Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission file number 001-37680

395710763_elevatelogoa23.jpg
 ELEVATE CREDIT, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
 
 
46-4714474
State or Other Jurisdiction of
Incorporation or Organization
 
 
 
I.R.S. Employer Identification Number
 
 
 
 
 
4150 International Plaza, Suite 300
Fort Worth, Texas 76109
 
 
 
76109
Address of Principal Executive Offices
 
 
 
Zip Code
 
 
(817) 928-1500
 
 
Registrant’s Telephone Number, Including Area Code
 
 
 
 
 
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Yes
x
No
o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Non-accelerated filer
x
Accelerated filer
o
Smaller reporting company
o
Emerging growth company
x
 
 




1



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Outstanding at November 7, 2018
Common Shares, $0.0004 par value
 
43,197,206





2



TABLE OF CONTENTS
 
Part I - Financial Information
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
Part II - Other Information
 
Item 1.
 
Item 1A.
 
Item 6.





3



NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained throughout this Quarterly Report on Form 10-Q, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include information concerning our strategy, future operations, future financial position, future revenues, projected expenses, margins, prospects and plans and objectives of management. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “seek,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
our future financial performance, including our expectations regarding our revenue, cost of revenue, growth rate of revenue, cost of borrowing, credit losses, marketing costs, net charge-offs, gross profit or gross margin, operating expenses, operating margins, loans outstanding, credit quality, ability to generate cash flow and ability to achieve and maintain future profitability;
the availability of debt financing, funding sources and disruptions in credit markets;
our ability to meet anticipated cash operating expenses and capital expenditure requirements;
anticipated trends, growth rates, seasonal fluctuations and challenges in our business and in the markets in which we operate;
our ability to anticipate market needs and develop new and enhanced or differentiated products, services and mobile apps to meet those needs, and our ability to successfully monetize them;
our expectations with respect to trends in our average portfolio effective annual percentage rate;
our anticipated growth and growth strategies and our ability to effectively manage that growth;
our anticipated expansion of relationships with strategic partners;
customer demand for our product and our ability to rapidly grow our business in response to fluctuations in demand;
our ability to attract potential customers and retain existing customers and our cost of customer acquisition;
the ability of customers to repay loans;
interest rates and origination fees on loans;
the impact of competition in our industry and innovation by our competitors;
our ability to attract and retain necessary qualified directors, officers and employees to expand our operations;
our reliance on third-party service providers;
our access to the automated clearinghouse system;
the efficacy of our marketing efforts and relationships with marketing affiliates;
our anticipated direct marketing costs and spending;
the evolution of technology affecting our products, services and markets;
continued innovation of our analytics platform, including our expectation that we will implement new technology and credit models beginning in the fourth quarter of 2018, with full benefits realized by the second quarter of 2019;
our ability to prevent security breaches, disruption in service and comparable events that could compromise the personal and confidential information held in our data systems, reduce the attractiveness of the platform or adversely impact our ability to service loans;
our ability to detect and filter fraudulent or incorrect information provided to us by our customers or by third parties;
our ability to adequately protect our intellectual property;
our compliance with applicable local, state, federal and foreign laws;

4



the impact of increased claims by claims management companies (“CMCs”) on our business, our accrual amounts related to such claims, and our expectation that the Financial Conduct Authority, a regulator in the UK financial services industry, will begin regulating the CMCs in April 2019;
our compliance with, and the effects on our business and results of operations from, current or future applicable regulatory developments and regulations, including developments or changes from the Consumer Financial Protection Bureau ("CFPB") and developments or changes in state law such as recently passed legislation in Ohio regarding interest rate caps;
regulatory developments or scrutiny by agencies regulating our business or the businesses of our third-party partners;
public perception of our business and industry;
the anticipated effect on our business of litigation or regulatory proceedings to which we or our officers are a party;
the anticipated effect on our business of natural or man-made catastrophes;
the increased expenses and administrative workload associated with being a public company;
failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;
our liquidity and working capital requirements;
the estimates and estimate methodologies used in preparing our consolidated financial statements;
the utility of non-GAAP financial measures;
the future trading prices of our common stock and the impact of securities analysts’ reports on these prices;
our anticipated development and release of certain products and applications and changes to certain products;
our anticipated investing activity; and
trends anticipated to continue as our portfolio of loans matures.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

5

Elevate Credit, Inc. and Subsidiaries


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
 
September 30,
2018
 
December 31,
2017
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Cash and cash equivalents*
 
$
54,794

 
$
41,142

Restricted cash
 
1,593

 
1,595

Loans receivable, net of allowance for loan losses of $89,422 and $87,946, respectively*
 
542,976

 
524,619

Prepaid expenses and other assets*
 
13,217

 
10,306

Receivable from CSO lenders
 
17,846

 
22,811

Receivable from payment processors*
 
28,519

 
21,126

Deferred tax assets, net
 
21,499

 
23,545

Property and equipment, net
 
36,738

 
24,249

Goodwill
 
16,027

 
16,027

Intangible assets, net
 
1,856

 
2,123

Derivative assets at fair value (cost basis of $436 and $0, respectively)*
 
1,238

 

Total assets
 
$
736,303

 
$
687,543

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Accounts payable and accrued liabilities ($45 and $95 payable to Think Finance at September 30, 2018 and December 31, 2017, respectively)*
 
$
44,955

 
$
42,213

State and other taxes payable
 
696

 
884

Deferred revenue*
 
30,639

 
33,023

Notes payable, net*
 
548,960

 
513,295

Derivative liability
 

 
1,972

Total liabilities
 
625,250

 
591,387

COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 10)
 

 

STOCKHOLDERS’ EQUITY
 
 
 
 
Preferred stock; $0.0004 par value; 24,500,000 authorized shares; None issued and outstanding at September 30, 2018 and December 31, 2017.
 

 

Common stock; $0.0004 par value; 300,000,000 authorized shares; 43,191,526 and 42,165,524 issued and outstanding, respectively
 
17

 
17

Additional paid-in capital
 
180,610

 
174,090

Accumulated deficit
 
(70,657
)
 
(79,954
)
Accumulated other comprehensive income, net of tax benefit of $1,257 and $2,273, respectively*
 
1,083

 
2,003

Total stockholders’ equity
 
111,053

 
96,156

Total liabilities and stockholders’ equity
 
$
736,303

 
$
687,543

* These balances include certain assets and liabilities of a variable interest entity (“VIE”) that can only be used to settle the liabilities of that VIE. All assets of the Company are pledged as security for the Company’s outstanding debt, including debt held by the VIE. For further information regarding the assets and liabilities included in our consolidated accounts, see Note 4—Variable Interest Entity.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
6


Elevate Credit, Inc. and Subsidiaries


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands, except share and per share amounts)
2018
 
2017
 
2018
 
2017
Revenues
 
$
201,480

 
$
172,851

 
$
579,394

 
$
479,689

Cost of sales:
 
 
 
 
 
 
 
 
      Provision for loan losses
 
113,896

 
96,203

 
294,636

 
251,293

      Direct marketing costs
 
21,280

 
20,242

 
64,155

 
50,322

      Other cost of sales
 
7,997

 
5,834

 
20,892

 
14,367

Total cost of sales
 
143,173

 
122,279

 
379,683

 
315,982

Gross profit
 
58,307

 
50,572

 
199,711

 
163,707

Operating expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
24,380

 
19,502

 
70,187

 
60,854

Professional services
 
9,789

 
8,618

 
26,475

 
25,045

Selling and marketing
 
2,170

 
2,042

 
7,525

 
6,662

Occupancy and equipment
 
4,553

 
3,227

 
13,302

 
10,003

Depreciation and amortization
 
3,490

 
2,656

 
9,167

 
7,657

Other
 
1,233

 
1,085

 
4,018

 
3,095

Total operating expenses
 
45,615

 
37,130

 
130,674

 
113,316

Operating income
 
12,692

 
13,442

 
69,037

 
50,391

Other income (expense):
 
 
 
 
 
 
 
 
      Net interest expense
 
(19,810
)
 
(17,261
)
 
(58,286
)
 
(54,602
)
      Foreign currency transaction (loss) gain
 
(325
)
 
536

 
(800
)
 
2,820

      Non-operating gain (loss)
 

 
(106
)
 
(38
)
 
2,407

Total other expense
 
(20,135
)
 
(16,831
)
 
(59,124
)
 
(49,375
)
Income (loss) before taxes
 
(7,443
)
 
(3,389
)
 
9,913

 
1,016

Income tax expense (benefit)
 
(3,209
)
 
(3,979
)
 
1,536

 
(4,262
)
Net income (loss)
 
$
(4,234
)
 
$
590

 
$
8,377

 
$
5,278

 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
(0.10
)
 
$
0.01

 
$
0.20

 
$
0.17

Diluted earnings (loss) per share
 
$
(0.10
)
 
$
0.01

 
$
0.19

 
$
0.16

Basic weighted average shares outstanding
 
43,182,208

 
41,717,231

 
42,653,947

 
31,211,084

Diluted weighted average shares outstanding
 
43,182,208

 
43,158,515

 
44,354,376

 
32,660,537




The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
7

Elevate Credit, Inc. and Subsidiaries


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2018
 
2017
 
2018
 
2017
Net income (loss)
 
$
(4,234
)
 
$
590

 
$
8,377

 
$
5,278

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax of $0 for all periods
 
(305
)
 
676

 
(707
)
 
770

Reclassification of certain deferred tax effects
 

 

 
(920
)
 

Change in derivative valuation, net of tax of $67 and $0 for the three months ended 2018 and 2017, respectively, and $96 and $0 for the nine months ended 2018 and 2017, respectively
 
(384
)
 

 
707

 

Total other comprehensive income (loss), net of tax
 
(689
)
 
676

 
(920
)
 
770

Total comprehensive income (loss)
 
$
(4,923
)
 
$
1,266

 
$
7,457

 
$
6,048



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
8

Elevate Credit, Inc. and Subsidiaries


CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
For the periods ended September 30, 2018 and 2017
(Dollars in thousands except share amounts)
 
Preferred Stock
 
 
 
Common Stock
 
Series A
Convertible
Preferred
 
Series B
Convertible
Preferred
 
Additional
paid-in
capital
 
Accumu-lated
deficit
 
Accumulated
other
comprehensive
income
 
Total
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances at December 31, 2016
 

 

 
13,001,216

 
$
5

 
2,957,059

 
$
3

 
2,682,351

 
$
3

 
$
88,854

 
$
(76,385
)
 
$
1,087

 
$
13,567

Share-based compensation
 

 

 

 

 

 

 

 

 
4,436

 

 

 
4,436

Exercise of stock options
 

 

 
358,738

 

 

 

 

 

 
104

 

 

 
104

Tax benefit of equity issuance costs
 

 

 

 

 

 

 

 

 
(1,843
)
 

 

 
(1,843
)
Issuance of common stock net of deferred costs
 

 

 
14,285,000

 
6

 

 

 

 

 
80,188

 

 

 
80,194

Conversion of preferred shares
 

 

 
5,639,410

 
6

 
(2,957,059
)
 
(3
)
 
(2,682,351
)
 
(3
)
 

 

 

 

2.5-for-1 common stock split on converted preferred shares
 

 

 
8,459,109

 

 

 

 

 

 

 

 

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment net of tax expense of $0
 

 

 

 

 

 

 

 

 

 

 
770

 
770

Cumulative effect of change in accounting
 

 

 

 

 

 

 

 

 

 
3,347

 

 
3,347

Net income
 

 

 

 

 

 

 

 

 

 
5,278

 

 
5,278

Balances at September 30, 2017
 

 

 
41,743,473

 
$
17

 

 
$

 

 
$

 
$
171,739

 
$
(67,760
)
 
$
1,857

 
$
105,853

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2017
 

 

 
42,165,524

 
17

 

 

 

 

 
174,090

 
(79,954
)
 
2,003

 
96,156

Share-based compensation
 

 

 

 

 

 

 

 

 
6,005

 

 

 
6,005

Exercise of stock options
 

 

 
271,891

 

 

 

 

 

 
997

 

 

 
997

Vesting of restricted stock units
 

 

 
692,115

 

 

 

 

 

 
(216
)
 

 

 
(216
)
ESPP shares issued
 

 

 
61,996

 

 

 

 

 

 
408

 

 

 
408

Tax benefit of equity issuance costs
 

 

 

 

 

 

 

 

 
(674
)
 

 

 
(674
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment net of tax expense of $0
 

 

 

 

 

 

 

 

 

 

 
(707
)
 
(707
)
Change in derivative valuation net of tax expense of $96
 

 

 

 

 

 

 

 

 

 

 
707

 
707

Reclassification of certain deferred tax effects
 

 

 

 

 

 

 

 

 

 
920

 
(920
)
 

Net income
 

 

 

 

 

 

 

 

 

 
8,377

 

 
8,377

Balances at September 30, 2018
 

 

 
43,191,526

 
$
17

 

 
$

 

 
$

 
$
180,610

 
$
(70,657
)
 
$
1,083

 
$
111,053


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
9

Elevate Credit, Inc. and Subsidiaries


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Nine Months Ended September 30,
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
8,377

 
$
5,278

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,167

 
7,657

Provision for loan losses
294,636

 
251,293

Share-based compensation
6,005

 
4,436

Amortization of debt issuance costs
280

 
410

Amortization of loan premium
4,583

 
3,933

Amortization of convertible note discount
138

 
3,241

Amortization of derivative assets
931

 

Deferred income tax expense, net
1,276

 
(4,848
)
Unrealized gain from foreign currency transactions
800

 
(2,820
)
Non-operating (gain) loss
38

 
(2,407
)
Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other assets
(2,473
)
 
(1,941
)
Receivables from payment processors
(7,688
)
 
(3,584
)
Receivables from CSO lenders
5,176

 
(3,881
)
Interest receivable
(72,818
)
 
(60,870
)
State and other taxes payable
(162
)
 
(50
)
Deferred revenue
5,332

 
8,370

Accounts payable and accrued liabilities
3,552

 
5,411

Net cash provided by operating activities
257,150

 
209,628

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Loans receivable originated or participations purchased
(1,000,059
)
 
(837,047
)
Principal collections and recoveries on loans receivable
749,145

 
576,007

Participation premium paid
(4,740
)
 
(4,227
)
Purchases of property and equipment
(21,437
)
 
(12,503
)
Net cash used in investing activities
(277,091
)
 
(277,770
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
10

Elevate Credit, Inc. and Subsidiaries


 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2018
 
2017
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from notes payable
 
$
35,932

 
$
67,500

Payments of notes payable
 

 
(84,950
)
Cash paid for interest rate caps
 
(1,367
)
 

Settlement of derivative liability
 
(2,010
)
 

Payment of capital lease obligations
 

 
(21
)
Debt issuance costs paid
 
(25
)
 
(865
)
Equity issuance costs paid
 

 
(1,731
)
ESPP shares issued
 
408

 

Proceeds from issuance of common stock
 

 
86,699

Proceeds from stock option exercises
 
997

 
933

Taxes paid related to net share settlement of equity awards
 
(216
)
 
(422
)
Net cash provided by financing activities
 
33,719

 
67,143

Effect of exchange rates on cash
 
(128
)
 
753

Net increase in cash, cash equivalents and restricted cash
 
13,650

 
(246
)
 
 
 
 
 
Cash and cash equivalents, beginning of period
 
41,142

 
53,574

Restricted cash, beginning of period
 
1,595

 
1,785

Cash, cash equivalents and restricted cash, beginning of period
 
42,737

 
55,359

 
 
 
 
 
Cash and cash equivalents, end of period
 
54,794

 
53,473

Restricted cash, end of period
 
1,593

 
1,640

Cash, cash equivalents and restricted cash, end of period
 
$
56,387

 
$
55,113

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
56,818

 
$
51,340

Taxes paid
 
$
342

 
$
563

 
 
 
 
 
Non-cash activities:
 
 
 
 
CSO fees charged-off included in Deferred revenues and Loans receivable
 
$
7,716

 
$
8,027

Derivative debt discount on convertible term notes
 
$

 
$
2,517

Prepaid expenses accrued but not yet paid
 
$
582

 
$
937

Property and equipment accrued but not yet paid
 
$
209

 
$

Impact on deferred tax assets of adoption of ASU 2016-09
 
$

 
$
3,347

Impact on OCI and retained earnings of adoption of ASU 2018-02
 
$
920

 
$

Changes in fair value of interest rate caps
 
$
803

 
$

Deferred IPO costs included in Additional paid-in capital
 
$

 
$
6,708

Tax benefit of equity issuance costs included in Additional paid-in capital
 
$
674

 
$
1,843




The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
11

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three and nine months ended September 30, 2018 and 2017


NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING CHANGES

Business Operations
Elevate Credit, Inc. (the “Company”) is a Delaware corporation. The Company provides technology-driven, progressive online credit solutions to non-prime consumers. The Company uses advanced technology and proprietary risk analytics to provide more convenient and more responsible financial options to its customers, who are not well-served by either banks or legacy non-prime lenders. The Company currently offers unsecured online installment loans and lines of credit in the United States (the “US”) and the United Kingdom (the “UK”). The Company’s products, Rise, Elastic and Sunny, reflect its mission of “Good Today, Better Tomorrow” and provide customers with access to competitively priced credit and services while helping them build a brighter financial future with credit building and financial wellness features. In the UK, the Company directly offers unsecured installment loans via the internet through its wholly owned subsidiary, Elevate Credit International (UK), Limited, (“ECI”) under the brand name of Sunny.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of September 30, 2018 and for the three and nine month periods ended September 30, 2018 and 2017 include the accounts of the Company, its wholly owned subsidiaries and a variable interest entity ("VIE") where the Company is the primary beneficiary. See Note 4—Variable Interest Entities for more information. All significant intercompany transactions and accounts have been eliminated.
The unaudited condensed consolidated financial information included in this report has been prepared in accordance with accounting principles generally accepted in the US (“US GAAP”) for interim financial information and Article 10 of Regulation S-X and conform, as applicable, to general practices within the finance company industry. The principles for interim financial information do not require the inclusion of all the information and footnotes required by US GAAP for complete financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2017 in the Company's Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission ("SEC") on March 9, 2018. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. Our business is seasonal in nature so the results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year.
Initial Public Offering and Share-Based Compensation
On April 11, 2017, the Company completed its initial public offering (“IPO”) in which it issued and sold 12,400,000 shares of common stock at a price of $6.50 per share to the public. In connection with the closing, the underwriters exercised their option to purchase in full for an additional 1,860,000 shares. On April 6, 2017, the Company's stock began trading on the New York Stock Exchange ("NYSE") under the symbol “ELVT.” The aggregate net proceeds received by the Company from the IPO, net of underwriting discounts and commissions and estimated offering expenses, were approximately $80.2 million.
Immediately prior to the closing of the IPO, all then outstanding shares of the Company's convertible preferred stock were converted into 5,639,410 shares of common stock (or 14,098,519 shares of common stock after the 2.5 to 1 stock split described below). The related carrying value of shares of preferred stock, in the aggregate amount of approximately $6 thousand, was reclassified as common stock. Additionally, the Company amended and restated its certificate of incorporation, effective April 11, 2017 to, among other things, change the authorized number of shares of common stock to 300,000,000 and the authorized number of shares of preferred stock to 24,500,000, each with a par value of $0.0004 per share.
Stock options granted to certain employees vest upon the satisfaction of the earlier of either a service condition or a liquidity condition. The service condition for these awards is generally satisfied over four years. The liquidity condition is satisfied upon the occurrence of a qualifying event, defined as the completion of the IPO, which occurred on April 11, 2017. The satisfaction of this vesting condition accelerated the expense attribution period for those stock options, and the Company recognized a cumulative share-based compensation expense for the portion of those stock options that met the liquidity condition.




12

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017



Stock Split
On December 11, 2015, the Board of Directors approved the ratio to effect a 2.5-for-1 forward stock split of the Company's common stock. The stock split became effective in connection with the completion of the Company’s IPO. The Company's IPO and resulting stock split had the following effect on the Company's equity as of September 30, 2018:
Convertible Preferred Stock: In April 2017, as a result of the IPO, all then outstanding shares of the Company's convertible preferred stock (5,639,410) were converted on a one-to-one basis without additional consideration into an aggregate of 5,639,410 shares of common stock and, thereafter, into 14,098,519 shares of common stock after the application of the 2.5-for-1 forward stock split.
Common Stock: The IPO and resulting stock split caused an adjustment to the par value for the common stock, from $0.001 per share to $0.0004 per share, and caused a two-and-a-half times increase in the number of authorized and outstanding shares of common stock. The number of shares of common stock and per share common stock data in the accompanying unaudited condensed consolidated financial statements and related notes have been retroactively adjusted to reflect a 2.5-for-1 forward stock split for all periods presented.
Share-Based Compensation: The IPO and resulting stock split decreased the exercise price for stock options by two-and-a-half times per share and reflected a two-and-a-half times increase in the number of stock options and restricted stock units ("RSUs") outstanding. The number of stock options and RSUs and per share common stock data in the accompanying unaudited condensed consolidated financial statements and related notes have been adjusted to reflect a 2.5-for-1 forward stock split for all periods presented.

Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant items subject to such estimates and assumptions include the valuation of the allowance for loan losses, goodwill, long-lived and intangible assets, deferred revenues, contingencies, the fair value of derivatives, the income tax provision, valuation of share-based compensation and the valuation allowance against deferred tax assets. The Company bases its estimates on historical experience, current data and assumptions that are believed to be reasonable. Actual results in future periods could differ from those estimates.
Property and Equipment, net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. The following table summarizes the components of net property and equipment.
(Dollars in thousands)
 
September 30, 2018

 
December 31, 2017

Property and equipment, gross
 
$
89,886

 
$
69,927

Accumulated depreciation and amortization
 
(53,148
)
 
(45,678
)
Property and equipment, net
 
$
36,738

 
$
24,249

Equity Issuance Costs
Costs incurred related to the Company's IPO were deferred and included in Prepaid expenses and other assets in the unaudited condensed consolidated financial statements and were charged against the gross proceeds of the IPO (i.e., charged against Additional paid-in capital in the accompanying unaudited condensed consolidated financial statements) as of the closing of the IPO on April 11, 2017. The balance of these equity issuance costs that were recorded against Additional paid-in capital in the unaudited Condensed Consolidated Balance Sheet at September 30, 2017 was approximately $6.7 million.




13

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


Interest Rate Caps
The Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging ("ASC 815"). On January 11, 2018, the Company entered into two interest rate cap transactions with a counterparty to mitigate the floating rate interest risk on a portion of the debt underlying the Rise and Elastic portfolios. See Note 5—Notes Payable for additional information. The interest rate caps are designated as cash flow hedges against expected future cash flows attributable to future interest payments on debt facilities held by each entity. The Company initially reports the gains or losses related to the hedges as a component of Accumulated other comprehensive income in the Condensed Consolidated Balance Sheets in the period incurred and subsequently reclassifies the interest rate caps’ gains or losses to interest expense when the hedged expenses are recorded. The Company excludes the change in the time value of the interest rate caps in its assessment of their hedge effectiveness. The Company presents the cash flows from cash flow hedges in the same category in the Condensed 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. The Company’s hedging program is not designed for trading or speculative purposes.
For additional information related to derivative instruments, see Note 8—Fair Value Measurements.

Recently Adopted Accounting Standards
In March 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05"). The purpose of ASU 2018-05 is to incorporate the guidance pronounced through Staff Accounting Bulletin No. 118 ("SAB 118"). The Company has adopted all of the amendments of ASU 2018-05 on a prospective basis as of January 1, 2018. The adoption of ASU 2018-05 did not have a material impact on the Company's condensed consolidated financial statements.
In February 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 after December 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 of January 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 three and nine months ended September 30, 2018 was $0 and $920 thousand, respectively.
In August 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. This guidance is effective for public companies for fiscal years beginning after December 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 of January 1, 2018. Since the Company did not have derivatives accounted for as hedges prior to December 31, 2017, there was no cumulative-effect adjustment needed to Accumulated other comprehensive income and Accumulated deficit. The adoption of ASU 2017-12 did not have a material impact on the Company's condensed consolidated financial statements.




14

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). The purpose of ASU 2017-09 is to provide clarity and reduce both the diversity in practice and the cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award. Under this new guidance, an entity should account for the effects of a modification unless all of the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted all amendments of ASU 2017-09 on a prospective basis as of January 1, 2018. The adoption of ASU 2017-09 did not have a material impact on the Company's financial condition, results of operations or cash flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash a consensus of the FASB Emerging Issues Task Force ("ASU 2016-18"). The purpose of ASU 2016-18 is to reduce diversity in practice related to the classification and presentation of changes in restricted cash on the statement of cash flows. Under this new guidance, the statement of cash flows during the reporting period must explain the change in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for public entities for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years. The Company adopted all amendments of ASU 2016-18 on a retrospective basis as of January 1, 2018. Upon adoption, the Company included any restricted cash balances as part of cash and cash equivalents in its Condensed Consolidated Statements of Cash Flows and did not present the change in restricted cash balances as a separate line item under investing activities. The amount of the reclassification for the nine months ended September 30, 2018 and 2017 was immaterial for both periods.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 is intended to reduce diversity in practice for certain cash receipts and cash payments that are presented and classified in the statement of cash flows. For public entities, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted all amendments of ASU 2016-15 on a prospective basis as of January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on the Company's condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date ("ASU 2015-14"), which defers the effective date of this guidance by one year, to the annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. A reporting entity may choose to early adopt the guidance as of the original effective date. In April 2016, the FASB issued ASU 2016-10, Revenues from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ("ASU 2016-10"), which clarifies the guidance related to identifying performance obligations and licensing implementation. The Company adopted all amendments of ASU 2016-10 using the alternative transition method, which requires the application of the guidance only to contracts that are uncompleted on the date of initial application. As a result of the scope exception for financial contracts, the Company's management determined that there are no material changes to the nature, extent or timing of revenues and expenses; additionally, the adoption of ASU 2014-09 did not have a significant impact to pretax income upon adoption as of September 30, 2018.




15

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017



Accounting Standards to be Adopted in Future Periods
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The purpose of ASU 2018-15 is to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is still assessing the potential impact of ASU 2018-15 on the Company's condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The purpose of ASU 2018-13 is to modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This guidance is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and requires both a prospective and retrospective approach to adoption based on amendment specifications. Early adoption of any removed or modified disclosures is permitted. Additional disclosures may be delayed until their effective date. The Company does not expect ASU 2018-13 to have a material impact on the Company's condensed consolidated financial statements.
In July 2018, the FASB issued 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. This portion of the guidance is effective for public companies for fiscal years beginning after December 15, 2018 and requires a modified retrospective approach to adoption. The Company does not expect ASU 2018-09 to have a material impact on the Company's condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). The purpose of ASU 2017-04 is to simplify the subsequent measurement of goodwill. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This guidance is effective for public companies for goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is still assessing the potential impact of ASU 2017-04 on the Company's condensed consolidated financial statements.
In June 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. For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is still assessing the potential impact of ASU 2016-13 on the Company's condensed consolidated financial statements. The internal financial controls processes in place for the Company's loan loss reserve process are expected to be impacted. The Company expects to complete its analysis of the impact in 2018.




16

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


In February 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 sheet the assets and liabilities for the rights and obligations created by those leases. In July 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 in July 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 after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company expects to adopt the transition method in ASU 2018-11 by applying the practical expedient prospectively and by using the retrospective approach at the beginning of the period of adoption through cumulative-effect adjustment. The Company is still assessing the potential impact of ASU 2016-02 on the Company's condensed consolidated financial statements. The Company is progressing as planned for implementation on January 1, 2019. The Company expects adoption of the standard to result in the recognition of significant additional right of use assets and liabilities for operating leases, but to not have a material impact on the Condensed Consolidated Statements of Operations.




17

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


NOTE 2 - EARNINGS PER SHARE

In April 2017, the Company effected a 2.5-for-1 forward stock split of its common stock in connection with the completion of the IPO, which has been retroactively applied to previously reported share and earnings per share amounts. 
Basic earnings per share ("EPS") is computed by dividing net income (loss) by the weighted average number of common shares outstanding ("WASO") during each period. Also, basic EPS includes any fully vested stock and unit awards that have not yet been issued as common stock. There are no unissued fully vested stock and unit awards at September 30, 2018 and 2017.

Diluted EPS is computed by dividing net income (loss) by the WASO during each period plus any unvested stock option awards granted, vested unexercised stock options and unvested RSUs using the treasury stock method but only to the extent that these instruments dilute earnings per share.
The computation of earnings (loss) per share was as follows for three and nine months ended September 30, 2018 and 2017:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands, except share and per share amounts)
 
2018
 
2017
 
2018
 
2017
Numerator (basic):
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(4,234
)
 
$
590

 
$
8,377

 
$
5,278

 
 
 
 
 
 
 
 
 
Numerator (diluted):
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(4,234
)
 
$
590

 
$
8,377

 
$
5,278

 
 
 
 
 
 
 
 
 
Denominator (basic):
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
43,182,208

 
41,717,231

 
42,653,947

 
31,211,084

 
 
 
 
 
 
 
 
 
Denominator (diluted):
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
43,182,208

 
41,717,231

 
42,653,947

 
31,211,084

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
 
Employee share plans (options, RSUs and ESPP)
 

 
1,441,284

 
1,700,429

 
1,449,453

Diluted weighted average number of shares outstanding
 
43,182,208

 
43,158,515

 
44,354,376

 
32,660,537

 
 
 
 
 
 
 
 
 
Basic and diluted earnings per share:
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
(0.10
)
 
$
0.01

 
$
0.20

 
$
0.17

Diluted earnings (loss) per share
 
$
(0.10
)
 
$
0.01

 
$
0.19

 
$
0.16


For the three months ended September 30, 2018 and 2017, the Company excluded the following potential common shares from its diluted earnings per share calculation because including these shares would be anti-dilutive:
2,323,839 and 777,275 common shares issuable upon exercise of the Company's stock options; and
3,360,382 and 27,057 common shares issuable upon vesting of the Company's RSUs.

For the nine months ended September 30, 2018 and 2017, the Company excluded the following potential common shares from its diluted earnings per share calculation because including these shares would be anti-dilutive:
131,859 and 420,324 common shares issuable upon exercise of the Company's stock options; and
699,318 and 1,196,858 common shares issuable upon vesting of the Company's RSUs.





18

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


ASC Topic 260, “Earnings Per Share” (“ASC Topic 260”) requires companies with participating securities to utilize a two-class method for the computation of net income per share attributable to the Company. The two-class method requires a portion of net income attributable to the Company to be allocated to participating securities. Net losses are not allocated to participating securities unless those securities are obligated to participate in losses. The Company did not have any participating securities for the three and nine month periods ended September 30, 2018 and 2017.
NOTE 3 - LOANS RECEIVABLE AND REVENUE
Revenues generated from the Company’s consumer loans for the three and nine months ended September 30, 2018 and 2017 were as follows:
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2018
 
2017
Finance charges
 
$
119,147

 
$
104,495

CSO fees
 
15,593

 
13,662

Lines of credit fees
 
65,676

 
52,261

Other
 
1,064

 
2,433

Total revenues
 
$
201,480

 
$
172,851


 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2018
 
2017
Finance charges
 
$
348,162

 
$
294,436

CSO fees
 
44,029

 
42,526

Lines of credit fees
 
183,877

 
137,841

Other
 
3,326

 
4,886

Total revenues
 
$
579,394

 
$
479,689


The Company's portfolio consists of both installment loans and lines of credit, which are considered the portfolio segments at September 30, 2018 and December 31, 2017. The following reflects the credit quality of the Company’s loans receivable as of September 30, 2018 and December 31, 2017 as delinquency status has been identified as the primary credit quality indicator. The Company classifies its loans as either current or past due. A customer in good standing may request a 16 day grace period when or before a payment becomes due and, if granted, the loan is considered current during the grace period. 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. All impaired loans that were not accounted for as a troubled debt restructuring ("TDR") as of September 30, 2018 and December 31, 2017 have been charged off.
 
 
September 30, 2018
(Dollars in thousands)
 
Rise and Sunny
 
Elastic
 
Total
Current loans
 
$
275,678

 
$
270,756

 
$
546,434

Past due loans
 
58,156

 
25,306

 
83,462

Total loans receivable
 
333,834

 
296,062

 
629,896

Net unamortized loan premium
 

 
2,502

 
2,502

Less: Allowance for loan losses
 
(54,888
)
 
(34,534
)
 
(89,422
)
Loans receivable, net
 
$
278,946

 
$
264,030

 
$
542,976





19

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


 
 
December 31, 2017
(Dollars in thousands)
 
Rise and Sunny
 
Elastic
 
Total
Current loans
 
$
298,964

 
$
237,797

 
$
536,761

Past due loans
 
52,379

 
21,076

 
73,455

Total loans receivable
 
351,343

 
258,873

 
610,216

Net unamortized loan premium
 

 
2,349

 
2,349

Less: Allowance for loan losses
 
(59,076
)
 
(28,870
)
 
(87,946
)
Loans receivable, net
 
$
292,267

 
$
232,352

 
$
524,619

Total loans receivable includes approximately $36.7 million and $36.6 million of interest receivable at September 30, 2018 and December 31, 2017, respectively. The carrying value for Loans receivable, net of the allowance for loan losses approximates the fair value due to the short-term nature of the loans receivable.
The changes in the allowance for loan losses for the three and nine months ended September 30, 2018 and 2017 are as follows:
 
 
 
Three Months Ended September 30, 2018
(Dollars in thousands)
 
Rise and Sunny
 
Elastic
 
Total
Balance beginning of period
 
$
51,137

 
$
29,394

 
$
80,531

Provision for loan losses
 
75,653

 
38,243

 
113,896

Charge-offs
 
(72,987
)
 
(35,832
)
 
(108,819
)
Recoveries of prior charge-offs
 
5,745

 
2,729

 
8,474

Effect of changes in foreign currency rates
 
(150
)
 

 
(150
)
Total
 
59,398

 
34,534

 
93,932

Accrual for CSO lender owned loans
 
(4,510
)
 

 
(4,510
)
Balance end of period
 
$
54,888

 
$
34,534

 
$
89,422


 
 
Three Months Ended September 30, 2017
(Dollars in thousands)
 
Rise and Sunny
 
Elastic
 
Total
Balance beginning of period
 
$
49,154

 
$
20,686

 
$
69,840

Provision for loan losses
 
64,396

 
31,807

 
96,203

Charge-offs
 
(61,837
)
 
(26,727
)
 
(88,564
)
Recoveries of prior charge-offs
 
6,296

 
2,036

 
8,332

Effect of changes in foreign currency rates
 
258

 

 
258

Total
 
58,267

 
27,802

 
86,069

Accrual for CSO lender owned loans
 
(5,097
)
 

 
(5,097
)
Balance end of period
 
$
53,170

 
$
27,802

 
$
80,972






20

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


 
 
Nine Months Ended September 30, 2018
(Dollars in thousands)
 
Rise and Sunny
 
Elastic
 
Total
Balance beginning of period
 
$
64,919

 
$
28,870

 
$
93,789

Provision for loan losses
 
197,694

 
96,942

 
294,636

Charge-offs
 
(220,181
)
 
(98,877
)
 
(319,058
)
Recoveries of prior charge-offs
 
17,316

 
7,599

 
24,915

Effect of changes in foreign currency rates
 
(350
)
 

 
(350
)
Total
 
59,398

 
34,534

 
93,932

Accrual for CSO lender owned loans
 
(4,510
)
 

 
(4,510
)
Balance end of period
 
$
54,888

 
$
34,534

 
$
89,422


 
 
Nine Months Ended September 30, 2017
(Dollars in thousands)
 
Rise and Sunny
 
Elastic
 
Total
Balance beginning of period
 
$
62,987

 
$
19,389

 
$
82,376

Provision for loan losses
 
174,250

 
77,043

 
251,293

Charge-offs
 
(197,519
)
 
(74,022
)
 
(271,541
)
Recoveries of prior charge-offs
 
17,757

 
5,392

 
23,149

Effect of changes in foreign currency rates
 
792

 

 
792

Total
 
58,267

 
27,802

 
86,069

Accrual for CSO lender owned loans
 
(5,097
)
 

 
(5,097
)
Balance end of period
 
$
53,170

 
$
27,802

 
$
80,972



As of September 30, 2018 and December 31, 2017, respectively, estimated losses of approximately $4.5 million and $5.8 million for the CSO owned loans receivable guaranteed by the Company of approximately $41.4 million and $45.5 million, respectively, are initially recorded at fair value and are included in Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets.

Troubled Debt Restructurings
In certain circumstances, the Company modifies the terms of its finance receivables for borrowers experiencing financial difficulties. Modifications may include principal and interest forgiveness. A modification of finance receivable terms is considered a TDR if the Company grants a concession to a borrower for economic or legal reasons related to the borrower’s financial difficulties that would not otherwise have been considered. Management considers TDRs to include all installment and line of credit loans that were granted principal and interest forgiveness as a part of a loss mitigation strategy for Rise and Elastic that began in October 2017. Once a loan has been classified as a TDR, it is assessed for impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate considering all available evidence. There were no loans that were modified as TDRs prior to October 2017.





21

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


The following table summarizes the financial effects, excluding impacts related to credit loss allowance and impairment, of TDRs for the three and nine months ended September 30, 2018:

 
 
Three Months Ended 
 September 30, 2018
(Dollars in thousands)
 
Installment loans and lines of credit
Outstanding recorded investment before TDR
 
$
1,752

Outstanding recorded investment after TDR
 
1,437

Total principal and interest forgiveness included in charge-offs within the Allowance for loan losses
 
$
315


 
 
Nine Months Ended 
 September 30, 2018
(Dollars in thousands)
 
Installment loans and lines of credit
Outstanding recorded investment before TDR
 
$
6,850

Outstanding recorded investment after TDR
 
5,229

Total principal and interest forgiveness included in charge-offs within the Allowance for loan losses
 
$
1,621



A loan that has been classified as a TDR remains classified as a TDR until it is liquidated through payoff or charge-off. The table below presents the Company's average outstanding recorded investment and interest income recognized on TDR loans for the three and nine months ended September 30, 2018:

 
Three Months Ended 
 September 30, 2018
(Dollars in thousands)
Installment loans and lines of credit
Average outstanding recorded investment(1)
$
2,813

Interest income recognized
$
640

1. Simple average based on the number of days between the modification date
      and the earlier of the liquidation date or September 30, 2018.

 
Nine Months Ended 
 September 30, 2018
(Dollars in thousands)
Installment loans and lines of credit
Average outstanding recorded investment(1)
$
3,930

Interest income recognized
$
3,454

1. Simple average based on the number of days between the modification date
      and the earlier of the liquidation date or September 30, 2018.






22

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


The table below presents the Company's loans modified as TDRs as of September 30, 2018 and December 31, 2017:

 
 
Installment loans and lines of credit
(Dollars in thousands)
 
September 30, 2018
 
December 31, 2017
Current outstanding investment
 
$
960

 
$
2,661

Delinquent outstanding investment
 
1,795

 
2,445

Outstanding recorded investment
 
2,755

 
5,106

Less: Impairment
 
(538
)
 
(459
)
Outstanding recorded investment, net of impairment
 
$
2,217

 
$
4,647


A TDR is considered to have defaulted upon charge-off when it is over 60 days past due or earlier if deemed uncollectible. There were approximately $1.3 million and $8.4 million loan restructurings accounted for as TDRs that subsequently defaulted for the three and nine months ended September 30, 2018, respectively. The Company had commitments to lend additional funds of approximately $0.1 million to customers with available and unfunded lines of credit as of September 30, 2018.


NOTE 4—VARIABLE INTEREST ENTITIES

The Company is involved with four entities that are deemed to be a VIE: Elastic SPV, Ltd. and three Credit Services Organization ("CSO") lenders. Under ASC 810-10-15, Variable Interest Entities, a VIE is an entity that: (1) has an insufficient amount of equity investment at risk to permit the entity to finance its activities without additional subordinated financial support by other parties; (2) the equity investors are unable to make significant decisions about the entity’s activities through voting rights or similar rights; or (3) the equity investors do not have the obligation to absorb expected losses or the right to receive residual returns of the entity. The Company is required to consolidate a VIE if it is determined to be the primary beneficiary, that is, the enterprise has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the VIE. The Company evaluates its relationships with VIEs to determine whether it is the primary beneficiary of a VIE at the time it becomes involved with the entity and it re-evaluates that conclusion each reporting period.
Elastic SPV, Ltd.
On July 1, 2015, the Company entered into several agreements with a third-party lender and Elastic SPV, Ltd. (“ESPV”), an entity formed by third party investors for the purpose of purchasing loan participations from the third-party lender. Per the terms of the agreements, the Company provides customer acquisition services to generate loan applications submitted to the third-party lender. In addition, the Company licenses loan underwriting software and provides services to the third party lender to evaluate the credit quality of those loan applications in accordance with the third-party lender’s credit policies. ESPV accounts for the loan participations acquired in accordance with ASC 860-10-40, Transfers and Services, Derecognition, as the lines of credit acquired meet the criteria of a participation interest.
Once the third-party lender originates the loan, ESPV has the right, but not the obligation, to purchase a 90% interest in each Elastic line of credit. Victory Park Management, LLC (“VPC”) entered into an agreement (the "ESPV Facility") under which it loans ESPV all funds necessary up to a maximum borrowing amount to purchase such participation interests in exchange for a fixed return (see Note 5—Notes Payable—ESPV Facility). The Company entered into a separate credit default protection agreement with ESPV whereby the Company agreed to provide credit protection to the investors in ESPV against Elastic loan losses in return for a credit premium. The Company does not hold a direct ownership interest in ESPV, however, as a result of the credit default protection agreement, ESPV was determined to be a VIE and the Company qualifies as the primary beneficiary.




23

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


The following table summarizes the assets and liabilities of the VIE that are included within the Company’s Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017:
 
(Dollars in thousands)
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Cash and cash equivalents
$
14,377

 
$
14,928

Loans receivable, net of allowance for loan losses of $34,534 and $28,869, respectively
264,030

 
232,353

Prepaid expenses and other assets ($64 and $50, respectively, eliminates upon consolidation)
168

 
50

Derivative asset at fair value (cost basis of $206 and $0, respectively)
587

 

Receivable from payment processors
12,620

 
9,889

Total assets
$
291,782

 
$
257,220

LIABILITIES AND SHAREHOLDER’S EQUITY
 
 
 
Accounts payable and accrued liabilities ($5,305 and $7,606, respectively, eliminates upon consolidation)
$
15,713

 
$
13,922

Deferred revenue
5,572

 
4,363

Reserve deposit liability ($35,250 and $31,200, respectively, eliminates upon consolidation)
35,250

 
31,200

Notes payable, net
234,867

 
207,735

Accumulated other comprehensive income
380

 

Total liabilities and shareholder’s equity
$
291,782

 
$
257,220

CSO Lenders
The three CSO lenders are considered VIE's of the Company; however, the Company does not have any ownership interest in the CSO lenders, does not exercise control over them, and is not the primary beneficiary, and therefore, does not consolidate the CSO lenders’ results with its results.





24

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


NOTE 5—NOTES PAYABLE
The Company has two debt facilities with VPC. The Rise SPV, LLC ("RSPV," a subsidiary of the Company) credit facility (the "VPC Facility") and the ESPV Facility.
VPC Facility
The VPC Facility provides the following term notes:
A maximum borrowing amount of $350 million at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 11% used to fund the Rise loan portfolio (“US Term Note”). The blended interest rate on the outstanding balance at September 30, 2018 and December 31, 2017 was 12.75% and 12.64%, respectively. The Company entered into an interest rate cap on January 11, 2018 to mitigate the floating rate interest risk on the aggregate $240 million outstanding as of September 30, 2018. See Note 8—Fair Value Measurements.
A maximum borrowing amount of $48 million at a base rate (defined as the 3-month LIBOR) plus 14% used to fund the UK Sunny loan portfolio (“UK Term Note”) as of September 30, 2018. As of December 31, 2017, the maximum borrowing amount was $48 million bearing interest at a base rate (defined as the 3-month LIBOR) plus 16%. The blended interest rate at September 30, 2018 and December 31, 2017 was 16.32% and 17.64%, respectively.
A maximum borrowing amount of $35 million at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 13% (“4th Tranche Term Note”) as of September 30, 2018. As of December 31, 2017, the maximum borrowing amount was $25 million bearing interest at the greater of 18% or a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 17%. The blended interest rate at September 30, 2018 and December 31, 2017 was 15.32% and 18.64%, respectively.
A maximum borrowing amount of $0 and $10 million as of September 30, 2018 and December 31, 2017, respectively. As of December 31, 2017, the interest rate was the greater of 10% or a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 9% (“Convertible Term Notes”). The blended interest rate at December 31, 2017 was 10.64%.
As of January 30, 2018, the balance of the Convertible Term Notes was converted into the 4th Tranche Term Notes.

In August 2018, the maturity date of $75 million outstanding under the US Term Note, which previously had a maturity date of August 13, 2018, was automatically extended to February 1, 2021 per the terms of the agreement. As a result of this extension, all amounts outstanding under the US Term Note, the UK Term Note and the 4th Tranche Term Note have a maturity date of February 1, 2021. The Convertible Term Note had a maturity date of January 30, 2018 but became a part of the 4th Tranche Term Note on that date. There are no principal payments due or scheduled until the maturity date. All assets of the Company are pledged as collateral to secure the VPC Facility. The VPC Facility contains certain financial covenants that require, among other things, maintenance of minimum amounts and ratios of working capital; minimum amounts of tangible net worth; maximum ratio of indebtedness; and maximum ratios of charge-offs. The Company was in compliance with all covenants related to the VPC Facility as of September 30, 2018 and December 31, 2017.

2017 Convertible Term Notes

The Convertible Term Notes were convertible, at the lender's option, into common stock upon the completion of specific defined liquidity events including certain equity financings, certain mergers and acquisitions or the sale of substantially all of the Company's assets, or during the period from the receipt of notice of the anticipated commencement of a roadshow in connection with the Company's IPO until immediately prior to the effectiveness of the Registration Statement in connection with such IPO. The Convertible Term Notes were convertible into common stock at the market value (or a set discount to market value) of the shares on the date of conversion and since the Convertible Term Notes included a conversion option that continuously reset as the underlying stock price increased or decreased and provided a fixed value of common stock to the lender, it was considered share-settled debt. The Company did not elect and was not required to measure the Convertible Term Notes at fair value; as such, the Company measured the Convertible Term Notes at the accreted value, determined using the effective interest method. The conversion rights were not exercised, and the Convertible Term Notes became a part of the 4th Tranche Term Note on January 30, 2018.





25

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


The Convertible Term Notes contained embedded features that were required to be assessed as derivatives. The Company determined that two of the features it assessed were required to be bifurcated and accounted for under derivative accounting as follows: (i) An embedded redemption feature upon conversion into common shares of the Company's stock ("Share-Settlement Feature") that includes a provision for the adjustment to the conversion price to a price less than the transaction-date fair value price per share if the Company is a party to certain qualifying liquidity or equity financing transactions. The incremental undiscounted present value of the embedded redemption feature is $6.25 million. (ii) An embedded redemption feature that requires the Company to pay an amount up to $5 million ("Redemption Premium Feature") upon a cash redemption at maturity or upon a redemption caused by certain events of default.

These two embedded features have been accounted for together as a single compound derivative. The Company estimated the fair value of the compound derivative using a probability-weighted valuation scenario model. The assumptions included in the calculations are highly subjective and subject to interpretation. The fair value of the single compound derivative was recognized as principal draw-downs were made and in proportion to the amount of principal draw-downs to the maximum borrowing amount. The initial fair value of the single compound derivative is recognized and presented as a debt discount and a derivative liability. The debt discount is amortized using the effective interest method from the principal draw-down date(s) through the maturity date. The derivative liability is accounted for in the same manner as a freestanding derivative pursuant to ASC 815, with subsequent changes in fair value recorded in earnings each period.

During the period from the receipt of notice from the Company to VPC of the anticipated commencement of the roadshow in connection with its IPO until immediately prior to the effectiveness of the Registration Statement, VPC had the option to convert the Convertible Term Notes, in whole or in part, into that number of shares of the Company's common stock determined by the outstanding principal balance of and accrued, but unpaid, interest on the Convertible Term Notes divided by the product of (a) 0.8 multiplied by (b) the IPO price per share. VPC did not elect to exercise its right to convert; however, VPC purchased 2.3 million shares in the offering at the IPO price, and the Company used the proceeds from that purchase, approximately $14.9 million, to reduce an equivalent amount of indebtedness under the Convertible Term Notes. Accordingly, the Company released $2.0 million of the debt discount associated with this repayment into Net interest expense on the Condensed Consolidated Statements of Operations.

Additionally, upon the effectiveness of the Registration Statement, VPC's option to convert was terminated, and the Convertible Term Notes were no longer convertible in whole or in part into shares of the Company's common stock. Furthermore, VPC agreed to waive approximately $3 million of the Redemption Premium Feature associated with the $14.9 million of Convertible Term Notes the Company repaid. The remaining fair value of the derivative recognized by the Company at December 31, 2017 relates to the Redemption Premium Feature. See Note 8—Fair Value Measurements for additional information. The debt discount on the Convertible Term Notes was fully amortized and the exit premium under the Convertible Term Notes of $2.0 million was due and paid on January 30, 2018.

ESPV Facility

The ESPV Facility is used to purchase loan participations from a third-party lender and has a $250 million commitment amount. Interest is charged at 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. All of the tiered rates will decrease by 1% effective July 1, 2019. In August 2018, the maturity date of $49 million outstanding under the ESPV Facility, which previously had a maturity date of August 13, 2018, was automatically extended to July 1, 2021 per the terms of the agreement. As a result of this extension, all amounts outstanding under the ESPV Facility have a maturity date of July 1, 2021. The blended interest rate at September 30, 2018 and December 31, 2017 was 14.60% and 14.45%, respectively. The Company entered into an interest rate cap on January 11, 2018 to mitigate the floating rate interest risk on an aggregate $216 million outstanding as of September 30, 2018. See Note 8—Fair Value Measurements.




26

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


There are no principal payments due or scheduled until the respective maturity dates. All assets of the Company and ESPV are pledged as collateral to secure the ESPV Facility. The ESPV Facility contains financial covenants, including a borrowing base calculation and certain financial ratios. ESPV was in compliance with all covenants related to the ESPV Facility as of September 30, 2018 and December 31, 2017.

VPC and ESPV Facilities:
The outstanding balances of Notes payable, net of debt issuance costs, are as follows:
(Dollars in thousands)
 
September 30,
2018
 
December 31,
2017
US Term Note bearing interest at 3-month LIBOR +11%
 
$
240,000

 
$
240,000

UK Term Note bearing interest at 3-month LIBOR + 14% (2018) + 16% (2017)
 
39,481
 
31,210

4th Tranche Term Note bearing interest at 3-month LIBOR + 13% (2018) + 17% (2017)
 
35,050

 
25,000

Convertible Term Notes bearing interest at 3-month LIBOR + 9%
 

 
10,050

ESPV Term Note bearing interest at 3-month LIBOR + 12-13.5%
 
235,000

 
208,000

Debt discount and issuance costs
 
(571
)
 
(965
)
Total
 
$
548,960

 
$
513,295


The Company has evaluated the interest rates for its debt and believes they represent market rates based on the Company’s size, industry, operations and recent amendments. As a result, the carrying value for the debt approximates the fair value.
Future debt maturities as of September 30, 2018 are as follows:
Year (dollars in thousands)
September 30, 2018
Remainder of 2018
$

2019

2020

2021
549,531

2022

Total
$
549,531






27

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2018 and 2017


NOTE 6—GOODWILL AND INTANGIBLE ASSETS
The carrying value of goodwill at September 30, 2018 and December 31, 2017 was approximately $16 million. There were no changes to goodwill during the three and nine months ended September 30, 2018. Goodwill represents the excess purchase price over the estimated fair market value of the net assets acquired by the predecessor parent company, Think Finance, Inc. ("Think Finance") related to the Elastic and UK reporting units. Of the total goodwill balance, approximately $0.5 million is deductible for tax purposes.
The carrying value of acquired intangible assets as of September 30, 2018 is presented in the table below:
(Dollars in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Assets subject to amortization:
 
 
 
 
 
 
Acquired technology
 
$
946

 
(946
)
 
$

Non-compete
 
3,404

 
(2,228
)
 
1,176

Customers
 
126

 
(126
)
 

Assets not subject to amortization:
 
 
 
 
 
 
Domain names
 
680

 

 
680

Total
 
$
5,156

 
$
(3,300
)
 
$
1,856

The carrying value of acquired intangible assets as of December 31, 2017 is presented in the table below:
(Dollars in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Assets subject to amortization:
 
 
 
 
 
 
Acquired technology
 
$
946

 
$
(946
)
 
$

Non-compete
 
3,404

 
(1,961
)
 
1,443

Customers
 
126

 
(126
)
 

Assets not subject to amortization:
 
 
 
 
 
 
Domain names