to be insignificant with regard to the Company's effective tax rate. The Company continues to monitor and evaluate its eligibility under the ARP Act tax relief provisions to identify any portions that may become applicable in the future.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The purpose of ASU 2019-12 is to reduce complexity in the accounting standards for income taxes by removing certain exceptions as well as clarifying certain allocations. This update also addresses the split recognition of franchise taxes that are partially based on income between income-based tax and non-income-based tax. This guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2019-12 at January 1, 2021 did not have a material impact on the Company's condensed consolidated financial statements.
Accounting Standards to be Adopted in Future Periods
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments ("ASU 2020-03"). The purpose of ASU 2020-03 is to clarify, correct errors in or make minor improvements to the codification. Among other revisions, the amendments clarify that an entity should record an allowance for credit losses when an entity regains control of financial assets sold in accordance with Topic 326. ASU 2020-03 also clarifies disclosure requirements for debt securities under Topic 942 and affirms that all entities are required to provide the fair value option disclosures within paragraphs 825-10-50-24 through 50-32 of the codification. The amendments in this update are effective on the latter of the issuance of ASU 2020-03 or the effective date of their related topic. The Company does not anticipate the adoption of ASU 2020-03 to have a material impact on the Company's condensed consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The purpose of ASU 2020-04 is to provide optional guidance for a period of time related to accounting for reference rate reform on financial reporting. It is intended to reduce the potential burden of reviewing contract modifications related to discontinued rates. The amendments and expedients in this update are effective as of March 12, 2020 through December 31, 2022 and may be elected by topic. The Company is assessing the potential impact of electing all or portions of ASU 2020-04 on the Company's condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 is intended to replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates to improve the quality of information available to financial statement users about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments ("ASU 2019-04"). This amendment clarifies the guidance in ASU 2016-13. The guidance in ASU 2016-13 was further clarified by ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments ("ASU 2019-11") issued in November 2019. ASU 2019-11 provides transition relief such as permitting entities an accounting policy election regarding existing TDRs, among other things. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief ("ASU 2019-05"). The purpose of this amendment is to provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments-Overall, on an instrument-by-instrument basis. Election of this option is intended to increase comparability of financial statement information and reduce costs for certain entities to comply with ASU 2016-13.
19
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates ("ASU 2019-10"). The purpose of this amendment is to create a two-tier rollout of major updates, staggering the effective dates between larger public companies and all other entities. This granted certain classes of companies, including Smaller Reporting Companies ("SRCs"), additional time to implement major FASB standards, including ASU 2016-13. Larger public companies will still have an effective date for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities are permitted to defer adoption of ASU 2016-13, and its related amendments, until fiscal periods beginning after December 15, 2022. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments - Credit Losses (Topic 326), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-12 ("ASU 2020-02"). ASU 2020-02 updates the SEC staff guidance related to ASU 2016-13 and all contingent amendments. Under the current SEC definitions, the Company meets the definition of an SRC as of the ASU 2019-10 issuance date and is eligible for the deferral period for ASU 2016-13. The Company has developed a project plan and engaged a consultant to assist with the implementation of ASU 2016-13. The Company is assessing the potential impact of earlier adoption of ASU 2016-13 on the Company's condensed consolidated financial statements and expects this adoption to have a material impact to the financial statements.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income (loss) by the weighted average number of common shares outstanding ("WASO") during each period. Also, basic EPS includes any fully vested stock and unit awards that have not yet been issued as common stock. There are no unissued fully vested stock and unit awards at September 30, 2021 and 2020.
Diluted EPS is computed by dividing net income (loss) by the WASO during each period plus any unvested stock option awards granted, vested unexercised stock options and unvested restricted stock units ("RSUs") using the treasury stock method but only to the extent that these instruments dilute earnings per share.
20
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
The computation of earnings per share was as follows for three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands, except share and per share amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Numerator (basic and diluted):
|
||||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | (11,005) | $ | 16,616 | $ | (1,334) | $ | 40,631 | ||||||||||||||||||
|
Net income (loss) from discontinued operations
|
— | 4,465 | — | (15,908) | ||||||||||||||||||||||
|
Net income (loss)
|
$ | (11,005) | $ | 21,081 | $ | (1,334) | $ | 24,723 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Denominator (basic):
|
||||||||||||||||||||||||||
|
Basic weighted average number of shares outstanding
|
33,786,968 | 40,230,256 | 34,841,624 | 41,856,894 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Denominator (diluted):
|
||||||||||||||||||||||||||
|
Basic weighted average number of shares outstanding
|
33,786,968 | 40,230,256 | 34,841,624 | 41,856,894 | ||||||||||||||||||||||
|
Effect of potentially dilutive securities:
|
||||||||||||||||||||||||||
|
Employee share plans (options, RSUs and ESPP)
|
— | 532,074 | — | 767,914 | ||||||||||||||||||||||
|
Diluted weighted average number of shares outstanding
|
33,786,968 | 40,762,330 | 34,841,624 | 42,624,808 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Basic and diluted earnings (loss) per share:
|
||||||||||||||||||||||||||
|
Continuing operations
|
$ | (0.33) | $ | 0.41 | $ | (0.04) | $ | 0.97 | ||||||||||||||||||
|
Discontinued operations
|
— | 0.11 | — | (0.38) | ||||||||||||||||||||||
|
Basic earnings (loss) per share
|
$ | (0.33) | $ | 0.52 | $ | (0.04) | $ | 0.59 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Continuing operations
|
$ | (0.33) | $ | 0.41 | $ | (0.04) | $ | 0.95 | ||||||||||||||||||
|
Discontinued operations
|
— | 0.11 | — | (0.37) | ||||||||||||||||||||||
|
Diluted earnings (loss) per share
|
$ | (0.33) | $ | 0.52 | $ | (0.04) | $ | 0.58 | ||||||||||||||||||
For the three months ended September 30, 2021 and 2020, the Company excluded the following potential common shares from its diluted earnings (loss) per share calculation because including these shares would be anti-dilutive:
•859,024 and 2,136,079 common shares issuable upon exercise of the Company's stock options; and
•2,622,009 and 2,300,612 common shares issuable upon vesting of the Company's RSUs.
For the nine months ended September 30, 2021 and 2020, the Company excluded the following potential common shares from its diluted earnings (loss) per share calculation because including these shares would be anti-dilutive:
•878,574 and 1,499,488 common shares issuable upon exercise of the Company's stock options; and
•2,862,857 and 2,713,045 common shares issuable upon vesting of the Company's RSUs.
21
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
NOTE 3 - LOANS RECEIVABLE AND REVENUE
Revenues generated from the Company’s consumer loans for the three and nine months ended September 30, 2021 and 2020 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Finance charges
|
$ | 69,731 | $ | 54,348 | $ | 173,707 | $ | 222,078 | ||||||||||||||||||
|
Lines of credit fees
|
41,743 | 36,758 | 110,103 | 137,603 | ||||||||||||||||||||||
|
CSO fees
|
6 | 2,822 | 607 | 14,129 | ||||||||||||||||||||||
|
Other
|
1,355 | 236 | 2,691 | 812 | ||||||||||||||||||||||
|
Total revenues
|
$ | 112,835 | $ | 94,164 | $ | 287,108 | $ | 374,622 | ||||||||||||||||||
The Company's portfolio consists of installment loans, lines of credit and credit card receivables, which are considered the portfolio segments for all periods presented. The Rise product is primarily installment loans with lines of credit offered in two states, which ceased lines of credit origination activity in September 2020. The Elastic product is a line of credit product and the Today Card is a credit card product, both offered in the US.
The following reflects the credit quality of the Company’s loans receivable as of September 30, 2021 and December 31, 2020 as delinquency status has been identified as the primary credit quality indicator. The Company classifies its loans as either current or past due. A customer in good standing may request up to a 16-day grace period when or before a payment becomes due and, if granted, the loan is considered current during the grace period. In response to the COVID-19 pandemic, the Company, along with the banks it supports, had also expanded existing payment flexibility programs to provide temporary payment relief to certain customers who meet the program’s qualifications. These programs allow for a deferral of payments for an initial period of 30 to 60 days, which the Company may extend for an additional 30 days, generally for a maximum of 180 days on a cumulative basis. A customer will return to the normal payment schedule after the end of the deferral period, with the extension of the maturity date equivalent to the deferral period, which is generally not to exceed an additional 180 days. Under the COVID-19 payment flexibility programs, customers that were 30 days past due or less as of March 1, 2020 or the date the customer requested the deferral are considered current. Customers more than 30 days past due as of March 1, 2020 or the date the customer requested the deferral are considered delinquent. The COVID-19-specific payment flexibility programs were no longer offered effective July 1, 2021, eliminating any new payment deferrals up to 180 days. The Company, along with the bank originators it supports, continues to offer other payment flexibility programs if certain qualifications are met. As of September 30, 2021, 2.6% of customers that had loan balances outstanding have been provided relief through a payment deferral program for a total of $13.1 million in loans with deferred payments. The Company believes that the allowance for loan losses is adequate to absorb the losses inherent in the portfolio as of September 30, 2021.
Installment loans, lines of credit and credit cards not impacted by COVID are considered past due if a grace period has not been requested and a scheduled payment is not paid on its due date. All impaired loans that were not accounted for as a TDR as of September 30, 2021 and December 31, 2020 have been charged off.
| September 30, 2021 | ||||||||||||||||||||||||||
| (Dollars in thousands) | Rise | Elastic | Today | Total | ||||||||||||||||||||||
|
Current loans
|
$ | 268,199 | $ | 180,664 | $ | 30,785 | $ | 479,648 | ||||||||||||||||||
|
Past due loans
|
37,621 | 11,845 | 4,357 | 53,823 | ||||||||||||||||||||||
|
Total loans receivable
|
305,820 | 192,509 | 35,142 | 533,471 | ||||||||||||||||||||||
|
Net unamortized loan premium
|
409 | 1,950 | — | 2,359 | ||||||||||||||||||||||
|
Less: Allowance for loan losses
|
(40,188) | (13,141) | (2,880) | (56,209) | ||||||||||||||||||||||
|
Loans receivable, net
|
$ | 266,041 | $ | 181,318 | $ | 32,262 | $ | 479,621 | ||||||||||||||||||
22
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
| December 31, 2020 | ||||||||||||||||||||||||||
| (Dollars in thousands) | Rise | Elastic | Today | Total | ||||||||||||||||||||||
|
Current loans
|
$ | 222,937 | $ | 154,950 | $ | 12,954 | $ | 390,841 | ||||||||||||||||||
|
Past due loans
|
22,383 | 6,926 | 1,564 | 30,873 | ||||||||||||||||||||||
|
Total loans receivable
|
245,320 | 161,876 | 14,518 | 421,714 | ||||||||||||||||||||||
|
Net unamortized loan premium
|
239 | 1,278 | — | 1,517 | ||||||||||||||||||||||
|
Less: Allowance for loan losses
|
(33,288) | (13,201) | (1,910) | (48,399) | ||||||||||||||||||||||
|
Loans receivable, net
|
$ | 212,271 | $ | 149,953 | $ | 12,608 | $ | 374,832 | ||||||||||||||||||
Total loans receivable includes approximately $12.3 million and $19.2 million of loans in a non-accrual status at September 30, 2021 and December 31, 2020, respectively.
Additionally, total loans receivable includes approximately $23.0 million and $25.3 million of interest receivable at September 30, 2021 and December 31, 2020, respectively. The carrying value for Loans receivable, net of the allowance for loan losses approximates the fair value due to the short-term nature of the loans receivable.
The changes in the allowance for loan losses for the three and nine months ended September 30, 2021 and 2020 are as follows:
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||
| (Dollars in thousands) | Rise | Elastic | Today | Total | ||||||||||||||||||||||
|
Balance beginning of period
|
$ | 28,099 | $ | 10,372 | $ | 1,850 | $ | 40,321 | ||||||||||||||||||
|
Provision for loan losses
|
42,299 | 10,832 | 1,772 | 54,903 | ||||||||||||||||||||||
|
Charge-offs
|
(34,986) | (8,745) | (785) | (44,516) | ||||||||||||||||||||||
|
Recoveries of prior charge-offs
|
4,776 | 682 | 43 | 5,501 | ||||||||||||||||||||||
|
Total
|
40,188 | 13,141 | 2,880 | 56,209 | ||||||||||||||||||||||
|
Accrual for CSO lender owned loans
|
— | — | — | — | ||||||||||||||||||||||
|
Balance end of period
|
$ | 40,188 | $ | 13,141 | $ | 2,880 | $ | 56,209 | ||||||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||
| (Dollars in thousands) | Rise | Elastic | Today | Total | ||||||||||||||||||||||
|
Balance beginning of period
|
$ | 40,614 | $ | 18,604 | $ | 1,376 | $ | 60,594 | ||||||||||||||||||
|
Provision for loan losses
|
9,039 | 3,531 | 594 | 13,164 | ||||||||||||||||||||||
|
Charge-offs
|
(18,059) | (7,471) | (388) | (25,918) | ||||||||||||||||||||||
|
Recoveries of prior charge-offs
|
2,723 | 751 | 16 | 3,490 | ||||||||||||||||||||||
|
Total
|
34,317 | 15,415 | 1,598 | 51,330 | ||||||||||||||||||||||
|
Accrual for CSO lender owned loans
|
(1,421) | — | — | (1,421) | ||||||||||||||||||||||
|
Balance end of period
|
$ | 32,896 | $ | 15,415 | $ | 1,598 | $ | 49,909 | ||||||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||
| (Dollars in thousands) | Rise | Elastic | Today | Total | ||||||||||||||||||||||
|
Balance beginning of period
|
$ | 33,968 | $ | 13,201 | $ | 1,910 | $ | 49,079 | ||||||||||||||||||
|
Provision for loan losses
|
78,453 | 21,377 | 3,268 | 103,098 | ||||||||||||||||||||||
|
Charge-offs
|
(81,261) | (23,658) | (2,404) | (107,323) | ||||||||||||||||||||||
|
Recoveries of prior charge-offs
|
9,028 | 2,221 | 106 | 11,355 | ||||||||||||||||||||||
|
Total
|
40,188 | 13,141 | 2,880 | 56,209 | ||||||||||||||||||||||
|
Accrual for CSO lender owned loans
|
— | — | — | — | ||||||||||||||||||||||
|
Balance end of period
|
$ | 40,188 | $ | 13,141 | $ | 2,880 | $ | 56,209 | ||||||||||||||||||
23
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||
| (Dollars in thousands) | Rise | Elastic | Today | Total | ||||||||||||||||||||||
|
Balance beginning of period
|
$ | 52,099 | $ | 28,852 | $ | 1,041 | $ | 81,992 | ||||||||||||||||||
|
Provision for loan losses
|
90,615 | 40,607 | 1,994 | 133,216 | ||||||||||||||||||||||
|
Charge-offs
|
(120,189) | (59,025) | (1,503) | (180,717) | ||||||||||||||||||||||
|
Recoveries of prior charge-offs
|
11,792 | 4,981 | 66 | 16,839 | ||||||||||||||||||||||
|
Total
|
34,317 | 15,415 | 1,598 | 51,330 | ||||||||||||||||||||||
|
Accrual for CSO lender owned loans
|
(1,421) | — | — | (1,421) | ||||||||||||||||||||||
|
Balance end of period
|
$ | 32,896 | $ | 15,415 | $ | 1,598 | $ | 49,909 | ||||||||||||||||||
As of December 31, 2020, estimated losses of approximately $0.7 million for the CSO owned loans receivable guaranteed by the Company of approximately $2.2 million were initially recorded at fair value and are included in Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets. At September 30, 2021, the CSO owned portfolio has been liquidated and no guarantee obligation associated with this portfolio exists.
In certain circumstances, the Company modifies the terms of its finance receivables for borrowers experiencing financial difficulties. Modifications may include principal and/or interest forgiveness. A modification of finance receivable terms is considered a TDR if the Company grants a concession to a borrower for economic or legal reasons related to the borrower’s financial difficulties that would not otherwise have been considered. Management considers TDRs to include all installment and line of credit loans that were granted principal and interest forgiveness as a part of a loss mitigation strategy for Rise and Elastic, unless excluded by policy. Once a loan has been classified as a TDR, it is assessed for impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate considering all available evidence.
The following table summarizes the financial effects, excluding impacts related to credit loss allowance and impairment, of TDRs for the three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Outstanding recorded investment before TDR
|
$ | 2,499 | $ | 467 | $ | 9,931 | $ | 7,619 | ||||||||||||||||||
|
Outstanding recorded investment after TDR
|
2,261 | 461 | 9,466 | 7,255 | ||||||||||||||||||||||
|
Total principal and interest forgiveness included in charge-offs within the Allowance for loan losses
|
$ | 238 | $ | 6 | $ | 465 | $ | 364 | ||||||||||||||||||
A loan that has been classified as a TDR remains classified as a TDR until it is liquidated through payoff or charge-off. The table below presents the Company's average outstanding recorded investment and interest income recognized on TDR loans for the three and nine months ended September 30, 2021 and 2020:
24
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
The table below presents the Company's loans modified as TDRs as of September 30, 2021 and December 31, 2020:
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
|
Current outstanding investment
|
$ | 8,256 | $ | 21,261 | ||||||||||
|
Delinquent outstanding investment
|
3,168 | 5,532 | ||||||||||||
|
Outstanding recorded investment
|
11,424 | 26,793 | ||||||||||||
|
Less: Impairment included in Allowance for loan losses
|
(3,361) | (7,533) | ||||||||||||
|
Outstanding recorded investment, net of impairment
|
$ | 8,063 | $ | 19,260 | ||||||||||
A TDR is considered to have defaulted upon charge-off when it is over 60 days past due or earlier if deemed uncollectible. There were loan restructurings accounted for as TDRs that subsequently defaulted of approximately $5.7 million and $0.9 million for the three months ended September 30, 2021 and 2020, respectively, and $17.5 million and $10.1 million for the nine months ended September 30, 2021 and 2020, respectively. The Company had commitments to lend additional funds of approximately $5.3 million to customers with available and unfunded lines of credit as of September 30, 2021.
NOTE 4—VARIABLE INTEREST ENTITIES
The Company is involved with four entities that are deemed to be a VIE: Elastic SPV, Ltd., EF SPV, Ltd., EC SPV, Ltd. and one Credit Services Organization ("CSO") lender. The CSO portfolio wind-down was completed in the third quarter of 2021 and the Company has no further involvement in this VIE as of September 30, 2021. Under ASC 810-10-15, Variable Interest Entities, a VIE is an entity that: (1) has an insufficient amount of equity investment at risk to permit the entity to finance its activities without additional subordinated financial support by other parties; (2) the equity investors are unable to make significant decisions about the entity’s activities through voting rights or similar rights; or (3) the equity investors do not have the obligation to absorb expected losses or the right to receive residual returns of the entity. The Company is required to consolidate a VIE if it is determined to be the primary beneficiary, that is, the enterprise has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the VIE. The Company evaluates its relationships with VIEs to determine whether it is the primary beneficiary of a VIE at the time it becomes involved with the entity and it re-evaluates that conclusion each reporting period.
Elastic SPV, Ltd.
On July 1, 2015, the Company entered into several agreements with a third-party lender and Elastic SPV, Ltd. (“ESPV”), an entity formed by third-party investors for the purpose of purchasing loan participations from the third-party lender. Per the terms of the agreements, the Company provides customer acquisition services to generate loan applications submitted to the third-party lender. In addition, the Company licenses loan underwriting software and provides services to the third-party lender to evaluate the credit quality of those loan applications in accordance with the third-party lender’s credit policies. ESPV accounts for the loan participations acquired in accordance with ASC 860-10-40, Transfers and Services, Derecognition, as the lines of credit acquired meet the criteria of a participation interest.
Once the third-party lender originates the loan, ESPV has the right, but not the obligation, to purchase a 90% interest in each Elastic line of credit. Victory Park Management, LLC (“VPC”) entered into an agreement (the "ESPV Facility") under which it loans ESPV all funds necessary up to a maximum borrowing amount to purchase such participation interests in exchange for a fixed return (see Note 5—Notes Payable—ESPV Facility). The Company entered into a separate credit default protection agreement with ESPV whereby the Company agreed to provide credit protection to the investors in ESPV against Elastic loan losses in return for a credit premium. The Company does not hold a direct ownership interest in ESPV, however, as a result of the credit default protection agreement, ESPV was determined to be a VIE and the Company qualifies as the primary beneficiary.
25
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
The following table summarizes the assets and liabilities of the VIE that are included within the Company’s Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020:
| (Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
|
ASSETS
|
||||||||||||||
|
Cash and cash equivalents
|
$ | 20,546 | $ | 97,345 | ||||||||||
|
Loans receivable, net of allowance for loan losses of $13,141 and $13,202, respectively
|
181,319 | 149,951 | ||||||||||||
|
Prepaid expenses and other assets
|
11 | — | ||||||||||||
|
Receivable from payment processors
|
4,219 | 3,652 | ||||||||||||
|
Total assets
|
$ | 206,095 | $ | 250,948 | ||||||||||
|
LIABILITIES AND SHAREHOLDER’S EQUITY
|
||||||||||||||
|
Accounts payable and accrued liabilities ($8,548 and $23,337, respectively, eliminates upon consolidation)
|
$ | 14,280 | $ | 27,663 | ||||||||||
|
Deferred revenue
|
2,814 | 2,300 | ||||||||||||
|
Reserve deposit liability ($15,650 and $23,150, respectively, eliminates upon consolidation)
|
15,650 | 23,150 | ||||||||||||
|
Notes payable, net
|
173,351 | 197,835 | ||||||||||||
|
Total liabilities and shareholder’s equity
|
$ | 206,095 | $ | 250,948 | ||||||||||
EF SPV, Ltd.
On October 15, 2018, the Company entered into several agreements with a third-party lender and EF SPV, Ltd. (“EF SPV”), an entity formed by third-party investors for the purpose of purchasing loan participations from the third-party lender. Per the terms of the agreements, the Company provides customer acquisition services to generate loan applications submitted to the third-party lender. In addition, the Company licenses loan underwriting software and provides services to the third-party lender to evaluate the credit quality of those loan applications in accordance with the third-party lender’s credit policies. EF SPV accounts for the loan participations acquired in accordance with ASC 860-10-40, Transfers and Services, Derecognition, as the installment loans acquired meet the criteria of a participation interest.
Once the third-party lender originates the loan, EF SPV has the right, but not the obligation, to purchase a 96% interest in each Rise bank originated installment loan. VPC lends EF SPV all funds necessary up to a maximum borrowing amount to purchase such participation interests in exchange for a fixed return (see Note 5—Notes Payable—EF SPV Facility). The Company entered into a separate credit default protection agreement with EF SPV whereby the Company agreed to provide credit protection to the investors in EF SPV against Rise bank originated loan losses in return for a credit premium. The Company does not hold a direct ownership interest in EF SPV, however, as a result of the credit default protection agreement, EF SPV was determined to be a VIE and the Company qualifies as the primary beneficiary.
26
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
The following table summarizes the assets and liabilities of the VIE that are included within the Company’s Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020:
| (Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
|
ASSETS
|
||||||||||||||
|
Cash and cash equivalents
|
$ | 16,153 | $ | 35,450 | ||||||||||
|
Loans receivable, net of allowance for loan losses of $22,173 and $14,342, respectively
|
126,291 | 83,869 | ||||||||||||
|
Prepaid expenses and other assets
|
3 | 34 | ||||||||||||
|
Receivable from payment processors ($352 and $231, respectively, eliminates upon consolidation)
|
1,553 | 679 | ||||||||||||
|
Total assets
|
$ | 144,000 | $ | 120,032 | ||||||||||
|
LIABILITIES AND SHAREHOLDER’S EQUITY
|
||||||||||||||
|
Accounts payable and accrued liabilities ($375 and $16,459, respectively, eliminates upon consolidation)
|
$ | 2,263 | $ | 17,599 | ||||||||||
|
Reserve deposit liability ($8,950 and $8,950, respectively, eliminates upon consolidation)
|
8,950 | 8,950 | ||||||||||||
|
Notes payable, net
|
132,787 | 93,483 | ||||||||||||
|
Total liabilities and shareholder’s equity
|
$ | 144,000 | $ | 120,032 | ||||||||||
EC SPV, Ltd.
In July 2020, the Company entered into several agreements with a third-party lender and EC SPV, Ltd. (“EC SPV”), an entity formed by third-party investors for the purpose of purchasing loan participations from the third-party lender. Per the terms of the agreements, the Company provides customer acquisition services to generate loan applications submitted to the third-party lender. In addition, the Company licenses loan underwriting software and provides services to the third-party lender to evaluate the credit quality of those loan applications in accordance with the third-party lender’s credit policies. EC SPV accounts for the loan participations acquired in accordance with ASC 860-10-40, Transfers and Services, Derecognition, as the installment loans acquired meet the criteria of a participation interest.
Once the third-party lender originates the loan, EC SPV has the right to purchase an interest in each Rise bank originated installment loan. The third-party lender retains 5% of the balances of all the loans originated and sells the remaining 95% participation to EC SPV. VPC will lend EC SPV all funds necessary up to a maximum borrowing amount to purchase such participation interests in exchange for a fixed return (see Note 5—Notes Payable—EC SPV Facility). The Company entered into a separate credit default protection agreement with EC SPV whereby the Company agreed to provide credit protection to the investors in EC SPV against Rise bank originated loan losses in return for a credit premium. The Company does not hold a direct ownership interest in EC SPV, however, as a result of the credit default protection agreement, EC SPV was determined to be a VIE and the Company qualifies as the primary beneficiary.
27
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
The following table summarizes the assets and liabilities of the VIE that are included within the Company’s Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020:
| (Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
|
ASSETS
|
||||||||||||||
|
Cash and cash equivalents
|
$ | 10,996 | $ | 9,377 | ||||||||||
|
Restricted cash
|
1,000 | 1,000 | ||||||||||||
|
Loans receivable, net of allowance for loan losses of $7,295 and $1,634, respectively
|
43,926 | 19,232 | ||||||||||||
|
Prepaid expenses and other assets
|
3 | 11 | ||||||||||||
|
Receivable from payment processors ($54 and $6, respectively, eliminates upon consolidation)
|
788 | 199 | ||||||||||||
|
Total assets
|
$ | 56,713 | $ | 29,819 | ||||||||||
|
LIABILITIES AND SHAREHOLDER’S EQUITY
|
||||||||||||||
|
Accounts payable and accrued liabilities ($976 and $803, respectively, eliminates upon consolidation)
|
$ | 2,880 | $ | 1,541 | ||||||||||
|
Reserve deposit liability ($3,500 and $3,500, respectively, eliminates upon consolidation)
|
3,500 | 3,500 | ||||||||||||
|
Notes payable, net
|
50,333 | 24,778 | ||||||||||||
|
Total liabilities and shareholder’s equity
|
$ | 56,713 | $ | 29,819 | ||||||||||
CSO Lender
The CSO lender was considered a VIE of the Company; however, the Company did not have any ownership interest in the CSO lender, did not exercise control over it, and was not the primary beneficiary, and therefore, did not consolidate the CSO lender’s results with its results. There were no new loan originations in 2021 under the CSO program and the wind-down of this portfolio was completed in the third quarter of 2021.
NOTE 5—NOTES PAYABLE, NET
The Company has four debt facilities with VPC, the Rise SPV, LLC credit facility (the "VPC Facility"), the ESPV Facility, the EF SPV Facility, and effective July 31, 2020, the EC SPV Facility. The facilities had the following terms as of September 30, 2021.
VPC Facility
The VPC facility has a maximum borrowing amount of $200 million (amended as of July 31, 2020) used to fund the Rise loan portfolio (“US Term Note”). Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). At December 31, 2020, the weighted average base rate on the outstanding balance was 2.73% and the overall interest rate was 9.98%. At September 30, 2021, the weighted average base rate on the outstanding balance was 2.49% and the overall interest rate was 9.49%. All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.0% at the borrowing date. The VPC facility has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.
The US Term Note matures on January 1, 2024. There are no principal payments due or scheduled until the maturity date. All assets of the Company are pledged as collateral to secure the VPC Facility. The VPC Facility contains certain covenants for the Company such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the VPC Facility as of September 30, 2021 and December 31, 2020.
28
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
The VPC Facility previously included a term note (the "4th Tranche Term Note") used to fund working capital with a maximum borrowing amount of $18 million and a base rate of 2.73% plus 13%. The interest rate at December 31, 2020 was 15.73%. In January 2021, the Company paid off this term note prior to its maturity on February 1, 2021.
Prior to ECIL entering administration and being classified a discontinued operation by the Company on June 29, 2020, the VPC Facility included a note used to fund the UK Sunny loan portfolio (“UK Term Note”). Upon deconsolidation of ECIL, this note was removed from the Company's Condensed Consolidated Balance Sheets and was presented within Liabilities from discontinued operations in all prior periods presented. Under the terms of the VPC Facility, Elevate Credit, Inc. (the "Parent") had provided a guarantee to VPC for the repayment of the debt of any subsidiary, which included the outstanding debt of ECIL. Repayment of the UK Term Note was completed by ECIL in the third quarter of 2020 and any guarantee obligation associated with the UK Term Note was released with the repayment.
ESPV Facility
The ESPV Facility has a maximum borrowing amount of $350 million used to purchase loan participations from a third-party lender. Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed at 15.48% (base rate of 2.73% plus 12.75%). Effective July 1, 2019, the interest rate on the debt outstanding as of the amendment date was set at 10.23% (base rate of 2.73% plus 7.5%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). At December 31, 2020 the weighted average base rate on the outstanding balance was 2.72% and the overall interest rate was 9.97%. At September 30, 2021, the weighted average base rate on the outstanding balance was 2.57% and the overall interest rate was 9.57%. All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.0% at the borrowing date. The ESPV Term Note has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.
The ESPV Term Note matures on January 1, 2024. There are no principal payments due or scheduled until the maturity date. All assets of the Company and ESPV are pledged as collateral to secure the ESPV Facility. The ESPV Facility contains certain covenants for the Company such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the ESPV Facility as of September 30, 2021 and December 31, 2020.
EF SPV Facility
The EF SPV Facility has a maximum borrowing amount of $250 million (amended as of July 31, 2020) used to purchase loan participations from a third-party lender. Prior to execution of the agreement with VPC effective February 1, 2019, EF SPV was a borrower on the US Term Note under the VPC Facility and the interest rate paid on this facility was a base rate (defined as 3-month LIBOR, with a 1% floor) plus 11%. Upon the February 1, 2019 amendment date, $43 million was re-allocated into the EF SPV Facility and the interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). The weighted average base rate on the outstanding balance at December 31, 2020 was 2.45% and the overall interest rate was 9.70%. The weighted average base rate on the outstanding balance at September 30, 2021 was 1.87% and the overall interest rate was 8.87%. All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.0% at the borrowing date. The EF SPV Term Note has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.
The EF SPV Term Note matures on January 1, 2024. There are no principal payments due or scheduled until the maturity date. All assets of the Company and EF SPV are pledged as collateral to secure the EF SPV Facility. The EF SPV Facility contains certain covenants for the Company such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the EF SPV Facility as of September 30, 2021 and December 31, 2020.
29
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
EC SPV Facility
VPC entered into a new debt facility with EC SPV on July 31, 2020. The EC SPV Facility has a maximum borrowing amount of $100 million used to purchase loan participations from a third-party lender. The weighted average base rate on the outstanding balance at December 31, 2020 was 2.73% and the overall interest rate was 9.98%. The weighted average base rate on the outstanding balance at September 30, 2021 was 2.20% and the overall interest rate was 9.20%. All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.0% at the borrowing date. The EC SPV Term Note has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.
The EC SPV Term Note matures on January 1, 2024. There are no principal payments due or scheduled until the maturity date. All assets of the Company and EC SPV are pledged as collateral to secure the EC SPV Facility. The EC SPV Facility contains certain covenants for the Company such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the EC SPV Facility as of September 30, 2021 and December 31, 2020.
VPC, ESPV, EF SPV and EC SPV Facilities:
The outstanding balances of Notes payable, net of debt issuance costs, are as follows:
| (Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
|
US Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)
|
|
$ | 79,600 | $ | 104,500 | |||||||||
|
4th Tranche Term Note bearing interest at the base rate + 13%
|
|
— | 18,050 | |||||||||||
|
ESPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)
|
|
174,600 | 199,500 | |||||||||||
|
EF SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)
|
|
132,800 | 93,500 | |||||||||||
|
EC SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)
|
|
50,500 | 25,000 | |||||||||||
|
Debt issuance costs
|
|
(1,682) | (2,147) | |||||||||||
|
Total
|
|
$ | 435,818 | $ | 438,403 | |||||||||
The change in the facility balances includes the following:
•US Term Note - Paydowns of $25.9 million and $10 million in the first and second quarter of 2021, respectively, and a draw of $11 million in the third quarter of 2021;
•4th Tranche Term Note - Debt obligation of $18.1 million paid off in the first quarter of 2021;
•ESPV Term Note - Paydown of $39.9 million in the first quarter of 2021 and a draw of $15 million in the third quarter of 2021;
•EF SPV Term note - Paydown of $18.7 million in the first quarter of 2021 and draws of $15 million and $43 million in the second and third quarter of 2021, respectively; and
•EC SPV Term Note - Draws of $5 million, $5 million, and $15.5 million in the first, second, and third quarters of 2021, respectively.
Per the terms of the February 2019 amendments and the July 31, 2020 EC SPV agreement, the Company qualified for a 25 bps rate reduction on the VPC, ESPV, EF SPV and EC SPV facilities effective January 1, 2021. The Company has evaluated the interest rates for its debt and believes they represent market rates based on the Company’s size, industry, operations and recent amendments. As a result, the carrying value for the debt approximates the fair value.
30
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
Future debt maturities as of September 30, 2021 are as follows:
| Year (dollars in thousands) | September 30, 2021 | |||||||
|
Remainder of 2021
|
$ | — | ||||||
|
2022
|
— | |||||||
|
2023
|
— | |||||||
|
2024
|
437,500 | |||||||
|
2025
|
— | |||||||
|
Thereafter
|
— | |||||||
|
Total
|
$ | 437,500 | ||||||
NOTE 6—GOODWILL AND INTANGIBLE ASSETS
The Company’s goodwill represents the excess purchase price over the estimated fair market value of the net assets acquired by the predecessor parent company, Think Finance, Inc. (“Think Finance”) related to the Elastic and previously consolidated UK reporting units. The Company performs an impairment review of goodwill and intangible assets with an indefinite life annually at October 1. As a result of the recent global economic impact and uncertainty due to the COVID-19 pandemic, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment testing on the goodwill balances of its reporting units. The Company performed a detailed qualitative and quantitative assessment of each reporting unit and concluded that the goodwill associated with the previously consolidated UK reporting unit was impaired as the fair value of the UK reporting unit was less than its carrying amount. The impairment loss of $9.3 million was included in Loss from discontinued operations due to the deconsolidation of ECIL. While there was a decline in the fair value of the Elastic reporting unit at March 31, 2020, there was no impairment identified during the quantitative assessment. The annual test was completed as of October 1, 2020 and the Company determined that there was no evidence of impairment of goodwill or indefinite life intangible assets. No events or circumstances occurred between October 2, 2020 and September 30, 2021 that would more likely than not reduce the fair value of the Elastic reporting unit below the carrying amount. The Company has $6.8 million of goodwill (all related to the Elastic reporting unit) on the Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, respectively. Of the total goodwill balance, approximately $270 thousand is deductible for tax purposes.
The Company's impairment evaluation of goodwill is based on comparing the fair value of the respective reporting unit to its carrying value. The fair value of the reporting unit is determined based on a weighted average of the income and market approaches. The income approach establishes fair value based on estimated future cash flows of the reporting unit, discounted by an estimated weighted-average cost of capital developed using the capital asset pricing model, which reflects the overall level of inherent risk of the reporting unit. The income approach uses the Company's projections of financial performance for a six- to nine-year period and includes assumptions about future revenue growth rates, operating margins and terminal values. The market approach establishes fair value by applying cash flow multiples to the respective reporting unit's operating performance. The multiples are derived from other publicly traded companies that are similar but not identical from an operational and economic standpoint. The Company’s estimates are based upon assumptions believed to be reasonable. However, given the inherent uncertainty in determining the assumptions underlying a discounted cash flow analysis, particularly in the current volatile market, actual results may differ from those used in these valuations which could result in additional impairment charges in the future.
31
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
The carrying value of acquired intangible assets as of September 30, 2021 is presented in the table below:
| (Dollars in thousands) | Cost | Accumulated Amortization | Net | |||||||||||||||||
|
Assets subject to amortization:
|
||||||||||||||||||||
|
Acquired technology
|
$ | 211 | $ | (211) | $ | — | ||||||||||||||
|
Non-compete
|
2,461 | (2,461) | — | |||||||||||||||||
|
Customers
|
126 | (126) | — | |||||||||||||||||
|
Assets not subject to amortization:
|
||||||||||||||||||||
|
Domain names
|
231 | — | 231 | |||||||||||||||||
|
Total
|
$ | 3,029 | $ | (2,798) | $ | 231 | ||||||||||||||
The carrying value of acquired intangible assets as of December 31, 2020 is presented in the table below:
| (Dollars in thousands) | Cost | Accumulated Amortization | Net | |||||||||||||||||
|
Assets subject to amortization:
|
||||||||||||||||||||
|
Acquired technology
|
$ | 211 | $ | (211) | $ | — | ||||||||||||||
|
Non-compete
|
2,461 | (1,859) | 602 | |||||||||||||||||
|
Customers
|
126 | (126) | — | |||||||||||||||||
|
Assets not subject to amortization:
|
||||||||||||||||||||
|
Domain names
|
531 | — | 531 | |||||||||||||||||
|
Total
|
$ | 3,329 | $ | (2,196) | $ | 1,133 | ||||||||||||||
With Robert Johnson's decision to not run for reelection to the Company's Board of Directors in March 2021, the remaining non-compete agreements expired and the Company accelerated the amortization of the assets to coincide with his announcement. Total amortization expense recognized for the nine months ended September 30, 2021 and 2020 was approximately $602 thousand and $90 thousand, respectively. For the three months ended September 30, 2020, $30 thousand of amortization expense was recognized. As of March 31, 2021, there were no intangible assets subject to amortization with any remaining life.
Additionally, in January 2021, the Company sold a domain name that was held for a gain of $949 thousand, included in Non-operating income (loss) in the Condensed Consolidated Statements of Operations.
NOTE 7—LEASES
The Company has non-cancelable operating leases for facility space and equipment with varying terms. All of the leases for facility space qualified for capitalization under FASB ASC 842, Leases. These leases have remaining lease terms of two to five years, and some may include options to extend the leases for up to ten years. The extension terms are not recognized as part of the right-of-use assets. The Company has elected not to capitalize leases with terms equal to, or less than, one year. As of September 30, 2021 and December 31, 2020, net assets recorded under operating leases totaled $6.2 million and $8.3 million, respectively, and net lease liabilities totaled $9.9 million and $12.0 million, respectively.
The Company analyzes contracts above certain thresholds to identify leases and lease components. Lease and non-lease components are not separated for facility space leases. The Company uses its contractual borrowing rate to determine lease discount rates when an implicit rate is not available.
The Company entered into two sublease contracts with independent third-parties for facility space related to right-of-use assets in January 2021 and September 2021, respectively. The Company's obligations under the original leases were not relieved. As the sublease income is immaterial, payments received are recognized as an offset to Occupancy and equipment in the Condensed Consolidated Statements of Operations. The signing of the subleases triggered impairment evaluations and the Company determined the related right-of-use assets were impaired. Impairment losses of $549 thousand for the January sublease and $84 thousand for the September sublease were recognized in Non-operating income (loss) in the Condensed Consolidated Statements of Operations.
32
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
Total gross lease cost for the three and nine months ended September 30, 2021 and 2020, included in Occupancy and equipment in the Condensed Consolidated Statements of Operations, is detailed in the table below:
| Three Months Ended September 30, | ||||||||||||||
| Lease cost (dollars in thousands) | 2021 | 2020 | ||||||||||||
|
Operating lease cost
|
$ | 766 | $ | 808 | ||||||||||
|
Short-term lease cost
|
— | — | ||||||||||||
|
Total lease cost
|
$ | 766 | $ | 808 | ||||||||||
| Nine Months Ended September 30, | ||||||||||||||
| Lease cost (dollars in thousands) | 2021 | 2020 | ||||||||||||
|
Operating lease cost
|
$ | 2,301 | $ | 2,423 | ||||||||||
|
Short-term lease cost
|
— | — | ||||||||||||
|
Total lease cost
|
$ | 2,301 | $ | 2,423 | ||||||||||
Further information related to leases is as follows:
| Three Months Ended September 30, | ||||||||||||||
| Supplemental cash flows information (dollars in thousands) | 2021 | 2020 | ||||||||||||
|
Cash paid for amounts included in the measurement of lease liabilities
|
$ | 973 | $ | 946 | ||||||||||
|
Right-of-use assets obtained in exchange for lease obligations
|
$ | — | $ | — | ||||||||||
|
Weighted average remaining lease term
|
2.9 years | 3.8 years | ||||||||||||
|
Weighted average discount rate
|
10.23 | % | 10.23 | % | ||||||||||
| Nine Months Ended September 30, | ||||||||||||||
| Supplemental cash flows information (dollars in thousands) | 2021 | 2020 | ||||||||||||
|
Cash paid for amounts included in the measurement of lease liabilities
|
$ | 2,891 | $ | 2,801 | ||||||||||
|
Right-of-use assets obtained in exchange for lease obligations
|
$ | — | $ | — | ||||||||||
|
Weighted average remaining lease term
|
2.9 years | 3.8 years | ||||||||||||
|
Weighted average discount rate
|
10.23 | % | 10.23 | % | ||||||||||
Future minimum lease payments as of September 30, 2021 are as follows:
| Year (dollars in thousands) | Operating Leases | |||||||
| 2021 |
|
$ | 985 | |||||
| 2022 |
|
3,984 | ||||||
| 2023 |
|
3,486 | ||||||
| 2024 |
|
1,438 | ||||||
| 2025 |
|
1,254 | ||||||
|
Thereafter
|
|
638 | ||||||
|
Total future minimum lease payments
|
|
$ | 11,785 | |||||
|
Less: Imputed interest
|
|
(1,876) | ||||||
|
Operating lease liabilities
|
|
$ | 9,909 | |||||
33
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
NOTE 8—SHARE-BASED COMPENSATION
Share-based compensation expense recognized for the three months ended September 30, 2021 and 2020 totaled approximately $1.6 million and $1.2 million, respectively, and $4.9 million and $6.5 million for the nine months ended September 30, 2021 and 2020, respectively.
2016 Omnibus Incentive Plan
The 2016 Omnibus Incentive Plan ("2016 Plan") was adopted by the Company’s Board of Directors on January 5, 2016 and approved by the Company’s stockholders thereafter. The 2016 Plan became effective on June 23, 2016. The 2016 Plan provides for the grant of incentive stock options to the Company’s employees, and for the grant of non-qualified stock options, stock appreciation rights, restricted stock, RSUs, dividend equivalent rights, cash-based awards (including annual cash incentives and long-term cash incentives), and any combination thereof to the Company’s employees, directors and consultants. In connection with the 2016 Plan, the Company has reserved but not issued 7,874,404 shares of common stock, which includes shares that would otherwise return to the 2014 Equity Incentive Plan (the "2014 Plan") as a result of forfeiture, termination, or expiration of awards previously granted under the 2014 Plan and outstanding when the 2016 Plan became effective.
The 2016 Plan will automatically terminate 10 years following the date it became effective, unless the Company terminates it sooner. In addition, the Company’s Board of Directors has the authority to amend, suspend or terminate the 2016 Plan provided such action does not impair the rights under any outstanding award.
As of September 30, 2021, the total number of shares available for future grants under the 2016 Plan was 3,527,023 shares.
The Company has in the past and may in the future make grants of share-based compensation as inducement awards to new employees who are outside the 2016 Plan. The Company's board may rely on the employment inducement exception under NYSE Rule 303A.08 in order to approve the grants.
2014 Equity Incentive Plan
The Company adopted the 2014 Plan on May 1, 2014. The 2014 Plan permitted the grant of incentive stock options, non-statutory stock options, and restricted stock. On April 27, 2017, the Company's Board of Directors terminated the 2014 Plan as to future awards and confirmed that underlying shares corresponding to awards under the 2014 Plan that were outstanding at the time the 2016 Plan became effective, that are forfeited, terminated or expired, will become available for issuance under the 2016 Plan.
For the nine months ended September 30, 2021, the Company had the following activity related to outstanding share-based awards:
Stock Options
Stock options are awarded to encourage ownership of the Company's common stock by employees and to provide increased incentive for employees to render services and to exert maximum effort for the success of the Company. The Company's stock options generally permit net-share settlement upon exercise. The option exercise price, vesting schedule and exercise period are determined for each grant by the administrator of the applicable plan. The Company's stock options generally have a 10-year contractual term and vest over a 4-year period.
34
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
A summary of stock option activity as of and for the nine months ended September 30, 2021 is presented below:
| Stock Options |
Shares
|
Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | |||||||||||||||||
|
Outstanding at December 31, 2020
|
886,685 | $ | 5.94 | |||||||||||||||||
|
Granted
|
— | — | ||||||||||||||||||
|
Exercised
|
(12,500) | 2.13 | ||||||||||||||||||
|
Expired
|
— | — | ||||||||||||||||||
|
Forfeited
|
(65,000) | 4.37 | ||||||||||||||||||
|
Outstanding at September 30, 2021
|
809,185 | 6.13 | 3.41 | |||||||||||||||||
|
Options exercisable at September 30, 2021
|
809,185 | $ | 6.13 | 3.41 | ||||||||||||||||
At September 30, 2021, there were no unrecognized compensation costs related to unvested stock options to be recognized. The total intrinsic value of options exercised for the nine months ended September 30, 2021 was $30 thousand.
Restricted Stock Units
RSUs are awarded to serve as a key retention tool for the Company to retain its executives and key employees. RSUs will transfer value to the holder even if the Company’s stock price falls below the price on the date of grant, provided that the recipient provides the requisite service during the period required for the award to “vest.”
The weighted-average grant-date fair value for RSUs granted under the 2016 Plan during the nine months ended September 30, 2021 was $4.26. These RSUs primarily vest 25% on the first anniversary of the effective date, and 25% each year thereafter, until full vesting on the fourth anniversary of the effective date.
A summary of RSU activity as of and for the nine months ended September 30, 2021 is presented below:
|
RSUs
|
Shares
|
Weighted Average Grant-Date Fair Value | ||||||||||||||||||
|
Unvested at December 31, 2020
|
2,924,086 | $ | 4.17 | |||||||||||||||||
|
Granted
|
1,853,617 | 4.26 | ||||||||||||||||||
|
Vested(1)
|
(1,135,586) | 4.77 | ||||||||||||||||||
|
Forfeited
|
(103,924) | 4.34 | ||||||||||||||||||
|
Unvested at September 30, 2021
|
3,538,193 | 4.02 | ||||||||||||||||||
|
Expected to vest at September 30, 2021
|
2,627,202 | $ | 4.03 | |||||||||||||||||
(1)During the year ended certain RSUs were net share-settled to cover the required withholding tax and the remaining amounts were converted into an equivalent number of shares of the Company's common stock. The Company withheld 317,100 shares for applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities for the nine months ended September 30, 2021.
At September 30, 2021, there was approximately $8.1 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 2.5 years. During the nine months ended September 30, 2021, the total intrinsic value of RSUs that vested during the period was approximately $4.2 million. As of September 30, 2021, the aggregate intrinsic value of the vested and expected to vest RSUs was approximately $10.9 million.
Employee Stock Purchase Plan
The Company offers an Employee Stock Purchase Plan ("ESPP") to eligible US employees. There are currently 2,196,257 shares authorized and 934,335 reserved for the ESPP. There were 149,613 shares purchased under the ESPP for the nine months ended September 30, 2021. Within share-based compensation expense for the nine months ended September 30, 2021 and 2020, $473 thousand and $460 thousand, respectively, relates to the ESPP. For the three months ended September 30, 2021 and 2020, $132 thousand and $177 thousand, respectively, relates to the ESPP within share-based compensation expense.
35
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
NOTE 9—FAIR VALUE MEASUREMENTS
The accounting guidance on fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).
The Company groups its assets and liabilities measured at fair value in three levels of the fair value hierarchy, based on the fair value measurement technique, as described below:
Level 1—Valuation is based upon quoted prices (unadjusted) for identical assets and liabilities in active exchange markets that the Company has the ability to access at the measurement date.
Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques with significant assumptions and inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3—Valuation is derived from model-based techniques that use inputs and significant assumptions that are supported by little or no observable market data. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.
The Company monitors the market conditions and evaluates the fair value hierarchy levels at least quarterly. For any transfers in and out of the levels of the fair value hierarchy, the Company discloses the fair value measurement at the beginning of the reporting period during which the transfer occurred. For the nine month periods ended September 30, 2021 and 2020, there were no significant transfers between levels.
The level of fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is most significant to the fair value measurement in its entirety. In the determination of the classification of assets and liabilities in Level 2 or Level 3 of the fair value hierarchy, the Company considers all available information, including observable market data, indications of market conditions, and its understanding of the valuation techniques and significant inputs used. Based upon the specific facts and circumstances, judgments are made regarding the significance of the Level 3 inputs to the fair value measurements of the respective assets and liabilities in their entirety. If the valuation techniques that are most significant to the fair value measurements are principally derived from assumptions and inputs that are corroborated by little or no observable market data, the asset or liability is classified as Level 3.
Financial Assets and Liabilities Not Measured at Fair Value
The Company has evaluated Loans receivable, net of allowance for loan losses, Receivable from payment processors and Accounts payable and accrued liabilities, and believes the carrying value approximates the fair value due to the short-term nature of these balances. The Company has also evaluated the interest rates for Notes payable, net and believes they represent market rates based on the Company’s size, industry, operations and recent amendments. As a result, the carrying value for Notes payable, net approximates the fair value. The Company classifies its fair value measurement techniques for the fair value disclosures associated with Loans receivable, net of allowance for loan losses, Receivable from payment processors, Accounts payable and accrued liabilities and Notes payable, net as Level 3 in accordance with ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”).
36
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
NOTE 10—INCOME TAXES
Income tax expense for the three and nine months ended September 30, 2021 and 2020 consists of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Current income tax expense:
|
||||||||||||||||||||||||||
|
Federal
|
$ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
|
State
|
440 | 803 | 486 | 1,133 | ||||||||||||||||||||||
|
Total current income tax expense
|
440 | 803 | 486 | 1,133 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Deferred income tax expense (benefit):
|
||||||||||||||||||||||||||
|
Federal
|
(5,059) | 6,301 | (366) | 12,658 | ||||||||||||||||||||||
|
State
|
2,776 | (2,221) | 1,709 | 1,520 | ||||||||||||||||||||||
|
Total deferred income tax expense (benefit)
|
(2,283) | 4,080 | 1,343 | 14,178 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Total income tax expense (benefit)
|
$ | (1,843) | $ | 4,883 | $ | 1,829 | $ | 15,311 | ||||||||||||||||||
No material penalties or interest related to taxes, other than as described below, were recognized for the three and nine months ended September 30, 2021 and 2020.
The Company’s effective tax rates for continuing operations for the nine months ended September 30, 2021 and 2020, including discrete items, were 369.5% and 27.4%, respectively. For the nine months ended September 30, 2021 the Company’s effective tax rate significantly differed from the standard corporate federal income tax rate of 21% primarily due to the Company's recognition of an uncertain tax position of $1.6 million, net in Income tax expense/(benefit) (see further discussion in the following paragraph). Other differences are due to discrete items, related to stock compensation and return-to-provision estimate adjustments, other permanent non-deductible items and corporate state tax obligations in the states where it has lending activities. For the nine months ended September 30, 2020, the Company's effective tax rate differed from the standard corporate federal income tax rate of 21% primarily due to discrete items, other permanent non-deductible items and corporate state tax obligations in the states where it has lending activities. The Company's cash effective tax rate was approximately 1.5%.
As of September 30, 2021, the gross liability for an uncertain tax position was $1.9 million, exclusive of interest and penalties. Of this amount, $1.5 million would affect the Company’s effective tax rate if realized. The Company recognizes interest income from favorable settlements and interest expense and penalties accrued on uncertain tax positions within income tax expense (benefit) in the Condensed Consolidated Statements of Operations. As of September 30, 2021, the Company had accrued $0.1 million for interest and penalties. The liability for the uncertain tax position results from a recent change in tax regulations in the state of Texas that impacted the Company’s previously recognized research and development state tax credits. The Company has no expectation that this liability on the books at September 30, 2021 will be settled in the next 12 months. The Company’s 2016-2020 tax years remain open to income tax audits in Texas at September 30, 2021. There were no uncertain tax positions identified and recognized at September 30, 2020 and December 31, 2020
On March 11, 2021, the American Rescue Plan Act ("ARP Act") was signed into law. The Company reviewed the tax relief provisions of the ARP Act, including the Company's eligibility for such provisions, and determined that the impact is likely to be insignificant with regard to the Company's effective tax rate. The Company continues to monitor and evaluate its eligibility under the ARP Act tax relief provisions to identify any portions that may become applicable in the future.
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company would make a cumulative adjustment in that quarter.
For purposes of evaluating the need for a deferred tax valuation allowance, significant weight is given to evidence that can be objectively verified. The following provides an overview of the assessment that was performed for the deferred tax assets, net.
37
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
Deferred tax assets, net
At September 30, 2021 and December 31, 2020, the Company did not establish a valuation allowance for its deferred tax assets (“DTA”) based on management’s expectation of generating sufficient taxable income in a look forward period over the next one to three years. The Federal net operating loss ("NOL") carryforward from operations at December 31, 2020 was approximately $64.7 million. Any research and development credits recognized as a deferred tax asset expire beginning in 2036. The ultimate realization of the resulting deferred tax asset is dependent upon generating sufficient taxable income prior to the expiration of this carryforward. The Company considered the following factors when making its assessment regarding the ultimate realizability of the deferred tax assets.
Significant factors included the following:
•The Company is in a three-year cumulative pre-tax income position in 2021. Additionally, the Company has a history utilizing its past NOL carryforwards.
•Due to the short-term nature of the loan portfolio and the other material items that comprise the deferred tax assets, net, the Company estimates that the majority of these deferred tax items will reverse within one to three years.
The Company has given due consideration to all the factors and has concluded that the deferred tax asset is expected to be realized based on management’s expectation of generating sufficient taxable income and the reversal of tax timing differences in a look-forward period over the next one to three years. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted in the future if estimates of future taxable income change. As a result, as of September 30, 2021 and December 31, 2020, the Company did not establish a valuation allowance for the DTA.
NOTE 11—COMMITMENTS, CONTINGENCIES AND GUARANTEES
Contingencies
Currently and from time to time, the Company may become a defendant in various legal and regulatory actions that arise in the ordinary course of business. The Company generally cannot predict the eventual outcome, the timing of the resolution or the potential losses, fines or penalties of such legal and regulatory actions. Actual outcomes or losses may differ materially from the Company's current assessments and estimates, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition or cash flows.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation, regulatory matters and other legal proceedings when those matters present material loss contingencies that are both probable and reasonably estimable. Even when an accrual is recorded, the Company may be exposed to loss in excess of any amounts accrued.
Except as described below, the Company believes that any sum it may be required to pay in connection with proceedings or claims in excess of the amounts recorded would likely not have a material adverse effect upon the Company's results of operations, financial conditions or cash flows on a consolidated annual basis but could have a material adverse impact in a particular quarterly reporting period.
38
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
Other Matters:
In December 2019, the Think Finance, Inc. ("TFI") bankruptcy plan was confirmed, and any potential future claims from the TFI Creditors' Committee were assigned to the Think Finance Litigation Trust (“TFLT”). On August 14, 2020, the TFLT filed an adversary proceeding against Elevate Credit, Inc. in the United States Bankruptcy Court for the Northern District of Texas, alleging certain avoidance claims related to Elevate's spin-off from TFI on May 1, 2014 under the Bankruptcy Code and the Texas Uniform Fraudulent Transfer Act ("TUFTA"). If it were determined that the spin-off constituted a fraudulent conveyance or that there were other avoidance actions associated with the spin-off, then the spin-off could be deemed void and there could be a number of different remedies imposed against Elevate, including without limitation, the requirement that Elevate has to pay money damages. While the TFLT values this claim at $246 million, the Company believes that it has valid defenses to the claim and intends to vigorously defend itself against this claim. Additionally, a class action lawsuit against Elevate was filed on August 14, 2020 in the Eastern District of Virginia alleging violations of usurious interest and aiding and abetting various racketeering activities related to the operations of TFI prior to and immediately after the 2014 spin-off. On October 26, 2020, Elevate filed a motion to dismiss which was denied by Judge Lauck on September 30, 2021Elevate views this lawsuit as without merit and intends to vigorously defend its position. Based upon preliminary settlement discussions in the fourth quarter of 2020, the Company accrued a contingent loss in the amount of $17 million for estimated losses related to the TFLT and class action disputes within Accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020. While Elevate can provide no assurances as to the duration or potential outcome of such proceedings, in the event that for either proceeding there is a settlement and Elevate is unable to pay any amount resulting from such settlement, it could have a material adverse effect on Elevate’s financial condition, or, if there is no settlement and Elevate is deemed to ultimately be liable in these matters, Elevate could be obligated to file for bankruptcy.
On June 5, 2020, the District of Columbia (the "District") sued Elevate in the Superior Court of the District of Columbia alleging that Elevate may have violated the District's Consumer Protection Procedures Act and the District of Columbia's Municipal Regulations in connection with loans issued by banks in the District of Columbia. This action was removed to federal court, and on August 3, 2020, the District filed a motion to remand to Superior Court. On July 15, 2021, the District Court Judge remanded the case to Superior Court. Elevate disagrees that it has violated the above referenced laws and regulations and it intends to vigorously defend its position.
In addition, on January 27, 2020, Sopheary Sanh filed a class action complaint in the Western District Court in the state of Washington against Rise Credit Service of Texas, LLC d/b/a Rise, Opportunity Financial, LLC and Applied Data Finance, LLC d/b/a Personify Financial. The Plaintiff in the case claims that Rise and Personify Financial have violated Washington’s Consumer Protection Act by engaging in unfair or deceptive practices, and seeks class certification, injunctive relief to prevent solicitation of consumers to apply for loans, monetary damages and other appropriate relief, including an award of costs, pre- and post-judgment interest, and attorneys' fees. The lawsuit was removed to federal court. On January 12, 2021, the court granted Rise's motion to dismiss, as well as the other non-affiliated service providers. The Judge did, however, allow Plaintiff the opportunity to amend its complaint. On June 22, 2021, the Plaintiff filed its Amended Complaint alleging that Elevate or its subsidiary were not service providers to the originating bank, but rather the true lender. On July 20, 2021, Elevate filed its Motion to Dismiss the Amended Complaint. On September 20, 2021, Plaintiff filed its Response and Opposition to Defendant's Motion to Dismiss. Elevate disagrees that it has violated the Washington Consumer Protection Act and it intends to vigorously defend its position.
On March 3, 2020, Heather Crawford filed a lawsuit in the Superior Court of the state of California, county of Los Angeles, against Elevate Credit, Inc., Elevate Credit Service, LLC and Rise Credit of California, LLC alleging unconscionable interest rates on Rise loans and seeking damages and public injunctive relief. Elevate filed a motion to compel arbitration, and Ms. Crawford dismissed the lawsuit without prejudice to refile in arbitration. Ms. Crawford has not yet filed any arbitration demand. In addition, on April 6, 2020, Dahn Le made a demand for arbitration against Elevate Credit, Inc., Elevate Credit Service, LLC and Rise Credit of California, LLC similarly alleging unconscionable interest rates on Rise loans and seeking damages and public injunctive relief. On September 1, 2021, the Arbitrator ruled that Elevate was deemed to be the prevailing party as to all matters in the Danh Le arbitration and all of Claimant's claims were denied. Elevate is seeking to confirm this judgment.
39
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
Commitments
The Elastic product, which offers lines of credit to consumers, had approximately $290.3 million and $275.9 million in available and unfunded credit lines at September 30, 2021 and December 31, 2020, respectively. The Today Card product had approximately $16.7 million and $5.4 million in available and unfunded credit lines as of September 30, 2021 and December 31, 2020, respectively. From May 2017 through September 2020, the Rise product offered lines of credit to consumers in certain states. At both September 30, 2021 and December 31, 2020, there were no remaining available and unfunded Rise credit lines. While these amounts represented the total available unused credit lines, the Company has not experienced and does not anticipate that all line of credit customers will access their entire available credit lines at any given point in time. The Company has not recorded a loan loss reserve for unfunded credit lines as the Company has the ability to cancel commitments within a relatively short timeframe.
Effective June 2017, the Company entered into a seven-year lease agreement for office space in California. Upon the commencement of the lease, the Company was required to provide the lessor with an irrevocable and unconditional $500 thousand letter of credit. Provided the Company is not in default of any terms of the lease agreement, the outstanding required balance of the letter of credit will be reduced by $100 thousand per year beginning on the second anniversary of the lease commencement and ending on the fifth anniversary of the lease agreement. The minimum balance of the letter of credit will be at least $100 thousand throughout the duration of the lease. At September 30, 2021 and December 31, 2020, the Company had $200 thousand and $300 thousand, respectively, of cash balances securing the letter of credit which is included in Restricted cash within the Condensed Consolidated Balance Sheets.
Guarantees
CSO Program:
In connection with its CSO programs, the Company guarantees consumer loan payment obligations to CSO lenders and is required to purchase any defaulted loans it has guaranteed. The guarantee represents an obligation to purchase specific loans that go into default. As of September 30, 2021, the guarantee no longer exists as there are no remaining CSO program obligations.
UK Debt Guarantee:
Under the terms of the VPC Facility, Elevate Credit, Inc. (the "Parent") had provided a guarantee to VPC for the repayment of the UK Term Note. ECIL completed payment of the UK Term Note in the third quarter of 2020 and any guarantee obligation associated with the UK Term Note was released with the repayment.
Indemnifications and contingent loss accrual
In the ordinary course of business, the Company may indemnify customers, vendors, lessors, investors, and other parties for certain matters subject to various terms and scopes. For example, the Company may indemnify certain parties for losses due to the Company's breach of certain agreements or due to certain services it provides. As the Company has previously disclosed, the Company has also entered into separate indemnification agreements with the Company’s directors and executive officers, in addition to the indemnification provided for in the Company’s amended and restated bylaws. These agreements, among other things, provide that the Company will indemnify its directors and executive officers for certain expenses, including attorneys’ fees, judgments, penalties, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of the Company’s or, where applicable, TFI’s directors or executive officers, or any of the Company’s subsidiaries or any other company or enterprise to which the person provides services at the Company’s request. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder.
As of December 31, 2020, the Company had accrued approximately $4.4 million for a contingent loss related to a legal matter for a former executive of the company. The Company had accrued $6.7 million at September 30, 2020. This contingent loss was based on a probable settlement composed of both cash and certain amounts that were subject to valuation adjustments until the final settlement. The accrual was recognized as Non-operating loss in the Condensed Consolidated Statements of Operations and as Accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets. The contingent loss was settled as of March 31, 2021 and no further accrual remains as of September 30, 2021. In April 2021, the Company received a net recovery of $510 thousand. The table below presents a roll forward of the net amounts accrued and paid for the three and nine months ended September 30, 2021 and 2020.
40
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Beginning balance
|
$ | — | $ | 5,670 | $ | 4,424 | $ | — | ||||||||||||||||||
|
Accruals
|
— | 1,007 | (510) | 6,677 | ||||||||||||||||||||||
|
Payments
|
— | — | (3,914) | — | ||||||||||||||||||||||
|
Net contingent loss related to a legal matter
|
$ | — | $ | 6,677 | $ | — | $ | 6,677 | ||||||||||||||||||
NOTE 12—DISCONTINUED OPERATIONS
As a result of the recent global economic impact and uncertainty due to the COVID-19 pandemic, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment testing on the goodwill balances of its reporting units. The Company performed a detailed qualitative and quantitative assessment of each reporting unit and concluded that the goodwill associated with the previously consolidated UK reporting unit was impaired as the fair value of the UK reporting unit was less than its carrying amount. The impairment loss of $9.3 million was included in Loss from discontinued operations due to the deconsolidation of ECIL.
On June 29, 2020, ECIL entered into administration in accordance with the provisions of the UK Insolvency Act 1986 and pursuant to a resolution of the board of directors of ECIL. The management, business, affairs and property of ECIL have been placed into the direct control of the appointed administrators, KPMG LLP. Accordingly, the Company deconsolidated ECIL as of June 29, 2020 and presents ECIL's results as Discontinued operations for all periods presented.
In connection with the disposition of ECIL, the Company recognized a loss on its investment. This loss resulted in an estimated US federal and state income tax benefit of $24.2 million and was recognized in the three- and six-month period ending June 30, 2020. During the three months ended September 30, 2020, the Company revised the estimated tax basis in ECIL resulting in an additional $3.9 million income tax benefit for a total tax benefit of $28.1 million at September 30, 2020, which will be available to offset future income tax obligations.
41
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
The table below presents the financial results of ECIL, which are considered Discontinued operations and are excluded from the Company's results of continuing operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 (1) | 2021 | 2020 (1) | ||||||||||||||||||||||
|
Revenues
|
$ | — | $ | — | $ | — | $ | 24,012 | ||||||||||||||||||
|
Cost of sales:
|
||||||||||||||||||||||||||
|
Provision for loan losses
|
— | — | — | 4,785 | ||||||||||||||||||||||
|
Direct marketing costs
|
— | — | — | 1,372 | ||||||||||||||||||||||
|
Other cost of sales
|
— | — | — | 10,790 | ||||||||||||||||||||||
|
Total cost of sales
|
— | — | — | 16,947 | ||||||||||||||||||||||
|
Gross profit
|
— | — | — | 7,065 | ||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||
|
Compensation and benefits
|
— | — | — | 4,785 | ||||||||||||||||||||||
|
Professional services
|
— | — | — | 2,879 | ||||||||||||||||||||||
|
Selling and marketing
|
— | — | — | 605 | ||||||||||||||||||||||
|
Occupancy and equipment
|
— | — | — | 2,141 | ||||||||||||||||||||||
|
Depreciation and amortization
|
— | — | — | 1,427 | ||||||||||||||||||||||
|
Other
|
— | — | — | 288 | ||||||||||||||||||||||
|
Total operating expenses
|
— | — | — | 12,125 | ||||||||||||||||||||||
|
Operating loss
|
— | — | — | (5,060) | ||||||||||||||||||||||
|
Other expense:
|
||||||||||||||||||||||||||
|
Net interest expense
|
— | — | — | (896) | ||||||||||||||||||||||
|
Foreign currency transaction loss
|
— | — | — | (854) | ||||||||||||||||||||||
|
Impairment loss
|
— | — | — | (9,251) | ||||||||||||||||||||||
|
Non-operating income
|
— | — | — | — | ||||||||||||||||||||||
|
Total other expense
|
— | — | — | (11,001) | ||||||||||||||||||||||
|
Loss from operations of discontinued operations
|
— | — | — | (16,061) | ||||||||||||||||||||||
|
Gain (loss) on disposal of discontinued operations
|
— | 529 | — | (27,983) | ||||||||||||||||||||||
|
Income (loss) from discontinued operations before taxes
|
— | 529 | — | (44,044) | ||||||||||||||||||||||
|
Income tax benefit
|
— | 3,936 | — | 28,136 | ||||||||||||||||||||||
|
Net income (loss) from discontinued operations
|
$ | — | $ | 4,465 | $ | — | $ | (15,908) | ||||||||||||||||||
(1) Includes ECIL financial results for the period through June 28, 2020.
At September 30, 2021 and December 31, 2020, the Company had no assets or liabilities related to the discontinued operations of ECIL.
42
| Elevate Credit, Inc. and Subsidiaries | ||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
For the three and nine months ended September 30, 2021 and 2020
NOTE 13—RELATED PARTIES
Expenses related to the Company's board of directors, including board fees, travel reimbursements, share-based compensation and a consulting arrangement with a related party for the three and nine months ended September 30, 2021 and 2020 are included in Professional services within the Condensed Consolidated Statements of Operations and were as follows:
| Three Months Ended September 30, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
|
Fees and travel expenses
|
$ | 111 | $ | 110 | ||||||||||
|
Stock compensation (1)
|
156 | (189) | ||||||||||||
|
Total board related expenses
|
$ | 267 | $ | (79) | ||||||||||
| Nine Months Ended September 30, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
|
Fees and travel expenses
|
$ | 368 | $ | 365 | ||||||||||
|
Stock compensation (1)
|
342 | 1,598 | ||||||||||||
|
Consulting
|
— | 150 | ||||||||||||
|
Total board related expenses
|
$ | 710 | $ | 2,113 | ||||||||||
(1) Includes Elevate's former CEO from January 1, 2020 through July 17, 2020.
During the year ended December 31, 2017, a member of the board of directors entered into a direct investment of $800 thousand in the Rise portion of the VPC Facility. For both the three months ended September 30, 2021 and 2020, the interest payments on this loan were $20 thousand and $59 thousand and $61 thousand for the nine months ended September 30, 2021 and 2020, respectively.
In addition, during the second quarter of 2021, the Company reached an agreement with a member of the board of directors for advances of legal fees under the indemnification provisions of their director agreement. Based on this agreement, the company accrued $1.2 million, which is included in Professional services in the Condensed Consolidated Statements of Operations and in Accounts payable and accrued liabilities within the Condensed Consolidated Balance Sheets.
At September 30, 2021 and December 31, 2020, the Company had approximately $127 thousand and $110 thousand, respectively, due to board members related to the above expenses, which is included in Accounts payable and accrued liabilities within the Condensed Consolidated Balance Sheets.
NOTE 14—SUBSEQUENT EVENTS
The Company evaluated subsequent events as of the date these financial statements were made available and determined there have been no material subsequent events that required recognition or additional disclosure in these condensed consolidated financial statements, except as follows:
On October 12, 2021, the Company entered into a $50 million financing facility, with an ability to increase the facility to $100 million, to fund continued growth of the Today Card product. The financing facility for the Today Card is provided by Park Cities Asset Management LLC. On October 15, 2021, the Company completed a $25 million draw on the new Today SPV, LLC Facility at an interest rate of Prime + 3.60%.
On October 28, 2021, the Company's Board of Directors authorized a $25 million increase to the existing $55 million common stock repurchase program, providing for the repurchase of up to $80 million of the Company's common stock through July 31, 2024. In addition, the Board of Directors approved an increase in the annual fiscal limit of repurchases from $25 million to $35 million.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our business, our results of operations and our financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.
Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Note About Forward-Looking Statements" section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We generally refer to loans, customers and other information and data associated with each of our brands (Rise, Elastic and Today Card) as Elevate’s loans, customers, information and data, irrespective of whether Elevate directly originates the credit to the customer or whether such credit is originated by a third party.
OVERVIEW
We provide online credit solutions to consumers in the US who are not well-served by traditional bank products and who are looking for better options than payday loans, title loans, pawn and storefront installment loans. Non-prime consumers now represent a larger market than prime consumers but are riskier to underwrite and serve with traditional approaches. We’re succeeding at it - and doing it responsibly - with best-in-class advanced technology and proprietary risk analytics honed by serving more than 2.6 million customers with $9.5 billion in credit. Our current online credit products, Rise, Elastic and Today Card, reflect our mission to provide customers with access to competitively priced credit and services while helping them build a brighter financial future with credit building and financial wellness features. We call this mission "Good Today, Better Tomorrow."
Prior to June 29, 2020, we provided services in the United Kingdom ("UK") through our wholly-owned subsidiary, Elevate Credit International Limited (“ECIL”) under the brand name ‘Sunny.’ During the year ended December 31, 2018, ECIL began to receive an increased number of customer complaints initiated by claims management companies ("CMCs") related to the affordability assessment of certain loans. The CMCs' campaign against the high cost lending industry increased significantly during the third and fourth quarters of 2018 and continued through 2019 and into the first half of 2020, resulting in a significant increase in affordability claims against all companies in the industry over this period. The Financial Conduct Authority ("FCA"), a regulator in the UK financial services industry, began regulating the CMCs in April 2019 in order to ensure that the methods used by the CMCs are in the best interests of the consumer and the industry. Separately, the FCA asked all industry participants to review their lending practices to ensure that such companies are using an appropriate affordability and creditworthiness analysis. However, there continued to be a lack of clarity within the regulatory environment in the UK. This lack of clarity, coupled with the ongoing impact of the Coronavirus Disease 2019 ("COVID-19") on the UK market for Sunny, led the ECIL board of directors to place ECIL into administration under the UK Insolvency Act 1986 and appoint insolvency practitioners from KPMG LLP to take control and management of the UK business. As a result, we have deconsolidated ECIL and are presenting its results as discontinued operations.
We earn revenues on the Rise installment loans, on the Rise and Elastic lines of credit and on the Today Card credit card product. Our revenue primarily consists of finance charges and line of credit fees. Finance charges are driven by our average loan balances outstanding and by the average annual percentage rate (“APR”) associated with those outstanding loan balances. We calculate our average loan balances by taking a simple daily average of the ending loan balances outstanding for each period. Line of credit fees are recognized when they are assessed and recorded to revenue over the life of the loan. We present certain key metrics and other information on a “combined” basis to reflect information related to loans originated by us and by our bank partners that license our brands, Republic Bank, FinWise Bank and Capital Community Bank ("CCB"), as well as loans originated by third-party lenders pursuant to CSO programs, which loans originated through CSO programs are not recorded on our balance sheet in accordance with US GAAP. See “—Key Financial and Operating Metrics” and “—Non-GAAP Financial Measures.”
We use our working capital and our credit facility with Victory Park Management, LLC ("VPC” and the "VPC Facility") to fund the loans we directly make to our Rise customers. The VPC Facility has a maximum total borrowing amount available of $200 million at September 30, 2021. See “—Liquidity and Capital Resources—Debt facilities.”
44
We also license our Rise installment loan brand to two banks. FinWise Bank originates Rise installment loans in 17 states. This bank initially provides all of the funding, retains 4% of the balances of all of the loans originated and sells the remaining 96% loan participation in those Rise installment loans to a third-party SPV, EF SPV, Ltd. ("EF SPV"). These loan participation purchases are funded through a separate financing facility (the "EF SPV Facility"), effective February 1, 2019, and through cash flows from operations generated by EF SPV. The EF SPV Facility has a maximum total borrowing amount available of $250 million. We do not own EF SPV, but we have a credit default protection agreement with EF SPV whereby we provide credit protection to the investors in EF SPV against Rise loan losses in return for a credit premium. Elevate is required to consolidate EF SPV as a variable interest entity ("VIE") under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 96% of the Rise installment loans originated by FinWise Bank and sold to EF SPV.
Beginning in the third quarter of 2020, we also license our Rise installment loan brand to an additional bank, CCB, which originates Rise installment loans in three different states than FinWise Bank. Similar to the relationship with FinWise Bank, CCB initially provides all of the funding, retains 5% of the balances of all of the loans originated and sells the remaining 95% loan participation in those Rise installment loans to a third-party SPV, EC SPV, Ltd. ("EC SPV"). These loan participation purchases are funded through a separate financing facility (the "EC SPV Facility"), and through cash flows from operations generated by EC SPV. The EC SPV Facility has a maximum total borrowing amount available of $100 million. We do not own EC SPV, but we have a credit default protection agreement with EC SPV whereby we provide credit protection to the investors in EC SPV against Rise loan losses in return for a credit premium. Elevate is required to consolidate EC SPV as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 95% of the Rise installment loans originated by CCB and sold to EC SPV.
The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all loans originated and sells a 90% loan participation in the Elastic lines of credit. An SPV structure was implemented such that the loan participations are sold by Republic Bank to Elastic SPV, Ltd. (“Elastic SPV”) and Elastic SPV receives its funding from VPC in a separate financing facility (the “ESPV Facility”), which was finalized on July 13, 2015. We do not own Elastic SPV, but we have a credit default protection agreement with Elastic SPV whereby we provide credit protection to the investors in Elastic SPV against Elastic loan losses in return for a credit premium. Per the terms of this agreement, under US GAAP, we are the primary beneficiary of Elastic SPV and are required to consolidate the financial results of Elastic SPV as a VIE in our condensed consolidated financial statements. The ESPV Facility has a maximum total borrowing amount available of $350 million at September 30, 2021. See “—Liquidity and Capital Resources—Debt facilities.”
Today Card is a credit card product designed to meet the spending needs of non-prime consumers by offering a prime customer experience. Today Card is originated by CCB under the licensed MasterCard brand, and a 95% participation interest in the credit card receivable is sold to us. As the lowest APR product in our portfolio, Today Card allows us to serve a broader spectrum of non-prime Americans. During 2020, the Today Card experienced significant growth in its portfolio size despite the pandemic due to the success of our direct mail campaigns, the primary marketing channel for acquiring new Today Card customers. We are following a specific growth plan that began in 2020 to grow the product while monitoring customer responses and credit quality. Customer response to the Today Card is very strong, as we continue to see extremely high response rates, high customer engagement, and positive customer satisfaction scores.
Our management assesses our financial performance and future strategic goals through key metrics based primarily on the following three themes:
•Revenue growth. Key metrics related to revenue growth that we monitor by product include the ending and average combined loan balances outstanding, the effective APR of our product loan portfolios, the total dollar value of loans originated, the number of new customer loans made, the ending number of customer loans outstanding and the related customer acquisition costs (“CAC”) associated with each new customer loan made. We include CAC as a key metric when analyzing revenue growth (rather than as a key metric within margin expansion).
•Stable credit quality. Since the time they were managing our US legacy products, our management team has maintained stable credit quality across the loan portfolio they were managing. Additionally, in the periods covered in this Management's Discussion and Analysis of Financial Condition and Results of Operations, we have improved our credit quality and lowered our credit losses. The credit quality metrics we monitor include net charge-offs as a percentage of revenues, the combined loan loss reserve as a percentage of outstanding combined loans, total provision for loan losses as a percentage of revenues and the percentage of past due combined loans receivable – principal.
45
•Margin expansion. We aim to manage our business to achieve a long-term operating margin of 15-20%. In periods of significant loan portfolio growth, our margins may become compressed due to the upfront costs associated with marketing and credit provisioning expense associated with this growth. As we continue to rebuild and scale our portfolio from the impacts of COVID-19, we anticipate that our direct marketing costs primarily associated with new customer acquisitions will decline to approximately 10% of revenues and our operating expenses will decline to approximately 20% of revenues. While our operating margins may exceed 15-20% in certain years, such as in 2020 when we incurred lower levels of direct marketing expense and materially lower credit losses due to a lack of customer demand for loans resulting from the effects of COVID-19, we do not expect our operating margin to increase beyond that level over the long-term, as we intend to pass on any improvements over our targeted margins to our customers in the form of lower APRs. We believe this is a critical component of our responsible lending platform and over time will also help us continue to attract new customers and retain existing customers.
Impact of COVID-19
The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States, including the markets that we serve. As the restrictive measures have been eased in certain geographic locations, the U.S. economy has begun to recover, and with the availability and distribution of COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity and the U.S. economy. While positive signs exist, we recognize that certain of our customers are experiencing varying degrees of financial distress, which may continue, especially if new COVID-19 variant infections increase and new economic restrictions are mandated.
In 2020, we experienced a significant decline in the loan portfolio due to a lack of customer demand for loans resulting from the effects of COVID-19 and related government stimulus programs. These impacts resulted in a lower level of direct marketing expense and materially lower credit losses during 2020 and continuing into early 2021. Beginning in the second quarter of 2021, we are experiencing a return of demand for the loan products that we, and the bank originators we support, offer, resulting in significant growth in the loan portfolio from that point. This significant loan portfolio growth is resulting in compressed margins in 2021 due to the upfront costs associated with marketing and credit provisioning expense related to growing and “rebuilding” the loan portfolio from the impacts of COVID-19. We continue to target loan portfolio originations within our target CACs of $250-$300 and credit quality metrics of 45-55% of revenue which, when combined with our expectation of continuing customer loan demand for our portfolio products, we believe will allow us to return to our historical performance levels prior to COVID-19 after initially resulting in earnings compression.
Both we and the bank originators are closely monitoring the key credit quality indicators such as payment defaults, continued payment deferrals, and line of credit utilization. While we initially anticipated that the COVID-19 pandemic would have a negative impact on our credit quality, instead the monetary stimulus programs provided by the US government to our customer base have generally allowed customers to continue making payments on their loans. At the beginning of the pandemic, we expected an increase in net charge-offs as compared to prior periods but experienced historically low net charge-offs as a percentage of revenue in the second half of 2020 and early 2021. With the increased volume of new customer loans expected to be originated as we grow our loan portfolio back to our pre-pandemic size and the ending of government assistance, we expect a return of net charge-offs to our targeted range of 45-55% of revenue. Further, we believe that the allowance for loan losses is adequate to absorb the losses inherent in the portfolio as of September 30, 2021.
We have implemented a hybrid remote environment where employees may choose to work primarily from the office or from home and gather collectively in the office on a limited basis. We have sought to ensure our employees feel secure in their jobs, have flexibility in their work location and have the resources they need to stay safe and healthy. As an 100% online lending solutions provider, our technology and underwriting platform has continued to serve our customers and the bank originators that we support without any material interruption in services.
COVID-19 has had a significant adverse impact on our business, and while uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment and expect continued loan portfolio growth and strong credit quality through the remainder of the year. We will continue assessing our minimum cash and liquidity requirement, monitoring our debt covenant compliance and implementing measures to ensure that our cash and liquidity position is maintained through the current economic cycle.
46
KEY FINANCIAL AND OPERATING METRICS
As discussed above, we regularly monitor a number of metrics in order to measure our current performance and project our future performance. These metrics aid us in developing and refining our growth strategies and in making strategic decisions.
Certain of our metrics are non-GAAP financial measures. We believe that such metrics are useful in period-to-period comparisons of our core business. However, non-GAAP financial measures are not an alternative to any measure of financial performance calculated and presented in accordance with US GAAP. See “—Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to US GAAP.
Revenues
| As of and for the three months ended September 30, | As of and for the nine months ended September 30, | |||||||||||||||||||||||||
| Revenue metrics (dollars in thousands, except as noted) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Revenues
|
$ | 112,835 | $ | 94,164 | $ | 287,108 | $ | 374,622 | ||||||||||||||||||
|
Period-over-period change in revenue
|
20 | % | (43) | % | (23) | % | (21) | % | ||||||||||||||||||
|
Ending combined loans receivable – principal(1)
|
$ | 512,870 | $ | 377,177 | 512,870 | 377,177 | ||||||||||||||||||||
|
Average combined loans receivable – principal(1)(2)
|
$ | 459,949 | $ | 389,701 | 398,566 | 479,526 | ||||||||||||||||||||
|
Total combined loans originated – principal
|
$ | 311,985 | $ | 132,516 | $ | 655,959 | 442,552 | |||||||||||||||||||
|
Average customer loan balance(3)
|
$ | 1,918 | $ | 1,797 | 1,918 | 1,797 | ||||||||||||||||||||
|
Number of new customer loans
|
69,682 | 8,489 | 122,558 | 47,054 | ||||||||||||||||||||||
|
Ending number of combined loans outstanding
|
267,434 | 209,887 | 267,434 | 209,887 | ||||||||||||||||||||||
|
Customer acquisition costs
|
$ | 221 | $ | 305 | 248 | 295 | ||||||||||||||||||||
| Effective APR of combined loan portfolio | 96 | % | 96 | % | 95 | % | 104 | % | ||||||||||||||||||
_________
(1)Combined loans receivable is defined as loans owned by us and consolidated VIEs plus loans originated and owned by third-party lenders pursuant to our CSO programs. See “—Non-GAAP Financial Measures” for more information and for a reconciliation of Combined loans receivable to Loans receivable, net, the most directly comparable financial measure calculated in accordance with US GAAP.
(2)Average combined loans receivable – principal is calculated using an average of daily Combined loans receivable – principal balances.
(3)Average customer loan balance is an average of all three products and is calculated for each product by dividing the ending Combined loans receivable – principal by the number of loans outstanding at period end.
Revenues. Our revenues are composed of Rise finance charges, Rise CSO fees (which are fees we receive from customers who obtain a loan through the CSO program for the credit services, including the loan guaranty, we provide), revenues earned on the Elastic line of credit, and finance charges and fee revenues from the Today Card credit card product. See “—Components of our Results of Operations—Revenues.”
Ending and average combined loans receivable – principal. We calculate the average combined loans receivable – principal by taking a simple daily average of the ending combined loans receivable – principal for each period. Key metrics that drive the ending and average combined loans receivable – principal include the amount of loans originated in a period and the average customer loan balance. All loan balance metrics include only the 90% participation in the related Elastic line of credit advances (we exclude the 10% held by Republic Bank), the 96% participation in FinWise Bank originated Rise installment loans and the 95% participation in CCB originated Rise installment loans and the 95% participation in the CCB originated Today Card credit card receivables, but include the full loan balances on CSO loans, which are not presented on our Condensed Consolidated Balance Sheets.
Total combined loans originated – principal. The amount of loans originated in a period is driven primarily by loans to new customers as well as new loans to prior customers, including refinancing of existing loans to customers in good standing.
47
Average customer loan balance and effective APR of combined loan portfolio. The average loan amount and its related APR are based on the product and the underlying credit quality of the customer. Generally, better credit quality customers are offered higher loan amounts at lower APRs. Additionally, new customers have more potential risk of loss than prior or existing customers due to lack of payment history and the potential for fraud. As a result, newer customers typically will have lower loan amounts and higher APRs to compensate for that additional risk of loss. The effective APR is calculated based on the actual amount of finance charges generated from a customer loan divided by the average outstanding balance for the loan and can be lower than the stated APR on the loan due to waived finance charges and other reasons. For example, a Rise customer may receive a $2,000 installment loan with a term of 24 months and a stated rate of 180%. In this example, the customer’s monthly installment loan payment would be $310.86. As the customer can prepay the loan balance at any time with no additional fees or early payment penalty, the customer pays the loan in full in month eight. The customer’s loan earns interest of $2,337.81 over the eight-month period and has an average outstanding balance of $1,948.17. The effective APR for this loan is 180% over the eight-month period calculated as follows:
($2,337.81 interest earned / $1,948.17 average balance outstanding) x 12 months per year = 180%
8 months
In addition, as an example for Elastic, if a customer makes a $2,500 draw on the customer’s line of credit and this draw required bi-weekly minimum payments of 5% (equivalent to 20 bi-weekly payments), and if all minimum payments are made, the draw would earn finance charges of $1,148. The effective APR for the line of credit in this example is 109% over the payment period and is calculated as follows:
($1,148.00 fees earned / $1,369.05 average balance outstanding) x 26 bi-weekly periods per year = 109%
20 payments
The actual total revenue we realize on a loan portfolio is also impacted by the amount of prepayments and charged-off customer loans in the portfolio. For a single loan, on average, we typically expect to realize approximately 60% of the revenues that we would otherwise realize if the loan were to fully amortize at the stated APR. From the Rise example above, if we waived $400 of interest for this customer, the effective APR for this loan would decrease to 149%.
Number of new customer loans. We define a new customer loan as the first loan or advance made to a customer for each of our products (so a customer receiving a Rise installment loan and then at a later date taking their first cash advance on an Elastic line of credit would be counted twice). The number of new customer loans is subject to seasonal fluctuations. New customer acquisition is typically slowest during the first six months of each calendar year, primarily in the first quarter, compared to the latter half of the year, as our existing and prospective customers usually receive tax refunds during this period and, thus, have less of a need for loans from us. Further, many customers will use their tax refunds to prepay all or a portion of their loan balance during this period, so our overall loan portfolio typically decreases during the first quarter of the calendar year. Overall loan portfolio growth and the number of new customer loans tends to accelerate during the summer months (typically June and July), at the beginning of the school year (typically late August to early September) and during the winter holidays (typically late November to early December).
Customer acquisition costs. A key expense metric we monitor related to loan growth is our CAC. This metric is the amount of direct marketing costs incurred during a period divided by the number of new customer loans originated during that same period. New loans to former customers are not included in our calculation of CAC (except to the extent they receive a loan through a different product) as we believe we incur no material direct marketing costs to make additional loans to a prior customer through the same product.
The following tables summarize the changes in customer loans by product for the three and nine months ended September 30, 2021 and 2020.
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||
| Rise | Elastic | Today | ||||||||||||||||||||||||
| (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | |||||||||||||||||||||||
|
Beginning number of combined loans outstanding
|
108,784 | 92,278 | 17,481 | 218,543 | ||||||||||||||||||||||
|
New customer loans originated
|
41,010 | 18,937 | 9,735 | 69,682 | ||||||||||||||||||||||
|
Former customer loans originated
|
18,295 | 154 | — | 18,449 | ||||||||||||||||||||||
|
Attrition
|
(35,391) | (3,870) | 21 | (39,240) | ||||||||||||||||||||||
|
Ending number of combined loans outstanding
|
132,698 | 107,499 | 27,237 | 267,434 | ||||||||||||||||||||||
|
Customer acquisition cost
|
$ | 268 | $ | 206 | $ | 52 | $ | 221 | ||||||||||||||||||
|
Average customer loan balance
|
$ | 2,194 | $ | 1,744 | $ | 1,254 | $ | 1,918 | ||||||||||||||||||
48
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||
| Rise | Elastic | Today | ||||||||||||||||||||||||
| (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | |||||||||||||||||||||||
|
Beginning number of combined loans outstanding
|
107,125 | 108,553 | 6,566 | 222,244 | ||||||||||||||||||||||
|
New customer loans originated
|
6,794 | 831 | 864 | 8,489 | ||||||||||||||||||||||
|
Former customer loans originated
|
14,466 | 72 | — | 14,538 | ||||||||||||||||||||||
|
Attrition
|
(28,426) | (6,602) | (356) | (35,384) | ||||||||||||||||||||||
|
Ending number of combined loans outstanding
|
99,959 | 102,854 | 7,074 | 209,887 | ||||||||||||||||||||||
|
Customer acquisition cost
|
$ | 317 | $ | 369 | $ | 141 | $ | 305 | ||||||||||||||||||
|
Average customer loan balance
|
$ | 2,157 | $ | 1,485 | $ | 1,256 | $ | 1,797 | ||||||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||
| Rise | Elastic | Today | ||||||||||||||||||||||||
| (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | |||||||||||||||||||||||
|
Beginning number of combined loans outstanding
|
103,940 | 100,105 | 10,803 | 214,848 | ||||||||||||||||||||||
|
New customer loans originated
|
77,370 | 28,128 | 17,060 | 122,558 | ||||||||||||||||||||||
|
Former customer loans originated
|
46,060 | 380 | — | 46,440 | ||||||||||||||||||||||
|
Attrition
|
(94,672) | (21,114) | (626) | (116,412) | ||||||||||||||||||||||
|
Ending number of combined loans outstanding
|
132,698 | 107,499 | 27,237 | 267,434 | ||||||||||||||||||||||
|
Customer acquisition cost
|
$ | 284 | $ | 261 | $ | 60 | $ | 248 | ||||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||
| Rise | Elastic | Today | ||||||||||||||||||||||||
| (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | |||||||||||||||||||||||
|
Beginning number of combined loans outstanding
|
152,435 | 146,317 | 3,207 | 301,959 | ||||||||||||||||||||||
|
New customer loans originated
|
31,834 | 10,888 | 4,332 | 47,054 | ||||||||||||||||||||||
|
Former customer loans originated
|
38,615 | 212 | — | 38,827 | ||||||||||||||||||||||
|
Attrition
|
(122,925) | (54,563) | (465) | (177,953) | ||||||||||||||||||||||
|
Ending number of combined loans outstanding
|
99,959 | 102,854 | 7,074 | 209,887 | ||||||||||||||||||||||
|
Customer acquisition cost
|
$ | 311 | $ | 337 | $ | 78 | $ | 295 | ||||||||||||||||||
Recent trends. Our revenues for the three months ended September 30, 2021 totaled $112.8 million, an increase of 20% versus the three months ended September 30, 2020. The increase in quarterly revenue is primarily attributable to higher average combined loans receivable-principal as we saw growth in all of our products in the third quarter of 2021. Conversely, our revenues for the nine months ended September 30, 2021 totaled $287.1 million, down 23% versus the prior year. Both the Rise and Elastic products experienced a year-over-year decline in revenues of 26% and 22%, respectively, which were attributable to reductions in year-to-date average loan balances and a lower Rise effective APR due to the economic crisis created by the COVID-19 pandemic beginning in March 2020, which resulted in substantial government assistance to our potential customers that lowered demand for our products. This decline in revenue was partially offset by a year-over-year increase in revenues for the Today Card product, which has more than doubled its average principal balance outstanding year-over year. We believe Today Card balances increased over the past year despite the impact of COVID-19 due to the nature of the product (credit card versus installment loan or lines of credit), the lower APR of the product (effective APR of 30% in the third quarter of 2021 compared to Rise at 104% and Elastic at 94%) as customers receiving stimulus payments would be more apt to pay down more expensive forms of credit, and the added convenience of having a credit card for online purchases of day-to-day items such as groceries or clothing (whereas the primary usage of a Rise installment loan or Elastic line of credit is for emergency financial needs such as a medical deductible or automobile repair).
49
We are currently experiencing an increase in new and former customers as demand for the loan products provided by us and the bank originators began to return during the second quarter of 2021. This is in contrast to 2020 and early 2021 when the portfolio of loan products experienced significantly decreased loan demand for both new and former customers due to COVID-19, including the effects of monetary stimulus provided by the US government reducing demand for loan products. We anticipate the return of demand for the loan products to continue for the remainder of the year, as we recover from the impacts from COVID-19. All three of our products experienced an increase in principal loan balances in the third quarter of 2021 compared to a year ago. Rise and Elastic principal loan balances at September 30, 2021 totaled $291.2 million and $187.5 million, respectively, up roughly $85.0 million and $34.8 million, respectively, from a year ago. Today Card principal loan balances at September 30, 2021 totaled $34.2 million, up $25.3 million from a year ago.
Our CAC was lower in the third quarter of 2021 at $221 as compared to the third quarter of 2020 at $305, with the third quarter of 2020 not reflective of our historical CAC due to the significant reduction in new loan originations due to the COVID-19 pandemic. The third quarter 2021 loan volume is being sourced from all our marketing channels including direct mail, strategic partners and digital. We’ve seen a marked improvement in loan volume from our strategic partners channel where we have improved our technology and risk capabilities to interface with the strategic partners via our application programming interface (APIs) that we developed within our new technology platform ("Blueprint"). Blueprint will allow us to more efficiently acquire new customers within our targeted CAC range. We believe our CAC in future quarters will continue to remain within or below our target range of $250 to $300 as we continue to optimize the efficiency of our marketing channels and continue to grow the Today Card which successfully generated new customers at a sub-$100 CAC.
Credit quality
| As of and for the three months ended September 30, | As of and for the nine months ended September 30, | |||||||||||||||||||||||||
| Credit quality metrics (dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Net charge-offs(1)
|
$ | 39,015 | $ | 22,428 | $ | 95,968 | $ | 163,878 | ||||||||||||||||||
|
Additional provision for loan losses(1)
|
15,888 | (9,264) | 7,130 | (30,662) | ||||||||||||||||||||||
|
Provision for loan losses
|
$ | 54,903 | $ | 13,164 | $ | 103,098 | $ | 133,216 | ||||||||||||||||||
|
Past due combined loans receivable – principal as a percentage of combined loans receivable – principal(2)
|
9 | % | 6 | % | 9 | % | 6 | % | ||||||||||||||||||
|
Net charge-offs as a percentage of revenues(1)
|
35 | % | 24 | % | 33 | % | 44 | % | ||||||||||||||||||
|
Total provision for loan losses as a percentage of revenues
|
49 | % | 14 | % | 36 | % | 36 | % | ||||||||||||||||||
|
Combined loan loss reserve(3)
|
$ | 56,209 | $ | 51,330 | $ | 56,209 | $ | 51,330 | ||||||||||||||||||
|
Combined loan loss reserve as a percentage of combined loans receivable(3)(4)
|
11 | % | 13 | % | 11 | % | 13 | % | ||||||||||||||||||
_________
(1)Net charge-offs and additional provision for loan losses are not financial measures prepared in accordance with US GAAP. Net charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due (Rise and Elastic) or 120 days past due (Today Card), or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud, offset by any recoveries. Additional provision for loan losses is the amount of provision for loan losses needed for a particular period to adjust the combined loan loss reserve to the appropriate level in accordance with our underlying loan loss reserve methodology. See “—Non-GAAP Financial Measures” for more information and for a reconciliation to Provision for loan losses, the most directly comparable financial measure calculated in accordance with US GAAP.
(2)Combined loans receivable is defined as loans owned by us and consolidated VIEs plus loans originated and owned by third-party lenders pursuant to our CSO programs. See “—Non-GAAP Financial Measures” for more information and for a reconciliation of Combined loans receivable to Loans receivable, net, the most directly comparable financial measure calculated in accordance with US GAAP.
(3)Combined loan loss reserve is defined as the loan loss reserve for loans originated and owned by us plus the loan loss reserve for loans owned by third-party lenders and guaranteed by us. See “—Non-GAAP Financial Measures” for more information and for a reconciliation of Combined loan loss reserve to Allowance for loan losses, the most directly comparable financial measure calculated in accordance with US GAAP.
(4)Combined loan loss reserve as a percentage of combined loans receivable is determined using period-end balances.
50
|
Net principal charge-offs as a percentage of average combined loans receivable - principal (1)(2)(3)
|
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
||||||||||||||||||||||
|
2021
|
6% | 5% | 6% | N/A | ||||||||||||||||||||||
|
2020
|
11% | 10% | 4% | 5% | ||||||||||||||||||||||
|
2019
|
13% | 10% | 10% | 12% | ||||||||||||||||||||||
_________
(1)Net principal charge-offs is comprised of gross principal charge-offs less recoveries.
(2)Average combined loans receivable - principal is calculated using an average of daily Combined loans receivable - principal balances during each quarter.
(3)Combined loans receivable is defined as loans owned by us and consolidated VIEs plus loans originated and owned by third-party lenders pursuant to our CSO programs. See “—Non-GAAP Financial Measures” for more information and for a reconciliation of Combined loans receivable to Loans receivable, net, the most directly comparable financial measure calculated in accordance with US GAAP.
Net principal charge-offs as a percentage of average combined loans receivable-principal for the third quarter of 2021 is higher than the third quarter of 2020 due to the lack of new customer loan demand, the implementation of payment assistance tools and government stimulus payments received by customers that contributed to historically low charge-off metrics during the third quarter of 2020. As we continue to increase loan originations to new and former customers, we expect this quarterly loss ratio to initially increase due to the volume of new customers being originated as we re-build the portfolio from the impacts of the COVID-19 pandemic and then return to a more normalized credit profile.
In reviewing the credit quality of our loan portfolio, we break out our total provision for loan losses that is presented on our statement of operations under US GAAP into two separate items—net charge-offs and additional provision for loan losses. Net charge-offs are indicative of the credit quality of our underlying portfolio, while additional provision for loan losses is subject to more fluctuation based on loan portfolio growth, recent credit quality trends and the effect of normal seasonality on our business. The additional provision for loan losses is the amount needed to adjust the combined loan loss reserve to the appropriate amount at the end of each month based on our loan loss reserve methodology.
Net charge-offs. Net charge-offs comprise gross charge-offs offset by recoveries on prior charge-offs. Gross charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due (Rise and Elastic) or 120 days (Today Card), or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud. Any payments received on loans that have been charged off are recorded as recoveries and reduce the total amount of gross charge-offs. Recoveries are typically less than 10% of the amount charged off, and thus, we do not view recoveries as a key credit quality metric.
Net charge-offs as a percentage of revenues can vary based on several factors, such as whether or not we experience significant growth or lower the APR of our products. Additionally, although a more seasoned portfolio will typically result in lower net charge-offs as a percentage of revenues, we do not intend to drive down this ratio significantly below our historical ratios and would instead seek to offer our existing products to a broader new customer base to drive additional revenues.
Net charge-offs as a percentage of average combined loans receivable-principal allow us to determine credit quality and evaluate loss experience trends across our loan portfolio.
Additional provision for loan losses. Additional provision for loan losses is the amount of provision for loan losses needed for a particular period to adjust the combined loan loss reserve to the appropriate level in accordance with our underlying loan loss reserve methodology.
Additional provision for loan losses relates to an increase in inherent losses in the loan portfolio as determined by our loan loss reserve methodology. This increase could be due to a combination of factors such as an increase in the size of the loan portfolio or a worsening of credit quality or increase in past due loans. It is also possible for the additional provision for loan losses for a period to be a negative amount, which would reduce the amount of the combined loan loss reserve needed (due to a decrease in the loan portfolio or improvement in credit quality). The amount of additional provision for loan losses is seasonal in nature, mirroring the seasonality of our new customer acquisition and overall loan portfolio growth, as discussed above. The combined loan loss reserve typically decreases during the first quarter or first half of the calendar year due to a decrease in the loan portfolio from year end. Then, as the rate of growth for the loan portfolio starts to increase during the second half of the year, additional provision for loan losses is typically needed to increase the reserve for losses associated with the loan growth. Because of this, our provision for loan losses can vary significantly throughout the year without a significant change in the credit quality of our portfolio.
51
The following provides an example of the application of our loan loss reserve methodology and the break-out of the provision for loan losses between the portion associated with replenishing the reserve due to net charge-offs and the amount related to the additional provision for loan losses. If the beginning combined loan loss reserve were $25 million, and we incurred $10 million of net charge-offs during the period and the ending combined loan loss reserve needed to be $30 million according to our loan loss reserve methodology, our total provision for loan losses would be $15 million, comprising $10 million in net charge-offs (provision needed to replenish the combined loan loss reserve) plus $5 million of additional provision related to an increase in inherent losses in the loan portfolio identified by our loan loss reserve methodology.
| Example (dollars in thousands) | ||||||||||||||
|
Beginning combined loan loss reserve
|
$ | 25,000 | ||||||||||||
|
Less: Net charge-offs
|
(10,000) | |||||||||||||
|
Provision for loan losses:
|
||||||||||||||
|
Provision for net charge-offs
|
10,000 | |||||||||||||
|
Additional provision for loan losses
|
5,000 | |||||||||||||
|
Total provision for loan losses
|
15,000 | |||||||||||||
|
Ending combined loan loss reserve balance
|
$ | 30,000 | ||||||||||||
Loan loss reserve methodology. Our loan loss reserve methodology is calculated separately for each product and, in the case of Rise loans originated under the state lending model (including CSO program loans), is calculated separately based on the state in which each customer resides to account for varying state license requirements that affect the amount of the loan offered, repayment terms and other factors. For each product, loss factors are calculated based on the delinquency status of customer loan balances: current, 1 to 30 days past due, 31 to 60 days past due or 61-120 past due (for Today Card only). These loss factors for loans in each delinquency status are based on average historical loss rates by product (or state) associated with each of these three delinquency categories. Hence, another key credit quality metric we monitor is the percentage of past due combined loans receivable – principal, as an increase in past due loans will cause an increase in our combined loan loss reserve and related additional provision for loan losses to increase the reserve. For customers that are not past due, we further stratify these loans into loss rates by payment number, as a new customer that is about to make a first loan payment has a significantly higher risk of loss than a customer who has successfully made ten payments on an existing loan with us. Based on this methodology, during the past two years we have seen our combined loan loss reserve as a percentage of combined loans receivable fluctuate between approximately 10% and 14% depending on the overall mix of new, former and past due customer loans.
Recent trends. Total loan loss provision for the three and nine months ended September 30, 2021, which was within or below our targeted range of approximately 45% to 55%, was 49% and 36% of revenues, respectively, compared to 14% and 36% in the respective prior year periods. Net charge-offs as a percentage of revenues for the three and nine months ended September 30, 2021 were 35% and 33%, respectively, compared to 24% and 44% in the respective prior year periods. The increase in these credit performance metrics is due to the increase in new loan originations beginning in the second quarter of 2021 and charge-offs and loan loss provisioning associated with a growing portfolio. While we initially anticipated that the COVID-19 pandemic would have a negative impact on our credit quality, instead the large quantity of monetary stimulus provided by the US government to our customer base has generally allowed customers to continue making payments on their loans. We continue to monitor the portfolio during the economic recovery resulting from COVID-19 and will adjust our underwriting and credit policies to mitigate any potential negative impacts as needed. As loan demand returns to pre-pandemic levels and the loan portfolio grows, we expect our total loan loss provision as a percentage of revenues to be within our targeted range of approximately 45% to 55% of revenue.
The combined loan loss reserve as a percentage of combined loans receivable totaled 11% and 13% as of September 30, 2021 and September 30, 2020, respectively. This year-over-year decrease reflects the continued strong credit performance of the portfolio, and we would expect the loan loss reserve to increase as we originate more new customers and return the portfolio to a normalized credit profile. Past due loan balances at September 30, 2021 were 9% of total combined loans receivable-principal, up from 6% from a year ago, due to the number of new customers originated beginning in the second quarter of 2021 which is consistent with our historical past due percentages prior to the pandemic. We, and the bank originators we support, are no longer offering specific COVID-19 payment deferral programs, but continue to offer other payment flexibility programs if certain qualifications are met. We are continuing to see that most customers are meeting their scheduled payments once they exit the payment deferral program. We anticipate the combined loan loss reserve as a percentage of combined loans receivable, as well as our past due loan balances as a percentage of total combined loans receivable-principal, will move toward historic norms as we continue to grow our loan portfolio.
52
We also look at Rise and Elastic principal loan charge-offs (including both credit and fraud losses) by loan vintage as a percentage of combined loans originated-principal. As the below table shows, our cumulative principal loan charge-offs for Rise and Elastic through September 30, 2021 for each annual vintage since the 2013 vintage are generally under 30% and continue to generally trend at or slightly below our 25% to 30% long-term targeted range. During 2019, we implemented new fraud tools that have helped lower fraud losses for the 2019 vintage and rolled out our next generation of credit models during the second quarter of 2019 and continued refining the models during the third and fourth quarters of 2019. Our payment deferral programs have also assisted in reducing losses in our 2019 and 2020 vintages coupled with a lower volume of new loan originations in our 2020 vintage. The 2019 and 2020 vintages are both performing better than the 2017 and 2018 vintages. While still very early, we would expect the 2021 vintage to be near 2019 levels or slightly higher given the increased volume of new customer loans expected to be originated this year and a return of net charge-offs to our targeted range of 45-55% of revenue. It is also possible that the cumulative loss rates on all vintages will increase and may exceed our recent historical cumulative loss experience due to the economic impact of a prolonged crisis resulting from the COVID-19 pandemic.
_________
1) The 2020 and 2021 vintages are not yet fully mature from a loss perspective.
2) UK included in the 2013 to 2017 vintages only.
We also look at Today Card principal loan charge-offs (including both credit and fraud losses) by account vintage as a percentage of account principal originations. As the below table shows, our cumulative principal credit card charge-offs through September 30, 2021 for the 2020 annual vintage is under 7%. While our 2021 annual vintage is currently performing better than 2020, it is not yet mature enough for analysis. Our 2018 and 2019 vintages are considered to be test vintages and were comprised of limited originations volume and not reflective of our current underwriting standards.
53
Margins
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| Margin metrics (dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Revenues
|
$ | 112,835 | $ | 94,164 | $ | 287,108 | $ | 374,622 | ||||||||||||||||||
|
Net charge-offs(1)
|
(39,015) | (22,428) | (95,968) | (163,878) | ||||||||||||||||||||||
|
Additional provision for loan losses(1)
|
(15,888) | 9,264 | (7,130) | 30,662 | ||||||||||||||||||||||
|
Direct marketing costs
|
(15,406) | (2,585) | (30,353) | (13,898) | ||||||||||||||||||||||
|
Other cost of sales
|
(4,766) | (1,672) | (9,718) | (5,949) | ||||||||||||||||||||||
|
Gross profit
|
37,760 | 76,743 | 143,939 | 221,559 | ||||||||||||||||||||||
|
Operating expenses
|
(40,866) | (42,662) | (117,066) | (121,517) | ||||||||||||||||||||||
|
Operating income (loss)
|
$ | (3,106) | $ | 34,081 | $ | 26,873 | $ | 100,042 | ||||||||||||||||||
|
As a percentage of revenues:
|
||||||||||||||||||||||||||
|
Net charge-offs
|
35 | % | 24 | % | 33 | % | 44 | % | ||||||||||||||||||
|
Additional provision for loan losses
|
14 | (10) | 2 | (8) | ||||||||||||||||||||||
|
Direct marketing costs
|
14 | 3 | 11 | 4 | ||||||||||||||||||||||
|
Other cost of sales
|
4 | 2 | 3 | 2 | ||||||||||||||||||||||
|
Gross margin
|
33 | 81 | 50 | 59 | ||||||||||||||||||||||
|
Operating expenses
|
36 | 45 | 41 | 32 | ||||||||||||||||||||||
|
Operating margin
|
(3) | % | 36 | % | 9 | % | 27 | % | ||||||||||||||||||
_________
(1)Non-GAAP measure. See “—Non-GAAP Financial Measures—Net charge-offs and additional provision for loan losses.”
54
Gross margin is calculated as revenues minus cost of sales, or gross profit, expressed as a percentage of revenues, and operating margin is calculated as operating income expressed as a percentage of revenues. Due to the negative impact of COVID-19 on our loan balances and revenue, we are monitoring our profit margins closely. Long-term, we intend to continue to manage the business to a targeted 15-20% operating margin.
Recent operating margin trends. For the three months ended September 30, 2021, our operating margin was (3)%, which was a decrease from 36% in the prior year period. For the nine months ended September 30, 2021, our operating margin was 9%, which was also a decrease from 27% in the prior year period. The margin decreases we are experiencing in 2021 are primarily driven by the upfront costs associated with credit provisioning and direct marketing expense associated with the increased new and former customer loan origination volume as we grow and rebuild our loan portfolio from the impacts of COVID-19. The margins achieved in 2020 are not reflective of our historical performance as we experienced a significant decline in the loan portfolio due to a lack of customer demand resulting from the effects of COVID-19 and related government stimulus programs. These impacts resulted in a lower level of direct marketing expense and materially lower credit losses during 2020 leading to an increased gross margin.
Our operating expense metrics have been negatively impacted by the COVID-19 pandemic and its impact on loan balances and revenue. We expect our expense metrics to continue to be negatively impacted in the short term as we focus on growth to increase our new customer loan volume and grow our overall loan portfolio. In the long term, as we grow the loan portfolio while actively managing our operating expenses, we expect to see our operating expense metrics return to approximately 20% of revenue. However, management will continue to look for opportunities to reduce our expenses to help offset the increased loan origination and direct marketing expenses.
NON-GAAP FINANCIAL MEASURES
We believe that the inclusion of the following non-GAAP financial measures in this Quarterly Report on Form 10-Q can provide a useful measure for period-to-period comparisons of our core business, provide transparency and useful information to investors and others in understanding and evaluating our operating results, and enable investors to better compare our operating performance with the operating performance of our competitors. Management uses these non-GAAP financial measures frequently in its decision-making because they provide supplemental information that facilitates internal comparisons to the historical operating performance of prior periods and give an additional indication of our core operating performance. However, non-GAAP financial measures are not a measure calculated in accordance with US generally accepted accounting principles, or US GAAP, and should not be considered an alternative to any measures of financial performance calculated and presented in accordance with US GAAP. Other companies may calculate these non-GAAP financial measures differently than we do.
Adjusted Earnings
Adjusted earnings (loss) for the three and nine months ended September 30, 2021 and 2020 represent our net income (loss) from continuing operations adjusted to exclude the impact of:
•Uncertain tax position
•Contingent loss related to a legal matter
•Cumulative tax effect of adjustments
Adjusted diluted earnings (loss) per share is Adjusted earnings (loss) divided by Diluted weighted average shares outstanding.
55
The following table presents a reconciliation of net income (loss) from continuing operations and diluted earnings (loss) per share to Adjusted earnings and Adjusted diluted earnings (loss) per share, which excludes the impact of the contingent loss and uncertain tax position for each of the periods indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands except per share amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | (11,005) | $ | 16,616 | $ | (1,334) | $ | 40,631 | ||||||||||||||||||
| Impact of uncertain tax position | 1,582 | — | 1,582 | — | ||||||||||||||||||||||
|
Impact of contingent loss related to a legal matter
|
— | 1,007 | — | 6,692 | ||||||||||||||||||||||
|
Cumulative tax effect of adjustments
|
— | (239) | — | (1,590) | ||||||||||||||||||||||
|
Adjusted earnings (loss)
|
$ | (9,423) | $ | 17,384 | $ | 248 | $ | 45,733 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Diluted earnings (loss) per share - continuing operations
|
$ | (0.33) | $ | 0.41 | $ | (0.04) | $ | 0.95 | ||||||||||||||||||
| Impact of uncertain tax position | 0.05 | — | 0.05 | — | ||||||||||||||||||||||
|
Impact of contingent loss related to a legal matter
|
— | 0.02 | — | 0.16 | ||||||||||||||||||||||
|
Cumulative tax effect of adjustments
|
— | (0.01) | — | (0.04) | ||||||||||||||||||||||
|
Adjusted diluted earnings (loss) per share
|
$ | (0.28) | $ | 0.42 | $ | 0.01 | $ | 1.07 | ||||||||||||||||||
|
Diluted weighted average shares outstanding
|
33,786,968 | 40,762,330 | 34,841,624 | 42,624,808 | ||||||||||||||||||||||
|
Effect of potentially dilutive shares outstanding*
|
— | — | 632,631 | — | ||||||||||||||||||||||
|
Adjusted diluted weighted average shares outstanding
|
33,786,968 | 40,762,330 | 35,474,255 | 42,624,808 | ||||||||||||||||||||||
_________
*Represents potentially dilutive shares that had not been included in the Company's nine months ended September 30, 2021 diluted weighted average shares outstanding as the Company is in a net loss position under U.S. GAAP. Including those shares would have been anti-dilutive when in a net loss position.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA represents our net income (loss) from continuing operations, adjusted to exclude:
•Net interest expense primarily associated with notes payable under the VPC Facility, ESPV Facility, EF SPV Facility and EC SPV Facility used to fund the loan portfolios;
•Share-based compensation;
•Depreciation and amortization expense on fixed assets and intangible assets;
•Gains and losses from dispositions or a contingent loss related to a legal matter included in non-operating (income) loss; and
•Income taxes.
Adjusted EBITDA margin is Adjusted EBITDA divided by revenue.
Management believes that Adjusted EBITDA and Adjusted EBITDA margin are useful supplemental measures to assist management and investors in analyzing the operating performance of the business and provide greater transparency into the results of operations of our core business.
Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to net income (loss) from continuing operations or any other performance measure derived in accordance with US GAAP. Our use of Adjusted EBITDA and Adjusted EBITDA margin has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are:
56
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect expected cash capital expenditure requirements for such replacements or for new capital assets;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and
•Adjusted EBITDA does not reflect interest associated with notes payable used for funding the loan portfolios, for other corporate purposes or tax payments that may represent a reduction in cash available to us.
The following table presents a reconciliation of net income (loss) from continuing operations to Adjusted EBITDA and Adjusted EBITDA margin for each of the periods indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | (11,005) | $ | 16,616 | $ | (1,334) | $ | 40,631 | ||||||||||||||||||
|
Adjustments:
|
||||||||||||||||||||||||||
|
Net interest expense
|
9,544 | 11,575 | 26,897 | 37,408 | ||||||||||||||||||||||
|
Share-based compensation
|
1,559 | 1,166 | 4,948 | 6,513 | ||||||||||||||||||||||
|
Depreciation and amortization
|
4,544 | 4,588 | 14,339 | 13,413 | ||||||||||||||||||||||
|
Non-operating (income) loss
|
198 | 1,007 | (519) | 6,692 | ||||||||||||||||||||||
|
Income tax expense (benefit)
|
(1,843) | 4,883 | 1,829 | 15,311 | ||||||||||||||||||||||
|
Adjusted EBITDA
|
$ | 2,997 | $ | 39,835 | $ | 46,160 | $ | 119,968 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
Adjusted EBITDA margin
|
2.7 | % | 42.3 | % | 16.1 | % | 32.0 | % | ||||||||||||||||||
Free cash flow
Free cash flow (“FCF”) represents our net cash provided by continuing operating activities, adjusted to include:
•Net charge-offs – combined principal loans; and
•Capital expenditures.
The following table presents a reconciliation of net cash provided by continuing operating activities to FCF for each of the periods indicated:
| Nine Months Ended September 30, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
|
Net cash provided by continuing operating activities(1)
|
$ | 111,566 | $ | 177,705 | ||||||||||
|
Adjustments:
|
||||||||||||||
|
Net charge-offs – combined principal loans
|
(70,636) | (125,232) | ||||||||||||
|
Capital expenditures
|
(11,903) | (12,867) | ||||||||||||
|
FCF
|
$ | 29,027 | $ | 39,606 | ||||||||||
_________
(1)Net cash provided by continuing operating activities includes net charge-offs – combined finance charges.
Net charge-offs and additional provision for loan losses
We break out our total provision for loan losses into two separate items—first, the amount related to net charge-offs, and second, the additional provision for loan losses needed to adjust the combined loan loss reserve to the appropriate amount at the end of each month based on our loan loss provision methodology. We believe this presentation provides more detail related to the components of our total provision for loan losses when analyzing the gross margin of our business.
Net charge-offs. Net charge-offs comprise gross charge-offs offset by recoveries on prior charge-offs. Gross charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due (Rise and Elastic) or 120 days (Today Card), or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud. Any payments received on loans that have been charged off are recorded as recoveries and reduce total gross charge-offs.
57
Additional provision for loan losses. Additional provision for loan losses is the amount of provision for loan losses needed for a particular period to adjust the combined loan loss reserve to the appropriate level in accordance with our underlying loan loss reserve methodology.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Net charge-offs
|
$ | 39,015 | $ | 22,428 | $ | 95,968 | $ | 163,878 | ||||||||||||||||||
|
Additional provision for loan losses
|
15,888 | (9,264) | 7,130 | (30,662) | ||||||||||||||||||||||
|
Provision for loan losses
|
$ | 54,903 | $ | 13,164 | $ | 103,098 | $ | 133,216 | ||||||||||||||||||
Combined loan information
The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all of the loans originated and sells a 90% loan participation in the Elastic lines of credit to a third-party SPV, Elastic SPV, Ltd. Elevate is required to consolidate Elastic SPV, Ltd. as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 90% of Elastic lines of credit originated by Republic Bank and sold to Elastic SPV.
Beginning in the fourth quarter of 2018, we started licensing our Rise installment loan brand to a third-party lender, FinWise Bank, which originates Rise installment loans in 17 states. FinWise Bank retains 4% of the balances of all the loans originated and sells a 96% participation to a third-party SPV, EF SPV, Ltd. We do not own EF SPV, but we are required to consolidate EF SPV as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 96% of Rise installment loans originated by FinWise Bank and sold to EF SPV.
Beginning in 2018, we started licensing the Today Card brand and our underwriting services and platform to launch a credit card product originated by CCB, which initially provides all of the funding for that product. CCB retains 5% of the credit card receivable balance of all the receivables originated and sells a 95% participation in the Today Card credit card receivables to us. The Today Card program was expanded beginning in 2020.
Beginning in the third quarter of 2020, we also license our Rise installment loan brand to an additional bank, CCB, which originates Rise installment loans in three different states than FinWise Bank. Similar to the relationship with FinWise Bank, CCB retains 5% of the balances of all of the loans originated and sells the remaining 95% loan participation in those Rise installment loans to EC SPV. We do not own EC SPV, but we are required to consolidate EC SPV as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 95% of the Rise installment loans originated by CCB and sold to EC SPV.
The information presented in the tables below on a combined basis are non-GAAP measures based on a combined portfolio of loans, which includes the total amount of outstanding loans receivable that we own and that are on our balance sheets plus outstanding loans receivable originated and owned by third parties that we guarantee pursuant to CSO programs in which we participate. There were no new loan originations in 2021 under our CSO programs, but we continued to have obligations as the CSO until the wind-down of this portfolio was completed in the third quarter of 2021. See “—Basis of Presentation and Critical Accounting Policies—Allowance and liability for estimated losses on consumer loans” and “—Basis of Presentation and Critical Accounting Policies—Liability for estimated losses on credit service organization loans.”
We believe these non-GAAP measures provide investors with important information needed to evaluate the magnitude of potential loan losses and the opportunity for revenue performance of the combined loan portfolio on an aggregate basis. We also believe that the comparison of the combined amounts from period to period is more meaningful than comparing only the amounts reflected on our balance sheet since both revenues and cost of sales as reflected in our financial statements are impacted by the aggregate amount of loans we own and those CSO loans we guaranteed.
Our use of total combined loans and fees receivable has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are:
•Rise CSO loans were originated and owned by a third-party lender and
•Rise CSO loans were funded by a third-party lender and were not part of the VPC Facility.
58
As of each of the period ends indicated, the following table presents a reconciliation of:
•Loans receivable, net, Company owned (which reconciles to our Condensed Consolidated Balance Sheets included elsewhere in this Quarterly Report on Form 10-Q);
•Loans receivable, net, guaranteed by the Company (as disclosed in Note 3 of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q);
•Combined loans receivable (which we use as a non-GAAP measure); and
•Combined loan loss reserve (which we use as a non-GAAP measure).
| 2020 | 2021 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | September 30 | December 31 | March 31 | June 30 | September 30 | |||||||||||||||||||||||||||||||||
|
Company Owned Loans:
|
||||||||||||||||||||||||||||||||||||||
|
Loans receivable – principal, current, company owned
|
$ | 346,380 | $ | 372,320 | $ | 331,251 | $ | 372,068 | $ | 466,140 | ||||||||||||||||||||||||||||
|
Loans receivable – principal, past due, company owned
|
21,354 | 25,563 | 21,678 | 27,231 | 46,730 | |||||||||||||||||||||||||||||||||
|
Loans receivable – principal, total, company owned
|
367,734 | 397,883 | 352,929 | 399,299 | 512,870 | |||||||||||||||||||||||||||||||||
|
Loans receivable – finance charges, company owned
|
24,117 | 25,348 | 21,393 | 19,157 | 22,960 | |||||||||||||||||||||||||||||||||
|
Loans receivable – company owned
|
391,851 | 423,231 | 374,322 | 418,456 | 535,830 | |||||||||||||||||||||||||||||||||
|
Allowance for loan losses on loans receivable, company owned
|
(49,909) | (48,399) | (39,037) | (40,314) | (56,209) | |||||||||||||||||||||||||||||||||
|
Loans receivable, net, company owned
|
$ | 341,942 | $ | 374,832 | $ | 335,285 | $ | 378,142 | $ | 479,621 | ||||||||||||||||||||||||||||
|
Third Party Loans Guaranteed by the Company:
|
||||||||||||||||||||||||||||||||||||||
|
Loans receivable – principal, current, guaranteed by company
|
$ | 9,129 | $ | 1,795 | $ | 145 | $ | 17 | $ | — | ||||||||||||||||||||||||||||
|
Loans receivable – principal, past due, guaranteed by company
|
314 | 144 | 15 | 4 | — | |||||||||||||||||||||||||||||||||
|
Loans receivable – principal, total, guaranteed by company(1)
|
9,443 | 1,939 | 160 | 21 | — | |||||||||||||||||||||||||||||||||
|
Loans receivable – finance charges, guaranteed by company(2)
|
679 | 299 | 22 | 4 | — | |||||||||||||||||||||||||||||||||
|
Loans receivable – guaranteed by company
|
10,122 | 2,238 | 182 | 25 | — | |||||||||||||||||||||||||||||||||
|
Liability for losses on loans receivable, guaranteed by company
|
(1,421) | (680) | (122) | (7) | — | |||||||||||||||||||||||||||||||||
|
Loans receivable, net, guaranteed by company(2)
|
$ | 8,701 | $ | 1,558 | $ | 60 | $ | 18 | $ | — | ||||||||||||||||||||||||||||
|
Combined Loans Receivable(3):
|
||||||||||||||||||||||||||||||||||||||
|
Combined loans receivable – principal, current
|
$ | 355,509 | $ | 374,115 | $ | 331,396 | $ | 372,085 | $ | 466,140 | ||||||||||||||||||||||||||||
|
Combined loans receivable – principal, past due
|
21,668 | 25,707 | 21,693 | 27,235 | 46,730 | |||||||||||||||||||||||||||||||||
|
Combined loans receivable – principal
|
377,177 | 399,822 | 353,089 | 399,320 | 512,870 | |||||||||||||||||||||||||||||||||
|
Combined loans receivable – finance charges
|
24,796 | 25,647 | 21,415 | 19,161 | 22,960 | |||||||||||||||||||||||||||||||||
|
Combined loans receivable
|
$ | 401,973 | $ | 425,469 | $ | 374,504 | $ | 418,481 | $ | 535,830 | ||||||||||||||||||||||||||||
|
Combined Loan Loss Reserve(3):
|
||||||||||||||||||||||||||||||||||||||
|
Allowance for loan losses on loans receivable, company owned
|
$ | (49,909) | $ | (48,399) | $ | (39,037) | $ | (40,314) | $ | (56,209) | ||||||||||||||||||||||||||||
|
Liability for losses on loans receivable, guaranteed by company
|
(1,421) | (680) | (122) | (7) | — | |||||||||||||||||||||||||||||||||
|
Combined loan loss reserve
|
$ | (51,330) | $ | (49,079) | $ | (39,159) | $ | (40,321) | $ | (56,209) | ||||||||||||||||||||||||||||
|
Combined loans receivable – principal, past due(3)
|
$ | 21,668 | $ | 25,707 | $ | 21,693 | $ | 27,235 | $ | 46,730 | ||||||||||||||||||||||||||||
|
Combined loans receivable – principal(3)
|
$ | 377,177 | $ | 399,822 | $ | 353,089 | $ | 399,320 | $ | 512,870 | ||||||||||||||||||||||||||||
|
Percentage past due(1)
|
6 | % | 6 | % | 6 | % | 7 | % | 9 | % | ||||||||||||||||||||||||||||
|
Combined loan loss reserve as a percentage of combined loans receivable(3)(4)
|
13 | % | 12 | % | 10 | % | 10 | % | 11 | % | ||||||||||||||||||||||||||||
|
Allowance for loan losses as a percentage of loans receivable – company owned
|
13 | % | 11 | % | 10 | % | 10 | % | 11 | % | ||||||||||||||||||||||||||||
(1)Represents loans originated by third-party lenders through the CSO programs, which are not included in our condensed consolidated financial statements. The wind-down of the CSO program was completed in the third quarter of 2021.
(2)Represents finance charges earned by third-party lenders through the CSO programs, which are not included in our condensed consolidated financial statements. The wind-down of the CSO program was completed in the third quarter of 2021.
(3)Non-GAAP measure
(4)Combined loan loss reserve as a percentage of combined loans receivable is determined using period-end balances.
59
COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenues
Our revenues are composed of Rise finance charges and CSO fees (inclusive of finance charges attributable to the participation in Rise installment loans originated by FinWise Bank and CCB), cash advance fees attributable to the participation in Elastic lines of credit that we consolidate, finance charges and fee revenues related to the Today Card credit card product, and marketing and licensing fees received from third-party lenders related to the Rise, Rise CSO, Elastic, and Today Card products. See “—Overview” above for further information on the structure of Elastic.
Cost of sales
Provision for loan losses. Provision for loan losses consists of amounts charged against income during the period related to net charge-offs and the additional provision for loan losses needed to adjust the loan loss reserve to the appropriate amount at the end of each month based on our loan loss methodology.
Direct marketing costs. Direct marketing costs consist of online marketing costs such as sponsored search and advertising on social networking sites, and other marketing costs such as purchased television and radio advertising and direct mail print advertising. In addition, direct marketing cost includes affiliate costs paid to marketers in exchange for referrals of potential customers. All direct marketing costs are expensed as incurred.
Other cost of sales. Other cost of sales includes data verification costs associated with the underwriting of potential customers and automated clearing house (“ACH”) transaction costs associated with customer loan funding and payments.
Operating expenses
Operating expenses consist of compensation and benefits, professional services, selling and marketing, occupancy and equipment, depreciation and amortization as well as other miscellaneous expenses.
Compensation and benefits. Salaries and personnel-related costs, including benefits, bonuses and share-based compensation expense, comprise a majority of our operating expenses and these costs are driven by our number of employees.
Professional services. These operating expenses include costs associated with legal, accounting and auditing, recruiting and outsourced customer support and collections.
Selling and marketing. Selling and marketing costs include costs associated with the use of agencies that perform creative services and monitor and measure the performance of the various marketing channels. Selling and marketing costs also include the production costs associated with media advertisements that are expensed as incurred over the licensing or production period. These expenses do not include direct marketing costs incurred to acquire customers, which comprises CAC.
Occupancy and equipment. Occupancy and equipment include rent expense on our leased facilities, as well as telephony and web hosting expenses.
Depreciation and amortization. We capitalize all acquisitions of property and equipment of $500 or greater as well as certain software development costs. Costs incurred in the preliminary stages of software development are expensed. Costs incurred thereafter, including external direct costs of materials and services as well as payroll and payroll-related costs, are capitalized. Post-development costs are expensed. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets.
Other expense
Net interest expense. Net interest expense primarily includes the interest expense associated with the VPC Facility that funds the Rise installment loans, the ESPV Facility related to the Elastic lines of credit and related Elastic SPV entity, and the EF SPV and EC SPV Facilities that fund Rise installment loans originated by FinWise Bank and CCB, respectively. Interest expense also includes any amortization of deferred debt issuance cost and prepayment penalties incurred associated with the debt facilities.
60
STATEMENTS OF OPERATIONS
The following table sets forth our condensed consolidated statements of operations data for each of the periods indicated. Effective June 29, 2020, ECIL was placed into administration in the UK, and we deconsolidated ECIL and present it as discontinued operations for all periods presented.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| Condensed consolidated statements of operations data (Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Revenues
|
$ | 112,835 | $ | 94,164 | $ | 287,108 | $ | 374,622 | ||||||||||||||||||
|
Cost of sales:
|
||||||||||||||||||||||||||
|
Provision for loan losses
|
54,903 | 13,164 | 103,098 | 133,216 | ||||||||||||||||||||||
|
Direct marketing costs
|
15,406 | 2,585 | 30,353 | 13,898 | ||||||||||||||||||||||
|
Other cost of sales
|
4,766 | 1,672 | 9,718 | 5,949 | ||||||||||||||||||||||
|
Total cost of sales
|
75,075 | 17,421 | 143,169 | 153,063 | ||||||||||||||||||||||
|
Gross profit
|
37,760 | 76,743 | 143,939 | 221,559 | ||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||
|
Compensation and benefits
|
20,445 | 23,921 | 58,038 | 64,239 | ||||||||||||||||||||||
|
Professional services
|
8,423 | 8,236 | 24,161 | 24,633 | ||||||||||||||||||||||
|
Selling and marketing
|
1,277 | 610 | 2,520 | 2,468 | ||||||||||||||||||||||
|
Occupancy and equipment
|
5,521 | 4,717 | 15,766 | 14,196 | ||||||||||||||||||||||
|
Depreciation and amortization
|
4,544 | 4,588 | 14,339 | 13,413 | ||||||||||||||||||||||
|
Other
|
656 | 590 | 2,242 | 2,568 | ||||||||||||||||||||||
|
Total operating expenses
|
40,866 | 42,662 | 117,066 | 121,517 | ||||||||||||||||||||||
|
Operating income (loss)
|
(3,106) | 34,081 | 26,873 | 100,042 | ||||||||||||||||||||||
|
Other expense:
|
||||||||||||||||||||||||||
|
Net interest expense
|
(9,544) | (11,575) | (26,897) | (37,408) | ||||||||||||||||||||||
|
Non-operating income (loss)
|
(198) | (1,007) | 519 | (6,692) | ||||||||||||||||||||||
|
Total other expense
|
(9,742) | (12,582) | (26,378) | (44,100) | ||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes
|
(12,848) | 21,499 | 495 | 55,942 | ||||||||||||||||||||||
|
Income tax expense (benefit)
|
(1,843) | 4,883 | 1,829 | 15,311 | ||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
(11,005) | 16,616 | (1,334) | 40,631 | ||||||||||||||||||||||
|
Net income (loss) from discontinued operations
|
— | 4,465 | — | (15,908) | ||||||||||||||||||||||
|
Net income (loss)
|
$ | (11,005) | $ | 21,081 | $ | (1,334) | $ | 24,723 | ||||||||||||||||||
61
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| As a percentage of revenues | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||||
|
Cost of sales:
|
||||||||||||||||||||||||||
|
Provision for loan losses
|
49 | % | 14 | % | 36 | % | 36 | % | ||||||||||||||||||
|
Direct marketing costs
|
14 | 3 | 11 | 4 | ||||||||||||||||||||||
|
Other cost of sales
|
4 | 2 | 3 | 2 | ||||||||||||||||||||||
|
Total cost of sales
|
67 | 19 | 50 | 41 | ||||||||||||||||||||||
|
Gross profit
|
33 | 81 | 50 | 59 | ||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||
|
Compensation and benefits
|
18 | 25 | 20 | 17 | ||||||||||||||||||||||
|
Professional services
|
7 | 9 | 8 | 7 | ||||||||||||||||||||||
|
Selling and marketing
|
1 | 1 | 1 | 1 | ||||||||||||||||||||||
|
Occupancy and equipment
|
5 | 5 | 5 | 4 | ||||||||||||||||||||||
|
Depreciation and amortization
|
4 | 5 | 5 | 4 | ||||||||||||||||||||||
|
Other
|
1 | 1 | 1 | 1 | ||||||||||||||||||||||
|
Total operating expenses
|
36 | 45 | 41 | 32 | ||||||||||||||||||||||
|
Operating income (loss)
|
(3) | 36 | 9 | 27 | ||||||||||||||||||||||
|
Other expense:
|
||||||||||||||||||||||||||
|
Net interest expense
|
(8) | (12) | (9) | (10) | ||||||||||||||||||||||
|
Non-operating income (loss)
|
— | (1) | — | (2) | ||||||||||||||||||||||
|
Total other expense
|
(9) | (13) | (9) | (12) | ||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes
|
(11) | 23 | — | 15 | ||||||||||||||||||||||
|
Income tax expense (benefit)
|
(2) | 5 | 1 | 4 | ||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
(10) | 18 | — | 11 | ||||||||||||||||||||||
|
Net income (loss) from discontinued operations
|
— | 5 | — | (4) | ||||||||||||||||||||||
|
Net income (loss)
|
(10) | % | 22 | % | — | % | 7 | % | ||||||||||||||||||
62
Comparison of the three months ended September 30, 2021 and 2020
Revenues
| Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Period-to-period change | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount |
Percentage of
revenues |
Amount |
Percentage of
revenues |
Amount | Percentage | ||||||||||||||||||||||||||||||||
|
Finance charges
|
$ | 111,480 | 99 | % | $ | 93,928 | 100 | % | $ | 17,552 | 19 | % | ||||||||||||||||||||||||||
|
Other
|
1,355 | 1 | 236 | — | 1,119 | 474 | ||||||||||||||||||||||||||||||||
|
Revenues
|
$ | 112,835 | 100 | % | $ | 94,164 | 100 | % | $ | 18,671 | 20 | % | ||||||||||||||||||||||||||
Revenues increased by $18.7 million, or 20%, from $94.2 million for the three months ended September 30, 2020 to $112.8 million for the three months ended September 30, 2021. The increase in quarterly revenue is primarily attributable to higher average combined loans receivable-principal as we saw growth in all of our products year over year.
The tables below break out this change in revenue (including CSO fees and cash advance fees) by product:
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||
|
Rise(1)
|
Elastic | Today | ||||||||||||||||||||||||
| (Dollars in thousands) | (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | ||||||||||||||||||||||
|
Average combined loans receivable – principal(2)
|
$ | 264,785 | $ | 167,684 | $ | 27,480 | $ | 459,949 | ||||||||||||||||||
|
Effective APR
|
104 | % | 94 | % | 30 | % | 96 | % | ||||||||||||||||||
|
Finance charges
|
$ | 69,738 | $ | 39,662 | $ | 2,080 | $ | 111,480 | ||||||||||||||||||
|
Other
|
275 | 331 | 749 | 1,355 | ||||||||||||||||||||||
|
Total revenue
|
$ | 70,013 | $ | 39,993 | $ | 2,829 | $ | 112,835 | ||||||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||
|
Rise(1)
|
Elastic | Today | ||||||||||||||||||||||||
| (Dollars in thousands) | (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | ||||||||||||||||||||||
|
Average combined loans receivable – principal(2)
|
$ | 225,041 | $ | 156,053 | $ | 8,607 | $ | 389,701 | ||||||||||||||||||
|
Effective APR
|
101 | % | 92 | % | 32 | % | 96 | % | ||||||||||||||||||
|
Finance charges
|
$ | 57,169 | $ | 36,071 | $ | 688 | $ | 93,928 | ||||||||||||||||||
|
Other
|
6 | 15 | 215 | 236 | ||||||||||||||||||||||
|
Total revenue
|
$ | 57,175 | $ | 36,086 | $ | 903 | $ | 94,164 | ||||||||||||||||||
________
(1) Includes loans originated by third-party lenders through the CSO programs, which are not included in our condensed consolidated financial statements.
(2) Average combined loans receivable - principal is calculated using daily Combined loans receivable – principal balances. Not a financial measure prepared in accordance with US GAAP. See reconciliation table accompanying this release for a reconciliation of non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with US GAAP.
Our average combined loans receivable-principal increased $70 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. This increase in average balance is primarily due to increases in the loan origination volume in all three products, and accounted for an approximately $17 million increase in revenue for the period. Our average APR remained unchanged at 96% for both the three months ended September 30, 2020 and the three months ended September 30, 2021. The flat effective APR is due to the increased volume of new originations at higher APRs being offset by the higher volume of the Today Card product, which has the lowest APR. We expect the overall effective APR of the loan portfolio to remain flat going forward.
63
Cost of sales
| Three Months Ended September 30, |
Period-to-period
change |
|||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount |
Percentage of
revenues |
Amount |
Percentage of
revenues |
Amount | Percentage | ||||||||||||||||||||||||||||||||
|
Cost of sales:
|
||||||||||||||||||||||||||||||||||||||
|
Provision for loan losses
|
$ | 54,903 | 49 | % | $ | 13,164 | 14 | % | $ | 41,739 | 317 | % | ||||||||||||||||||||||||||
|
Direct marketing costs
|
15,406 | 14 | 2,585 | 3 | 12,821 | 496 | ||||||||||||||||||||||||||||||||
|
Other cost of sales
|
4,766 | 4 | 1,672 | 2 | 3,094 | 185 | ||||||||||||||||||||||||||||||||
|
Total cost of sales
|
$ | 75,075 | 67 | % | $ | 17,421 | 19 | % | $ | 57,654 | 331 | % | ||||||||||||||||||||||||||
Provision for loan losses. Provision for loan losses increased by $41.7 million, or 317%, from $13.2 million for the three months ended September 30, 2020 to $54.9 million for the three months ended September 30, 2021 due to the loan portfolio growth.
The tables below break out these changes by loan product:
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||
| Rise | Elastic | Today | ||||||||||||||||||||||||
| (Dollars in thousands) | (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | ||||||||||||||||||||||
|
Combined loan loss reserve(1):
|
||||||||||||||||||||||||||
|
Beginning balance
|
$ | 28,099 | $ | 10,372 | $ | 1,850 | $ | 40,321 | ||||||||||||||||||
|
Net charge-offs
|
(30,210) | (8,063) | (742) | (39,015) | ||||||||||||||||||||||
|
Provision for loan losses
|
42,299 | 10,832 | 1,772 | 54,903 | ||||||||||||||||||||||
|
Ending balance
|
$ | 40,188 | $ | 13,141 | $ | 2,880 | $ | 56,209 | ||||||||||||||||||
|
Combined loans receivable(1)(2)
|
$ | 306,229 | $ | 194,459 | $ | 35,142 | $ | 535,830 | ||||||||||||||||||
|
Combined loan loss reserve as a percentage of ending combined loans receivable
|
13 | % | 7 | % | 8 | % | 11 | % | ||||||||||||||||||
|
Net charge-offs as a percentage of revenues
|
43 | % | 20 | % | 26 | % | 35 | % | ||||||||||||||||||
|
Provision for loan losses as a percentage of revenues
|
60 | % | 27 | % | 63 | % | 49 | % | ||||||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||
| Rise | Elastic | Today | ||||||||||||||||||||||||
| (Dollars in thousands) | (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | ||||||||||||||||||||||
|
Combined loan loss reserve(1):
|
||||||||||||||||||||||||||
|
Beginning balance
|
$ | 40,614 | $ | 18,604 | $ | 1,376 | $ | 60,594 | ||||||||||||||||||
|
Net charge-offs
|
(15,336) | (6,720) | (372) | (22,428) | ||||||||||||||||||||||
|
Provision for loan losses
|
9,039 | 3,531 | 594 | 13,164 | ||||||||||||||||||||||
|
Ending balance
|
$ | 34,317 | $ | 15,415 | $ | 1,598 | $ | 51,330 | ||||||||||||||||||
|
Combined loans receivable(1)(2)
|
$ | 234,277 | $ | 158,517 | $ | 9,179 | $ | 401,973 | ||||||||||||||||||
|
Combined loan loss reserve as a percentage of ending combined loans receivable
|
15 | % | 10 | % | 17 | % | 13 | % | ||||||||||||||||||
|
Net charge-offs as a percentage of revenues
|
27 | % | 19 | % | 41 | % | 24 | % | ||||||||||||||||||
|
Provision for loan losses as a percentage of revenues
|
16 | % | 10 | % | 66 | % | 14 | % | ||||||||||||||||||
_________
(1) Not a financial measure prepared in accordance with US GAAP. See “—Non-GAAP Financial Measures” for more information and for a reconciliation to the most directly comparable financial measure calculated in accordance with US GAAP.
(2) Includes loans originated by third-party lenders through the CSO programs, which are not included in our condensed consolidated financial statements.
64
Total loan loss provision for the three months ended September 30, 2021 was 49% of revenues, which was within our targeted range of 45% to 55%, and higher than the 14% for the three months ended September 30, 2020. For the three months ended September 30, 2021, net charge-offs as a percentage of revenues increased to 35% compared to 24% in the prior year period. The increase in these credit performance metrics is due to the increase in new loan originations beginning in the second quarter of 2021 and charge-offs and loan loss provisioning associated with a growing portfolio.We continue to monitor the portfolio during the economic recovery from COVID-19 and continue to adjust our underwriting and credit policies to mitigate any potential negative impacts. As we recover from the impacts of COVID-19 and return our loan portfolio to our pre-pandemic size, we expect our total loan loss provision as a percentage of revenues will continue to remain within our targeted range of approximately 45% to 55% of revenue.
The combined loan loss reserve as a percentage of combined loans receivable totaled 11% and 13% as of September 30, 2021 and September 30, 2020, respectively. This year-over-year decrease reflects the reduction in credit losses experienced by the portfolio during the COVID-19 pandemic due to reduced demand, reduced origination activity and various government stimulus programs. We would expect the loan loss reserve to increase as we originate more new customers and return the portfolio to a normalized credit profile. Past due loan balances at September 30, 2021 were 9% of total combined loans receivable-principal, up from 6% from a year ago due to the number of new customers originated beginning in the second quarter of 2021 which is consistent with our historical past due percentages prior to the pandemic. We, and the bank originators we support, are no longer offering specific COVID-19 payment deferral programs, but continue to offer other payment flexibility programs if certain qualifications are met. We are continuing to see that customers are meeting their scheduled payments once they exit the payment deferral program. We anticipate the combined loan loss reserve as a percentage of combined loans receivable, as well as our past due loan balances as a percentage of total combined loans receivable-principal, will move toward historic norms as we continue to grow our loan portfolio.
Direct marketing costs. Direct marketing costs increased by $12.8 million, or 496%, from $2.6 million for the three months ended September 30, 2020 to $15.4 million for the three months ended September 30, 2021. We had limited marketing activities and new loan origination volume in the third quarter of 2020 in response to the COVID-19 pandemic. We have seen a return to more normalized new customer acquisition in all three products in the third quarter as the economy continues to recover from the COVID-19 pandemic and demand for the loan products return. For the three months ended September 30, 2021, the number of new customers acquired increased to 69,682 compared to 8,489 during the three months ended September 30, 2020. We anticipate our direct marketing costs will continue to increase as we focus on growing our loan portfolio. Our CAC was lower in the third quarter of 2021 at $221 as compared to the third quarter of 2020 at $305, with the third quarter of 2020 not reflective of our historical CAC due to the significant reduction in new loan originations due to the COVID-19 pandemic. We believe our CAC in future quarters will continue to remain within or below our target range of $250 to $300 as we continue to optimize the efficiency of our marketing channels and continue to grow the Today Card which successfully generated new customers at a sub-$100 CAC.
Other cost of sales. Other cost of sales increased by $3.1 million, or 185%, from $1.7 million for the three months ended September 30, 2020 to $4.8 million for the three months ended September 30, 2021 due to increased data verification costs resulting from increased loan origination volume in the third quarter of 2021.
Operating expenses
| Three Months Ended September 30, |
Period-to-period
change |
|||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount |
Percentage of
revenues |
Amount |
Percentage of
revenues |
Amount | Percentage | ||||||||||||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||||||||||||||
|
Compensation and benefits
|
$ | 20,445 | 18 | % | $ | 23,921 | 25 | % | $ | (3,476) | (15) | % | ||||||||||||||||||||||||||
|
Professional services
|
8,423 | 7 | 8,236 | 9 | 187 | 2 | ||||||||||||||||||||||||||||||||
|
Selling and marketing
|
1,277 | 1 | 610 | 1 | 667 | 109 | ||||||||||||||||||||||||||||||||
|
Occupancy and equipment
|
5,521 | 5 | 4,717 | 5 | 804 | 17 | ||||||||||||||||||||||||||||||||
|
Depreciation and amortization
|
4,544 | 4 | 4,588 | 5 | (44) | (1) | ||||||||||||||||||||||||||||||||
|
Other
|
656 | 1 | 590 | 1 | 66 | 11 | ||||||||||||||||||||||||||||||||
|
Total operating expenses
|
$ | 40,866 | 36 | % | $ | 42,662 | 45 | % | $ | (1,796) | (4) | % | ||||||||||||||||||||||||||
65
Compensation and benefits. Compensation and benefits decreased by $3.5 million, or 15%, from $23.9 million for the three months ended September 30, 2020 to $20.4 million for the three months ended September 30, 2021. This primarily resulted from a reduction in staff related to an operating expense reduction plan we implemented in the second and third quarters of 2020 in response to the pandemic.
Professional services. Professional services increased by $0.2 million, or 2%, from $8.2 million for the three months ended September 30, 2020 to $8.4 million for the three months ended September 30, 2021 primarily due to increased consulting expense.
Selling and marketing. Selling and marketing increased by $0.7 million, or 109%, from $0.6 million for the three months ended September 30, 2020 to $1.3 million for the three months ended September 30, 2021 primarily due to increased marketing agency fees.
Occupancy and equipment. Occupancy and equipment increased by $0.8 million, or 17%, from $4.7 million for the three months ended September 30, 2020 to $5.5 million for the three months ended September 30, 2021 primarily due to increased web hosting expenses, partially offset by decreased rent and license expenses.
Depreciation and amortization. Depreciation and amortization was roughly $4.6 million for both the three months ended September 30, 2020 and 2021 as our additions to capitalized projects have been relatively flat over the past two years resulting in a consistent depreciation and amortization expense.
Other. Other operating expenses increased by $0.1 million, or 11%, from $0.6 million for the three months ended September 30, 2020 to $0.7 million for the three months ended September 30, 2021 primarily due to an increase in travel, supplies, and meals and entertainment expenses.
Net interest expense
Net interest expense decreased 18% during the three months ended September 30, 2021 as compared to the prior year period. Our average balance of notes payable outstanding under the debt facilities in the third quarter of 2021 decreased $54 million from the third quarter of 2020 due to debt paydowns, including the maturity of one of our term notes, partially offset by new draws to fund loan portfolio growth. This year-over-year reduction resulted in a decrease in interest expense of approximately $1.3 million. In addition, our average effective interest rate on notes payable outstanding has decreased from 10.4% for the three months ended September 30, 2020 to 9.8% for the three months ended September 30, 2021, resulting in a decrease in interest expense of approximately $0.7 million. At September 30, 2021, our effective cost of funds on new borrowings is 8%, which is expected to reduce our overall effective cost of funds as we continue to borrow on our debt facilities in the future.
66
The following table shows the effective cost of funds of each debt facility for the period:
| Three Months Ended September 30, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
|
VPC Facility
|
||||||||||||||
|
Average facility balance during the period
|
$ | 71,230 | $ | 147,550 | ||||||||||
|
Net interest expense
|
1,779 | 4,034 | ||||||||||||
|
Effective cost of funds
|
9.9 | % | 10.9 | % | ||||||||||
|
|
||||||||||||||
|
ESPV Facility
|
||||||||||||||
|
Average facility balance during the period
|
$ | 163,187 | $ | 199,500 | ||||||||||
|
Net interest expense
|
4,177 | 5,222 | ||||||||||||
|
Effective cost of funds
|
10.2 | % | 10.4 | % | ||||||||||
|
|
||||||||||||||
|
EF SPV Facility
|
||||||||||||||
|
Average facility balance during the period
|
$ | 109,882 | 93,500 | |||||||||||
|
Net interest expense
|
2,544 | 2,319 | ||||||||||||
|
Effective cost of funds
|
9.2 | % | 9.9 | % | ||||||||||
|
|
||||||||||||||
|
EC SPV Facility
|
||||||||||||||
|
Average facility balance during the period
|
$ | 42,587 | $ | — | ||||||||||
|
Net interest expense
|
1,044 | — | ||||||||||||
|
Effective cost of funds
|
9.7 | % | — | % | ||||||||||
In July 2020, we entered into a new facility, the EC SPV Facility. As of September 30, 2021, we have drawn $50.5 million on the EC SPV facility. Per the terms of the February 2019 amendments and the July 31, 2020 EC SPV agreement, we qualified for a 25 bps rate reduction on the VPC, ESPV, EF SPV and EC SPV facilities effective January 1, 2021.
Non-operating income (loss)
For the three months ended September 30, 2020, we accrued a $1.0 million estimated indemnification obligation related to a legal matter for a former executive of the Company. As of March 31, 2021, the indemnification obligation was paid and no further accrual remains. For the three months ended September 30, 2021, we had an impairment loss related to a subleased asset resulting in non-operating loss of $0.2 million.
Income tax expense (benefit)
Our income tax expense decreased $6.7 million, from $4.9 million for the three months ended September 30, 2020 to $(1.8) million for the three months ended September 30, 2021. We recognized an uncertain tax position of $1.6 million in income tax expense (benefit) due to a recent change in tax regulations in the state of Texas that impacted our previously recognized research and development state tax credits. Our effective tax rates for continuing operations for the three months ended September 30, 2021 and 2020, respectively, were 14.3% and 22.7%, respectively. Our effective tax rate differed from the standard corporate federal income tax rate of 21% due to permanent non-deductible items and corporate state tax obligations in the states where we have lending activities. Our cash effective tax rate was approximately 1.5% for the third quarter of 2021.
Net income from discontinued operations
Our income from discontinued operations on our UK entity (ECIL) for the three months ended September 30, 2020 consisted of a gain of $0.6 million due to the release of the parent guarantee accrual as ECIL repaid its outstanding debt to VPC during the quarter. Additionally, we revised our estimated tax basis in ECIL resulting in an additional $3.9 million income tax benefit recognized during the three months ended September 30, 2020.
67
Net income (loss)
Our net income (loss) decreased $32.1 million or 152% from $21.1 million net income for the three months ended September 30, 2020 to $11.0 million net loss for the three months ended September 30, 2021 primarily due to the upfront costs associated with credit provisioning and direct marketing expense associated with the increased loan origination volume experienced during the quarter as compared to minimum loan origination volume and a declining portfolio in 2020.
Comparison of the nine months ended September 30, 2021 and 2020
Revenues
Revenues decreased by $87.5 million, or 23%, from $374.6 million for the nine months ended September 30, 2020 to $287.1 million for the nine months ended September 30, 2021. The decrease in revenue is primarily attributable to a lower average combined loans receivable-principal coupled with lower effective APRs earned on the loan portfolio.
The tables below break out this change in revenue (including CSO fees and cash advance fees) by product:
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||
| Rise(1) | Elastic | Today | ||||||||||||||||||||||||
| (Dollars in thousands) | (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | ||||||||||||||||||||||
|
Average combined loans receivable – principal(2)
|
$ | 229,203 | $ | 149,534 | $ | 19,829 | $ | 398,566 | ||||||||||||||||||
|
Effective APR
|
102 | % | 94 | % | 30 | % | 95 | % | ||||||||||||||||||
|
Finance charges
|
$ | 174,314 | $ | 105,650 | $ | 4,453 | $ | 284,417 | ||||||||||||||||||
|
Other
|
536 | 492 | 1,663 | 2,691 | ||||||||||||||||||||||
|
Total revenue
|
$ | 174,850 | $ | 106,142 | $ | 6,116 | $ | 287,108 | ||||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||
| Rise(1) | Elastic | Today | ||||||||||||||||||||||||
| (Dollars in thousands) | (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | ||||||||||||||||||||||
|
Average combined loans receivable – principal(2)
|
$ | 279,202 | $ | 193,519 | $ | 6,805 | $ | 479,526 | ||||||||||||||||||
|
Effective APR
|
113 | % | 94 | % | 31 | % | 104 | % | ||||||||||||||||||
|
Finance charges
|
$ | 236,207 | $ | 136,023 | $ | 1,580 | $ | 373,810 | ||||||||||||||||||
|
Other
|
114 | 191 | 507 | 812 | ||||||||||||||||||||||
|
Total revenue
|
$ | 236,321 | $ | 136,214 | $ | 2,087 | $ | 374,622 | ||||||||||||||||||
_________
(1) Includes loans originated by third-party lenders through the CSO programs, which are not included in our condensed consolidated financial statements.
(2) Average combined loans receivable - principal is calculated using daily Combined loans receivable – principal balances. Not a financial measure prepared in accordance with US GAAP. See reconciliation table accompanying this release for a reconciliation of non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with US GAAP.
68
Our average combined loans receivable-principal decreased $81 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. This decrease in average balance is primarily due to lower combined loans receivable-principal balances in the Rise and Elastic portfolios in the first half of 2021 which were impacted by the COVID-19 pandemic and substantial government assistance to our customers prior to the growth which commenced in late second quarter 2021. The decrease in average balances accounted for approximately $66 million of the reduction in revenue for the period. For the nine months ended September 30, 2021 and 2020, the average effective APR for the portfolio was 95% and 104%, respectively. This reduction in the effective APR is due to both the lower effective interest rates earned on loans in a deferral status under the payment flexibility tools that were implemented in response to the COVID-19 pandemic and the growth of Today Card relative to the total loan portfolio, which has the lowest APR. The lower effective APR accounted for approximately $23 million of the reduction in revenue for the period. We expect the overall effective APR of the loan portfolio to remain flat going forward.
Cost of sales
| Nine Months Ended September 30, |
Period-to-period
change |
|||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount |
Percentage of
revenues |
Amount |
Percentage of
revenues |
Amount | Percentage | ||||||||||||||||||||||||||||||||
|
Cost of sales:
|
||||||||||||||||||||||||||||||||||||||
|
Provision for loan losses
|
$ | 103,098 | 36 | % | $ | 133,216 | 36 | % | $ | (30,118) | (23) | % | ||||||||||||||||||||||||||
|
Direct marketing costs
|
30,353 | 11 | 13,898 | 4 | 16,455 | 118 | ||||||||||||||||||||||||||||||||
|
Other cost of sales
|
9,718 | 3 | 5,949 | 2 | 3,769 | 63 | ||||||||||||||||||||||||||||||||
|
Total cost of sales
|
$ | 143,169 | 50 | % | $ | 153,063 | 41 | % | $ | (9,894) | (6) | % | ||||||||||||||||||||||||||
Provision for loan losses. Provision for loan losses decreased by $30.1 million, or 23%, from $133.2 million for the nine months ended September 30, 2020 to $103.1 million for the nine months ended September 30, 2021.
The tables below break out these changes by loan product:
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||
| Rise | Elastic | Today | ||||||||||||||||||||||||
| (Dollars in thousands) | (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | ||||||||||||||||||||||
|
Combined loan loss reserve(1):
|
||||||||||||||||||||||||||
|
Beginning balance
|
$ | 33,968 | $ | 13,201 | $ | 1,910 | $ | 49,079 | ||||||||||||||||||
|
Net charge-offs
|
(72,233) | (21,437) | (2,298) | (95,968) | ||||||||||||||||||||||
|
Provision for loan losses
|
78,453 | 21,377 | 3,268 | 103,098 | ||||||||||||||||||||||
|
Ending balance
|
$ | 40,188 | $ | 13,141 | $ | 2,880 | $ | 56,209 | ||||||||||||||||||
|
Combined loans receivable(1)(2)
|
$ | 306,229 | $ | 194,459 | $ | 35,142 | $ | 535,830 | ||||||||||||||||||
|
Combined loan loss reserve as a percentage of ending combined loans receivable
|
13 | % | 7 | % | 8 | % | 11 | % | ||||||||||||||||||
|
Net charge-offs as a percentage of revenues
|
41 | % | 20 | % | 38 | % | 33 | % | ||||||||||||||||||
|
Provision for loan losses as a percentage of revenues
|
45 | % | 20 | % | 53 | % | 36 | % | ||||||||||||||||||
69
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||
| Rise | Elastic | Today | ||||||||||||||||||||||||
| (Dollars in thousands) | (Installment Loans) | (Lines of Credit) | (Credit Card) | Total | ||||||||||||||||||||||
|
Combined loan loss reserve(1):
|
||||||||||||||||||||||||||
|
Beginning balance
|
$ | 52,099 | $ | 28,852 | $ | 1,041 | $ | 81,992 | ||||||||||||||||||
|
Net charge-offs
|
(108,397) | (54,044) | (1,437) | (163,878) | ||||||||||||||||||||||
|
Provision for loan losses
|
90,615 | 40,607 | 1,994 | 133,216 | ||||||||||||||||||||||
|
Ending balance
|
$ | 34,317 | $ | 15,415 | $ | 1,598 | $ | 51,330 | ||||||||||||||||||
|
Combined loans receivable(1)(2)
|
$ | 234,277 | $ | 158,517 | $ | 9,179 | $ | 401,973 | ||||||||||||||||||
|
Combined loan loss reserve as a percentage of ending combined loans receivable
|
15 | % | 10 | % | 17 | % | 13 | % | ||||||||||||||||||
|
Net charge-offs as a percentage of revenues
|
46 | % | 40 | % | 69 | % | 44 | % | ||||||||||||||||||
|
Provision for loan losses as a percentage of revenues
|
38 | % | 30 | % | 96 | % | 36 | % | ||||||||||||||||||
_________
(1) Not a financial measure prepared in accordance with US GAAP. See “—Non-GAAP Financial Measures” for more information and for a reconciliation to the most directly comparable financial measure calculated in accordance with US GAAP.
(2) Includes loans originated by third-party lenders through the CSO programs, which are not included in our condensed consolidated financial statements.
Total loan loss provision was 36% of revenues for both the nine months ended September 30, 2021 and the nine months ended September 30, 2020, which was below our targeted range of 45% to 55%. For the nine months ended September 30, 2021, net charge-offs as a percentage of revenues decreased to 33% compared to 44% in the prior year period. The decrease in these credit performance metrics is due to the limited new loan originations in the first half of 2021 which had historically low credit loss metrics and are expected to return to our target levels due to the increased origination volume in the second half of 2021 and a return of the loan portfolios to a more normalized credit profile. We continue to monitor the portfolio during the economic recovery resulting from COVID-19 and continue to adjust our underwriting and credit policies to mitigate any potential negative impacts. As loan demand returns to pre-pandemic levels and the loan portfolio grows, we expect our total loan loss provision as a percentage of revenues to be within our targeted range of approximately 45% to 55% of revenue.
The combined loan loss reserve as a percentage of combined loans receivable totaled 11% and 13% as of September 30, 2021 and September 30, 2020, respectively. This year-over-year decrease reflects the reduction in credit losses experienced by the portfolio during the COVID-19 pandemic due to reduced demand, reduced origination activity and various government stimulus programs. We would expect the loan loss reserve to increase as we originate more new customers and return the portfolio to a normalized credit profile. Past due loan balances at September 30, 2021 were 9% of total combined loans receivable-principal, up from 6% from a year ago due to the number of new customers originated beginning in the second quarter of 2021 which is consistent with our historical past due percentages prior to the pandemic. We, and the bank originators we support, are no longer offering specific COVID-19 payment deferral programs, but continue to offer other payment flexibility programs if certain qualifications are met. We are continuing to see that most customers are meeting their scheduled payments once they exit the payment deferral program. We anticipate the combined loan loss reserve as a percentage of combined loans receivable, as well as our past due balances as a percentage of total combined loans receivable-principal, will move toward historic norms as we continue to grow our loan portfolio.
Direct marketing costs. Direct marketing costs increased by $16.5 million, or 118%, from $13.9 million for the nine months ended September 30, 2020 to $30.4 million for the nine months ended September 30, 2021. We had limited marketing activities and new loan origination volume in 2020 in response to the COVID-19 pandemic. We have seen a return to more normalized new customer acquisition in all three loan products in the third quarter of 2021 as the economy continues to recover from the COVID-19 pandemic and demand for the loan products returns. For the nine months ended September 30, 2021, the number of new customers acquired increased to 122,558 compared to 47,054 during the nine months ended September 30, 2020. We anticipate our direct marketing costs will continue to increase as we focus on growing our loan portfolio. Our CAC was lower for the nine months ended September 30, 2021 at $248 as compared to the nine months ended September 30, 2020 at $295, with the second and third quarters of 2020 not reflective of our historical CAC due to the significant reduction in marketing activity and new loan originations due to the COVID-19 pandemic. We believe our CAC in future quarters will continue to remain within or below our target range of $250 to $300 as we continue to optimize the efficiency of our marketing channels and continue to grow the Today Card which successfully generated new customers at a sub-$100 CAC.
Other cost of sales. Other cost of sales increased by $3.8 million, or 63%, from $5.9 million for the nine months ended September 30, 2020 to $9.7 million for the nine months ended September 30, 2021 primarily due to increased data verification costs resulting from increased loan origination volume.
70
Operating expenses
| Nine Months Ended September 30, |
Period-to-period
change |
|||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount |
Percentage of
revenues |
Amount |
Percentage of
revenues |
Amount | Percentage | ||||||||||||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||||||||||||||
|
Compensation and benefits
|
$ | 58,038 | 20 | % | $ | 64,239 | 17 | % | $ | (6,201) | (10) | % | ||||||||||||||||||||||||||
|
Professional services
|
24,161 | 8 | 24,633 | 7 | (472) | (2) | ||||||||||||||||||||||||||||||||
|
Selling and marketing
|
2,520 | 1 | 2,468 | 1 | 52 | 2 | ||||||||||||||||||||||||||||||||
|
Occupancy and equipment
|
15,766 | 5 | 14,196 | 4 | 1,570 | 11 | ||||||||||||||||||||||||||||||||
|
Depreciation and amortization
|
14,339 | 5 | 13,413 | 4 | 926 | 7 | ||||||||||||||||||||||||||||||||
|
Other
|
2,242 | 1 | 2,568 | 1 | (326) | (13) | ||||||||||||||||||||||||||||||||
|
Total operating expenses
|
$ | 117,066 | 41 | % | $ | 121,517 | 32 | % | $ | (4,451) | (4) | % | ||||||||||||||||||||||||||
Compensation and benefits. Compensation and benefits decreased by $6.2 million, or 10%, from $64.2 million for the nine months ended September 30, 2020 to $58.0 million for the nine months ended September 30, 2021. This primarily resulted from a reduction in staff related to an operating expense reduction plan we implemented in the second and third quarters of 2020 in response to the pandemic.
Professional services. Professional services decreased by $0.5 million, or 2%, from $24.6 million for the nine months ended September 30, 2020 to $24.2 million for the nine months ended September 30, 2021 due to decreased other outside services, partially offset by increased legal expenses.
Selling and marketing. Selling and marketing was relatively flat year over year at $2.5 million for both the nine months ended September 30, 2020 and the nine months ended September 30, 2021.
Occupancy and equipment. Occupancy and equipment increased by $1.6 million, or 11%, from $14.2 million for the nine months ended September 30, 2020 to $15.8 million for the nine months ended September 30, 2021 primarily due to increased web hosting expense, partially offset by decreases in additional licenses expense and rent.
Depreciation and amortization. Depreciation and amortization increased by $0.9 million, or 7%, from $13.4 million for the nine months ended September 30, 2020 to $14.3 million for the nine months ended September 30, 2021 primarily due to the acceleration of a board member's non-compete agreement of $0.6 million with a slight depreciation expense increase between the two years.
Other. Other operating expenses decreased by $0.3 million, or 13%, from $2.6 million for the nine months ended September 30, 2020 to $2.2 million for the nine months ended September 30, 2021 primarily due to decreased travel, and meals and entertainment expenses.
Net interest expense
71
Net interest expense decreased 28% during the nine months ended September 30, 2021 as compared to the prior year period. Our average balance of notes payable outstanding under the debt facilities in the first nine months of 2021 decreased $115.9 million from the first nine months of 2020 due to debt paydowns, including the maturity of one of our term notes, partially offset by new draws to fund loan portfolio growth. This year-over-year reduction resulted in a decrease in interest expense of approximately $8.6 million. In addition, our average effective interest rate on notes payable outstanding has decreased from 10.5% for the nine months ended September 30, 2020 to 10.0% for the nine months ended September 30, 2021, resulting in a decrease in interest expense of approximately $1.9 million. At September 30, 2021, our effective cost of funds on new borrowings is 8%, which is expected to reduce our overall effective costs of funds as we continue to borrow on our debt facilities in the future.
The following table shows the effective cost of funds of each debt facility for the period:
| Nine Months Ended September 30, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
|
VPC Facility
|
||||||||||||||
|
Average facility balance during the period
|
$ | 78,183 | $ | 167,043 | ||||||||||
|
Net interest expense
|
5,912 | 13,522 | ||||||||||||
|
Effective cost of funds
|
10.1 | % | 10.8 | % | ||||||||||
|
|
||||||||||||||
|
ESPV Facility
|
||||||||||||||
|
Average facility balance during the period
|
$ | 161,247 | $ | 208,894 | ||||||||||
|
Net interest expense
|
12,286 | 16,267 | ||||||||||||
|
Effective cost of funds
|
10.2 | % | 10.4 | % | ||||||||||
|
|
||||||||||||||
|
EF SPV Facility
|
||||||||||||||
|
Average facility balance during the period
|
$ | 87,725 | 100,863 | |||||||||||
|
Net interest expense
|
6,177 | 7,619 | ||||||||||||
|
Effective cost of funds
|
9.4 | % | 10.1 | % | ||||||||||
|
|
||||||||||||||
|
EC SPV Facility
|
||||||||||||||
|
Average facility balance during the period
|
$ | 33,747 | $ | — | ||||||||||
|
Net interest expense
|
2,513 | — | ||||||||||||
|
Effective cost of funds
|
10.0 | % | — | % | ||||||||||
In July 2020, we entered into a new facility, the EC SPV Facility. As of September 30, 2021, we have drawn $50.5 million on the EC SPV facility. Per the terms of the February 2019 amendments and the July 31, 2020 EC SPV agreement, we qualified for a 25 bps rate reduction on the VPC, ESPV, EF SPV and EC SPV facilities effective January 1, 2021.
Non-operating income (loss)
As of September 30, 2020, we had accrued a $6.7 million estimated indemnification obligation related to a legal matter for a former executive of the Company. As of March 31, 2021, the indemnification obligation was paid and no further accrual remains. During the nine months ended September 30, 2021, we received a partial recovery of an indemnification payment we made related to a lawsuit for $0.5 million and also recognized a gain on the sale of an intangible asset of $0.9 million, partially offset by impairment losses related to subleased assets of $0.9 million, resulting in non-operating income of $0.5 million
Income tax expense
| Nine Months Ended September 30, |
Period-to-period
change |
|||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount |
Percentage of
revenues |
Amount |
Percentage of
revenues |
Amount | Percentage | ||||||||||||||||||||||||||||||||
|
Income tax expense
|
$ | 1,829 | 1 | % | $ | 15,311 | 4 | % | $ | (13,482) | (88) | % | ||||||||||||||||||||||||||
72
Our income tax expense decreased $13.5 million, from $15.3 million for the nine months ended September 30, 2020 to $1.8 million for the nine months ended September 30, 2021. We recognized an uncertain tax position of $1.6 million in income tax expense due to a recent change in tax regulations in the state of Texas that impacted our previously recognized research and development state tax credits. Our effective tax rates for continuing operations for the nine months ended September 30, 2021 and 2020, were 369.5% and 27.4%, respectively. Our effective tax rates are different from the standard corporate federal income tax rate of 21% due to permanent non-deductible items and corporate state tax obligations in the states where we have lending activities. Our cash effective tax rate was approximately 1.5% for the first nine months of 2021.
Net loss from discontinued operations
Our loss from discontinued operations on our UK entity (ECIL) consists of an investment loss of $28.0 million, UK operating losses of $6.8 million for the first nine months of 2020, and a goodwill impairment loss of $9.3 million, partially offset by an income tax benefit of $28.1 million.
Net income (loss)
| Nine Months Ended September 30, |
Period-to-period
change |
|||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount |
Percentage of
revenues |
Amount |
Percentage of
revenues |
Amount | Percentage | ||||||||||||||||||||||||||||||||
|
Net income (loss)
|
$ | (1,334) | — | % | $ | 24,723 | 7 | % | $ | (26,057) | (105) | % | ||||||||||||||||||||||||||
Our loss of $1.3 million for the nine months ended September 30, 2021 was down $26.1 million from net income of $24.7 million for the prior year period primarily due to a decrease in net income from continuing operations of $42.0 million resulting from increased loan loss provision and direct marketing expenses associated with loan origination growth, partially offset by eliminating the discontinued UK operations which resulted in a loss of $15.9 million in 2020.
LIQUIDITY AND CAPITAL RESOURCES
As previously discussed, we are closely monitoring the impacts of the COVID-19 pandemic across our business, including the resulting uncertainties around customer demand, credit performance of the loan portfolio, our levels of liquidity and our ongoing compliance with debt covenants. We had cash and cash equivalents available of $85 million as of September 30, 2021 compared to cash and cash equivalents available of $201 million as of December 31, 2020, a decrease of $116 million, primarily due to debt payments. Our principal debt payment obligation of $18 million was paid off in January 2021 prior to its maturity in February 2021, and there are no additional required principal payments on our outstanding debt until January 2024. Throughout the first and second quarters, we made additional net paydowns on the debt facilities of approximately $70 million. As we are experiencing increased demand for the loan products resulting in increased origination volume, we are drawing down on our available debt facilities to fund the loan portfolio growth. In the third quarter, we made draws on the debt facilities of approximately $85 million. While the ultimate impact of COVID-19 on our business, financial condition, liquidity and results of operations is dependent on future developments which are highly uncertain, we believe that our actions taken to date, future cash provided by operating activities, availability under our debt facilities with VPC, and possibly the capital markets, as well as certain potential measures within our control that could be put in place to maintain a sound financial position and liquidity will provide adequate resources to fund our operating and financing needs. We are continuing to assess minimum cash and liquidity requirements and implementing measures to ensure that our strong liquidity position is maintained through the current economic cycle created by the COVID-19 pandemic. We principally rely on our working capital and our credit facility with VPC to fund the loans we make to our customers.
Stock Repurchase Program
At September 30, 2021, we had an outstanding stock repurchase program authorized by our Board of Directors providing for the repurchase of up to $55 million of our common stock through July 31, 2024, inclusive of a $25 million increase to the plan authorized by the Board of Directors in January 2021. During the third quarter of 2021, we purchased 1.6 million common shares, roughly 5% of common shares outstanding at the beginning of the quarter, for a total of $5.7 million or $3.63 weighted average cost per share under our previously approved common stock repurchase program with $7.4 million available for further repurchases. As of September 30, 2021, we had repurchased approximately 31% of all common shares issued and outstanding since August 2019 under this common stock repurchase program.
73
The amended stock repurchase program provides that up to a maximum aggregate amount of $25 million shares may be repurchased in any given fiscal year. Repurchases will be made in accordance with applicable securities laws from time-to-time in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. The share repurchase program does not require the purchase of any minimum number of shares and may be implemented, modified, suspended or discontinued in whole or in part at any time without further notice. Any repurchased shares will be available for use in connection with equity plans and for other corporate purposes.
On October 28, 2021, our Board of Directors authorized a $25 million increase to our existing $55 million common stock repurchase program, providing for the repurchase of up to $80 million of the our common stock through July 31, 2024. In addition, our Board of Director's approved an increase in the annual fiscal limit of repurchases from $25 million to $35 million.
Debt Facilities
VPC Facility
VPC Facility Term Notes
On January 30, 2014, we entered into the VPC Facility in order to fund our Rise product and provide working capital. The VPC Facility has been amended several times, with the most recent amendment effective July 31, 2020, to decrease the maximum total borrowing amount available and other terms of the VPC Facility.
The VPC facility has a maximum borrowing amount of $200 million (amended as of July 31, 2020) used to fund the Rise loan portfolio (“US Term Note”). Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). At December 31, 2020, the weighted average base rate on the outstanding balance was 2.73% and the overall interest rate was 9.98%. At September 30, 2021, the weighted average base rate on the outstanding balance was 2.49% and the overall interest rate was 9.49%. All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.0% at the borrowing date. The VPC facility has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.
There are no principal payments due or scheduled under the VPC Facility until the maturity date of the US Term Note. In January 2021, we paid down approximately $21 million, or 20%, of the current outstanding debt on the VPC Facility under the revolving feature noted above. The remaining outstanding debt on the US Term Note matures on January 1, 2024.
All of our assets are pledged as collateral to secure the VPC Facility. The agreement contains customary financial covenants, including minimum cash and excess spread requirements, maximum roll rate and charge-off rate levels, maximum loan-to-value ratios and a minimum book value of equity requirement. We were in compliance with all covenants as of September 30, 2021.
The VPC Facility previously included a term note (the "4th Tranche Term Note") used to fund working capital with a maximum borrowing amount of $18 million and a base rate of 2.73% plus 13%. The interest rate at December 31, 2020 was 15.73%. In January 2021, we paid off this term note prior to its maturity on February 1, 2021.
ESPV Facility
ESPV Facility Term Note
The ESPV Facility has a maximum borrowing amount of $350 million to be used to purchase loan participations from a third-party lender. Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed at 15.48% (base rate of 2.73% plus 12.75%). Effective July 1, 2019, the interest rate on the debt outstanding as of the amendment date was set at 10.23% (base rate of 2.73% plus 7.5%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). At December 31, 2020 the weighted average base rate on the outstanding balance was 2.72% and the overall interest rate was 9.97%. At September 30, 2021, the weighted average base rate on the outstanding balance was 2.57% and the overall interest rate was 9.57%. All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.0% at the borrowing date. The ESPV Term Note has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity. In January 2021, we paid down approximately $40 million, or 20%, of the current outstanding debt balance on the ESPV Facility under the revolving feature. The remaining outstanding debt on the ESPV Term Note matures on January 1, 2024.
74
All of our assets are pledged as collateral to secure the ESPV Facility. The agreement contains customary financial covenants, including minimum cash and excess spread requirements, maximum roll rate and charge-off rate levels, maximum loan-to-value ratios and a minimum book value of equity requirement. We were in compliance with all covenants related to the ESPV facility as of September 30, 2021.
EF SPV Facility
EF SPV Facility Term Note
The EF SPV Facility has a maximum borrowing amount of $250 million (amended as of July 31, 2020) to be used to purchase Rise installment loan participations from a third-party bank, FinWise Bank. Prior to execution of the agreement with VPC effective February 1, 2019, EF SPV was a borrower on the US Term Note under the VPC Facility and the interest rate paid on this facility was a base rate (defined as 3-month LIBOR, with a 1% floor) plus 11%. Upon the February 1, 2019 amendment date, $43 million was re-allocated into the EF SPV Facility and the interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). The weighted average base rate on the outstanding balance at December 31, 2020 was 2.45% and the overall interest rate was 9.70%. The weighted average base rate on the outstanding balance at September 30, 2021 was 1.87% and the overall interest rate was 8.87%. All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.0% at the borrowing date. The EF SPV Term Note has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity. In January 2021, we paid down approximately $19 million, or 20%, of the current outstanding debt balance on the EF SPV Facility under the revolving feature. The remaining outstanding debt on the EF SPV Term Note matures on January 1, 2024.
All of our assets are pledged as collateral to secure the EF SPV Term Note. The agreement contains customary financial covenants, including minimum cash and excess spread requirements, maximum roll rate and charge-off rate levels, maximum loan-to-value ratios and a minimum book value of equity requirement. We were in compliance with all covenants related to the EF SPV facility as of September 30, 2021.
EC SPV Facility
EC SPV Facility Term Note
VPC entered into a new debt facility with EC SPV on July 31, 2020. The EC SPV Facility has a maximum borrowing amount of $100 million used to purchase Rise installment loan participations from a third-party bank, Capital Community Bank. The weighted average base rate on the outstanding balance at December 31, 2020 was 2.73% and the overall interest rate was 9.98%. The weighted average base rate on the outstanding balance at September 30, 2021 was 2.20% and the overall interest rate was 9.20%. All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.0% at the borrowing date. The EC SPV Term Note has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.
The EC SPV Term Note matures on January 1, 2024. There are no principal payments due or scheduled until the maturity date. All of our assets and EC SPV are pledged as collateral to secure the EC SPV Facility. The EC SPV Facility contains certain covenants for us such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. We were in compliance with all covenants related to the EC SPV facility as of September 30, 2021.
75
Outstanding Notes Payable
The outstanding balances of notes payable as of September 30, 2021 and December 31, 2020 are as follows:
| (Dollars in thousands) |
September 30,
2021 |
December 31,
2020 |
||||||||||||
| US Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020) |
|
$ | 79,600 | $ | 104,500 | |||||||||
|
4th Tranche Term Note bearing interest at the base rate + 13%
|
|
— | 18,050 | |||||||||||
| ESPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020) |
|
174,600 | 199,500 | |||||||||||
| EF SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020) |
|
132,800 | 93,500 | |||||||||||
| EC SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020) |
|
50,500 | 25,000 | |||||||||||
|
Total
|
|
$ | 437,500 | $ | 440,550 | |||||||||
The change in the facility balances includes the following:
•US Term Note - Paydowns of $25.9 million and $10 million in the first and second quarter of 2021, respectively, and a draw of $11 million in the third quarter of 2021;
•4th Tranche Term Note - Debt obligation of $18.1 million paid off in the first quarter of 2021;
•ESPV Term Note - Paydown of $39.9 million in the first quarter of 2021 and a draw of $15 million in the third quarter of 2021;
•EF SPV Term note - Paydown of $18.7 million in the first quarter of 2021 and draws of $15 million and $43 million in the second and third quarter of 2021, respectively; and
•EC SPV Term Note - Draws of $5 million, $5 million, and $15.5 million in the first, second, and third quarters of 2021, respectively.
The following table presents the future debt maturities as of September 30, 2021:
| Year (dollars in thousands) | September 30, 2021 | |||||||
|
Remainder of 2021
|
|
$ | — | |||||
| 2022 |
|
— | ||||||
| 2023 |
|
— | ||||||
| 2024 |
|
437,500 | ||||||
| 2025 |
|
— | ||||||
|
Thereafter
|
|
— | ||||||
|
Total
|
|
$ | 437,500 | |||||
On October 12, 2021, the Company entered into a $50 million financing facility, with an ability to increase the facility to $100 million, to fund continued growth of the Today Card product. The financing facility for the Today Card is provided by Park Cities Asset Management LLC.
76
Cash and cash equivalents, restricted cash, loans (net of allowance for loan losses), and cash flows
The following table summarizes our cash and cash equivalents, restricted cash, loans receivable, net and cash flows for the periods indicated:
| As of and for the nine months ended September 30, | ||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 79,979 | $ | 224,259 | ||||||||||||||||||||||
|
Restricted cash
|
4,962 | 3,135 | ||||||||||||||||||||||||
|
Loans receivable, net
|
479,621 | 373,024 | ||||||||||||||||||||||||
|
Cash provided by (used in):
|
||||||||||||||||||||||||||
|
Operating activities - continuing operations
|
111,566 | 177,705 | ||||||||||||||||||||||||
|
Investing activities - continuing operations
|
(199,462) | 79,154 | ||||||||||||||||||||||||
|
Financing activities - continuing operations
|
(28,281) | (102,915) | ||||||||||||||||||||||||
Our cash and cash equivalents at September 30, 2021 were held primarily for working capital purposes. We may, from time to time, use excess cash and cash equivalents to fund our lending activities, paydown debt or repurchase stock. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate working capital requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our excess cash is invested primarily in demand deposit accounts that are currently providing only a minimal return.
Net cash provided by operating activities
We generated $111.6 million in cash from our operating activities-continuing operations for the nine months ended September 30, 2021. This was down $66.1 million from the $177.7 million of cash provided by operating activities-continuing operations during the nine months ended September 30, 2020 due to a decrease in revenues realized for the nine months ended September 30, 2021 resulting from a smaller average loan portfolio and lower effective APR as compared to the prior year.
Net cash provided by (used in) investing activities
For the nine months ended September 30, 2021 and 2020, cash provided by (used in) investing activities-continuing operations was $(199.5) million and $79.2 million, respectively. The decrease was primarily due to an increase in net loans issued to customers and a growing loan portfolio compared to a declining loan portfolio year over year. The following table summarizes cash used in investing activities for the periods indicated:
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||||||||||||
|
Cash provided by (used in) investing activities - continuing operations
|
||||||||||||||||||||||||||
|
Net loans issued to consumers, less repayments
|
$ | (184,789) | $ | 94,844 | ||||||||||||||||||||||
|
Participation premium paid
|
(4,020) | (2,823) | ||||||||||||||||||||||||
|
Purchases of property and equipment
|
(11,903) | (12,867) | ||||||||||||||||||||||||
|
Proceeds from sale of intangible assets
|
1,250 | — | ||||||||||||||||||||||||
|
|
$ | (199,462) | $ | 79,154 | ||||||||||||||||||||||
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Net cash used in financing activities
Cash flows from financing activities-continuing operations primarily include cash received from issuing notes payable, payments on notes payable, and activity related to stock awards. For the nine months ended September 30, 2021 and 2020, cash used in financing activities was $28.3 million and $102.9 million, respectively. The following table summarizes cash used in financing activities for the periods indicated:
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||||||||||||
|
Cash used in financing activities - continuing operations
|
||||||||||||||||||||||||||
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Proceeds from issuance of Notes payable, net
|
$ | 109,500 | $ | 6,500 | ||||||||||||||||||||||
|
Payments on Notes payable
|
(112,550) | (94,000) | ||||||||||||||||||||||||
|
Debt issuance costs paid
|
(75) | (253) | ||||||||||||||||||||||||
|
Common stock repurchased
|
(24,453) | (14,739) | ||||||||||||||||||||||||
|
Proceeds from issuance of stock, net
|
480 | 381 | ||||||||||||||||||||||||
|
Taxes paid related to net share settlement
|
(1,183) | (804) | ||||||||||||||||||||||||
|
|
$ | (28,281) | $ | (102,915) | ||||||||||||||||||||||
The decrease in cash used in financing activities-continuing operations for the nine months ended September 30, 2021 versus the comparable period of 2020 was primarily due to increased draws on our debt facilities, partially offset by payments on the facilities early in 2021 and increased stock repurchases in 2021.
Free Cash Flow
In addition to the above, we also review FCF when analyzing our cash flows from operations. We calculate free cash flow as cash flows from operating activities-continuing operations, adjusted for the principal loan net charge-offs and capital expenditures incurred during the period. While this is a non-GAAP measure, we believe it provides a useful presentation of cash flows derived from our core continuing operating activities. The below tables provides a reconciliation of free cash flow to our cash flows from operations.
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||||||||||||
|
Net cash provided by continuing operating activities
|
$ | 111,566 | $ | 177,705 | ||||||||||||||||||||||
|
Adjustments:
|
||||||||||||||||||||||||||
|
Net charge-offs – combined principal loans
|
(70,636) | (125,232) | ||||||||||||||||||||||||
|
Capital expenditures
|
(11,903) | (12,867) | ||||||||||||||||||||||||
|
FCF
|
$ | 29,027 | $ | 39,606 | ||||||||||||||||||||||
Our FCF was $29.0 million for the nine months ended September 30, 2021 compared to $39.6 million for the comparable prior year period. While our net cash provided by continuing operating activities decreased by $66.1 million, this was partially offset by a similar decrease of $54.6 million in net charge-offs - combined principal loans and a $1.0 million decrease in capital expenditures.
Operating and capital expenditure requirements
We are continuing to assess our minimum cash and liquidity requirements and implementing measures to ensure that our cash and liquidity position is maintained through the current economic cycle created by the COVID-19 pandemic. We believe that our existing cash balances, together with the available borrowing capacity under the VPC Facility, ESPV Facility, EF SPV Facility and EC SPV Facility, will be sufficient to meet our anticipated cash operating expense and capital expenditure requirements through at least this year. Beginning in October 2021, we have a new debt facility for the Today Card to support its future growth. If our loan growth exceeds our expectations, our available cash balances may be insufficient to satisfy our liquidity requirements, and we may seek additional equity or debt financing. This additional capital may not be available on reasonable terms, or at all.
CONTRACTUAL OBLIGATIONS
Our principal commitments consist of obligations under our debt facilities and operating lease obligations. There have been no material changes to our contractual obligations since December 31, 2020.
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OFF-BALANCE SHEET ARRANGEMENTS
We previously provide services in connection with installment loans originated by independent third-party lenders (“CSO lenders”) whereby we acted as a credit service organization/credit access business on behalf of consumers in accordance with applicable state laws through our “CSO program.” The CSO program included arranging loans with CSO lenders, assisting in the loan application, documentation and servicing processes. Under the CSO program, we guaranteed the repayment of a customer’s loan to the CSO lenders as part of the credit services we provided to the customer. As of September 30. 2021, the CSO program has completed its wind-down and the Company no longer has a guarantee under this program.
RECENT REGULATORY DEVELOPMENTS
Federal Regulations: The Consumer Financial Protection Bureau (“CFPB”) amended Regulation F, 12 CFR part 1006, which implements the Fair Debt Collection Practices Act (FDCPA), to prescribe Federal rules governing certain activities of debt collectors. The final rule, among other things, clarifies the information that a debt collector must provide to a consumer at the outset of debt collection communications and provides a model notice containing such information, prohibits debt collectors from bringing or threatening to bring a legal action against a consumer to collect a time-barred debt, and requires debt collectors to take certain actions before furnishing information about a consumer’s debt to a consumer reporting agency. The rule is effective on November 30, 2021.
On March 31, the Federal Reserve Board, the CFPB, the Federal Deposit Insurance Corporation ("FDIC"), the National Credit Union Administration ("NCUA") and the Office of the Comptroller of the Currency ("OCC") announced the request for information ("RFI") to gain input from financial institutions, trade associations, consumer groups, and other stakeholders on the growing use of Artificial Intelligence ("AI") by financial institutions. The request seeks comments regarding the use of AI, including machine learning, by financial institutions; appropriate governance, risk management and controls over AI; as well as challenges in developing, adopting and managing AI. The comment period was extended from May 30, 2021 to July 1, 2021 and is now closed.
On August 31, 2021, the U.S. District Court for the Western District of Texas issued an order in Community Financial Services Association of America, LTD. v. Consumer Financial Protection Bureau, granting the Bureau's motion for summary judgment and staying the date for complying with the CFPB's Rulemaking on Payday, Vehicle Title, and High-Cost Installment Loans for 286 days until June 13, 2022. On October 1, 2021, the trade groups appealed the Texas federal district court’s final judgment and argued that the compliance date should be 286 days after their appeal to the Fifth Circuit is resolved. On October 14, 2021, the Fifth Circuit Court of Appeals agreed to an extension of the compliance date until after resolution of the appeal. Regardless of outcome of the appeal, it is anticipated that the rule will increase costs and create challenges in the Company's collection activities.
State Privacy Laws: The California Consumer Privacy Act went into effect Jan. 1, 2020, and enforcement by California’s Office of the Attorney General began July 1, 2020. The California Privacy Rights Act ballot initiative passed in November 2020, with the majority of its provisions becoming operative Jan. 1, 2023. Virginia passed the Consumer Data Protection Act which establishes a framework for controlling and processing personal data in the Commonwealth. The bill applies to all persons that conduct business in the Commonwealth and either (i) control or process personal data of at least 100,000 consumers or (ii) derive over 50 percent of gross revenue from the sale of personal data and control or process personal data of at least 25,000 consumers. The bill outlines responsibilities and privacy protection standards for data controllers and processors and has a delayed effective date of January 1, 2023. On July 7, 2021, Colorado Governor Jared Polis signed the Colorado Privacy Act into law that will go into effect on July 1, 2023. Once effective, covered entities will be required to provide Colorado residents with various privacy rights, including the right to access, correct, and delete their personal data and to opt out of the sale of their personal data. Covered entities also will need to provide privacy policy disclosures and create data protection assessments for certain types of processing activities. Ongoing implementation of and changes to state-enacted privacy laws will increase the Company's costs and could create challenges in the relevant markets.
BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES
Revenue recognition
We recognize consumer loan fees as revenues for each of the loan products we offer. Revenues on the Condensed Consolidated Statements of Operations include: finance charges, lines of credit fees, fees for services provided through CSO programs (“CSO fees”), and interest, as well as any other fees or charges permitted by applicable laws and pursuant to the agreement with the borrower. Other revenues also include marketing and licensing fees received from the originating lender related to the Elastic product and Rise bank-originated loans and from CSO fees related to the Rise product. Revenues related to these fees are recognized when the service is performed.
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We accrue finance charges on installment loans on a constant yield basis over their terms. We accrue and defer fixed charges such as CSO fees and lines of credit fees when they are assessed and recognize them to earnings as they are earned over the life of the loan. We accrue interest on credit cards based on the amount of the loan outstanding and their contractual interest rate. Credit card membership fees are amortized to revenue over the card membership period. Other credit card fees, such as late payment fees and returned payment fees, are accrued when assessed. We do not accrue finance charges and other fees on installment loans or lines of credit for which payment is greater than 60 days past due. Credit card interest charges are recognized based on the contractual provisions of the underlying arrangements and are not accrued for which payment is greater than 90 days past due. Installment loans and lines of credit are considered past due if a grace period has not been requested and a scheduled payment is not paid on its due date. Credit cards have a grace period of 25 days and are considered delinquent after the grace period. Payments received on past due loans are applied against the loan and accrued interest balance to bring the loan current. Payments are generally first applied to accrued fees and interest, and then to the principal loan balance.
The spread of COVID-19 since March 2020 has created a global public health crisis that has resulted in unprecedented disruption to businesses and economies. In response to the pandemic's effects and in accordance with federal and state guidelines, we expanded our payment flexibility programs for our customers, including payment deferrals. This program allows for a deferral of payments for an initial period of 30-60 days, and generally up to a maximum of 180 days on a cumulative basis. The customer will return to their normal payment schedule after the end of the deferral period with the extension of their maturity date equivalent to the deferral period, which is generally not to exceed an additional 180 days. Per FASB guidance, the finance charges will continue to accrue at a lower effective interest rate over the expected term of the loan considering the deferral period provided (not to exceed an amount greater than the amount at which the borrower could settle the loan) or placed on non-accrual status. The COVID-19 payment flexibility programs were no longer offered effective July 1, 2021, eliminating any new payment deferrals up to 180 days. We and the bank originators continue to offer certain payment flexibility programs if certain qualifications are met.
Our business is affected by seasonality, which can cause significant changes in portfolio size and profit margins from quarter to quarter. Although this seasonality does not impact our policies for revenue recognition, it does generally impact our results of operations by potentially causing an increase in its profit margins in the first quarter of the year and decreased margins in the second through fourth quarters.
Allowance and liability for estimated losses on consumer loans
We have adopted Financial Accounting Standards Board (“FASB”) guidance for disclosures about the credit quality of financing receivables and the allowance for loan losses (“allowance”). We maintain an allowance for loan losses for loans and interest receivable for loans not classified as TDRs at a level estimated to be adequate to absorb credit losses inherent in the outstanding loans receivable. We primarily utilize historical loss rates by product, stratified by delinquency ranges, to determine the allowance, but we also consider recent collection and delinquency trends, as well as macro-economic conditions that may affect portfolio losses. Additionally, due to the uncertainty of economic conditions and cash flow resources of our customers, the estimate of the allowance for loan losses is subject to change in the near-term and could significantly impact the condensed consolidated financial statements. If a loan is deemed to be uncollectible before it is fully reserved, it is charged-off at that time. For loans classified as TDRs, impairment is typically measured based on the present value of the expected future cash flows discounted at the original effective interest rate. As permitted by the SEC, we have elected to not adopt the Current Expected Credit Losses ("CECL") model which would require a broader range of reasonable and supportable information to inform credit loss estimates. See "- Recently Issued Accounting Pronouncements And JOBS Act Election" for more information.
We classify loans as either current or past due. An installment loan or line of credit customer in good standing may request a 16-day grace period when or before a payment becomes due and, if granted, the loan is considered current during the grace period. Credit card customers have a 25-day grace period for each payment. Installment loans and lines of credit are considered past due if a grace period has not been requested and a scheduled payment is not paid on its due date. Credit cards are considered past due if the grace period has passed and the scheduled payment has not been made. Increases in the allowance are created by recording a Provision for loan losses in the Condensed Consolidated Statements of Operations. Installment loans and lines of credit are charged off, which reduces the allowance, when they are over 60 days past due or earlier if deemed uncollectible. Credit cards are charged off, which reduces the allowance, when they are over 120 days past due or earlier if deemed uncollectible. Recoveries on losses previously charged to the allowance are credited to the allowance when collected.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. In accordance with Accounting Standards Codification ("ASC") 350-20-35, Goodwill—Subsequent Measurement, we perform a quantitative approach method impairment review of goodwill and intangible assets with an indefinite life annually at October 1 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
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Prior to the adoption of ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), our impairment evaluation of goodwill was already based on comparing the fair value of our reporting units to their carrying value. The adoption of ASU 2017-04 as of January 1, 2020 had no impact on our evaluation procedures. The fair value of the reporting units is determined based on a weighted average of the income and market approaches. The income approach establishes fair value based on estimated future cash flows of the reporting units, discounted by an estimated weighted-average cost of capital developed using the capital asset pricing model, which reflects the overall level of inherent risk of the reporting units. The income approach uses our projections of financial performance for a six to nine-year period and includes assumptions about future revenues growth rates, operating margins and terminal values. The market approach establishes fair value by applying cash flow multiples to the reporting units’ operating performance. The multiples are derived from other publicly traded companies that are similar but not identical from an operational and economic standpoint.
Internal-use software development costs
We capitalize certain costs related to software developed for internal use, primarily associated with the ongoing development and enhancement of our technology platform. Costs incurred in the preliminary development and post-development stages are expensed. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally three years.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized.
Relative to uncertain tax positions, we accrue for losses we believe are probable and can be reasonably estimated. The amount recognized is subject to estimate and management judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. If the amounts recorded are not realized or if penalties and interest are incurred, we have elected to record all amounts within income tax expense.
At September 30, 2021, the Company recorded an uncertain tax position of $1.6 million, net and no liability was recorded at December 31, 2020. Tax periods from fiscal years 2014 to 2019 remain open and subject to examination for US federal and state tax purposes. As we had no operations nor had filed US federal tax returns prior to May 1, 2014, there are no other US federal or state tax years subject to examination.
Share-Based Compensation
In accordance with applicable accounting standards, all share-based compensation, consisting of stock options and restricted stock units (“RSUs") issued to employees is measured based on the grant-date fair value of the awards and recognized as compensation expense on a straight-line basis over the period during which the recipient is required to perform services in exchange for the award (the requisite service period). We also have an employee stock purchase plan (“ESPP”). The determination of fair value of share-based payment awards and ESPP purchase rights on the date of grant using option-pricing models is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise activity, risk-free interest rate, expected dividends and expected term. We use the Black-Scholes-Merton Option Pricing Model to estimate the grant-date fair value of stock options. We also use an equity valuation model to estimate the grant-date fair value of RSUs. Additionally, the recognition of share-based compensation expense requires an estimation of the number of awards that will ultimately vest and the number of awards that will ultimately be forfeited.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND JOBS ACT ELECTION
Under the Jumpstart Our Business Startups Act (the “JOBS Act”), we meet the definition of an emerging growth company. We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
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Recently Adopted Accounting Standards
See Note 1 in the Notes to the Consolidated Condensed Financial Statements included in this report for a discussion of recent accounting pronouncements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We are exposed to market risk related to changes in interest rates. We do not use derivative financial instruments for speculative or trading purposes, although in the future we may enter into interest rate hedging arrangements to manage the risks described below.
Interest rate sensitivity
Our cash and cash equivalents as of September 30, 2021 consisted of demand deposit accounts. Our primary exposure to market risk for our cash and cash equivalents is interest income sensitivity, which is affected by changes in the general level of interest rates. Given the currently low interest rates, we generate only a de minimis amount of interest income from these deposits.
All of our customer loan portfolios are fixed APR loans and not variable in nature. Additionally, given the high APRs associated with these loans, we do not believe there is any interest rate sensitivity associated with our customer loan portfolio.
On February 1, 2019, the VPC and ESPV Facilities were amended and a new EF SPV Facility was added. As part of these amendments, the base interest rate on existing debt outstanding on February 1, 2019 was locked to the 3-month LIBOR as of February 1, 2019 of 2.73% until note maturity. Any additional borrowings on the facilities (excluding the 4th Tranche Term Note) after February 1, 2019 bear a base interest rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus the applicable spread at the borrowing date. On July 31, 2020, the new EC SPV Facility was added. This facility does not have a rate lock and is tied to the 3-month LIBOR rate.
Any increase in the base interest rate on future borrowings will result in an increase in our net interest expense. The outstanding balance of our VPC Facility at September 30, 2021 was $79.6 million and the balance at December 31, 2020 was $122.6 million. The outstanding balance of our ESPV Facility was $174.6 million and $199.5 million at September 30, 2021 and December 31, 2020, respectively. The outstanding balance of our EF SPV Facility was $132.8 million at September 30, 2021 and the balance at December 31, 2020 was $93.5 million. The outstanding balance of our EC SPV Facility was $50.5 million and $25 million at September 30, 2021 and December 31, 2020, respectively. Based on the average outstanding indebtedness through the nine months ended September 30, 2021, a 1% (100 basis points) increase in interest rates would have increased our interest expense by approximately $2.2 million for the period.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and interim Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, from time to time, we have been and may be named as a defendant in various legal proceedings arising in connection with our business activities. We may also be involved, from time to time, in reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding our business (collectively, “regulatory matters”). We contest liability and/or the amount of damages as appropriate in each such pending matter. We do not anticipate that the ultimate liability, if any, arising out of any such pending matter will have a material effect on our financial condition, results of operations or cash flows. Our material legal proceedings are described in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 11, "Commitments, Contingencies and Guarantees" under the heading "Other Matters."
Item 1A. Risk Factors
There have been no material changes from the Risk Factors described in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, except as set forth below.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
The consumer lending industry continues to be subject to new laws and regulations in many jurisdictions that could restrict the consumer lending products and services we offer, impose additional compliance costs on us, render our current operations unprofitable or even prohibit our current operations.
State and federal governments regulatory bodies may seek to impose new laws, direct contractual arrangements with us, regulatory restrictions or licensing requirements that affect the products or services we offer, the terms on which we may offer them, and the disclosure, compliance and reporting obligations we must fulfill in connection with our lending business. They may also interpret or enforce existing requirements in new ways that could restrict our ability to continue our current methods of operation or to expand operations, impose significant additional compliance costs and may have a negative effect on our business, prospects, results of operations, financial condition or cash flows. In some cases, these measures could even directly prohibit some or all of our current business activities in certain jurisdictions or render them unprofitable or impractical to continue.
In order to serve our non-prime customers profitably we need to sufficiently price the risk of the transaction into the APR of our loans. If individual states or the federal government impose rate caps lower than those at which we can operate our current business profitably or otherwise impose stricter limits on non-prime lending, we would need to exit such states or dramatically reduce our rate of growth by limiting our products to customers with higher creditworthiness. Congress, the states and regulatory agencies, as well as local municipalities, could further regulate the consumer financial services industry in ways that make it more difficult or costly for us to operate and facilitate the origination of loans for our bank partners. For example, Congressional bills that would create a national interest rate cap of 36% on consumer loans have been proposed at various times, including in 2009, 2013, 2015, 2017 and 2019. On July 28, 2021, a bill called the Veterans and Consumers Fair Credit Act of 2021 was introduced in the Senate. If enacted it would extend the 36% rate cap on payday and car-title lenders in the Military Lending Act (MLA) to cover all Americans. Although the proposed national rate cap may never be enacted into law, if such a bill were to be enacted, it would greatly restrict the number of loans that could be funded through our platform. States have passed laws regulating the consumer financial services industry. For example, on January 1, 2020, California lending law changed to impose a rate cap of 36% plus the Federal Funds Rate set by the Federal Reserve Board for all consumer-purpose installment loans and in 2021 the Illinois legislature passed a law setting an interest rate cap of 36% on most consumer loans. States are increasingly introducing and, in some cases, passing laws that restrict interest rates and APRs on loans similar to the loans made on our platform. If such legislation or bills were to be propagated, or state or federal regulators seek to restrict regulated financial institutions such as our bank partners from engaging in business us in certain ways, our bank partners’ ability to originate loans in certain states could be greatly reduced, and as a result, our business, financial condition and results of operations would be adversely affected.
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Furthermore, legislative or regulatory actions may be influenced by negative perceptions of us and our industry, even if such negative perceptions are inaccurate, attributable to conduct by third parties not affiliated with us (such as other industry members) or attributable to matters not specific to our industry. Any of these or other legislative or regulatory actions that affect our consumer loan business at the national, state and local level could, if enacted or interpreted differently, have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows and prohibit or directly or indirectly impair our ability to continue current operations.
We may be subject to changes in our tax rates, new tax legislation or exposed to additional tax liabilities.
The tax laws applicable to our business, at local, state and federal levels, are subject to interpretation and may be subject to significant change. Changes in existing laws, the interpretation of existing laws, or introduction of new laws could have a material impact on our financial condition, results of operations or cash flows. The determination of our provision for income taxes and other tax liabilities involves significant judgment by management and there may be uncertainties regarding the ultimate tax determination. Our tax returns and positions are subject to review and audit by federal, state and local authorities. While we believe that our provisions and accrued liabilities are adequate to cover reasonably expected tax risk, there can be no assurance of any final outcome regarding any tax issue. An unfavorable outcome could have a material adverse impact on our effective tax rate, financial position, cash flows, or results of operations.
OTHER RISKS RELATED TO COMPLIANCE AND REGULATION
The regulatory landscape in which we operate is continually changing due to new CFPB rules, regulations and interpretations, as well as various legal actions that have been brought against others in marketplace lending, including several lawsuits that have sought to re-characterize certain loans made by federally insured banks as loans made by third parties. If litigation on similar theories were brought against us when we work with a federally insured bank that makes loans, rather than making loans ourselves and were such an action to be successful, we could be subject to state usury limits and/or state licensing requirements, in addition to the state consumer protection laws to which we are already subject, in a greater number of states, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.
The case law involving whether an originating lender, on the one hand, or third party vendors, on the other hand, are the “true lenders” of a loan is still developing and courts have come to different conclusions and applied different analyses. The determination of whether a third-party service provider is the “true lender” is significant because third-parties risk having the loans they service becoming subject to a consumer’s state usury limits. If we were re-characterized as a “true lender” with respect to any bank or third party we work with, loans could be deemed to be void and unenforceable in some states, the right to collect finance charges could be affected, and we could be subject to fines and penalties from state and federal regulatory agencies as well as claims by borrowers, including class actions by private plaintiffs.
In 2017, the Colorado Administrator of the Uniform Consumer Credit Code filed complaints in state court against marketplace lenders Marlette Funding LLC and Avant of Colorado LLC. The Administrator asserted that loans to Colorado residents facilitated through the platform were required to comply with Colorado laws regarding interest rates and fees, and that those laws were not preempted by federal laws that apply to loans originated by WebBank, the federally regulated issuing bank who originated loans through Avant’s platform. The matter ultimately settled without a determination of which entity is the “true lender” but created certain safe-harbor transactional structures that the regulator would find indicative of the bank being the “true lender.” The settlement provides a safe harbor for the marketplace lending programs if certain criteria related to oversight, disclosure, funding, licensing, consumer terms, and structure are followed. Only the parties to the litigation are bound by this settlement and further, it only applies to closed-end loans offered by banks in conjunction with non-bank partners or fintechs partnering with banks that involve origination of loans through an online platform.
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Additionally, in May 2015, the U.S. Court of Appeals for the Second Circuit issued its decision in Madden v. Midland Funding, LLC, where the court interpreted the scope of federal preemption under the National Bank Act (“NBA”) and held that a nonbank assignee of a loan originated by a national bank was not entitled to the benefits of federal preemption of claims of usury. The Second Circuit’s decision is binding on federal courts located in Connecticut, New York, and Vermont, but the decision could also be adopted by other courts. The Madden decision created some uncertainty as to whether non-bank entities purchasing loans originated by a bank may rely on federal preemption of state usury laws, which created an increased risk of litigation by plaintiffs challenging the interest rates charged in accordance with the terms of loans. The Madden decision, and any decisions with similar findings, may substantially reduce our operating efficiency and/or attractiveness to investors, possibly resulting in a decline in our operating results.
In response to the uncertainty Madden created as to the validity of interest rates of bank-originated loans, both the OCC and FDIC issued final rules to clarify that when a bank sells, assigns or otherwise transfers a loan, the interest permissible prior to the transfer continues to be permissible following the transfer. The OCC final rule was effective on August 3, 2020. The FDIC final rule was effective on August 21, 2020. On July 29, 2020, the attorneys general from California, Illinois and New York filed a lawsuit against the OCC challenging the rule. Then in August 2020, attorneys general from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina and D.C. sued the FDIC alleging the core of the rule-making "is beyond the FDIC's power to issue, is contrary to statute, and would facilitate predatory lending through sham 'rent-a-bank' partnerships designed to evade state law."
On October 27, 2020, the OCC issued its final rule to remove uncertainty and determine when a national bank or federal savings association makes a loan and is the "true lender" in the context of a partnership between a bank and a third party. The rule specified that a bank makes a loan and is the "true lender" if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan. The rule became effective December 29, 2020. However, this rule was rescinded through a Congressional Review Act resolution and on June 30, 2021, President Biden signed the resolution to overturn the rule. The repeal of this rule does not directly impact Elevate, as the banks it works with are state banks which are regulated by the FDIC.
If we are deemed to be the “true lender,” then we could be subject to claims by borrowers, as well as enforcement actions by regulators. If a borrower or regulator were to successfully bring claims for violations of state consumer lending laws, including usury and licensing requirements, we could be subject to fines and penalties, including the voiding of loans and repayment of principal and interest to borrowers and investors. We might decide to, among other actions, limit the maximum interest rate and terms on certain loans, might decide to not offer certain products, might decide to not offer products in certain geographic locations, and some regulators could conclude we are subject to state laws, including licensing or registration in connection with services we provide to our Bank Partners. These actions may substantially reduce our operating efficiency and/or attractiveness to investors, possibly resulting in a decline in operating results, which could in turn adversely affect our business, financial condition and results of operations.
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2. Unregistered Sales of Equity Securities and Use of Proceeds.
Repurchases of Equity Securities
At September 30, 2021, we had an outstanding stock repurchase program authorized by our Board of Directors providing for the repurchase of up to $55 million of our common stock through July 31, 2024, inclusive of a $25 million increase to the plan authorized by the Board of Directors in January 2021. On October 28, 2021, our Board of Directors authorized an additional $25 million increase, providing for the repurchase of up to $80 million of the our common stock, as well as an increase in the annual fiscal limit of repurchases from $25 million to $35 million. There were no changes to the end date of the program. The Company purchased $3.3 million of common shares under its $10 million authorization during the second half of 2019 and during the year ended December 31, 2020, an additional 7,694,896 shares were repurchased at a total cost of $19.8 million, inclusive of any transactional fees or commissions. Repurchases will be made in accordance with applicable securities laws from time-to-time in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. The share repurchase plan does not require the purchase of any minimum number of shares and may be implemented, modified, suspended or discontinued in whole or in part at any time without further notice. All repurchased shares may potentially be withheld for fulfillment of certain employee stock equity programs.
The following table provides information about our common stock repurchases during the quarter ended September 30, 2021.
| Period | Total number of shares purchased (1) | Average price paid per share (2) | Total number of shares purchased as part of the publicly announced program | Approximate dollar value of shares that may yet be purchased under the program (2) | ||||||||||||||||||||||
|
July 1, 2021 to July 31, 2021
|
401,694 | $ | 3.58 | 401,063 | $ | 11,631,185 | ||||||||||||||||||||
|
August 1, 2021 to August 31, 2021
|
614,186 | $ | 3.33 | 560,348 | $ | 9,587,443 | ||||||||||||||||||||
|
September 1, 2021 to September 30, 2021
|
605,749 | $ | 3.64 | 605,063 | $ | 7,384,545 | ||||||||||||||||||||
|
Total
|
1,621,629 | $ | 3.51 | 1,566,474 | ||||||||||||||||||||||
(1)During the quarter ended September 30, 2021, certain RSUs were net share-settled to cover the required withholding tax and the remaining amounts were converted into an equivalent number of shares of the Company's common stock. The Company withheld 55,155 shares for applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities during the quarter ended September 30, 2021.
(2)Includes fees and commissions associated with the shares repurchased.
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Item 6. Exhibits
|
Exhibit
number |
Description | ||||
|
10.1+
|
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10.2+#
|
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10.3+#
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10.4+#
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10.5+
|
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10.6+
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10.7+
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10.8+
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10.9+
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10.10
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31.1
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31.2
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32.1&
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32.2&
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|
101.INS
|
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
|
101.SCH
|
Inline XBRL Taxonomy Extension Schema Document. | ||||
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||
|
101.LAB
|
Inline XBRL Taxonomy Extension Labels Linkbase Document. | ||||
|
101.PRE
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
|
104
|
XBRL for cover page of the Company's Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set. | ||||
| # | Previously filed. | |||||||
| + | Indicates a management contract or compensatory plan. | |||||||
| & | This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. | |||||||
(1) Filed as an exhibit to our Quarterly Report on Form 10-Q filed on May 7, 2021.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
| Elevate Credit, Inc. | |||||||||||
| Date: | November 5, 2021 | By: | /s/ Jason Harvison | ||||||||
| Jason Harvison | |||||||||||
|
Chief Executive Officer
(Principal Executive Officer) |
|||||||||||
| Date: | November 5, 2021 | By: | /s/ Chad Bradford | ||||||||
| Chad Bradford | |||||||||||
|
Interim Chief Financial Officer
(Principal Financial Officer) |
|||||||||||
90