ELEVATE CREDIT, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. 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 "Risk Factors" and "Note About Forward-Looking Statements" sections of this Annual Report on Form 10-K 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 Rise, Elastic, Sunny 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 and theUK 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 risky 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 2.4 million customers with$8.1 billion in credit. Our current online credit products, Rise, Elastic and Sunny, and our recently test launched 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." We earn revenues on the Rise and Sunny 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 andCapital Community Bank , 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 sheets in accordance with US GAAP. See "-Key Financial and Operating Metrics" and "-Non-GAAP Financial Measures." We use our working capital, funds provided by third-party lenders pursuant to CSO programs and our credit facility withVictory Park Management, LLC ("VPC" and the "VPC Facility") to fund the loans we make to our Rise and Sunny customers and provide working capital. Since originally entering into the VPC Facility, it has been amended several times to increase the maximum total borrowing amount available from the original amount of$250 million to approximately$500 million atDecember 31, 2019 . See "-Liquidity and Capital Resources-Debt facilities." Beginning in the fourth quarter of 2018, the Company also licenses its Rise installment loan brand to a third-party lender,FinWise Bank , which originates Rise installment loans in 19 states.FinWise Bank initially provides all of the funding and retains a percentage of the balances of all of the loans originated and sells the remaining loan participation in those Rise installment loans to a third-party SPV,EF SPV, Ltd. ("EF SPV"). Prior toAugust 1, 2019 ,FinWise Bank retained 5% of the balances and sold a 95% participation to EF SPV. OnAugust 1, 2019 , EF SPV purchased an additional 1% participation in the outstanding portfolio with the participation percentage revised going forward to 96%. These loan participation purchases are funded through a separate financing facility (the "EF SPV Facility"), effectiveFebruary 1, 2019 , and through cash flows from operations generated by EF SPV. The EF SPV Facility has a maximum total borrowing amount available of$150 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 under GAAP and the consolidated financial statements include revenue, losses and loans receivable related to the 96% of the Rise installment loans originated byFinWise Bank and sold to EF SPV. 76 -------------------------------------------------------------------------------- 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 toElastic SPV, Ltd. ("Elastic SPV") and Elastic SPV receives its funding from VPC in a separate financing facility (the "ESPV Facility"), which was finalized onJuly 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, the Company is the primary beneficiary of Elastic SPV and is required to consolidate the financial results of Elastic SPV as a variable interest entity ("VIE") in its consolidated financial results.
The ESPV Facility has also been amended several times and the original
commitment amount of
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 legacy US
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. 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.
• Margin expansion. We expect that our operating margins will continue to
expand over the near term as we lower our direct marketing costs and
efficiently manage our operating expenses while continuing to improve our
credit quality. Over the next several years, as we continue to scale our loan
portfolio, 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. We
aim to manage our business to achieve a long-term operating margin of 20%,
and do not expect our operating margin to increase beyond that level, 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.
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.
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Revenues
As of and for the years ended December 31,
Revenue metrics (dollars in thousands,
except as noted) 2019 2018 2017
Revenues $ 746,962 $ 786,682 $ 673,132
Period-over-period revenue
increase/(decrease) (5 )% 17 % 16 %
Ending combined loans
receivable - principal(1) 640,779 648,538 618,375
Average combined loans
receivable - principal(1)(2) 609,596 607,743 506,928
Total combined loans originated - principal 1,386,768 1,498,351 1,318,338
Average customer loan balance (in
dollars)(3 ) 1,711 1,627 1,708
Number of new customer loans 247,706 316,483 305,186
Ending number of combined loans outstanding 374,484 398,604 361,972
Customer acquisition costs (in dollars) $ 207 $
245$ 237 Effective APR of combined loan portfolio 122 % 129 % 131 %
_________
(1) Combined loans receivable is defined as loans owned by the Company 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 principal balances.
(3) Average customer loan balance is a weighted 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
(excluding Today Card as balances are immaterial).
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),
finance charges on Sunny installment loans and revenues earned on the Rise and
Elastic lines of credit. Finance charge and fee revenues from the Today Card
credit card product, which expanded its test launch in November 2018 , were
immaterial. 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) and the 96% participation in FinWise Bank originated Rise installment
loans, but include the full loan balances on CSO loans, which are not presented
on our Consolidated Balance Sheet.
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 refinancings of existing loans to customers in good
standing.
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:
(
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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
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 US customers usually receive tax refunds during this period and,
thus, have less of a need for loans from us. Further, many US 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
years ended December 31, 2019 , 2018 and 2017.
Year ended
Rise (US) Elastic (US)(1) Total Domestic Sunny (UK) Total
Beginning number of
combined loans outstanding 142,758 166,397 309,155 89,449 398,604
New customer loans
originated 108,813 50,912 159,725 87,981 247,706
Former customer loans
originated 80,624 62 80,686 - 80,686
Attrition (179,760 ) (67,847 ) (247,607 ) (104,905 ) (352,512 )
Ending number of combined
loans outstanding 152,435 149,524 301,959 72,525 374,484
Customer acquisition cost $ 248 $ 226 $ 241 $ 145 $ 207
Average customer loan
balance $ 2,297 $ 1,719 $ 2,011 $ 464 $ 1,711
Year ended December 31, 2018
Rise (US) Elastic (US)(1) Total Domestic Sunny (UK) Total
Beginning number of
combined loans outstanding 140,790 140,672 281,462 80,510 361,972
New customer loans
originated 111,860 99,820 211,680 104,803 316,483
Former customer loans
originated 86,278 746 87,024 - 87,024
Attrition (196,170 ) (74,841 ) (271,011 ) (95,864 ) (366,875 )
Ending number of combined
loans outstanding 142,758 166,397 309,155 89,449 398,604
Customer acquisition cost $ 275 $ 240 $ 259 $ 218 $ 245
Average customer loan
balance $ 2,167 $ 1,746 $ 1,940 $ 544 $ 1,627 (1) Includes immaterial balances related to the Today Card, which expanded its
test launch in
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Year Ended December 31, 2017
Rise (US) Elastic (US) Total Domestic Sunny (UK) Total
Beginning number of
combined loans outstanding 121,996 89,153 211,149 78,044 289,193
New customer loans
originated 116,030 110,145 226,175 79,011 305,186
Former customer loans
originated 71,109 - 71,109 - 71,109
Attrition (168,345 ) (58,626 ) (226,971 ) (76,545 ) (303,516 )
Ending number of combined
loans outstanding 140,790 140,672 281,462 80,510 361,972
Customer acquisition cost $ 281 $ 182 $ 233 $ 249 $ 237
Average customer loan
balance $ 2,276 $ 1,784 $ 2,030 $ 584 $ 1,708
Recent trends. Our revenues for the year ended December 31, 2019 totaled $747.0
million , a decrease of 5% versus the prior year period. This decrease in
revenues primarily resulted from a decrease in our effective APR on the combined
loans receivable - principal balance as the APR declined to 122% during the year
ended December 31, 2019 from 129% during the comparable prior year period. This
decrease in the average APR resulted primarily from our Rise product as the
average APR of a new Rise loan originated by a FinWise Bank customer is 130%,
which is lower than our typical state-licensed Rise customer but with a better
credit profile. In addition, we have experienced slower new customer loan growth
as we funded 247,706 new customer loans for the year ended December 31, 2019 , a
decrease of 22% from the prior year. As we disclosed in our 2018 Annual Report
on Form 10-K, we chose to moderate our new customer growth in 2019 as we
deployed and refined our new credit models during the second and third quarters
of 2019.
Our CAC was significantly lower for the year ended December 31, 2019 as compared
to prior year and was below the lower end of our targeted range of $250 to $300 .
This decrease was attributable to all three products. The Rise and Elastic CAC
decreased due to more efficient marketing spend. The Sunny CAC also decreased
for the year ended December 31, 2019 from $218 to $145 due to more efficient
marketing spend coupled with diminished competition in the UK market. We believe
our CAC in future quarters will remain within or below our target range of $250
to $300 as we continue to optimize the efficiency of our marketing channels and
benefit from continued less competition in the UK market.
Credit quality
As of and for the years ended December 31,
Credit quality metrics (dollars in
thousands) 2019 2018 2017
Net charge-offs(1) $ 371,458 $ 409,160 $ 347,010
Additional provision for loan losses(1) (7,217 ) 2,819 10,564
Provision for loan losses $ 364,241 $ 411,979 357,574
Past due combined loans receivable -
principal as a percentage of combined loans
receivable - principal(2) 10 % 11 % 10 %
Net charge-offs as a percentage of
revenues(1) 50 % 52 % 52 %
Total provision for loan losses as a
percentage of revenues 49 % 52 % 53 %
Combined loan loss reserve(3) $ 89,075 $ 96,052 $ 93,789
Combined loan loss reserve as a percentage
of combined loans receivable(3) 13 % 14 % 14 %
_________
(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, 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 the Company and
consolidated VIEs plus loans originated and owned by third-party lenders. 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 the Company and consolidated VIEs plus the loan loss
reserve for loans owned by third-party lenders and guaranteed by the Company.
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.
80-------------------------------------------------------------------------------- Net principal charge-offs as a percentage of average combined loans receivable - principal (1) First Third (2) (3) Quarter Second Quarter Quarter Fourth Quarter 2019 13% 11% 11% 12% 2018 13% 12% 13% 14% 2017 15% 14% 12% 13%
(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 the Company 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.
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, 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.
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 future 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 future 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.
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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 future 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 or
31 to 60 days past due. 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 three years we have seen our combined
loan loss reserve as a percentage of combined loans receivable fluctuate between
approximately 13% and 17% depending on the overall mix of new, former and past
due customer loans.
Recent trends. Total loan loss provision for the year ended December 31, 2019
was 49% of revenues, which was within our targeted range of 45% to 55%, and
lower than the 52% in the prior year period. For the year ended December 31,
2019 , net charge-offs as a percentage of revenues totaled 50%, compared to 52%
in the prior year period. We expect total loan loss provision as a percentage of
revenues to continue to remain within our targeted range due to ongoing
maturation of the loan portfolio and continued improvements in our underwriting
models and processes.
The combined loan loss reserve as a percentage of combined loans receivable
totaled 13% and 14% as of December 31, 2019 and December 31, 2018 , respectively,
reflecting improvements in our credit quality in each product portfolio. Past
due loan balances at December 31, 2019 were 10% of total combined loans
receivable - principal, down from 11% from a year ago.
Additionally, we also look at principal loan charge-offs (including both credit
and fraud losses) by vintage as a percentage of combined loans originated -
principal. As the below table shows, our cumulative principal loan charge-offs
through December 31, 2019 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% targeted range. In the beginning of 2019, we implemented new fraud tools
that have helped lower fraud losses. Additionally, we rolled out our next
generation of credit models during the second quarter of 2019 and continued
refining the models during the third quarter of 2019. The preliminary data on
the 2019 vintage is that it is performing better than both 2017 and 2018
vintages.
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[[Image Removed: cumulativecreditlossa122019.jpg]](1) The 2019 vintage is not yet fully mature from a loss perspective.
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Margins
Twelve Months Ended December 31,
Margin metrics (dollars in thousands) 2019 2018 2017
Revenues $ 746,962 $ 786,682 $ 673,132
Net charge-offs(1) (371,458 ) (409,160 ) (347,010 )
Additional provision for loan losses(1) 7,217 (2,819 ) (10,564 )
Direct marketing costs (51,283 ) (77,605 ) (72,222 )
Other cost of sales (28,846 ) (26,359 ) (20,536 )
Gross profit 302,592 270,739 222,800
Operating expenses (191,169 ) (175,865 ) (151,937 )
Operating income $ 111,423 $ 94,874 $ 70,863
As a percentage of revenues:
Net charge-offs 50 % 52 % 52 %
Additional provision for loan losses (1 ) - 2
Direct marketing costs 7 10 11
Other cost of sales 4 3 3
Gross margin 41 34 33
Operating expenses 26 22 23
Operating margin 15 % 12 % 11 %
_________(1) Non-GAAP measure. See "-Non-GAAP Financial Measures-Net charge-offs and
additional provision for loan losses."
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. We expect our margins to continue to increase as we continue to scale our business while maintaining stable credit quality. We allocate all marketing spend only to new customer loans. As our loan portfolio continues to mature with more customer loans that are from repeat customers, we will be generating revenue from those repeat customer loans without incurring any related marketing expense. As a result, we expect marketing expense as a percentage of revenue to continue to decline over time resulting in an increased gross profit margin. Additionally, being an online fintech company, we believe that as we continue to scale our business, we will generate operating efficiencies and our operating expense as a percentage of revenues will decline resulting in an increased operating margin. Recent operating margin trends. For the year endedDecember 31, 2019 , our operating margin was 15%, which was an improvement from 12% in the prior year period. This increase was largely due to a higher gross margin driven by lower direct marketing costs and an overall lower loan loss provision due to improved credit quality in the loan portfolio. Direct marketing costs for the year endedDecember 31, 2019 decreased to 7% of revenue from 10% in the prior year period. This decrease is due to the measured new customer growth we targeted as we focused on deploying our new credit models during the second quarter of 2019 and refining our credit models during the third quarter of 2019. The lower marketing spend, coupled with improved marketing efficiencies, resulted in a CAC of$207 for the year endedDecember 31, 2019 , which is below the low end of our targeted range of$250 to$300 and lower than the CAC of$245 for the prior year. We expect CAC to continue to be within or below our targeted range of$250 to$300 as we continue to optimize the efficiency of our marketing channels for our Rise and Elastic products, and benefit from decreased competition in theUK , although we may see some quarterly volatility in CAC. 84 -------------------------------------------------------------------------------- NON-GAAP FINANCIAL MEASURES We believe that the inclusion of the following non-GAAP financial measures in this Annual Report on Form 10-K 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 the Company's 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 EBITDA and Adjusted EBITDA Margin Adjusted EBITDA represents our net income (loss), adjusted to exclude: • Net interest expense primarily associated with notes payable under the VPC
Facility, EF SPV Facility and ESPV Facility used to fund the loan portfolios;
• Share-based compensation;
• Foreign currency gains and losses associated with our
• Depreciation and amortization expense on fixed assets and intangible assets;
• Gains and losses from fair value adjustments or dispositions 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) 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: • 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.
85--------------------------------------------------------------------------------
The following table presents a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDA margin for each of the periods indicated:
Twelve Months Ended December 31,
(Dollars in thousands) 2019 2018 2017
Net income (loss) $ 32,183 $ 12,509 $ (6,916 )
Adjustments:
Net interest expense 66,646 79,198 73,043
Share-based compensation 9,940 8,233 6,318Foreign currency transaction (gain) loss (334 ) 1,409
(2,900 ) Depreciation and amortization 17,380 12,988 10,272 Non-operating (income) loss 681 350 (2,295 ) Income tax expense 12,247 1,408 9,931 Adjusted EBITDA$ 138,743 $ 116,095 $ 87,453 Adjusted EBITDA margin 19 % 15 % 13 % Free cash flow Free cash flow ("FCF") represents our net cash provided by 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 operating activities to FCF for each of the periods indicated:
Twelve Months Ended December 31,
(Dollars in thousands) 2019 2018 2017
Net cash provided by operating activities(1)
$ 308,688 Adjustments: Net charge-offs - combined principal loans (287,188 ) (319,326 ) (275,192 ) Capital expenditures (24,690 ) (27,490 ) (16,755 ) FCF$ 58,466 $ 15,460 $ 16,741 _________
(1) Net cash provided by 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, 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.
86
--------------------------------------------------------------------------------
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.
Twelve Months Ended December 31,
(Dollars in thousands) 2019 2018 2017
Net charge-offs $ 371,458 $ 409,160 $ 347,010
Additional provision for loan losses (7,217 ) 2,819 10,564
Provision for loan losses $ 364,241 $ 411,979 $ 357,574
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
variable interest entity under US GAAP and the 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, the Company also licenses its Rise
installment loan brand to a third-party lender, FinWise Bank , which originates
Rise installment loans in 19 states. Prior to August 1, 2019 , FinWise Bank
retained 5% of the balances of all originated loans and sold a 95% loan
participation in those Rise installment loans to a third-party SPV, EF SPV. On
August 1, 2019 , EF SPV purchased an additional 1% participation in the
outstanding portfolio with the participation percentage revised going forward to
96%. Elevate is required to consolidate EF SPV as a VIE under US GAAP and the
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.
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. 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
sheets 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 guarantee.
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 are originated and owned by a third-party lender and
• Rise CSO loans are funded by a third-party lender and are not part of the VPC
Facility.
As of each of the period ends indicated, the following table presents a reconciliation of: • Loans receivable, net, Company owned (which reconciles to our Consolidated
Balance Sheets included elsewhere in this Annual Report on Form 10-K);
• Loans receivable, net, guaranteed by the Company (as disclosed in Note 3 of
our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K);
• Combined loans receivable (which we use as a non-GAAP measure); and
• Combined loan loss reserve (which we use as a non-GAAP measure).
87--------------------------------------------------------------------------------
2017 2018 2019
(Dollars in thousands)
December 31 Company Owned Loans: Loans receivable - principal, current, company owned$ 514,147 $ 471,996 $ 493,908 $ 525,717 $ 543,405 $ 491,208 $ 523,785 $ 543,565 $ 559,169 Loans receivable - principal, past due, company owned 61,856 60,876 58,949 69,934 68,251 55,286 55,711 65,824 63,413 Loans receivable - principal, total, company owned 576,003 532,872 552,857 595,651 611,656 546,494 579,496 609,389 622,582 Loans receivable - finance charges, company owned 36,562 31,181 31,519 36,747 41,646 32,491 31,805 35,702 38,091 Loans receivable - company owned 612,565 564,053 584,376 632,398 653,302 578,985 611,301 645,091 660,673 Allowance for loan losses on loans receivable, company owned (87,946 ) (80,497 ) (76,575 ) (89,422 ) (91,608 ) (76,457 ) (75,896 ) (89,667 ) (86,996 ) Loans receivable, net, company owned$ 524,619 $ 483,556 $ 507,801 $ 542,976 $ 561,694 $ 502,528 $ 535,405 $ 555,424 $ 573,677 Third-Party Loans Guaranteed by the Company: Loans receivable - principal, current, guaranteed by company$ 41,220 $ 33,469 $ 35,114 $ 36,649 $ 35,529 $ 27,941 $ 21,099 $ 18,633 $ 17,474 Loans receivable - principal, past due, guaranteed by company 1,152 1,123 1,494 1,661 1,353 696 596 697 723 Loans receivable - principal, total, guaranteed by company(1) 42,372 34,592 36,608 38,310 36,882 28,637 21,695 19,330 18,197 Loans receivable - finance charges, guaranteed by company(2) 3,093 2,612 2,777 3,103 2,944 2,164 1,676 1,553 1,395 Loans receivable - guaranteed by company 45,465 37,204 39,385 41,413 39,826 30,801 23,371 20,883 19,592 Liability for losses on loans receivable, guaranteed by company (5,843 ) (3,749 ) (3,956 ) (4,510 ) (4,444 ) (3,242 ) (1,983 ) (1,972 ) (2,079 ) Loans receivable, net, guaranteed by company(3)$ 39,622 $ 33,455 $ 35,429 $ 36,903 $ 35,382 $ 27,559 $ 21,388 $ 18,911 $ 17,513 Combined Loans Receivable(3): Combined loans receivable - principal, current$ 555,367 $ 505,465 $ 529,022 $ 562,366 $ 578,934 $ 519,149 $ 544,884 $ 562,198 $ 576,643 Combined loans receivable - principal, past due 63,008 61,999 60,443 71,595 69,604 55,982 56,307 66,521 64,136 Combined loans receivable - principal 618,375 567,464 589,465 633,961 648,538 575,131 601,191 628,719 640,779 Combined loans receivable - finance charges 39,655 33,793 34,296 39,850 44,590 34,655 33,481 37,255 39,486 Combined loans receivable$ 658,030 $ 601,257 $ 623,761 $ 673,811 $ 693,128 $ 609,786 $ 634,672 $ 665,974 $ 680,265 88
--------------------------------------------------------------------------------
2017 2018 2019
(Dollars in thousands)
December 31 Combined Loan Loss Reserve(3): Allowance for loan losses on loans receivable, company owned$ (87,946 ) $ (80,497 ) $ (76,575 ) $ (89,422 ) $ (91,608 ) $ (76,457 ) $ (75,896 ) $ (89,667 ) $ (86,996 ) Liability for losses on loans receivable, guaranteed by company (5,843 ) (3,749 ) (3,956 ) (4,510 ) (4,444 ) (3,242 ) (1,983 ) (1,972 ) (2,079 ) Combined loan loss reserve$ (93,789 ) $ (84,246 ) $ (80,531 ) $ (93,932 ) $ (96,052 ) $ (79,699 ) $ (77,879 ) $ (91,639 ) $ (89,075 ) Combined loans receivable - principal, past due(3)$ 63,008 $ 61,999 $ 60,443 $ 71,595 $ 69,604 $ 55,982 $ 56,307 $ 66,521 $ 64,136 Combined loans receivable - principal(3) 618,375 567,464 589,465 633,961 648,538 575,131 601,191 628,719 640,779 Percentage past due 10 % 11 % 10 % 11 % 11 % 10 % 9 % 11 % 10 % Combined loan loss reserve as a percentage of combined loans receivable(3)(4) 14 % 14 % 13 % 14 % 14 % 13 % 12 % 14 % 13 % Allowance for loan losses as a percentage of loans receivable - company owned 14 % 14 % 13 % 14 % 14 % 13 % 12 % 14 % 13 % _________
(1) Represents loans originated by third-party lenders through the CSO programs,
which are not included in our financial statements.
(2) Represents finance charges earned by third-party lenders through the CSO
programs, which are not included in our financial statements.
(3) Non-GAAP measure.
(4) Combined loan loss reserve as a percentage of combined loans receivable is
determined using period-end balances.
89-------------------------------------------------------------------------------- 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 byFinWise Bank ), finance charges on Sunny installment loans, cash advance fees attributable to the participation in Elastic lines of credit that we consolidate and marketing and licensing fees received from third-party lenders related to the Rise, Rise CSO and Elastic products. See "-Overview" above for further information on the structure of Elastic. Finance charge and fee revenues related to the test launch of the Today Card credit card product were immaterial. 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 air time 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, automated clearing house ("ACH") transaction costs associated with customer loan funding and payments, and settlement expense associated withUK affordability claims. 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 includes 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. 90 -------------------------------------------------------------------------------- Other income (expense) Net interest expense. Net interest expense primarily includes the interest expense associated with the VPC Facility that funds the Rise and Sunny installment loans, the interest expense associated with the EF SPV Facility that funds Rise installment loans originated byFinWise Bank and the interest expense associated with the ESPV Facility related to the Elastic lines of credit and related Elastic SPV entity. For the year endedDecember 31, 2019 , net interest expense included amortization on the ESPV amendment fee and the prepayment penalty associated with the early repayment of a portion of the 4th Tranche Note. For the year endedDecember 31, 2018 , amortization of the costs of and realized gains from the interest rate caps on the VPC and ESPV Facility are included within net interest expense. For the year endedDecember 31, 2017 , net interest expense also included amortization of the debt discount for the Convertible Term Notes. Foreign currency transaction gain (loss). We incur foreign currency transaction gains and losses related to activities associated with ourUK entity,Elevate Credit International, Ltd. , primarily with regard to the VPC Facility used to fund Sunny installment loans. Non-operating income (loss). Non-operating income primarily includes gains and losses on adjustments to the fair value of derivatives not designated as cash flow hedges and losses from dispositions of capitalized software and other property and equipment.
RESULTS OF OPERATIONS
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 . The following table sets forth our consolidated statements of operations data for each of the periods indicated: Years ended December 31, Consolidated statements of operations data (dollars in thousands) 2019 2018 2017 Revenues$ 746,962 $ 786,682 $ 673,132 Cost of sales: Provision for loan losses 364,241 411,979 357,574 Direct marketing costs 51,283 77,605 72,222 Other cost of sales 28,846 26,359 20,536 Total cost of sales 444,370 515,943 450,332 Gross profit 302,592 270,739 222,800 Operating expenses: Compensation and benefits 103,070 94,382 81,969 Professional services 36,715 35,864 32,848 Selling and marketing 7,381 9,435 8,353 Occupancy and equipment 20,712 17,547 13,895 Depreciation and amortization 17,380 12,988 10,272 Other 5,911 5,649 4,600 Total operating expenses 191,169 175,865 151,937 Operating income 111,423 94,874 70,863 Other income (expense): Net interest expense (66,646 ) (79,198 ) (73,043 ) Foreign currency transaction gain (loss) 334 (1,409 ) 2,900 Non-operating income (loss) (681 ) (350 ) 2,295 Total other expense (66,993 ) (80,957 ) (67,848 ) Income before taxes 44,430 13,917 3,015 Income tax expense 12,247 1,408 9,931 Net income (loss)$ 32,183 $ 12,509 $ (6,916 ) 91
--------------------------------------------------------------------------------
Years ended December 31,
As a percentage of revenues 2019 2018 2017
Cost of sales:
Provision for loan losses 49 % 52 % 53 %
Direct marketing costs 7 10 11
Other cost of sales 4 3 3
Total cost of sales 59 66 67
Gross profit 41 34 33
Operating expenses:
Compensation and benefits 14 12 12
Professional services 5 5 5
Selling and marketing 1 1 1
Occupancy and equipment 3 2 2
Depreciation and amortization 2 2 2
Other 1 1 1
Total operating expenses 26 22 23
Operating income 15 12 11
Other income (expense):
Net interest expense (9 ) (10 ) (11 )
Foreign currency transaction gain (loss) - - -
Non-operating income (loss) - - -
Total other expense (9 ) (10 ) (10 )
Income before taxes 6 2 -
Income tax expense 2 - 1
Net income (loss) 4 % 2 % (1 )%
Comparison of the years ended December 31, 2019 and 2018
Revenues
Years ended December 31,
2019 2018 Period-to-period change
Percentage of Percentage of
(Dollars in thousands) Amount revenues Amount revenues Amount Percentage
Finance charges $ 744,690 100 % $ 782,473 99 % $ (37,783 ) (5 )%
Other 2,272 - 4,209 1 (1,937 ) (46 )
Revenues $ 746,962 100 % $ 786,682 100 % $ (39,720 ) (5 )%
Revenues decreased by $39.7 million , or 5%, from $786.7 million for the year
ended December 31, 2018 to $747.0 million for the year ended December 31, 2019 .
This decrease in revenue was primarily due to a decline in the effective APR of
the combined loans receivable, partially offset by an increase in our average
combined loans receivable - principal balance, as illustrated in the tables
below. The decrease in Other revenues is due to a decrease in marketing and
licensing fees related to the Rise CSO programs as our CSO partners stopped
originating Rise CSO loans in Ohio in April 2019 due to a state law change.
92
--------------------------------------------------------------------------------The tables below break out this change in revenue (including CSO fees and cash advance fees) by product:
Year ended December 31, 2019
(Dollars in thousands) Rise (US)(1) Elastic (US)(2) Total Domestic Sunny (UK) Total
Average combined loans
receivable - principal(3) $ 306,785 $ 254,549 $ 561,334 $ 48,262 $ 609,596
Effective APR 127 % 97 % 113 % 224 % 122 %
Finance charges $ 389,372 $ 247,397 $ 636,769 $ 107,921 $ 744,690
Other 982 1,121 2,103 169 2,272
Total revenue $ 390,354 $ 248,518 $ 638,872 $ 108,090 $ 746,962
Year endedAverage combined loans receivable - principal(3)$ 293,413 $ 262,537 $ 555,950 $ 51,793 $ 607,743 Effective APR 138 % 97 % 119 % 237 % 129 % Finance charges$ 405,224 $ 254,561 $ 659,785 $ 122,688 $ 782,473 Other 2,187 1,745 3,932 277 4,209 Total revenue$ 407,411 $ 256,306 $ 663,717 $ 122,965 $ 786,682 _________
(1) Includes loans originated by third-party lenders through the CSO programs,
which are not included in the Company's consolidated financial statements.
(2) Includes immaterial balances related to the Today Card, which expanded its
test launch in
(3) Average combined loans receivable - principal is calculated using daily
combined loans receivable - principal balances. Combined loans receivable is
defined as loans owned by the Company 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.
Our average APR declined from 129% for the year endedDecember 31, 2018 to 122% for the year endedDecember 31, 2019 . This resulted in a$42.5 million decrease in finance charges on a year-over-year basis, primarily in our Rise product. The average APR of a new Rise loan originated for aFinWise Bank customer is 130%, which is lower than our typical state-licensed Rise customer but with a better credit profile. While this has impacted top-line revenue growth, the related decrease in net charge-offs due to the better customer credit profile has resulted in an increase in gross profits.
Cost of sales
Years ended December 31, Period-to-period
2019 2018 change
(Dollars in Percentage of Percentage of
thousands) Amount revenues Amount revenues Amount Percentage
Cost of sales:
Provision for
loan losses $ 364,241 49 % $ 411,979 52 % $ (47,738 ) (12 )%
Direct marketing
costs 51,283 7 77,605 10 (26,322 ) (34 )
Other cost of
sales 28,846 4 26,359 3 2,487 9
Total cost of
sales $ 444,370 59 % $ 515,943 66 % $ (71,573 ) (14 )%
93-------------------------------------------------------------------------------- Provision for loan losses. Provision for loan losses decreased by$47.7 million , or 12%, from$412.0 million for the year endedDecember 31, 2018 to$364.2 million for the year endedDecember 31, 2019 primarily due to a$37.7 million decrease in net charge-offs and a decrease of$10.0 million in the additional provision for loan losses resulting from improved credit quality. The tables below break out these changes by loan product: Year ended
Combined loan loss reserve(2): Beginning balance$ 50,597 $ 36,050 $ 86,647 $ 9,405 $ 96,052 Net charge-offs (205,577 ) (124,740 ) (330,317 ) (41,141 ) (371,458 ) Provision for loan losses 207,079 118,583 325,662 38,579 364,241 Effect of foreign currency - - - 240 240 Ending balance$ 52,099 $ 29,893 $ 81,992 $ 7,083 $ 89,075 Combined loans receivable(2)(3)$ 373,676 $ 267,903 $ 641,579 $ 38,686 $ 680,265 Combined loan loss reserve as a percentage of ending combined loans receivable 14 % 11 % 13 % 18 % 13 % Net charge-offs as a percentage of revenues 53 % 50 % 52 % 38 % 50 % Provision for loan losses as a percentage of revenues 53 % 48 % 51 % 36 % 49 % Year ended
Combined loan loss reserve(2): Beginning balance$ 55,867 $ 28,870 $ 84,737 $ 9,052 $ 93,789 Net charge-offs (228,569 ) (131,719 ) (360,288 ) (48,872 ) (409,160 ) Provision for loan losses 223,299 138,899 362,198 49,781 411,979 Effect of foreign currency - - - (556 ) (556 ) Ending balance$ 50,597 $ 36,050 $ 86,647 $ 9,405 $ 96,052 Combined loans receivable(2)(3)$ 333,001 $ 303,418 $ 636,419 $ 56,709 $ 693,128 Combined loan loss reserve as a percentage of ending combined loans receivable 15 % 12 % 14 % 17 % 14 % Net charge-offs as a percentage of revenues 56 % 51 % 54 % 40 % 52 % Provision for loan losses as a percentage of revenues 55 % 54 % 55 % 40 % 52 % _________
(1) Includes immaterial balances related to the Today Card, which expanded its
test launch in
(2) 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.
(3) Includes loans originated by third-party lenders through the CSO programs,
which are not included in our financial statements.
Net charge-offs decreased$37.7 million for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , due to improved credit quality, with the primary decrease attributed to the Rise product and in particular theFinWise Bank customer, which has a better credit profile than the state-licensed Rise customer. Net charge-offs as a percentage of revenues for the year endedDecember 31, 2019 was 50%, a decrease from 52% for the comparable period in 2018. Provision for loan losses for the year endedDecember 31, 2019 totaled 49% of revenues, lower than 52% for the year endedDecember 31, 2018 . 94 -------------------------------------------------------------------------------- Direct marketing costs. Direct marketing costs decreased by$26.3 million , or 34%, from$77.6 million for the year endedDecember 31, 2018 to$51.3 million for the year endedDecember 31, 2019 . The decrease was due to slower new customer growth as we focused on deploying our new credit models during 2019. For the year endedDecember 31, 2019 , the number of new customers acquired decreased to 247,706 compared to 316,483 during the year endedDecember 31, 2018 . For the years endedDecember 31, 2019 and 2018, our CAC was$207 and$245 , respectively. We expect our CAC to continue to be lower than, or within, our targeted range of$250 to$300 as we continue to optimize the efficiency of our marketing channels for our Rise and Elastic products and benefit from decreased competition in theUK , although we may see some quarterly volatility in CAC. Other cost of sales. Other cost of sales increased by$2.5 million , or 9%, from$26.4 million for the year endedDecember 31, 2018 to$28.8 million for the year endedDecember 31, 2019 due to increased affordability claim settlement expense related to the SunnyUK product, partially offset by decreased data verification costs incurred from the lower new customer loan volume across all products. Operating expenses Years ended December 31, Period-to-period 2019 2018 change (Dollars in Percentage of Percentage of thousands) Amount revenues Amount revenues Amount Percentage Operating expenses: Compensation and benefits$ 103,070 14 %$ 94,382 12 %$ 8,688 9 % Professional services 36,715 5 35,864 5 851 2 Selling and marketing 7,381 1 9,435 1 (2,054 ) (22 ) Occupancy and equipment 20,712 3 17,547 2 3,165 18 Depreciation and amortization 17,380 2 12,988 2 4,392 34 Other 5,911 1 5,649 1 262 5 Total operating expenses$ 191,169 26 %$ 175,865 22 %$ 15,304 9 % Compensation and benefits. Compensation and benefits increased by$8.7 million , or 9%, from$94.4 million for the year endedDecember 31, 2018 to$103.1 million for the year endedDecember 31, 2019 primarily due to an increase in the number of employees and severance payments related to the resignation of our CEO inJuly 2019 . Professional services. Professional services increased by$0.9 million , or 2%, from$35.9 million for the year endedDecember 31, 2018 to$36.7 million for the year endedDecember 31, 2019 primarily due to increased legal expenses related to various regulatory matters and outsourced servicing expense, partially offset by decreased contractor and consulting expenses. Selling and marketing. Selling and marketing decreased by$2.1 million , or 22%, from$9.4 million for the year endedDecember 31, 2018 to$7.4 million for the year endedDecember 31, 2019 primarily due to decreased marketing agency fees. Occupancy and equipment. Occupancy and equipment increased by$3.2 million , or 18%, from$17.5 million for the year endedDecember 31, 2018 to$20.7 million for the year endedDecember 31, 2019 primarily due to increased web hosting expense, increased software licenses, and increased rent expense needed to support a greater number of employees. Depreciation and amortization. Depreciation and amortization increased by$4.4 million , or 34%, from$13.0 million for the year endedDecember 31, 2018 to$17.4 million for the year endedDecember 31, 2019 primarily due to increased purchases of property and equipment, including depreciation on internally developed software. 95
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Net interest expense
Years ended December 31, Period-to-period
2019 2018 change
Percentage of Percentage of
(Dollars in thousands) Amount revenues Amount revenues Amount Percentage
Net interest expense $ 66,646 9 % $ 79,198 10 %
Net interest expense decreased$12.6 million , or 16%, during the year endedDecember 31, 2019 versus the year endedDecember 31, 2018 . Our average effective cost of funds on our notes payable outstanding decreased to 12.1% from 14.8% on an unadjusted basis for the years endedDecember 31, 2019 and 2018. This lower cost of funds led to a decrease in interest expense of$14.3 million , which was partially offset by additional interest expense of approximately$1.8 million due to a higher average debt balance in 2019. For the year endedDecember 31, 2018 , we had an average balance of$534.9 million in notes payable outstanding under our debt facilities, which increased to$549.4 million on average for fiscal year 2019. In addition, we incurred an$850 thousand prepayment penalty during the second quarter of 2019 for the early repayment on the 4th Tranche Term Note that is included in net interest expense. The following table shows the effective cost of funds of each debt facility for the period: Years ended December 31, (Dollars in thousands) 2019 2018 VPC Facility Average facility balance during the period$ 251.875 $ 311.505 Net interest expense 29,335
45,381
Less: prepayment penalty associated with the early repayment on the 4th Tranche Term Note
(850 ) -
Net interest expense, as adjusted $ 28,485 $ 45,381
Effective cost of funds 11.7 % 14.6 %
Effective cost of funds, as adjusted 11.3 % 14.6 %
EF SPV Facility Average facility balance during the period$ 70.518 $ - Net interest expense 7,350 - Cost of funds 10.4 % - % ESPV Facility Average facility balance during the period$ 227,044 $ 223,370 Net interest expense 29,961 33,817 Cost of funds 13.2 % 15.1 % InJanuary 2018 , the Company entered into interest rate caps, which cap 3-month LIBOR at 1.75%, to mitigate the floating interest rate risk on$240 million of the US Term Notes included in the VPC Facility and on$216 million of the ESPV Facility. The interest rate caps matured onFebruary 1, 2019 . Additionally, effectiveFebruary 1, 2019 , the VPC Facility and ESPV Facility were amended and a third new facility, the EF SPV Facility, was also created. The amended facilities included reductions to the interest rates paid on our debt in addition to other changes. The reduction in interest rates was effectiveFebruary 1, 2019 for the VPC Facility and the EF SPV Facility. The reduction in interest rates for the ESPV Facility was effectiveJuly 1, 2019 . All existing debt outstanding under these facilities (excluding the 4th Tranche Term Note of$18.1 million under the VPC Facility) had an effective cost of funds of approximately 10.3% atDecember 31, 2019 . Per the terms of theFebruary 1, 2019 amendments, the Company qualifies for a 25 bps rate reduction on all three facilities effectiveJanuary 1, 2020 . This reduction does not apply to the 4th Tranche Term Note. See "-Liquidity and Capital Resources-Debt facilities" for more information. 96 -------------------------------------------------------------------------------- Foreign currency transaction gain (loss) During the year endedDecember 31, 2019 , we realized a$0.3 million gain in foreign currency remeasurement primarily related to a portion of the debt facility that ourUK entity,Elevate Credit International, Ltd. , has with a third-party lender, VPC, which is denominated in US dollars. The foreign currency remeasurement loss for the year endedDecember 31, 2018 was$1.4 million . Non-operating income (expense) During the year endedDecember 31, 2018 , we recognized$0.4 million in non-operating expenses related to certain impairments and losses on disposals of fixed assets. During the year endedDecember 31, 2019 , we recognized$0.7 million in non-operating losses related to the write-off of an internally developed software project. Income tax expense Years ended December 31, Period-to-period 2019 2018 change Percentage of Percentage of (Dollars in thousands) Amount revenues Amount
revenues Amount Percentage
Income tax expense $ 12,247 2 % $ 1,408 - % $ 10,839 770 %
Our income tax expense increased $10.8 million , or 770%, from $1.4 million for
the year ended December 31, 2018 to $12.2 million for the year ended
December 31, 2019 . Our consolidated effective tax rates for the years ended
December 31, 2019 and 2018 were 27.6% and 10.1%, respectively. Our effective tax
rates are different from the standard corporate federal income tax rate of 21%
in the US primarily due to our permanent non-deductible items, corporate state
tax obligations in the states where we have lending activities, and the impact
of the GILTI provision of the Tax Cuts and Jobs Act enacted in 2017. The
Company's US cash effective tax rate was approximately 2% for 2019. Our UK
operations have a full valuation allowance provided due to the lack of
sufficient objective evidence regarding the realizability of this asset due to
the regulatory uncertainty in the UK . Therefore, no UK tax benefit has been
recognized in the financial statements for the years ended December 31, 2019 and
2018.
Net income
Years ended December 31, Period-to-period
2019 2018 change
Percentage of Percentage of
(Dollars in thousands) Amount revenues Amount
revenues Amount Percentage
Net income $ 32,183 4 % $ 12,509 2 % $ 19,674 (157 )%
Our net income increased $19.7 million , or 157%, from $12.5 million for the year
ended December 31, 2018 to $32.2 million for the year ended December 31, 2019 ,
due to improved gross profit and lower interest expense offset by higher income
tax expense.
97
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LIQUIDITY AND CAPITAL RESOURCES
We principally rely on our working capital, funds from third-party lenders under
the CSO programs, and our credit facility with VPC to fund the loans we make to
our customers.
On July 25, 2019 , the Company's Board of Directors authorized a share repurchase
program providing for the repurchase of up to $10 million of our common stock
through July 31, 2024 . In January 2020 , the Company's Board of Directors
authorized a $20 million increase to the Company's existing common stock
repurchase program providing for the repurchase of up to $30 million of the
Company's common stock through July 31, 2024 . The prior authorization totaled $5
million for both fiscal years 2019 and 2020. The Company purchased $3.3 million
of common shares under its $5 million authorization during the second half of
2019. The amended share repurchase program provides that up to a maximum
aggregate amount of $25 million shares (inclusive of the previous maximum
aggregate amount of $5 million ) 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. During the
year ended December 31, 2019 , 768,910 shares were repurchased at a total cost of
$3.3 million inclusive of any transactional fees or commissions.
Debt Facilities
VPC Facility VPC Facility Term Notes OnJanuary 30, 2014 , we entered into the VPC Facility in order to fund our Rise and Sunny products and provide working capital. The VPC Facility has been amended several times, with the most recent amendment effectiveFebruary 1, 2019 , to increase the maximum total borrowing amount available and other terms of the VPC Facility. The VPC Facility provided the following term notes as ofDecember 31, 2019 : • A maximum borrowing amount of$350 million used to fund the Rise loan
portfolio ("US Term Note"). Prior to the
interest rate paid on this facility was a base rate (defined as the
3-month LIBOR, with a 1% floor) plus 11%. This resulted in a blended
interest rate paid of 12.79% on debt outstanding under this facility as of
December 31, 2018 . The Company entered into an interest rate cap onJanuary 11, 2018 to mitigate the floating interest rate risk on the aggregate$240 million outstanding as ofDecember 31, 2017 . This cap matured inFebruary 2019 . Upon theFebruary 1, 2019 amendment date, the
interest rate of the debt outstanding as of the amendment date was fixed
through the
plus 7.5%). 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 7.5% at the borrowing date. The
weighted-average base rate on the outstanding balance at
was 2.73% and the overall rate was 10.23%.
• A maximum borrowing amount of
portfolio ("
interest rate paid on this facility was a base rate (defined as the
3-month LIBOR rate) plus 14%. This resulted in a blended interest rate
paid of 16.74% on debt outstanding under this facility as of
2018. Upon the
debt outstanding as of the amendment date was fixed through the
2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%). 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 7.5% at the borrowing date. The weighted-average base rate on the
outstanding balance at December 31, 2019 was 2.73% and the overall
interest rate was 10.23%.
• A maximum borrowing amount of
and prior to
LIBOR, with a 1% floor) plus 13% ("4th Tranche Term Note"). Upon the
February 1, 2019 amendment date, the interest rate was fixed through the
February 1, 2021 maturity date at a base rate of 2.73% plus 13%. The
interest rate at December 31, 2019 and 2018 was 15.73% and 15.74%,
respectively. There was no change in the interest rate spread on this
facility upon the February 1, 2019 amendment.
• A revolving feature which provides the option to pay down up to 20% of the
outstanding balance, excluding the 4th Tranche Term note, once per year
during the first quarter. Amounts paid down may be drawn again at a later
date prior to maturity.
98-------------------------------------------------------------------------------- There are no principal payments due or scheduled under the VPC Facility until the respective maturity dates of the US Term Note, theUK Term Note and the 4th Tranche Term Note. The 4th Tranche Term Note matures onFebruary 1, 2021 , although we expect to repay this early during the first half of 2020 out of our free cash flow. The US Term Note and theUK Term Note mature onJanuary 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 ofDecember 31, 2019 . Our Convertible Term Notes were converted into the 4th Tranche Term Notes onJanuary 30, 2018 per the terms of the VPC Facility. Additionally, the maturity of the Convertible Term Notes (due to their conversion to 4th Tranche Term Notes) was extended toFebruary 1, 2021 and the debt discount on the Convertible Term Notes was fully amortized. Finally, the exit premium under the Convertible Term Notes of$2.0 million was due and paid onJanuary 30, 2018 . See Note 7-Notes Payable of our consolidated financial statements for additional information. EF SPV Facility EF SPV Term Note The EF SPV Facility has a maximum borrowing amount of$150 million used to purchase loan participations from a third-party lender. Prior to execution of the agreement with VPC effectiveFebruary 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 theFebruary 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 theJanuary 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%). 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 7.5% at the borrowing date. The weighted-average base rate on the outstanding balance atDecember 31, 2019 was 2.49% and the overall interest rate was 9.99%. 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 onJanuary 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 ofDecember 31, 2019 . ESPV Facility ESPV Facility Term Note Elastic SPV receives its funding from VPC in the ESPV Facility, which was finalized onJuly 13, 2015 . The ESPV Facility has a maximum borrowing amount of$350 million used to purchase loan participations from a third-party lender. Prior to theFebruary 1, 2019 amendment, the interest rate paid on this facility was a base rate (defined as the greater of the 3-month LIBOR rate or 1% per annum) plus 13% for the outstanding balance up to$50 million , plus 12% for the outstanding balance greater than$50 million up to$100 million , plus 13.5% for any amounts greater than$100 million up to$150 million , and plus 12.75% for borrowing amounts greater than$150 million . This resulted in a blended interest rate paid of 14.65% on the debt outstanding under this facility atDecember 31, 2018 . Upon theFebruary 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%). EffectiveJuly 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%). All future borrowings under this facility afterJuly 1, 2019 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 7.5% at the borrowing date. The weighted-average base rate on the outstanding balance atDecember 31, 2019 was 2.72% and the overall interest rate was 10.22%. The Company entered into an interest rate cap onJanuary 11, 2018 to mitigate the floating rate interest risk on an aggregate$216 million then outstanding. This cap matured inFebruary 2019 . 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. 99 -------------------------------------------------------------------------------- The ESPV Term Note matures onJanuary 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 levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the ESPV Facility as ofDecember 31, 2019 and 2018. Outstanding Notes Payable The outstanding balance of notes payable as ofDecember 31, 2019 and 2018 are as follows: (Dollars in thousands) 2019
2018
US Term Note bearing interest at the base rate + 7.5% (2019) and + 11% (2018)
$ 182,000
29,635 39,196
4th Tranche Term Note bearing interest at the base rate + 13%
18,050 35,050
EF SPV Term Note bearing interest at the base rate + 7.5%
102,000 -
ESPV Term Note bearing interest at the base rate + 7.5% (2019) and + 12-13.5% (2018) 226,000 239,000 Total$ 557,685 $ 563,246
The change in the facility balances includes the following:
• US Term Note -
down of
component of the facility;
•
• 4th Tranche Term Note -
of 2019;
• EF SPV Term note -
quarter of 2019 and additional draws of $59 million during the year ended
December 31, 2019 ; and
• ESPV Term Note - Paydown of
the revolver component of the facility and an additional draw of $5
million in the third quarter of 2019.
Per the terms of the
The Company paid a$2.4 million amendment fee on the ESPV Facility during the first quarter of 2019 that is included in deferred debt issuance costs and will be amortized into interest expense over the remaining life of the facility (throughJanuary 1, 2024 ). Additionally, the Company incurred an$850 thousand prepayment penalty during the second quarter of 2019 for the early repayment on the 4th Tranche Term Note that is included in interest expense. The following table presents the future debt maturities, including debt issuance costs, as ofDecember 31, 2019 : Year (dollars in thousands)December 31, 2019 2020 - 2021 18,050 2022 - 2023 - 2024 539,635 Total $ 557,685 100
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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 years ended December 31,
(Dollars in thousands) 2019 2018 2017
Cash and cash equivalents $ 88,913 $ 58,313 41,142
Restricted cash 2,294 2,591 1,595
Loans receivable, net 573,677 561,694 524,619
Cash provided by (used in):
Operating activities 370,344 362,276 308,688
Investing activities (327,521 ) (391,818 ) (424,441 )
Financing activities (12,920 ) 47,842 102,695
Our cash and cash equivalents at December 31, 2019 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 $370.3 million in cash from our operating activities for the year
ended December 31, 2019 , primarily from revenues derived from our loan
portfolio. This was up $8.1 million from the $362.3 million of cash provided by
operating activities during the year ended December 31, 2018 . This increase was
the result of the expansion of our gross margin, which contributed to the $19.7
million increase in our net income for the year ended December 31, 2019 compared
to the same prior year period.
Net cash used in investing activities
For the years ended December 31, 2019 , 2018 and 2017, cash used in investing
activities was $327.5 million , $391.8 million and $424.4 million , respectively.
The decrease for the year ended December 31, 2019 was primarily due to a
decrease in net loans issued to customers. The following table summarizes cash
used in investing activities for the periods indicated:
For the years ended December 31,
(Dollars in thousands) 2019 2018 2017
Cash used in investing activities
Net loans issued to consumers, less repayments $ (296,970 ) $ (357,935 ) $ (402,006 )
Participation premium paid (5,861 ) (6,393 ) (5,680 )
Purchases of property and equipment (24,690 ) (27,490 ) (16,755 )
$ (327,521 ) $ (391,818 ) $ (424,441 )
101-------------------------------------------------------------------------------- Net cash provided by financing activities Cash flows from financing activities primarily include cash received from issuing notes payable, payments on notes payable, and activity related to stock awards. For the years endedDecember 31, 2019 , 2018 and 2017, cash provided by financing activities was$12.9 million ,$47.8 million and$102.7 million , respectively. The following table summarizes cash provided by (used in) financing activities for the periods indicated: For the years ended December 31, (Dollars in thousands) 2019 2018 2017 Cash provided by (used in) financing activities Proceeds from issuance of Notes payable, net$ 61,394 $ 49,624 $ 102,772 Payments on Notes payable (70,000 ) - (84,950 ) Debt prepayment penalties paid (850 ) - - Cash paid for interest rate caps - (1,367 ) - Settlement of derivative liability - (2,010 ) - Common stock repurchased (3,344 ) - - Proceeds from issuance of stock, net (120 ) 1,595 84,894 Other activities - - (21 )$ (12,920 ) $ 47,842 $ 102,695 The decrease in cash provided by financing activities for the year endedDecember 31, 2019 versus the comparable period of 2018 was due primarily to payments made on notes payable made during 2019. 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, 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 operating activities. For the years ended December 31, (Dollars in thousands) 2019 2018 2017 Net cash provided by operating activities$ 370,344 $ 362,276 $ 308,688 Adjustments: Net charge-offs - combined principal loans (287,188 ) (319,326 ) (275,192 ) Capital expenditures (24,690 ) (27,490 ) (16,755 ) FCF$ 58,466 $ 15,460 $ 16,741 Our FCF was$58.5 million for the year endedDecember 31, 2019 compared to$15.5 million for the prior year. The increase in our FCF was the result of the increase in cash provided by operations and a decrease in net-charge-offs - combined principal loans and capital expenditures during the year endedDecember 31, 2019 . Operating and capital expenditure requirements We believe that our existing cash balances, together with the available borrowing capacity under our VPC Facility and ESPV Facility, will be sufficient to meet our anticipated cash operating expense and capital expenditure requirements through at least the next 12 months. If our loan growth exceeds our expectations, our available cash balances may be insufficient to satisfy our liquidity requirements, and we may seek additional equity or debt financing. This additional capital may not be available on reasonable terms, or at all. 102 -------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS Our principal commitments consist of obligations under our debt facilities and operating lease obligations. The following table summarizes our contractual obligations as ofDecember 31, 2019 . Payment due by period as of December 31, 2019 Less than More than (Dollars in thousands) Total 1 year 1-3 years 3-5 years 5 years Contractual obligations: Long-term debt obligations$ 557,685 $ -$ 18,050 $ 539,635 $ - Operating lease obligations 18,436 3,760 7,860 4,924 1,892
Total contractual obligations
OFF-BALANCE SHEET ARRANGEMENTS
We provide services in connection with installment loans originated by
independent third-party lenders ("CSO lenders") whereby we act 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 includes
arranging loans with CSO lenders, assisting in the loan application,
documentation and servicing processes. Under the CSO program, we guarantee the
repayment of a customer's loan to the CSO lenders as part of the credit services
we provide to the customer. A customer who obtains a loan through the CSO
program pays us a fee for the credit services, including the guaranty, and
enters into a contract with the CSO lenders governing the credit services
arrangement. We estimate a liability for losses associated with the guaranty
provided to the CSO lenders using assumptions and methodologies similar to the
allowance for loan losses, which we recognize for our consumer loans.
RECENT REGULATORY DEVELOPMENTS
During the year ended December 31, 2018 , our UK business began to receive an
increased number of customer complaints initiated by claims management companies
("CMCs") related to the affordability assessment of certain loans. If our
evidence supports the affordability assessment and we reject the claim, the
customer has the right to take the complaint to the Financial Ombudsman Service
for further adjudication. The CMCs' campaign against the high cost lending
industry increased significantly during the third and fourth quarters of 2018
and continued during 2019 resulting in a significant increase in affordability
claims against all companies in the industry during this period. We believe that
many of the increased claims are without merit and reflect the use of abusive
and deceptive tactics by the CMCs. 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. As of December 31, 2019 , we accrued
approximately $2.3 million for the claims received that were determined to be
probable and reasonably estimable based on the Company's historical loss rates
related to these claims. The outcomes of the adjudication of these claims may
differ from the Company's estimates, and as a result, our estimates may change
in the near term and the effect of any such change could be material to the
financial statements. We continue to monitor the matters for further
developments that could affect the amount of the accrued liability recognized.
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. Our UK business provided the requested
information to the FCA . The FCA recently reported back to us and asked our UK
business to tighten certain aspects of its income verification and expenditure
processes. We are working with the FCA to ensure the changes we make address all
matters raised by the FCA .
On October 25, 2019 , the Company's UK subsidiary, ECI, entered into an agreement
with the Financial Conduct Authority ("FCA") (the "Agreement") to not make any
payments greater than £1.0 million outside of the normal course of business
without obtaining prior approval from the FCA . The Company believes this
Agreement will not have a material impact on ECI's ability to continue to serve
its customers and meet its obligations.
On May 7, 2019 , the Consumer Financial Protection Bureau (the "CFPB") proposed
amendments to Regulation F, which implements the FDCPA. The Bureau's proposal
would, among other things, address communications in connection with debt
collection; interpret and apply prohibitions on harassment or abuse, false or
misleading representations, and unfair practices in debt collection; and clarify
requirements for certain consumer-facing debt collection disclosures. The public
comment period on the proposed amendments closed on September 18, 2019 . Once a
final rule is promulgated, we will take the necessary steps to ensure that the
third-party debt collectors we work with are compliant with the final rule.
103
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On October 10, 2019 , AB 539 was signed by the Governor and chaptered by the
California Secretary of State. Among other things, AB 539 imposes an interest
rate cap on all consumer loans made by Consumer Finance Lenders licensees
between $2,500 and $10,000 of 36% plus the Federal Funds Rate. Effective January
1, 2020 , Rise will no longer originate state-licensed loans under the California
Consumer Finance Lenders Law.
California Attorney General Xavier Becerra has issued draft regulations to guide
covered businesses' implementation of the California Consumer Privacy Act
("CCPA") which became operative on January 1, 2020 . The CCPA imposes obligations
on the handling of consumers' personal information by businesses, including
required disclosures to consumers; consumer access and deletion rights,
consumers' right to opt-out of the sale of personal information; and a private
right of action relating to a failure to maintain reasonable security procedures
and practices leading to a security breach, as defined by the CCPA. The CCPA
does not apply to information that is covered by the GLBA or California's
Financial Information Privacy Act, or to personal consumer report information
that is processed pursuant to the Fair Credit Reporting Act ("FCRA"). While it
is too early to know its full impact, implementation of the CCPA and its related
requirements could increase costs or otherwise adversely affect our business in
the California market.
Another California bill, AB 1202, was signed into law on October 11, 2019 and
came into effect January 1, 2020 . This new law requires "data brokers" that
collect and sell personal information of consumers with whom they do not have a
direct relationship and that are not exempted under the FCRP or the GLBA to
register with the California Attorney General's office.
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 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. We also record
revenues related to the sale of customer applications to unrelated third
parties. These applications are sold with the customer's consent in the event
that we or our CSO lenders are unable to offer the customer a loan. Revenue is
recognized at the time of the sale. 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.
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. 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.
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 consolidated financial statements. If a loan
is deemed to be uncollectible before it is fully reserved, it is charged-off at
that time.
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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 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.
Liability for estimated losses on credit service organization loans
Under the CSO program, we guarantee the repayment of a customer's loan to the
CSO lenders as part of the credit services we provide to the customer. A
customer who obtains a loan through the CSO program pays us a fee for the credit
services, including the guaranty, and enters into a contract with the CSO
lenders governing the credit services arrangement. We estimate a liability for
losses associated with the guaranty provided to the CSO lenders using
assumptions and methodologies similar to the allowance for loan losses, which we
recognize for our consumer loans.
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. We perform an impairment review of goodwill and intangible assets with an indefinite life annually atOctober 1 and between annual tests if we determine that an event has occurred or circumstances changed in a way that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Such a determination may be based on our consideration of macro-economic and other factors and trends, such as current and projected financial performance, interest rates and access to capital. We completed our annual test and determined that there was no evidence of impairment of goodwill or indefinite lived intangible assets. No events or circumstances occurredbetween October 1 and December 31, 2019 that would more likely than not reduce the fair value of the reporting units below the carrying amount. Our 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 our 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. We completed our 2019 annual test and determined that there was no evidence of impairment of goodwill for the two reporting units that have goodwill. Although no goodwill impairment was noted, there can be no assurances that future goodwill impairments will not occur. 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. 105 -------------------------------------------------------------------------------- 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. We have no recorded liabilities for US uncertain tax positions atDecember 31, 2019 and 2018. Tax periods from fiscal years 2014 to 2018 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 toMay 1, 2014 , there are no other US federal or state tax years subject to examination. ForUK taxes, tax periods from fiscal years 2010 to 2019 remain open and subject to examination. We had an uncertain tax position atDecember 31, 2017 that was resolved and released during the year endedDecember 31, 2018 . There are no additionalUK uncertain tax positions atDecember 31, 2019 . OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "Act", or "Tax Reform") was enacted into law. The Act contains several changes to the US federal tax law including a reduction to the US federal corporate tax rate from 35% to 21%, an acceleration of the expensing of certain business assets, a reduction to the amount of executive pay that could qualify as a tax deduction, and the addition of a repatriation tax on any accumulated offshore earnings and profit. We recognized a one-time$12.5 million charge as ofDecember 31, 2017 due to the impact of the Tax Reform. This one-time charge was primarily the result of US GAAP requiring remeasurement of all US deferred income tax assets and liabilities for temporary differences from the previous tax rate of 35% to the new corporate tax rate of 21%. The Tax Reform also included a new "Mandatory Repatriation" that required a one-time tax on shareholders of Specific Foreign Corporations ("SFCs"). The one-time tax was imposed using the Subpart F rules to require US shareholders to include in income the pro rata share of their SFC's previously untaxed accumulated post 1986 deferred foreign income. Our SFC, ECI, had an accumulated earnings and profit ("E&P") deficit atDecember 31, 2017 , and therefore, we had no US impact from the new mandatory repatriation law. Additionally, tax reform included a new anti-deferral provision, similar to the subpart F provision, requiring a US shareholder ofControlled Foreign Corporation's ("CFC") to include in income annually its pro rata share of a CFC's "global intangible low-taxed income" ("GILTI"). Our SFC, ECI, qualifies as a CFC, and as such, requires a GILTI inclusion in the applicable tax year. ECI has a US tax year end ofNovember 30 . We have elected to treat GILTI as a period cost, and therefore, will recognize those taxes as expenses in the period incurred. Share-Based Compensation In accordance with applicable accounting standards, all share-based payments, consisting of stock options, and restricted stock units ("RSUs") issued to employees are 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). StartingJuly 2017 , 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. 106 -------------------------------------------------------------------------------- Derivative Financial Instruments OnJanuary 11, 2018 , we and ESPV each entered into one interest rate cap transaction with a counterparty to mitigate the floating rate interest risk on a portion of the debt underlying the Rise and Elastic portfolios, respectively, which matured onFebruary 1, 2019 . See Note 7-Notes Payable of our consolidated financial statements for additional information. The interest rate caps were designated as cash flow hedges against expected future cash flows attributable to future interest payments on debt facilities held by each entity. We initially reported the gains or losses related to the hedges as a component of Accumulated other comprehensive income in the Consolidated Balance Sheets in the period incurred and subsequently reclassified the interest rate caps' gains or losses to interest expense when the hedged expenses were recorded. We excluded the change in the time value of the interest rate caps in its assessment of their hedge effectiveness. We present the cash flows from cash flow hedges in the same category in the Consolidated Statements of Cash Flows as the category for the cash flows from the hedged items. The interest rate caps do not contain any credit risk related contingent features. Our hedging program is not designed for trading or speculative purposes. Our derivative financial instruments also included bifurcated embedded derivatives that were identified within the Convertible Term Notes recorded as assets or liabilities initially at fair value, and the changes in fair value at the end of each quarterly reporting period are included in earnings. Upon repayment of a portion of the Convertible Term Notes, approximately$2.0 million was released from the debt discount where the derivative was recorded into Interest expense. InJanuary 2018 , the Convertible Term Notes matured and became a portion of the 4th Tranche Term Note. Therefore, there is no bifurcated embedded derivatives as ofDecember 31, 2019 . 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. Recently Adopted Accounting Standards InJuly 2018 , the FASB issued Accounting Standards Update ("ASU") No. 2018-09, Codification Improvements ("ASU 2018-09"). The purpose of ASU 2018-09 is to clarify, correct errors in or make minor improvements to the Codification. Among other revisions, the amendments clarify that an entity should recognize excess tax benefits or tax deficiencies for share compensation expense that is taken on an entity's tax return in the period in which the amount of the deduction is determined. The Company has adopted all of the amendments of ASU 2018-09 as ofJanuary 1, 2019 on a modified retrospective basis. The adoption of ASU 2018-09 did not have a material impact on the Company's consolidated financial statements. InFebruary 2018 , the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). The purpose of ASU 2018-02 is to allow an entity to elect to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act from Accumulated other comprehensive income into Retained earnings. The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning afterDecember 15, 2018 , and for interim periods within those fiscal years. Early adoption is permitted. The Company adopted all amendments of ASU 2018-02 on a prospective basis as ofJanuary 1, 2018 and elected to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act from Accumulated other comprehensive income to Accumulated deficit. The amount of the reclassification for the year endedDecember 31, 2018 was$920 thousand . InAugust 2017 , the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815)-Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). The purpose of ASU 2017-12 is to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. In addition, ASU 2017-12 makes certain targeted improvements to simplify the application of the hedge accounting guidance. InApril 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 2017-12. ASU 2017-12 is effective for public companies for fiscal years beginning afterDecember 15, 2018 , and for interim periods within those fiscal years. Early adoption is permitted. The Company has adopted all of the amendments of ASU 2017-12 on a prospective basis as ofJanuary 1, 2018 . Since the Company did not have derivatives accounted for as hedges prior toDecember 31, 2017 , there was no cumulative-effect adjustment needed to Accumulated other comprehensive income (loss) and Accumulated deficit. The adoption of ASU 2017-12 did not have a material impact on the Company's consolidated financial statements. 107 -------------------------------------------------------------------------------- InFebruary 2016 , the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. ASU 2016-02 will require organizations that lease assets to recognize on the balance sheets the assets and liabilities for the rights and obligations created by those leases. InJuly 2018 , the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases ("ASU 2018-10"), which clarifies certain matters in the codification with the intention to correct unintended application of the guidance. Also inJuly 2018 , the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"), which provides entities with an additional (and optional) transition method whereby the entity applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, under the new transition method, an entity's reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with current US GAAP (Topic 840, Leases). ASU 2016-02, as amended, is effective for fiscal years beginning afterDecember 15, 2018 , including interim periods within those fiscal years. Early adoption is permitted. The Company elected to adopt the transition method in ASU 2018-11 by applying the practical expedient prospectively atJanuary 1, 2019 . The Company also elected to apply the optional practical expedient package to not reassess existing or expired contracts for lease components, lease classification or initial direct costs. The adoption of ASU 2016-02 onJanuary 1, 2019 , as amended, resulted in the recognition of approximately$11.5 million and$15.4 million additional right of use assets and liabilities for operating leases, respectively, but did not have a material impact on the Company's Consolidated Statements of Operations. Subsequent to initial adoption, the Company entered into additional leases for a total recognition in 2019 of$13.4 million and$17.6 million right of use assets and liabilities for operating leases, respectively. InJuly 2019 , the FASB issued Accounting Standards Update ("ASU") No. 2019-07, Codification Updates to SEC Sections ("ASU 2019-07"). The purpose of ASU 2019-07 is to amend variousSEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. Among other revisions, the amendments reduce duplication and clarify the inclusion of comprehensive income. The Company has adopted all of the amendments of ASU 2019-07 as ofJuly 2019 with no impact to the Company's consolidated financial statements. Accounting Standards to be Adopted in Future Periods InDecember 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 afterDecember 15, 2020 , and interim periods within those fiscal years. Early adoption is permitted. The Company is still assessing the potential impact of ASU 2019-12 on the Company's consolidated financial statements. InAugust 2018 , the FASB issued ASU No. 2018-15, Intangibles-Goodwill andOther-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 afterDecember 15, 2019 , and interim periods within those fiscal years. Early adoption is permitted. Entities have the option to apply the guidance in ASU 2018-15 prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company has elected to adopt prospectively as ofJanuary 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. The Company does not expect ASU 2018-15 to have a material impact on the Company's consolidated financial statements. InAugust 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 afterDecember 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 Company does not expect ASU 2018-13 to have a material impact on the Company's consolidated financial statements. 108
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InJanuary 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 afterDecember 15, 2019 . The Company does not expect ASU 2017-04 to have a material impact on the Company's consolidated financial statements. InJune 2016 , the FASB issued ASU No. 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. InApril 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 inNovember 2019 . ASU 2019-11 provides transition relief such as permitting entities an accounting policy election regarding existing Troubled Debt Restructurings ("TDRs") among other things. InMay 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. For public entities, ASU 2016-13 is effective for fiscal years beginning afterDecember 15, 2019 , including interim periods within those fiscal years. InNovember 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 afterDecember 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 the earlier of fiscal periods beginning afterDecember 15, 2022 . Under the currentSEC definitions, the Company meets the definition of an SRC as of the ASU 2019-10 issuance date and is adopting the deferral period for ASU 2016-13.
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