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Section 1: 10-Q (10-Q)

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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, 2019
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

400909182_elevatelogoa42.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 and post 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
o
Accelerated filer
x
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

Securities registered pursuant to Section 12(b) of the Act.
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, $0.0004 par value
ELVT
New York Stock Exchange

Indicate 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 6, 2019
Common Shares, $0.0004 par value
 
44,158,038





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 2.
 
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” and "Risk Factors." Forward-looking statements include information concerning our strategy, future operations, future financial position, future revenues, projected expenses, margins, prospects and plans and objectives of management. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “seek,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
our future financial performance, including our expectations regarding our revenue, cost of revenue, growth rate of revenue, cost of borrowing, credit losses, marketing costs, net charge-offs, gross profit or gross margin, operating expenses, operating margins, loans outstanding, credit quality, ability to generate cash flow and ability to achieve and maintain future profitability;
the 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, including banks;
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 clearing house system;
the efficacy of our marketing efforts and relationships with marketing affiliates;
our anticipated direct marketing costs and spending;
the evolution of technology affecting our products, services and markets;
continued innovation of our analytics platform, including releases of new credit models;
our ability to prevent security breaches, disruption in service and comparable events that could compromise the personal and confidential information held in our data systems, reduce the attractiveness of the platform or adversely impact our ability to service loans;
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



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

5

Elevate Credit, Inc. and Subsidiaries


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
 
September 30,
2019
 
December 31,
2018
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Cash and cash equivalents*
 
$
77,337

 
$
58,313

Restricted cash
 
2,290

 
2,591

Loans receivable, net of allowance for loan losses of $89,667 and $91,608, respectively*
 
555,424

 
561,694

Prepaid expenses and other assets*
 
11,702

 
11,418

Operating lease right of use assets
 
11,036

 

Receivable from CSO lenders
 
9,694

 
16,183

Receivable from payment processors*
 
21,079

 
21,716

Deferred tax assets, net
 
12,304

 
21,628

Property and equipment, net
 
48,937

 
41,579

Goodwill
 
16,027

 
16,027

Intangible assets, net
 
1,432

 
1,712

Derivative assets at fair value (cost basis of $0 and $109, respectively)*
 

 
412

Total assets
 
$
767,262

 
$
753,273

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Accounts payable and accrued liabilities (See Note 14)*
 
$
43,177

 
$
44,950

Operating lease liabilities
 
15,306

 

State and other taxes payable
 
719

 
681

Deferred revenue*
 
13,330

 
28,261

Notes payable, net*
 
549,028

 
562,590

Total liabilities
 
621,560

 
636,482

COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 12)
 

 

STOCKHOLDERS’ EQUITY
 
 
 
 
Preferred stock; $0.0004 par value; 24,500,000 authorized shares; None issued and outstanding at September 30, 2019 and December 31, 2018.
 

 

Common stock; $0.0004 par value; 300,000,000 authorized shares; 44,242,476 and 43,329,262 issued; 44,151,106 and 43,329,262 outstanding, respectively
 
18

 
18

Additional paid-in capital
 
189,783

 
183,244

Treasury stock; at cost; 91,370 and 0 shares of common stock, respectively
 
(434
)
 

Accumulated deficit
 
(42,631
)
 
(66,525
)
Accumulated other comprehensive income (loss), net of tax benefit of $1,353 and $1,257, respectively*
 
(1,034
)
 
54

Total stockholders’ equity
 
145,702

 
116,791

Total liabilities and stockholders’ equity
 
$
767,262

 
$
753,273


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

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


Elevate Credit, Inc. and Subsidiaries


CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(Dollars in thousands, except share and per share amounts)
2019
 
2018
 
2019
 
2018
Revenues
 
$
192,778

 
$
201,480

 
$
560,042

 
$
579,394

Cost of sales:
 
 
 
 
 
 
 
 
      Provision for loan losses
 
101,047

 
113,896

 
266,503

 
294,636

      Direct marketing costs
 
13,821

 
21,280

 
41,169

 
64,155

      Other cost of sales
 
7,459

 
7,997

 
21,081

 
20,892

Total cost of sales
 
122,327

 
143,173

 
328,753

 
379,683

Gross profit
 
70,451

 
58,307

 
231,289

 
199,711

Operating expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
26,953

 
24,380

 
78,301

 
70,187

Professional services
 
8,715

 
9,789

 
27,274

 
26,475

Selling and marketing
 
1,794

 
2,170

 
5,845

 
7,525

Occupancy and equipment (See Note 14)
 
5,054

 
4,553

 
15,285

 
13,302

Depreciation and amortization
 
4,350

 
3,490

 
12,940

 
9,167

Other
 
1,252

 
1,233

 
4,269

 
4,018

Total operating expenses
 
48,118

 
45,615

 
143,914

 
130,674

Operating income
 
22,333

 
12,692

 
87,375

 
69,037

Other expense:
 
 
 
 
 
 
 
 
      Net interest expense (See Note 14)
 
(14,660
)
 
(19,810
)
 
(51,826
)
 
(58,286
)
      Foreign currency transaction loss
 
(870
)
 
(325
)
 
(967
)
 
(800
)
      Non-operating loss
 
(695
)
 

 
(695
)
 
(38
)
Total other expense
 
(16,225
)
 
(20,135
)
 
(53,488
)
 
(59,124
)
Income (loss) before taxes
 
6,108

 
(7,443
)
 
33,887

 
9,913

Income tax expense (benefit)
 
1,344

 
(3,209
)
 
9,993

 
1,536

Net income (loss)
 
$
4,764

 
$
(4,234
)
 
$
23,894

 
$
8,377

 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.11

 
$
(0.10
)
 
$
0.55

 
$
0.20

Diluted earnings (loss) per share
 
$
0.11

 
$
(0.10
)
 
$
0.54

 
$
0.19

Basic weighted average shares outstanding
 
44,169,964

 
43,182,208

 
43,736,458

 
42,653,947

Diluted weighted average shares outstanding
 
44,743,944

 
43,182,208

 
44,320,427

 
44,354,376




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,
2019
 
2018
 
2019
 
2018
Net income (loss)
 
$
4,764

 
$
(4,234
)
 
$
23,894

 
$
8,377

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax of $(1) and $0 for the three and nine months ended 2019 and 2018, respectively
 
821

 
(305
)
 
(880
)
 
(707
)
Reclassification of certain deferred tax effects
 

 

 

 
(920
)
Change in derivative valuation, net of tax of $0 and $67 for the three months ended 2019 and 2018, respectively, and $(95) and $96 for the nine months ended 2019 and 2018, respectively
 

 
(384
)
 
(208
)
 
707

Total other comprehensive income (loss), net of tax
 
821

 
(689
)
 
(1,088
)
 
(920
)
Total comprehensive income (loss)
 
$
5,585

 
$
(4,923
)
 
$
22,806

 
$
7,457



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, 2019 and 2018
(Dollars in thousands except share amounts)
 
Preferred Stock
 
 
 
Common Stock
 
Additional
paid-in
capital
 
Treasury Stock
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income (loss)
 
Total
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Balances at December 31, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2018
 

 

 
43,329,262

 
18

 
183,244

 

 

 
(66,525
)
 
54

 
116,791

Share-based compensation
 

 

 

 

 
7,272

 

 

 

 

 
7,272

Exercise of stock options
 

 

 
37,500

 

 
121

 

 

 

 

 
121

Vesting of restricted stock units
 

 

 
733,447

 

 
(1,350
)
 

 

 

 

 
(1,350
)
ESPP shares issued
 

 

 
142,267

 

 
498

 

 

 

 

 
498

Tax benefit of equity issuance costs
 

 

 

 

 
(2
)
 

 

 

 

 
(2
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment net of tax benefit of $1
 

 

 

 

 

 

 

 

 
(880
)
 
(880
)
Change in derivative valuation net of tax benefit of $95
 

 

 

 

 

 

 

 

 
(208
)
 
(208
)
Treasury stock acquired
 

 

 
(91,370
)
 

 

 
91,370

 
(434
)
 

 

 
(434
)
Net income
 

 

 

 

 

 

 

 
23,894

 

 
23,894

Balances at September 30, 2019
 

 

 
44,151,106

 
$
18

 
$
189,783

 
91,370

 
$
(434
)
 
$
(42,631
)
 
$
(1,034
)
 
$
145,702


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,
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
23,894

 
$
8,377

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,940

 
9,167

Provision for loan losses
266,503

 
294,636

Share-based compensation
7,272

 
6,005

Amortization of debt issuance costs
460

 
280

Amortization of loan premium
4,454

 
4,583

Amortization of convertible note discount

 
138

Amortization of derivative assets
108

 
931

Amortization of operating leases
113

 

Deferred income tax expense, net
9,418

 
1,276

Unrealized loss from foreign currency transactions
967

 
800

Non-operating loss
695

 
38

Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other assets
(437
)
 
(2,473
)
Receivables from payment processors
503

 
(7,688
)
Receivables from CSO lenders
6,489

 
5,176

Interest receivable
(59,248
)
 
(72,818
)
State and other taxes payable
62

 
(162
)
Deferred revenue
(10,670
)
 
5,332

Accounts payable and accrued liabilities
5,582

 
3,552

Net cash provided by operating activities
269,105

 
257,150

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Loans receivable originated or participations purchased
(957,971
)
 
(1,000,059
)
Principal collections and recoveries on loans receivable
748,963

 
749,145

Participation premium paid
(4,530
)
 
(4,740
)
Purchases of property and equipment
(20,712
)
 
(21,437
)
Net cash used in investing activities
(234,250
)
 
(277,091
)

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)
 
2019
 
2018
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from notes payable
 
$
49,000

 
$
35,932

Payments of notes payable
 
(60,000
)
 

Cash paid for interest rate caps
 

 
(1,367
)
Settlement of derivative liability
 

 
(2,010
)
Debt issuance costs paid
 
(2,597
)
 
(25
)
Debt prepayment costs paid
 
(850
)
 

ESPP shares issued
 
498

 
408

Common stock repurchased
 
(434
)
 

Proceeds from stock option exercises
 
121

 
997

Taxes paid related to net share settlement of equity awards
 
(1,349
)
 
(216
)
Net cash (used in) provided by financing activities
 
(15,611
)
 
33,719

Effect of exchange rates on cash
 
(521
)
 
(128
)
Net increase in cash, cash equivalents and restricted cash
 
18,723

 
13,650

 
 
 
 
 
Cash and cash equivalents, beginning of period
 
58,313

 
41,142

Restricted cash, beginning of period
 
2,591

 
1,595

Cash, cash equivalents and restricted cash, beginning of period
 
60,904

 
42,737

 
 
 
 
 
Cash and cash equivalents, end of period
 
77,337

 
54,794

Restricted cash, end of period
 
2,290

 
1,593

Cash, cash equivalents and restricted cash, end of period
 
$
79,627

 
$
56,387

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
53,378

 
$
56,818

Taxes paid
 
$
565

 
$
342

 
 
 
 
 
Non-cash activities:
 
 
 
 
CSO fees charged-off included in Deferred revenues and Loans receivable
 
$
4,174

 
$
7,716

CSO fees on loans paid-off prior to maturity included in Receivable from CSO lenders and Deferred revenue
 
$
159

 
$
137

Annual membership fee included in Deferred revenues and Loans receivable
 
$
72

 
$

Prepaid expenses accrued but not yet paid
 
$

 
$
582

Property and equipment accrued but not yet paid
 
$

 
$
209

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

 
$
920

Changes in fair value of interest rate caps
 
$
304

 
$
803

Tax benefit of equity issuance costs included in Additional paid-in capital
 
$
2

 
$
674

Impact of deferred tax asset included in Other comprehensive income (loss)
 
$
96

 
$

Leasehold improvements allowance included in Property and equipment, net
 
$
439

 
$

Lease incentives allowance included in Accounts payable and accrued liabilities
 
$
3,720

 
$

Operating lease right of use assets recognized
 
$
13,399

 
$

Operating lease liabilities recognized
 
$
17,556

 
$




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, 2019 and 2018


NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING CHANGES

Business Operations
Elevate Credit, Inc. (the “Company”) is a Delaware corporation. The Company provides technology-driven, progressive online credit solutions to non-prime consumers. The Company uses advanced technology and proprietary risk analytics to provide more convenient and more responsible financial options to its customers, who are not well-served by either banks or legacy non-prime lenders. The Company currently offers unsecured online installment loans, lines of credit and credit cards in the United States (the “US”) and the United Kingdom (the “UK”). The Company’s products, Rise, Elastic, Today Card 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, 2019 and for the three and nine month periods ended September 30, 2019 and 2018 include the accounts of the Company, its wholly owned subsidiaries and variable interest entities ("VIEs") where the Company is the primary beneficiary. All significant intercompany transactions and accounts have been eliminated.
The unaudited condensed consolidated financial information included in this report has been prepared in accordance with accounting principles generally accepted in the US (“US GAAP”) for interim financial information and Article 10 of Regulation S-X and conform, as applicable, to general practices within the finance company industry. The principles for interim financial information do not require the inclusion of all the information and footnotes required by US GAAP for complete financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2018 in the Company's Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission ("SEC") on March 8, 2019. 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, 2019 are not necessarily indicative of the results to be expected for the full year.
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, operating lease right of use assets, operating lease liabilities and the valuation allowance against deferred tax assets. The Company bases its estimates on historical experience, current data and assumptions that are believed to be reasonable. Actual results in future periods could differ from those estimates.




12

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


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, 2019
 
December 31, 2018
Property and equipment, gross
 
$
118,076

 
$
98,357

Accumulated depreciation and amortization
 
(69,139
)
 
(56,778
)
Property and equipment, net
 
$
48,937

 
$
41,579


Interest Rate Caps
The Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. On January 11, 2018, the Company 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. The interest rate caps matured on February 1, 2019. 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. The Company initially reported the gains or losses related to the hedges as a component of Accumulated other comprehensive income (loss) in the Condensed 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. The Company excluded the change in the time value of the interest rate caps in its assessment of their hedge effectiveness. The Company presented 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 did 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 9—Fair Value Measurements.

Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease right of use (“ROU”) assets and Operating lease liabilities on our Condensed Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The operating lease ROU asset may also include initial direct costs incurred and excludes any lease payments made and lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components. The lease and non-lease components are accounted for as a single lease component.

Treasury Stock
The Company evaluates each stock repurchase transaction in the period in which it is completed. If the repurchase transaction is significantly in excess of the current market price at purchase, the Company will identify whether the price paid included payment for other agreements, rights, and privileges. Repurchase transactions that do not contain these elements, or are not significantly in excess of the current market price at purchase are accounted for using the cost method. The Company anticipates using its treasury stock to fulfill certain employee stock compensation grants and settlements. The Company has elected to use a first in, first out ("FIFO") method for assigning share cost at reissuance. Any gain or loss in the stock value will be credited or charged to paid in capital upon subsequent reissuance of the shares, with losses in excess of previously recognized gains charged to retained earnings. The Company is not obligated to purchase or reissue any shares at any time in accordance with its previously disclosed share repurchase plan.




13

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


Recently Adopted Accounting Standards
In July 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 of January 1, 2019 on a modified retrospective basis. The adoption of ASU 2018-09 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 (loss) 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 (loss) to Accumulated deficit. The amount of the reclassification for the nine months ended September 30, 2018 was $920 thousand.
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. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments ("ASU 2019-04"). This amendment clarifies the guidance in ASU 2017-12. ASU 2017-12 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 (loss) and Accumulated deficit. The adoption of ASU 2017-12 did not have a material impact on the Company's condensed consolidated financial statements.
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 elected to adopt the transition method in ASU 2018-11 by applying the practical expedient prospectively at January 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, 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 condensed consolidated income statements.
In July 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 various SEC 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 of July 2019 with no impact to 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, 2019 and 2018


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 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. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments ("ASU 2019-04"). This amendment clarifies the guidance in ASU 2016-13. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief ("ASU 2019-05"). The purpose of this amendment is to provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments-Overall, on an instrument-by-instrument basis. Election of this option is intended to increase comparability of financial statement information and reduce costs for certain entities to comply with ASU 2016-13. For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In August 2019, the FASB issued a draft proposed ASU for comment that would grant certain classes of companies, including Smaller Reporting Companies ("SRCs"), additional time to implement major FASB standards, including ASU 2016-13. The proposed standard was approved on October 18, 2019 (with the final ASU to be issued in November 2019) and SRCs are permitted to defer adoption of ASU 2016-13, and its related amendments, until the earlier of fiscal periods beginning after December 15, 2022 or the Company no longer qualifies as an SRC. Under the current SEC definitions, the Company expects to meet the definition of an SRC as of the proposed ASU's issuance date and is considering the adoption of the deferral period for ASU 2016-13.
Management has continued its implementation efforts, and would be ready to adopt ASU 2016-13 as of January 1, 2020 if it elects not to defer adoption of the standard. As of September 30, 2019, the Company has built, reviewed, and back-tested the inputs and models used in calculating the reserve under ASU 2016-13. In the fourth quarter, management plans to continue to refine and run the models in parallel with the existing reserve methodology. If the Company adopts ASU 2016-13 on January 1, 2020, the Company would expect an overall increase to its reserves approximately equal to its cumulative loss rates.





15

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


NOTE 2 - EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income (loss) by the weighted average number of common shares outstanding ("WASO") during each period. Also, basic EPS includes any fully vested stock and unit awards that have not yet been issued as common stock. There are no unissued fully vested stock and unit awards at September 30, 2019 and 2018.

Diluted EPS is computed by dividing net income (loss) by the WASO during each period plus any unvested stock option awards granted, vested unexercised stock options and unvested restricted stock units ("RSUs") using the treasury stock method but only to the extent that these instruments dilute earnings per share.
The computation of earnings (loss) per share was as follows for three and nine months ended September 30, 2019 and 2018:
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(Dollars in thousands, except share and per share amounts)
 
2019
 
2018
 
2019
 
2018
Numerator (basic):
 
 
 
 
 
 
 
 
Net income (loss)
 
$
4,764

 
$
(4,234
)
 
$
23,894

 
$
8,377

 
 
 
 
 
 
 
 
 
Numerator (diluted):
 
 
 
 
 
 
 
 
Net income (loss)
 
$
4,764

 
$
(4,234
)
 
$
23,894

 
$
8,377

 
 
 
 
 
 
 
 
 
Denominator (basic):
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
44,169,964

 
43,182,208

 
43,736,458

 
42,653,947

 
 
 
 
 
 
 
 
 
Denominator (diluted):
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
44,169,964

 
43,182,208

 
43,736,458

 
42,653,947

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
 
Employee share plans (options, RSUs and ESPP)
 
573,980

 

 
583,969

 
1,700,429

Diluted weighted average number of shares outstanding
 
44,743,944

 
43,182,208

 
44,320,427

 
44,354,376

 
 
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.11

 
$
(0.10
)
 
$
0.55

 
$
0.20

Diluted earnings (loss) per share
 
$
0.11

 
$
(0.10
)
 
$
0.54

 
$
0.19


For the three months ended September 30, 2019 and 2018, the Company excluded the following potential common shares from its diluted earnings per share calculation because including these shares would be anti-dilutive:
1,428,046 and 2,323,839 common shares issuable upon exercise of the Company's stock options; and
2,268,439 and 3,360,382 common shares issuable upon vesting of the Company's RSUs.

For the nine months ended September 30, 2019 and 2018, the Company excluded the following potential common shares from its diluted earnings per share calculation because including these shares would be anti-dilutive:
1,441,952 and 131,859 common shares issuable upon exercise of the Company's stock options; and
3,393,374 and 699,318 common shares issuable upon vesting of the Company's RSUs.

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, 2019 and 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, 2019 and 2018


NOTE 3 - LOANS RECEIVABLE AND REVENUE
Revenues generated from the Company’s consumer loans for the three and nine months ended September 30, 2019 and 2018 were as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Finance charges
 
$
120,922

 
$
119,147

 
$
339,092

 
$
348,162

CSO fees
 
8,939

 
15,593

 
32,739

 
44,029

Lines of credit fees
 
62,173

 
65,676

 
186,223

 
183,877

Other
 
744

 
1,064

 
1,988

 
3,326

Total revenues
 
$
192,778

 
$
201,480

 
$
560,042

 
$
579,394


The Company's portfolio consists of both installment loans and lines of credit, which are considered the portfolio segments for all periods presented. The Rise product is primarily installment loans in the US with lines of credit offered in two states. The Sunny product is an installment loan product offered in the UK. The Elastic product is a line of credit product in the US. In November of 2018, the Company expanded a test launch of the Today Card, a credit card product offered in the US. Balances and activity for the Today Card as of and for the nine months ended September 30, 2019 were not material.
The following reflects the credit quality of the Company’s loans receivable as of September 30, 2019 and December 31, 2018 as delinquency status has been identified as the primary credit quality indicator. The Company classifies its loans as either current or past due. A customer in good standing may request up to a 16-day grace period when or before a payment becomes due and, if granted, the loan is considered current during the grace period. Installment loans, lines of credit and credit cards 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, 2019 and December 31, 2018 have been charged off.
 
 
September 30, 2019
(Dollars in thousands)
 
Rise and Sunny
 
Elastic(1)
 
Total
Current loans
 
$
320,335

 
$
244,460

 
$
564,795

Past due loans
 
54,228

 
23,595

 
77,823

Total loans receivable
 
374,563

 
268,055

 
642,618

Net unamortized loan premium
 
420

 
2,053

 
2,473

Less: Allowance for loan losses
 
(57,662
)
 
(32,005
)
 
(89,667
)
Loans receivable, net
 
$
317,321

 
$
238,103

 
$
555,424

 
 
December 31, 2018
(Dollars in thousands)
 
Rise and Sunny
 
Elastic(1)
 
Total
Current loans
 
$
296,339

 
$
273,217

 
$
569,556

Past due loans
 
53,491

 
27,778

 
81,269

Total loans receivable
 
349,830

 
300,995

 
650,825

Net unamortized loan premium
 
54

 
2,423

 
2,477

Less: Allowance for loan losses
 
(55,557
)
 
(36,051
)
 
(91,608
)
Loans receivable, net
 
$
294,327

 
$
267,367

 
$
561,694

(1) Includes immaterial balances related to the Today Card, which expanded its test launch in November 2018.




17

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


Total loans receivable includes approximately $9.9 million and $7.4 million of loans in a non-accrual status at September 30, 2019 and December 31, 2018, respectively. The previously reported non-accrual loan balance as of December 31, 2018 excluded certain non-accrual loans that amounted to $2.7 million. The omission of these amounts only impacted the footnote disclosure and not the reported balances on the balance sheet and statement of operations, the Company does not believe this omission has a material impact on the previously reported balances in the consolidated financial statements as of December 31, 2018.
Additionally, total loans receivable includes approximately $35.7 million and $41.6 million of interest receivable at September 30, 2019 and December 31, 2018, 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, 2019 and 2018 are as follows:
 
 
 
Three Months Ended September 30, 2019
(Dollars in thousands)
 
Rise and Sunny
 
Elastic(1)
 
Total
Balance beginning of period
 
$
51,400

 
$
26,479

 
$
77,879

Provision for loan losses
 
67,635

 
33,412

 
101,047

Charge-offs
 
(64,125
)
 
(30,162
)
 
(94,287
)
Recoveries of prior charge-offs
 
5,016

 
2,276

 
7,292

Effect of changes in foreign currency rates
 
(292
)
 

 
(292
)
Total
 
59,634

 
32,005

 
91,639

Accrual for CSO lender owned loans
 
(1,972
)
 

 
(1,972
)
Balance end of period
 
$
57,662

 
$
32,005

 
$
89,667


 
 
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


 
 
Nine Months Ended September 30, 2019
(Dollars in thousands)
 
Rise and Sunny
 
Elastic(1)
 
Total
Balance beginning of period
 
$
60,002

 
$
36,050

 
$
96,052

Provision for loan losses
 
178,261

 
88,242

 
266,503

Charge-offs
 
(194,583
)
 
(100,173
)
 
(294,756
)
Recoveries of prior charge-offs
 
16,281

 
7,886

 
24,167

Effect of changes in foreign currency rates
 
(327
)
 

 
(327
)
Total
 
59,634

 
32,005

 
91,639

Accrual for CSO lender owned loans
 
(1,972
)
 

 
(1,972
)
Balance end of period
 
$
57,662

 
$
32,005

 
$
89,667

(1) Includes immaterial balances related to the Today Card, which expanded its test launch in November 2018.




18

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018



 
 
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



As of September 30, 2019 and December 31, 2018, estimated losses of approximately $2.0 million and $4.4 million for the CSO owned loans receivable guaranteed by the Company of approximately $20.9 million and $39.8 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/or interest forgiveness. A modification of finance receivable terms is considered a TDR if the Company grants a concession to a borrower for economic or legal reasons related to the borrower’s financial difficulties that would not otherwise have been considered. Management considers TDRs to include all installment and line of credit loans that were granted principal and interest forgiveness as a part of a loss mitigation strategy for Rise, Elastic and Sunny. Once a loan has been classified as a TDR, it is assessed for impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate considering all available evidence.

The following table summarizes the financial effects, excluding impacts related to credit loss allowance and impairment, of TDRs for the three and nine months ended September 30, 2019 and 2018:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Outstanding recorded investment before TDR
 
$
12,256

 
$
1,752

 
$
33,020

 
$
6,850

Outstanding recorded investment after TDR
 
11,809

 
1,437

 
31,140

 
5,229

Total principal and interest forgiveness included in charge-offs within the Allowance for loan losses
 
$
447

 
$
315

 
$
1,880

 
$
1,621







19

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


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, 2019 and 2018:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Average outstanding recorded investment(1)
 
$
15,703

 
$
2,813

 
$
15,384

 
$
3,930

Interest income recognized
 
$
2,643

 
$
640

 
$
7,438

 
$
3,454

1. Simple average as of September 30, 2019 and 2018, respectively.

The table below presents the Company's loans modified as TDRs as of September 30, 2019 and December 31, 2018:

(Dollars in thousands)
 
2019
 
2018
Current outstanding investment
 
$
10,529

 
$
7,627

Delinquent outstanding investment
 
7,081

 
5,531

Outstanding recorded investment
 
17,610

 
13,158

Less: Impairment
 
(4,542
)
 
(969
)
Outstanding recorded investment, net of impairment
 
$
13,068

 
$
12,189


A TDR is considered to have defaulted upon charge-off when it is over 60 days past due or earlier if deemed uncollectible. There were loan restructurings accounted for as TDRs that subsequently defaulted of approximately $5.7 million and $1.3 million for the three months ended September 30, 2019 and 2018, respectively, and $16.4 million and $8.4 million for the nine months ended September 30, 2019 and 2018, respectively. The Company had commitments to lend additional funds of approximately $1.8 million to customers with available and unfunded lines of credit as of September 30, 2019.






20

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


NOTE 4—VARIABLE INTEREST ENTITIES

The Company is involved with five entities that are deemed to be a VIE: Elastic SPV, Ltd., EF 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.




21

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


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, 2019 and December 31, 2018:
 
(Dollars in thousands)
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
21,236

 
$
18,723

Loans receivable, net of allowance for loan losses of $30,901 and $36,019, respectively
 
234,392

 
266,725

Prepaid expenses and other assets ($0 and $64, respectively, eliminates upon consolidation)
 
3

 
251

Derivative asset at fair value (cost basis of $0 and $51, respectively)
 

 
195

Receivable from payment processors
 
10,949

 
12,212

Total assets
 
$
266,580

 
$
298,106

LIABILITIES AND SHAREHOLDER’S EQUITY
 
 
 
 
Accounts payable and accrued liabilities ($7,414 and $9,372, respectively, eliminates upon consolidation)
 
$
15,225

 
$
17,923

Deferred revenue
 
4,564

 
5,293

Reserve deposit liability ($23,150 and $35,850, respectively, eliminates upon consolidation)
 
23,150

 
35,850

Notes payable, net
 
223,641

 
238,896

Accumulated other comprehensive income
 

 
144

Total liabilities and shareholder’s equity
 
$
266,580

 
$
298,106


EF SPV, Ltd.
On October 15, 2018, the Company entered into several agreements with a third-party lender and EF SPV, Ltd. (“EF SPV”), an entity formed by third-party investors for the purpose of purchasing loan participations from the third-party lender. Per the terms of the agreements, the Company provides customer acquisition services to generate loan applications submitted to the third-party lender. In addition, the Company licenses loan underwriting software and provides services to the third-party lender to evaluate the credit quality of those loan applications in accordance with the third-party lender’s credit policies. EF SPV accounts for the loan participations acquired in accordance with ASC 860-10-40, Transfers and Services, Derecognition, as the installment loans acquired meet the criteria of a participation interest.
Once the third-party lender originates the loan, EF SPV has the right, but not the obligation, to purchase an interest in each Rise bank originated installment loan. Prior to August 1, 2019, FinWise Bank retained 5% of the balances and sold a 95% participation to 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%. VPC lends EF SPV all funds necessary up to a maximum borrowing amount to purchase such participation interests in exchange for a fixed return (see Note 5—Notes Payable—EF SPV Facility). The Company entered into a separate credit default protection agreement with EF SPV whereby the Company agreed to provide credit protection to the investors in EF SPV against Rise bank originated loan losses in return for a credit premium. The Company does not hold a direct ownership interest in EF SPV, however, as a result of the credit default protection agreement, EF SPV was determined to be a VIE and the Company qualifies as the primary beneficiary.




22

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


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, 2019 and December 31, 2018:

(Dollars in thousands)
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
10,501

 
$
8,185

Loans receivable, net of allowance for loan losses of $17,662 and $3,388, respectively
 
87,235

 
25,484

Prepaid expenses and other assets ($31 and $0, respectively, eliminates upon consolidation)
 
31

 

Receivable from payment processors ($0 and $101 eliminates upon consolidation)
 
1,072

 
285

Total assets
 
$
98,839

 
$
33,954

LIABILITIES AND SHAREHOLDER’S EQUITY
 
 
 
 
Accounts payable and accrued liabilities ($1,745 and $905, respectively, eliminates upon consolidation)
 
$
2,913

 
$
1,332

Reserve deposit liability ($8,950 and $4,650, respectively, eliminates upon consolidation)
 
8,950

 
4,650

Notes payable, net
 
86,976

 
27,972

Total liabilities and shareholder’s equity
 
$
98,839

 
$
33,954


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.





23

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


NOTE 5—NOTES PAYABLE, NET
The Company has three debt facilities with VPC. The Rise SPV, LLC credit facility (the "VPC Facility"), the EF SPV Facility, and the ESPV Facility. The facilities were modified effective February 1, 2019 to the following terms.
VPC Facility
The VPC Facility is primarily used to fund the Rise and Sunny loan portfolio with a subordinated debt component used for general corporate purposes. It provides the following term notes:
A maximum borrowing amount of $350 million used to fund the Rise loan portfolio (“US Term Note”). Prior to the February 1, 2019 amendment, 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. Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%). 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 September 30, 2019 was 2.73% and the overall interest rate was 10.23%.
A maximum borrowing amount of $123 million used to fund the UK Sunny loan portfolio (“UK Term Note”). Prior to the February 1, 2019 amendment, the interest rate paid on this facility was a base rate (defined as the 3-month LIBOR) plus 14%. This resulted in a blended interest rate paid of 16.74% on debt outstanding under this facility as of December 31, 2018. Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%). 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 September 30, 2019 was 2.73% and the overall interest rate was 10.23%.
A maximum borrowing amount of $18 million used to fund working capital, and prior to February 1, 2019, at a base rate (defined as the 3-month 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 September 30, 2019 and December 31, 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.
Revolving feature providing 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.

The 4th Tranche Term Note matures on February 1, 2021. The US Term Note and the UK Term Note both mature on January 1, 2024. There are no principal payments due or scheduled until the respective maturity dates. All assets of the Company are pledged as collateral to secure the VPC Facility. The VPC Facility contains certain covenants for the Company such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the VPC Facility as of September 30, 2019 and December 31, 2018.





24

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


EF SPV Facility

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 effective February 1, 2019, EF SPV was a borrower on the US Term Note under the VPC Facility and the interest rate paid on this facility was a base rate (defined as 3-month LIBOR, with a 1% floor) plus 11%. Upon the February 1, 2019 amendment date, $43 million was re-allocated into the EF SPV Facility and the interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%). 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 September 30, 2019 was 2.59% and the overall interest rate was 10.09%. The EF SPV Term Note has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.

The EF SPV Term Note matures on January 1, 2024. There are no principal payments due or scheduled until the maturity date. All assets of the Company and EF SPV are pledged as collateral to secure the EF SPV Facility. The EF SPV Facility contains certain covenants for the Company such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the EF SPV Facility as of September 30, 2019.

ESPV Facility

The ESPV Facility has a maximum borrowing amount of $350 million used to purchase loan participations from a third-party lender. Prior to the February 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 debt outstanding under this facility at December 31, 2018. Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed at 15.48% (base rate of 2.73% plus 12.75%). Effective July 1, 2019, the interest rate on the debt outstanding as of the amendment date was set at 10.23% (base rate of 2.73% plus 7.50%). All future borrowings under this facility after July 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 at September 30, 2019 was 2.72% and the overall interest rate was 10.22%. 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.
There are no principal payments due or scheduled until the maturity date. All assets of the Company and ESPV are pledged as collateral to secure the ESPV Facility. The ESPV Facility contains certain covenants for the Company such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the ESPV Facility as of September 30, 2019 and December 31, 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, 2019 and 2018


VPC, EF SPV and ESPV Facilities:
The outstanding balances of Notes payable, net of debt issuance costs, are as follows:
(Dollars in thousands)
 
September 30,
2019
 
December 31,
2018
US Term Note bearing interest at the base rate + 7.5% (2019) and 11% (2018)
 
$
182,000

 
$
250,000

UK Term Note bearing interest at the base rate + 7.5% (2019) + 14% (2018)
 
38,770

 
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%
 
87,000

 

ESPV Term Note bearing interest at the base rate + 7.5% (2019) and + 12-13.5% (2018)
 
226,000

 
239,000

Debt issuance costs
 
(2,792
)
 
(656
)
Total
 
$
549,028

 
$
562,590


The change in the facility balances includes the following:
US Term Note - $43 million re-allocation to new EF SPV facility and pay down of $25 million in the first quarter of 2019 under the revolver component of the facility;
4th Tranche Term Note - $17 million early repayment in the second quarter of 2019;
EF SPV Term note - $43 million re-allocation from US Term Note in the first quarter of 2019 and additional draws of $10 million, $17 million and $17 million in the first, second and third quarters of 2019, respectively; and
ESPV Term Note - Pay-down of $18 million in the first quarter of 2019 under the revolver component of the facility and an additional draw of $5 million in the third quarter of 2019.

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 (through January 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 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, 2019 are as follows:
Year (dollars in thousands)
September 30, 2019
Remainder of 2019
$

2020

2021
18,050

2022

2023

Thereafter
533,770

Total
$
551,820






26

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2019 and 2018


NOTE 6—GOODWILL AND INTANGIBLE ASSETS
The carrying value of goodwill at September 30, 2019 and December 31, 2018 was approximately $16 million. There were no changes to goodwill during the three and nine months ended September 30, 2019. 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 $0.4 million is deductible for tax purposes.
The carrying value of acquired intangible assets as of September 30, 2019 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

 
(2,652
)
 
752

Customers
 
126

 
(126
)
 

Assets not subject to amortization:
 
 
 
 
 
 
Domain names
 
680

 

 
680

Total
 
$
5,156

 
$
(3,724
)
 
$
1,432

The carrying value of acquired intangible assets as of December 31, 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

 
(2,372
)
 
1,032

Customers
 
126