ELEVATE CREDIT, INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
business, our results of operations and our financial condition. The MD&A is
provided as a supplement to, and should be read in conjunction with our
unaudited condensed consolidated financial statements and the related notes and
other financial information included elsewhere in this Quarterly Report on Form
10-Q.
Some of the information contained in this discussion and analysis, including
information with respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties. You should
review the "Note About Forward-Looking Statements" section of this Quarterly
Report on Form 10-Q for a discussion of important factors that could cause
actual results to differ materially from the results described in or implied by
the forward-looking statements contained in the following discussion and
analysis. We generally refer to loans, customers and other information and data
associated with each of our brands (Rise, Elastic and Today Card) as Elevate's
loans, customers, information and data, irrespective of whether Elevate directly
originates the credit to the customer or whether such credit is originated by a
third party.
OVERVIEW
We provide online credit solutions to consumers in the US who are not
well-served by traditional bank products and who are looking for better options
than payday loans, title loans, pawn and storefront installment loans. Non-prime
consumers now represent a larger market than prime consumers but are riskier to
underwrite and serve with traditional approaches. We're succeeding at it - and
doing it responsibly - with best-in-class advanced technology and proprietary
risk analytics honed by serving more than 2.8 million customers with $10.6
billion in credit. Our current online credit products, Rise, Elastic and Today
Card, reflect our mission to provide customers with access to competitively
priced credit and services while helping them build a brighter financial future
with credit building and financial wellness features. We call this mission "Good
Today, Better Tomorrow."
We earn revenues on the Rise installment loans, on the Rise and Elastic lines of
credit and on the Today Card credit card product. Our revenue primarily consists
of finance charges and line of credit fees. Finance charges are driven by our
average loan balances outstanding and by the average annual percentage rate
("APR") associated with those outstanding loan balances. We calculate our
average loan balances by taking a simple daily average of the ending loan
balances outstanding for each period. Line of credit fees are recognized when
they are assessed and recorded to revenue over the life of the loan. We present
certain key metrics and other information on a "combined" basis to reflect
information related to loans originated by us and by our bank partners that
license our brands, Republic Bank, FinWise Bank and Capital Community Bank
("CCB"), as well as loans originated by third-party lenders pursuant to CSO
programs, which loans originated through CSO programs are not recorded on our
balance sheet in accordance with US GAAP. See "-Key Financial and Operating
Metrics" and "-Non-GAAP Financial Measures."
We use our working capital and our credit facility with Victory Park Management,
LLC ("VPC" and the "VPC Facility") to fund the loans we directly make to our
Rise customers. The VPC Facility has a maximum total borrowing amount available
of $200 million at September 30, 2022 .
We also license our Rise installment loan brand to two banks. FinWise Bank
originates Rise installment loans in 17 states. This bank initially provides all
of the funding, retains 4% of the balances of all of the loans originated and
sells the remaining 96% loan participation in those Rise installment loans to a
third-party SPV, EF SPV, Ltd. ("EF SPV"). These loan participation purchases are
funded through a separate financing facility (the "EF SPV Facility"), and
through cash flows from operations generated by EF SPV. The EF SPV Facility has
a maximum total borrowing amount available of $250 million . We do not own EF
SPV, but we have a credit default protection agreement with EF SPV whereby we
provide credit protection to the investors in EF SPV against Rise loan losses in
return for a credit premium. As the primary beneficiary, Elevate is required to
consolidate EF SPV as a variable interest entity ("VIE") under US GAAP and the
condensed consolidated financial statements include revenue, losses and loans
receivable related to the 96% of the Rise installment loans originated by
FinWise Bank and sold to EF SPV.
43
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Since the third quarter of 2020, we have licensed our Rise installment loan
brand to an additional bank, CCB, which originates Rise installment loans in
three different states than FinWise Bank . Similar to the relationship with
FinWise Bank , CCB initially provides all of the funding, retains 5% of the
balances of all of the loans originated and sells the remaining 95% loan
participation in those Rise installment loans to a third-party SPV, EC SPV, Ltd.
("EC SPV"). These loan participation purchases are funded through a separate
financing facility (the "EC SPV Facility"), and through cash flows from
operations generated by EC SPV. The EC SPV Facility has a maximum total
borrowing amount available of $100 million . We do not own EC SPV, but we have a
credit default protection agreement with EC SPV whereby we provide credit
protection to the investors in EC SPV against Rise loan losses in return for a
credit premium. As the primary beneficiary, Elevate is required to consolidate
EC SPV as a VIE under US GAAP and the condensed consolidated financial
statements include revenue, losses and loans receivable related to the 95% of
the Rise installment loans originated by CCB and sold to EC SPV.
The Elastic line of credit product is originated by a third-party lender,
Republic Bank, which initially provides all of the funding for that product.
Republic Bank retains 10% of the balances of all loans originated and sells a
90% loan participation in the Elastic lines of credit. An SPV structure was
implemented such that the loan participations are sold by Republic Bank to
Elastic SPV, Ltd. ("Elastic SPV") and Elastic SPV receives its funding from VPC
in a separate financing facility (the "ESPV Facility"), which was finalized on
July 13, 2015 . We do not own Elastic SPV, but we have a credit default
protection agreement with Elastic SPV whereby we provide credit protection to
the investors in Elastic SPV against Elastic loan losses in return for a credit
premium. Per the terms of this agreement, under US GAAP, we are the primary
beneficiary of Elastic SPV and are required to consolidate the financial results
of Elastic SPV as a VIE in our condensed consolidated financial statements. The
ESPV Facility has a maximum total borrowing amount available of $350 million at
September 30, 2022 .
Today Card is a credit card product designed to meet the spending needs of
non-prime consumers by offering a prime customer experience. Today Card is
originated by CCB under the licensed MasterCard brand, and a 95% participation
interest in the credit card receivable is sold to us. These credit card
receivable purchases are funded through a separate financing facility (the "TSPV
Facility"), and through cash flows from operations generated by the Today Card
portfolio. The TSPV Facility has a maximum commitment amount of $50 million ,
which may be increased up to $100 million . As the lowest APR product in our
portfolio, Today Card allows us to serve a broader spectrum of non-prime
Americans. The Today Card experienced significant growth in its portfolio size
despite the pandemic due to the success of our direct mail campaigns, the
primary marketing channel for acquiring new Today Card customers. We are
following a specific growth plan to grow the product while monitoring customer
responses and credit quality. Customer response to the Today Card has been
strong, as we continue to see high response rates, high customer engagement, and
positive customer satisfaction scores.
In January 2022 , we collaborated with Central Pacific Bank ("CPB") to invest in
the launch of a new fintech company, Swell Financial, Inc. ("Swell"). The Swell
App includes several groundbreaking features to help customers automatically
control their spending, tackle debt, and invest in exclusive private market
opportunities with as little as $1 thousand . We will help CPB and Swell offer
the Swell Credit line of credit product with APRs between 8% and 24%. Our
current total investment carrying value in Swell, using equity method
accounting, is $4.8 million and we have a non-controlling interest in Swell.
Our management assesses our financial performance and future strategic goals through key metrics based primarily on the following three themes:
•Revenue growth. Key metrics related to revenue growth that we monitor by
product include the ending and average combined loan balances outstanding, the
effective APR of our product loan portfolios, the total dollar value of loans
originated, the number of new and former customer loans made, the ending number
of customer loans outstanding and the related customer acquisition costs ("CAC")
associated with each new customer loan made. We include CAC as a key metric when
analyzing revenue growth (rather than as a key metric within margin expansion).
•Stable credit quality. We work with our bank partners that originate loans on
our platform to address the appropriate credit risk for the revenues earned. Our
management team has extensive experience managing credit quality across loan
portfolios. With the adoption of fair value for the loans receivable portfolio
effective January 1, 2022 , the credit quality metrics we monitor include net
charge-offs as a percentage of revenues, change in fair value of loans
receivable as a percentage of revenues, the percentage of past due combined
loans receivable - principal and net principal charge-offs as a percentage of
average combined loans receivable-principal. Prior to our adoption of fair value
for the loans receivable portfolio effective January 1, 2022 , our credit quality
metrics also included the combined loan loss reserve as a percentage of
outstanding combined loans and total provision for loan losses as a percentage
of revenues. Under fair value accounting, a specific loan loss reserve is no
longer required to be recognized as a credit loss estimate is a key assumption
used in measuring fair value. See "-Non-GAAP Financial Measures" for further
information.
44-------------------------------------------------------------------------------- •Margin expansion. We aim to manage our business to achieve a long-term operating margin of 20%. In periods of significant loan portfolio growth, our margins may become compressed due to the upfront costs associated with marketing. Prior to our adoption of fair value for the loans receivable portfolio, we incurred upfront credit provisioning expense associated with loan portfolio growth. When applying fair value accounting, estimated credit loss is a key assumption within the fair value assumptions used each quarter and specific loan loss allowance is no longer required to be recognized. Long term, we anticipate that our direct marketing costs primarily associated with new customer acquisitions will be approximately 10% of revenues and our operating expenses will decline to 20% of revenues. While our operating margins may exceed 20% in certain years, such as in 2020 when we incurred lower levels of direct marketing expense and materially lower credit losses due to a lack of customer demand for loans resulting from the effects of COVID-19, we do not expect our operating margin to increase beyond that level over the long term, as we intend to pass on any improvements over our targeted margins to our customers in the form of lower APRs. We believe this is a critical component of our responsible lending platform and over time will also help us continue to attract new customers and retain existing customers.
Going Concern
We assess our ability to continue as a going concern each reporting period for
one year after the date the financial statements are issued. This assessment
evaluates whether relevant conditions and events, in the aggregate, raise
substantial doubt that we will meet future financial obligations as they become
due within one year. In accordance with Accounting Standards Codification
("ASC") Subtopic 205-40: Presentation of Financial Statements - Going Concern,
our initial evaluation does not consider potential mitigating effects of our
management's plans unless they have been fully implemented as of the date the
financial statements are issued.
As a result of the substantial inflationary pressures of the current
macroeconomic environment, we are experiencing higher charge-offs and limiting
loan portfolio growth, with both resulting in lower cash collections. We were in
compliance with the terms of our debt agreements, as amended, as of
September 30, 2022 , however, the reduced collections and higher macroeconomic
environment related charge-offs may result in non-compliance with debt
agreements in future periods. If such non-compliance is not waived by our
lenders, we are not able to obtain amendments or other relief, or we are
otherwise unable to obtain new or alternate methods of financing on acceptable
terms, such non-compliance can result in loss of ability to borrow under the
facilities and/or events of default. Absent the actions below that our
management is in the midst of executing, or has already executed, we concluded
that the uncertainty surrounding our future non-compliance with our debt
facilities, ability to negotiate some of our existing facilities, and maintain
sufficient liquidity raises substantial doubt about our ability to continue as a
going concern within one year of the issuance date of these financial
statements.
Effective August 31, 2022 , we have obtained amendments to our debt covenants to
lower certain covenant thresholds through December 31, 2022 . Furthermore, we
obtained an additional $5.0 million in sub debt to improve liquidity. Our
management is actively engaging with lenders to review and address debt covenant
compliance and liquidity position beyond December 31, 2022 as we forecast the
impacts of various scenarios associated with the current macroeconomic
environment.
We have implemented measures to assist customers with their payments and
additional verification procedures on new and returning originating customers.
We have also taken aggressive measures to reduce costs for the foreseeable
future by reducing operating expenses beginning in the third quarter of 2022. In
addition, our management and the Board of Directors are conducting a strategic
review process with the intention of maximizing shareholder value.
These steps have been taken, and others are under consideration, to help manage
our liquidity and preserve capital. Although our management believes that the
actions that have been implemented and the others that are planned will be
sufficient to meet its liquidity needs for the 12 months from the issuance of
these financial statements, substantial doubt about our ability to continue as a
going concern exists as we cannot predict with certainty that these efforts will
be successful or sufficient.
Strategic Review
On November 9, 2022 , we announced that our Board of Directors, along with our
management, had initiated a strategic review to consider other ways to achieve
maximum shareholder value. There can be no assurances regarding the outcome or
timing of the strategic review process.
45
--------------------------------------------------------------------------------Election of Fair Value Option
Prior toJanuary 1, 2022 , we carried our combined loans receivable portfolio at amortized cost, net of an allowance for estimated loan losses inherent in the combined loan portfolio. EffectiveJanuary 1, 2022 , we elected the fair value option to account for all our combined loan portfolio in conjunction with our early adoption of Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") and the related amendments. We believe the election of the fair value option better reflects the value of our portfolio and its future economic performance, as well as more closely aligns with our decision-making processes that rely on unit economics, corresponding with the discounted cash flow methodologies utilized in fair value accounting. Refer to Note 1 in the Notes to the Condensed Consolidated Financial Statements included in this report for discussion of the election and its impact on our accounting policies. In accordance with the transition guidance, onJanuary 1, 2022 , we released the allowance for loan losses and measured the combined loans receivable at fair value at adoption. The cumulative-effect adjustment, net of tax, was recognized collectively as a net increase of$98.6 million to opening Retained earnings. During the quarter endedSeptember 30, 2022 , we identified that the initial adjustment onJanuary 1, 2022 was overstated by$1.9 million related to the loan premiums associated with certain loans within the loan portfolio resulting in a net cumulative-effect adjustment to retained earnings of$96.7 million . In comparing our current period results under the fair value option to prior periods, it may be helpful to consider that loans receivable are carried at fair value with changes in fair value of loans receivable recorded in the Condensed Consolidated Statements of Operations. The fair value takes into consideration expected lifetime losses of the loans receivable, whereas the prior method incorporated only incurred losses recognized as an allowance for loan losses. As such, changes in credit quality, amongst other significant assumptions, typically have a more significant impact on the carrying value of the combined loans receivable portfolio under the fair value option. See "-Non-GAAP Financial Measures" for further information.
Macroeconomic Factors
During the second quarter of 2022, the broader market environment that had persisted since the second half of 2021 began to soften. The substantial inflation pressures that our economy continues to face have resulted in many challenges, most notably in the form of rising interest rates, softening of consumer demand, and increased labor costs. With theFederal Reserve prioritizing its mandate of price stability, it continues to take actions to reduce and stabilize inflation, increasing the potential recessionary risks posted by such actions. The inflation rate continues to be historically high, with the second quarter inflation rate at the highest in four decades. Our operations have been, and may continue to be adversely impacted by inflation, primarily from higher financing costs. Additionally, inflation has, and may continue to impact our customers' demand for additional debt and their ability to pay back their existing loans, impacting our revenue and charge-off rate. Although the current macroeconomic environment may have a significant adverse impact on our business, and while uncertainty exists, we continue to take appropriate actions to operate effectively through the present economic environment and expect to have a more cautious approach to portfolio growth through the remainder of 2022. In addition, during the third quarter of 2022, we implemented a cost reduction plan, including furloughing approximately 25% of our workforce, to lower compensation and professional service expense to mitigate the reduced revenue and higher credit losses resulting from the current macroeconomic environment. Impact of COVID-19 In 2020, we experienced a significant decline in the loan portfolio due to a lack of customer demand for loans resulting from the effects of COVID-19 and related government stimulus programs. These impacts resulted in a lower level of direct marketing expense and materially lower credit losses during 2020 and continuing into early 2021. Beginning in the second quarter of 2021, we experienced a return of demand for the loan products that we, and the bank originators we support, offer, resulting in significant growth in the loan portfolio from that point. This significant loan portfolio growth resulted in compressed margins in 2021 due to the upfront costs associated with marketing and credit provisioning expense related to growing and "rebuilding" the loan portfolio from the impacts of COVID-19. We implemented a hybrid remote environment where employees may choose to work primarily from the office or from home and gather collectively in the office on a limited basis. We sought to ensure our employees feel secure in their jobs, have flexibility in their work location and have the resources they need to stay safe and healthy. As a 100% online lending solutions provider, our technology and underwriting platform has continued to serve our customers and the bank originators that we support without any material interruption in services. We continue to monitor the sustained impacts of COVID-19 on our business, loan portfolio, customers and employees, and while uncertainty still exists, we believe we are well-positioned to operate effectively through any future impacts associated with COVID-19. 46
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KEY FINANCIAL AND OPERATING METRICS
As discussed above, we regularly monitor a number of metrics in order to measure
our current performance and project our future performance. These metrics aid us
in developing and refining our growth strategies and in making strategic
decisions.
Certain of our metrics are non-GAAP financial measures. We believe that such
metrics are useful in period-to-period comparisons of our core business.
However, non-GAAP financial measures are not an alternative to any measure of
financial performance calculated and presented in accordance with US GAAP. See
"-Non-GAAP Financial Measures" for a reconciliation of our non-GAAP measures to
US GAAP.
Revenues
As of and for the three months As of and for the nine months ended
ended September 30, September 30,
Revenue metrics (dollars in thousands, except as noted) 2022 2021 2022 2021
Revenues $ 125,617 $ 112,835 $ 367,467 $ 287,108
Period-over-period change in revenue 11 % 20 % 28 % (23) %
Ending combined loans receivable - principal(1) $ 545,818 $ 512,870 $ 545,818 $ 512,870
Average combined loans receivable - principal(1)(2) $ 541,128 $ 459,949 $ 529,085 $ 398,566
Total combined loans originated - principal $ 248,846 $ 311,985 $ 699,484 $ 655,959
Average customer loan balance(3) $ 2,134 $ 1,918 $ 2,134 $ 1,918
Number of new customer loans 28,182 69,682 73,195 122,558
Ending number of combined loans outstanding 255,740 267,434 255,740 267,434
Customer acquisition costs $ 230 $ 221 $ 281 $ 248
Effective APR of combined loan portfolio 91 % 96 % 92 % 95 %
_________
(1)Combined loans receivable is defined as loans owned by us and consolidated
VIEs plus loans originated and owned by third-party lenders pursuant to our CSO
programs. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation of Combined loans receivable to Loans receivable, net, / Loans
receivable at fair value, the most directly comparable financial measures
calculated in accordance with US GAAP.
(2)Average combined loans receivable - principal is calculated using an average
of daily Combined loans receivable - principal balances.
(3)Average customer loan balance is an average of all three products and is
calculated for each product by dividing the ending Combined loans receivable -
principal by the number of loans outstanding at period end.
Revenues. Our revenues are composed of Rise finance charges, Rise CSO fees
(which are fees we received from customers who obtained a loan through the CSO
program for the credit services, including the loan guaranty, we provided),
revenues earned on the Elastic line of credit, and finance charges and fee
revenues from the Today Card credit card product. See "-Components of our
Results of Operations-Revenues."
Ending and average combined loans receivable - principal. We calculate the
average combined loans receivable - principal by taking a simple daily average
of the ending combined loans receivable - principal for each period. Key metrics
that drive the ending and average combined loans receivable - principal include
the amount of loans originated in a period and the average customer loan
balance. All loan balance metrics include only the 90% participation in the
related Elastic line of credit advances (we exclude the 10% held by Republic
Bank), the 96% participation in FinWise Bank originated Rise installment loans,
the 95% participation in CCB originated Rise installment loans and the 95%
participation in the CCB originated Today Card credit card receivables, but
include the full loan balances on CSO loans, which are not presented on our
Condensed Consolidated Balance Sheets.
Total combined loans originated - principal. The amount of loans originated in
a period is driven primarily by loans to new customers as well as new loans to
prior customers, including refinancing of existing loans to customers in good
standing.
47-------------------------------------------------------------------------------- Average customer loan balance and effective APR of combined loan portfolio. The average loan amount and its related APR are based on the product and the underlying credit quality of the customer. Generally, better credit quality customers are offered higher loan amounts at lower APRs. Additionally, new customers have more potential risk of loss than prior or existing customers due to lack of payment history and the potential for fraud. As a result, newer customers typically will have lower loan amounts and higher APRs to compensate for that additional risk of loss. The effective APR is calculated based on the actual amount of finance charges generated from a customer loan divided by the average outstanding balance for the loan and can be lower than the stated APR on the loan due to waived finance charges and other reasons. For example, a Rise customer may receive a$2,000 installment loan with a term of 24 months and a stated rate of 130%. In this example, the customer's monthly installment loan payment would be$236.72 . As the customer can prepay the loan balance at any time with no additional fees or early payment penalty, the customer pays the loan in full in month eight. The customer's loan earns interest of$1,657.39 over the eight-month period and has an average outstanding balance of$1,912.37 . The effective APR for this loan is 130% over the eight-month period calculated as follows:
(
8 months
In addition, as an example for Elastic, if a customer makes a$2,500 draw on the customer's line of credit and this draw required bi-weekly minimum payments of 5% (equivalent to 20 bi-weekly payments), and if all minimum payments are made, the draw would earn finance charges of$1,125 . The effective APR for the line of credit in this example is 107% over the payment period and is calculated as follows:
(
20 payments
The actual total revenue we realize on a loan portfolio is also impacted by the amount of prepayments and charged-off customer loans in the portfolio. For a single loan, on average, we typically expect to realize approximately 60% of the revenues that we would otherwise realize if the loan were to fully amortize at the stated APR. From the Rise example above, if we waived$350 of interest for this customer, the effective APR for this loan would decrease to 103%. From the Elastic example above, if we waived$125 of fees for this customer, the effective APR for this loan would decrease to 95%. Number of new customer loans. We define a new customer loan as the first loan or advance made to a customer for each of our products (so a customer receiving a Rise installment loan and then at a later date taking their first cash advance on an Elastic line of credit would be counted twice). The number of new customer loans is subject to seasonal fluctuations. New customer acquisition is typically slowest during the first six months of each calendar year, primarily in the first quarter, compared to the latter half of the year, as our existing and prospective customers usually receive tax refunds during this period and, thus, have less of a need for loans from us. Further, many customers will use their tax refunds to prepay all or a portion of their loan balance during this period, so our overall loan portfolio typically decreases during the first quarter of the calendar year. Overall loan portfolio growth and the number of new customer loans tends to accelerate during the summer months (typically June and July), at the beginning of the school year (typically late August to early September) and during the winter holidays (typically late November to early December). Customer acquisition costs. A key expense metric we monitor related to loan growth is our CAC. This metric is the amount of direct marketing costs incurred during a period divided by the number of new customer loans originated during that same period. New loans to former customers are not included in our calculation of CAC (except to the extent they receive a loan through a different product) as we believe we incur no material direct marketing costs to make additional loans to a prior customer through the same product. 48 --------------------------------------------------------------------------------
The following tables summarize the changes in customer loans by product for the
three and nine months ended
Three Months Ended September 30, 2022
Rise Elastic Today
(Installment (Lines of
Loans) Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 115,082 103,607 36,410 255,099
New customer loans originated 18,935 4,406 4,841 28,182
Former customer loans originated 16,848 228 - 17,076
Attrition (34,491) (7,187) (2,939) (44,617)
Ending number of combined loans
outstanding 116,374 101,054 38,312 255,740
Customer acquisition cost (in
dollars) $ 285 $ 147 $ 90 $ 230
Average customer loan balance (in
dollars) $ 2,523 $ 1,957 $ 1,422 $ 2,134
Three Months Ended September 30, 2021
Rise Elastic Today
(Installment (Lines of
Loans) Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 108,784 92,278 17,481 218,543
New customer loans originated 41,010 18,937 9,735 69,682
Former customer loans originated 18,295 154 - 18,449
Attrition (35,391) (3,870) 21 (39,240)
Ending number of combined loans
outstanding 132,698 107,499 27,237 267,434
Customer acquisition cost (in
dollars) $ 268 $ 206 $ 52 $ 221
Average customer loan balance (in
dollars) $ 2,194 $ 1,744 $ 1,254 $ 1,918
Nine
Months Ended
Rise Elastic Today
(Installment
Loans) (Lines of Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 134,414 110,628 35,464 280,506
New customer loans originated 46,711 15,107 11,377 73,195
Former customer loans originated 49,584 555 - 50,139
Attrition (114,335) (25,236) (8,529) (148,100)
Ending number of combined loans
outstanding 116,374 101,054 38,312 255,740
Customer acquisition cost $ 304 $ 346 $ 97 $ 281
Nine
Months Ended
Rise Elastic Today
(Installment
Loans) (Lines of Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 103,940 100,105 10,803 214,848
New customer loans originated 77,370 28,128 17,060 122,558
Former customer loans originated 46,060 380 - 46,440
Attrition (94,672) (21,114) (626) (116,412)
Ending number of combined loans
outstanding 132,698 107,499 27,237 267,434
Customer acquisition cost $ 284 $ 261 $ 60 $ 248
49-------------------------------------------------------------------------------- Recent trends. Our revenues for the three months endedSeptember 30, 2022 totaled$125.6 million , an increase of 11% versus the three months endedSeptember 30, 2021 . Similarly, our revenues for the nine months endedSeptember 30, 2022 totaled$367.5 million , up 28% versus the prior year. The increase in quarterly and year-to-date revenue is due to higher average combined loans receivable-principal as we saw growth in all of our products in the third quarter of 2022 as compared the prior year period. Rise, Elastic, and the Today products experienced year-over-year growth in revenues for the nine months endedSeptember 30, 2022 of 23%, 28%, and 174%, respectively, which were due to the increased year-over-year average loan balances, as we focused on growing the portfolios beginning in the second half of 2021. The Today Card also benefits from the nature of the product, which provides an added convenience of having a credit card for online purchases of day-to-day items such as groceries or clothing (whereas the primary usage of a Rise installment loan or Elastic line of credit is for emergency financial needs such as a medical deductible or automobile repair). We and the bank originators experienced a decrease in new customers during the third quarter of 2022 versus the prior year period as a result of our more cautious approach to growth based on recent performance and our expectation of the impact of inflation on our customers. However, all three of our products experienced an increase in principal loan balances in the third quarter of 2022 compared to a year ago. Rise and Elastic principal loan balances atSeptember 30, 2022 totaled$293.6 million and$197.8 million , respectively, up roughly$2.4 million and$10.2 million , respectively, from a year ago. Today Card principal loan balances atSeptember 30, 2022 totaled$54.5 million , up$20.3 million from a year ago. Our CAC was higher in the third quarter of 2022 at$230 as compared to the third quarter of 2021 at$221 but below our targeted range of$250-$300 . The new customer loan volume is being sourced from all our marketing channels including direct mail, digital and our strategic partners channel, where we have improved our technology and risk capabilities to interface with the strategic partners via our application programming interface (APIs) developed within our new technology platform ("Blueprint"). Blueprint will allow us to more efficiently acquire new customers within our targeted CAC range. We believe our CAC in future quarters, and on an annual basis, will be within our target range of$250 to$300 as we continue to take a more cautious approach to growth during the remainder of the year and monitor the macroeconomic environment closely. Long term, we expect to achieve our target range of$250 to$300 as we optimize the efficiency of our marketing channels and continue to grow the Today Card which successfully generates new customers at a sub-$100 CAC. Credit quality As of and for the three months ended As of and for the nine months ended September September 30, 30, Credit quality metrics (dollars in thousands), after adoption of fair value 2022 2021 (Pro-forma)(6) 2022 2021 (Pro-forma)(6) Net charge-offs(1)$ 73,607 $ 39,015$ 215,476 $ 95,968 Net change in fair value(1)(6) (1,296) 1,620 2,450 (69) Total change in fair value of loans receivable (6)$ 72,311 $ 40,635$ 217,926 $ 95,899 Net charge-offs as a percentage of revenues (1) 59 % 35 % 59 % 33 % Total change in fair value of loans receivable as a percentage of revenues(6) 58 % 36 % 59 % 33 % Percentage past due 11 % 9 % 11 % 9 % Fair value premium(6) 10 % 9 % 10 % 9 % 50
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As of and for the three months As of and for the nine months
ended September 30, ended September 30,
Credit quality metrics (dollars in thousands),
before adoption of fair value 2021 2021
Net charge-offs(2) $ 39,015 $ 95,968
Additional provision for loan losses(2) 15,888 7,130
Provision for loan losses $ 54,903 $ 103,098
Net charge-offs as a percentage of revenues(2) 35 % 33 %
Total provision for loan losses as a percentage
of revenues 49 % 36 %
Percentage past due 9 % 9 %
Combined loan loss reserve(4) $ 56,209 $ 56,209
Combined loan loss reserve as a percentage of
combined loans receivable(3)(4)(5) 11 % 11 %
_________
(1)Net charge-offs and net change in fair value of loans receivable are not
financial measures prepared in accordance with US GAAP. Net charge-offs include
the amount of principal and accrued interest on loans that are more than 60 days
past due (Rise and Elastic) or 120 days past due (Today Card), or sooner if we
receive notice that the loan will not be collected, such as a bankruptcy notice
or identified fraud, offset by any recoveries. Net change in fair value reflects
the adjustment recognized related to the change in the fair value mark during
the reported period. See "-Non-GAAP Financial Measures" for more information and
for a reconciliation to Change in fair value of loans receivable, the most
directly comparable financial measure calculated in accordance with US GAAP.
(2)Net charge-offs and additional provision for loan losses are not financial
measures prepared in accordance with US GAAP. Net charge-offs include the amount
of principal and accrued interest on loans that are more than 60 days past due
(Rise and Elastic) or 120 days past due (Today Card), or sooner if we receive
notice that the loan will not be collected, such as a bankruptcy notice or
identified fraud, offset by any recoveries. Additional provision for loan losses
is the amount of provision for loan losses needed for a particular period to
adjust the combined loan loss reserve to the appropriate level in accordance
with our underlying loan loss reserve methodology. See "-Non-GAAP Financial
Measures" for more information and for a reconciliation to Provision for loan
losses, the most directly comparable financial measure calculated in accordance
with US GAAP.
(3)Combined loans receivable is defined as loans owned by us and consolidated
VIEs plus loans originated and owned by third-party lenders pursuant to our CSO
programs. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation of Combined loans receivable to Loans receivable, net, the most
directly comparable financial measure calculated in accordance with US GAAP.
(4)Combined loan loss reserve is defined as the loan loss reserve for loans
originated and owned by us and consolidated VIEs plus the loan loss reserve for
loans owned by third-party lenders and guaranteed by us. See "-Non-GAAP
Financial Measures" for more information and for a reconciliation of Combined
loan loss reserve to Allowance for loan losses, the most directly comparable
financial measure calculated in accordance with US GAAP.
(5)Combined loan loss reserve as a percentage of combined loans receivable is
determined using period-end balances.
(6)We have provided pro-forma information reflecting the adoption of fair value
in the 2021 financial period to provide comparability to the 2022 financial
period. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation to previously reported amounts for 2021 calculated in accordance
with US GAAP. The pro-forma fair value adjustments reflect fair value
methodology acceptable with US GAAP.
Net principal charge-offs as a percentage of
average combined loans receivable - principal First Second Third Fourth
(1)(2)(3) Quarter Quarter Quarter Quarter
2022 11% 10% 11% N/A
2021 6% 5% 6% 10%
2020 11% 10% 4% 5%
_________
(1)Net principal charge-offs is comprised of gross principal charge-offs less
recoveries.
(2)Average combined loans receivable - principal is calculated using an average
of daily Combined loans receivable - principal balances during each quarter.
(3)Combined loans receivable is defined as loans owned by us and consolidated
VIEs plus loans originated and owned by third-party lenders pursuant to our CSO
programs. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation of Combined loans receivable to the most directly comparable
financial measure calculated in accordance with US GAAP.
51
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Net principal charge-offs as a percentage of average combined loans
receivable-principal for the third quarter of 2022 is higher than the third
quarter of 2021, but consistent with this credit metric both before and after
the impact of the COVID-19 pandemic. The above chart depicts the historically
low charge-off metrics from the third quarter of 2020 through the third quarter
of 2021, due to COVID-19 pandemic impacts such as a lack of new customer demand,
our implementation of payment assistance tools, and government stimulus payments
received by our customers. Beginning in the fourth quarter of 2021, net
principal charge-offs as a percentage of average combined loans
receivable-principal have returned to the levels consistent with 2019 due to the
increased volume of new customers being originated.
Upon adoption of fair value for the combined loans receivable portfolio on
January 1, 2022 , in reviewing the credit quality of our loan portfolio, we break
out our total change in fair value in loans receivable that is presented on our
Condensed Combined Statement of Operations under US GAAP into two separate
items-net charge-offs and net change in fair value. Net charge-offs are
indicative of the credit quality of our underlying portfolio, while net change
in fair value is subject to more fluctuation based on loan portfolio growth and
changes in assumptions used in the fair value methodology. The net change in
fair value is the change in the reporting period between the current period fair
value mark as compared to the beginning of period fair value mark. With all
other assumptions held flat and a fair value premium associated with the
combined loan portfolio, we would expect the net change in fair value to be
positive in periods of growth in the loan portfolio and expect the net change in
fair value to be negative in periods of attrition in the loan portfolio.
Net charge-offs. Net charge-offs comprise gross charge-offs offset by recoveries
on prior charge-offs. Gross charge-offs include the amount of principal and
accrued interest on loans that are more than 60 days past due (Rise and Elastic)
or 120 days (Today Card), or sooner if we receive notice that the loan will not
be collected, such as a bankruptcy notice or identified fraud. Any payments
received on loans that have been charged off are recorded as recoveries and
reduce the total amount of gross charge-offs. Recoveries are typically less than
10% of the amount charged off, and thus, we do not view recoveries as a key
credit quality metric.
Net charge-offs as a percentage of revenues can vary based on several factors,
such as whether or not we experience significant growth or lower the APR of our
products. Additionally, although a more seasoned portfolio will typically result
in lower net charge-offs as a percentage of revenues, we do not intend to drive
down this ratio significantly below our historical ratios and would instead seek
to offer our existing products to a broader new customer base to drive
additional revenues.
Net charge-offs as a percentage of average combined loans receivable-principal
allow us to determine credit quality and evaluate loss experience trends across
our loan portfolio.
Net change in fair value. Beginning January 1, 2022 , we utilize the fair value
option on the combined loans receivable portfolio. As such, loans receivables
are carried at fair value in the Condensed Consolidated Balance Sheets with
changes in fair value recorded in the Condensed Consolidated Statements of
Operations. To derive the fair value, we generally utilize discounted cash flow
analyses that factor in estimated losses and prepayments over the estimated
duration of the underlying assets. Loss and prepayment assumptions are
determined using historical loss data and include appropriate consideration of
recent trends and anticipated future performance. Hence, another key credit
quality metric we monitor is the percentage of past due combined loans
receivable - principal, as an increase in past due loans is a consideration in
the credit loss assumption used in the fair value assumptions as a significant
increase in the percentage of past due loans may indicate a future increase in
credit loss in the portfolio. As such, changes in credit quality, amongst other
significant assumptions, typically have a more significant impact on the
carrying value of the combined loans receivable portfolio under the fair value
option. Future cash flows are discounted using a rate of return that we believe
a market participant would require. Accrued and unpaid interest and fees are
included in Loans receivable at fair value in the Condensed Consolidated Balance
Sheets.
Additional provision for loan losses. For financial data prior to January 1,
2022 , in reviewing the credit quality of our loan portfolio, we broke out our
total provision for loan losses that was presented on our statement of
operations under US GAAP into two separate items-net charge-offs (as discussed
above) and additional provision for loan losses. The additional provision for
loan losses is the amount needed to adjust the combined loan loss reserve to the
appropriate amount at the end of each month based on our loan loss reserve
methodology.
Additional provision for loan losses relates to an increase in inherent losses
in the loan portfolio as determined by our loan loss reserve methodology. This
increase could be due to a combination of factors such as an increase in the
size of the loan portfolio or a worsening of credit quality or increase in past
due loans. It is also possible for the additional provision for loan losses for
a period to be a negative amount, which would reduce the amount of the combined
loan loss reserve needed (due to a decrease in the loan portfolio or improvement
in credit quality). The amount of additional provision for loan losses is
seasonal in nature, mirroring the seasonality of our new customer acquisition
and overall loan portfolio growth, as discussed above. The combined loan loss
reserve typically decreased during the first quarter or first half of the
calendar year due to a decrease in the loan portfolio from year end. Then, as
the rate of growth for the loan portfolio started to increase during the second
half of the year, additional provision for loan losses was typically needed to
increase the reserve for losses associated with the loan growth. Because of
this, our provision for loan losses varied significantly throughout the year
without a significant change in the credit quality of our portfolio.
52
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Loan loss reserve methodology prior to January 1, 2022 . Our loan loss reserve
methodology was calculated separately for each product and, in the case of Rise
loans originated under the state lending model (including CSO program loans),
was calculated separately based on the state in which each customer resides to
account for varying state license requirements that affect the amount of the
loan offered, repayment terms and other factors. For each product, loss factors
were calculated based on the delinquency status of customer loan balances:
current, 1 to 30 days past due, 31 to 60 days past due or 61-120 past due (for
Today Card only). These loss factors for loans in each delinquency status were
based on average historical loss rates by product (or state) associated with
each of these three delinquency categories.
Recent trends. Total change in fair value of loans receivable for the three and
nine months ended September 30, 2022 were 58% and 59% of revenue, compared to
the pro-forma three and nine months ended September 30, 2021 of 36% and 33%,
respectively, (See "-Non-GAAP Financial Measures" for more information and for a
reconciliation to previously reported amounts for 2021 calculated in accordance
with US GAAP.). Net charge-offs as a percentage of revenues for both the three
and nine months ended September 30, 2022 were 59%, compared to 35% and 33%,
respectively, in the prior year periods. The increase in net charge-offs as a
percentage of revenues is due to continued inflationary pressures that have
impacted our customers' ability to repay their loans, as well as the growth in
the loan portfolio during the second half of 2021 and associated seasoning,
which included a higher mix of new customers that carry a higher overall loss
rate. In the near term, we expect our portfolio to perform above our targeted
range of 45% to 55% based on the current macroeconomic factors being observed in
the economy. We continue to monitor the portfolio and will adjust our
underwriting and credit policies to mitigate any potential negative impacts as
needed. Long term, we would expect to see the portfolio return to our targeted
range of 45-55% of revenue.
Past due loan balances at September 30, 2022 were 11% of total combined loans
receivable-principal, up from 9% from a year ago, due to the seasoning of the
2021 vintage and portfolio customers impacted by the continued inflationary
pressures, which is consistent with our historical past due percentages prior to
the pandemic. We, and the bank originators we support, continue to offer payment
flexibility programs, if certain qualifications are met, to assist borrowers
during the current economic environment. The population of customers utilizing
the payment flexibility programs has remained stable, and we continue to see
that most customers are meeting their scheduled payments once they exit the
payment flexibility program.
Net change in fair value as a percentage of revenue was (1)% and 1% for the
three months ended September 30, 2022 and pro-forma September 30, 2021 ,
respectively, and 1% and -% for the nine months ended September 30, 2022 and
pro-forma September 30, 2021 , respectively (See "-Non-GAAP Financial Measures"
for more information and for a reconciliation to previously reported amounts for
2021 calculated in accordance with US GAAP.). The fair value premium of the
combined loans receivable-principal portfolio was fairly consistent
year-over-year at 10% at September 30, 2022 compared to 9% at September 30,
2021 . The key assumptions used in the fair value estimate at September 30, 2022
are as follows:
September 30, 2022
Credit loss rate 18 %
Prepayment rate 28 %
Discount rate 21 %
Total loan loss provision for the three and nine months ended September 30,
2021 , prior to the adoption of fair value, were 49% and 36% of revenues,
respectively, which were within and below our targeted range of approximately
45% to 55%. Net charge-offs as a percentage of revenues for the three and nine
months ended September 30, 2021 were 35% and 33%, respectively, due to reduced
demand and limited loan origination activity in 2020 and early 2021 coupled with
customers' receipt of monetary stimulus provided by the US government which
allowed customers to continue making payments on their loans.
The combined loan loss reserve as a percentage of combined loans receivable
totaled 11% as of
We also look at Rise and Elastic principal loan charge-offs (including both credit and fraud losses) by loan vintage as a percentage of combined loans originated-principal. As the below table shows, our cumulative principal loan charge-offs for Rise and Elastic throughSeptember 30, 2022 for each annual vintage since the 2013 vintage are generally under 30% and continue to generally trend at or slightly below our 20% to 25% long-term targeted range. Our payment deferral programs and monetary stimulus programs provided by the US government in response to the COVID-19 pandemic have also assisted in reducing losses in our 2019 and 2020 vintages coupled with a lower volume of new loan originations in our 2020 vintage. We would expect the 2021 vintage to be at or near 2018 levels given the increased volume of new customer loans originated during the second half of 2021. While still early, our 2022 vintage is impacted by the continued inflationary pressures on all customer types. It is also possible that the cumulative loss rates on all vintages will increase and may exceed our recent historical cumulative loss experience due to the economic impact of the current inflationary environment. 53 -------------------------------------------------------------------------------- [[Image Removed: elvt-20220930_g2.jpg]] _________
(1)The 2021 and 2022 vintages are not yet fully mature from a loss perspective.
(2)
We also look at Today Card principal loan charge-offs (including both credit and fraud losses) by account vintage as a percentage of account principal originations. As the below table shows, our cumulative principal credit card charge-offs throughSeptember 30, 2022 for the 2020 annual vintage is between 8% and 9%. As expected, the 2021 account vintage is experiencing losses higher than the 2020 account vintage due to the volume of new customers originated in the second half of 2021 and the performance of certain segments upon the release of the credit model during 2021. The Today Card requires accounts to be charged off that are more than 120 days past due which results in a longer maturity period for the cumulative loss curve related to this portfolio. Therefore, the 2022 vintage is not mature enough for analysis. Our 2018 and 2019 vintages are considered to be test vintages and were comprised of limited originations volume and not reflective of our current underwriting standards. 54 --------------------------------------------------------------------------------
[[Image Removed: elvt-20220930_g3.jpg]]
Margins
Three Months Ended September 30, Nine Months Ended September 30,
Margin metrics (dollars in thousands) 2022 2021 2022 2021
Revenues $ 125,617 $ 112,835 $ 367,467 $ 287,108
Net charge-offs(1) (73,607) (39,015) (215,476) (95,968)
Net change in fair value(1) 1,296 - (2,450) -
Additional provision for loan
losses(1) - (15,888) - (7,130)
Direct marketing costs (6,478) (15,406) (20,532) (30,353)
Other cost of sales (2,968) (4,766) (9,013) (9,718)
Gross profit 43,860 37,760 119,996 143,939
Operating expenses (35,020) (40,866) (113,166) (117,066)
Operating income (loss) $ 8,840 $ (3,106) $ 6,830 $ 26,873
As a percentage of revenues:
Net charge-offs 59 % 35 % 59 % 33 %
Net change in fair value (1) - 1 -
Additional provision for loan losses - 14 - 2
Direct marketing costs 5 14 6 11
Other cost of sales 2 4 2 3
Gross margin 35 33 33 50
Operating expenses 28 36 31 41
Operating margin 7 % (3) % 2 % 9 %
_________
(1)Non-GAAP measure. See "-Non-GAAP Financial Measures-Net charge-offs and Net change in fair value" and "-Non-GAAP Financial Measures-Net charge-offs and additional provision for loan losses."
55
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Gross margin is calculated as revenues minus cost of sales, or gross profit,
expressed as a percentage of revenues, and operating margin is calculated as
operating income expressed as a percentage of revenues. Due to the negative
impact of COVID-19 and the current economic environment on our loan balances and
revenue, we are monitoring our profit margins closely. Long term, we intend to
continue to manage the business to a targeted 20% operating margin.
Recent operating margin trends. For the three months ended September 30, 2022 ,
our operating margin was 7%, which was an increase from (3)% in the prior year
period, as originally reported, and a decrease from 10% on a pro-forma basis
considering the pro-forma adoption of fair value at the beginning of 2021 (See
"-Non-GAAP Financial Measures" for more information and for a reconciliation to
previously reported amounts for 2021 calculated in accordance with US GAAP.).
For the nine months ended September 30, 2022 , our operating margin was 2%, which
was a decrease from 9% in the prior year period, and 12% on a pro-forma basis
considering the pro-forma adoption of fair value at the beginning of 2021 (See
"-Non-GAAP Financial Measures" for more information and for a reconciliation to
previously reported amounts for 2021 calculated in accordance with US GAAP.).
The year-over-year margin decreases we are experiencing in 2022 are primarily
driven by the continued inflationary pressures as well as increased net
charge-offs in 2022 due to a higher volume of new customers originated in the
loan portfolio during the second half of 2021 and associated seasoning. As the
portfolio matures and we manage the mix of new and returning customers to the
portfolio over the long term, we expect to see our net charge-offs as a
percentage of revenue return to our target range of 45-55% and would expect our
gross margin to normalize in future periods with our past historical
performance. In the short term, we expect our expense metrics to remain above
our target of 20% of revenue as we take a more cautious approach in executing
our growth strategy over the remainder of the year, but have implemented our
operating expense reduction plan to mitigate the reduced revenue and higher
credit losses resulting from the current macroeconomic environment. In the long
term, as we grow the loan portfolio while actively managing our operating
expenses, we expect to see our operating expense metrics return to approximately
20% of revenue.
NON-GAAP FINANCIAL MEASURES
We believe that the inclusion of the following non-GAAP financial measures in
this Quarterly Report on Form 10-Q can provide a useful measure for
period-to-period comparisons of our core business, provide transparency and
useful information to investors and others in understanding and evaluating our
operating results, and enable investors to better compare our operating
performance with the operating performance of our competitors. Management uses
these non-GAAP financial measures frequently in its decision-making because they
provide supplemental information that facilitates internal comparisons to the
historical operating performance of prior periods and give an additional
indication of our core operating performance. However, non-GAAP financial
measures are not a measure calculated in accordance with US generally accepted
accounting principles, or US GAAP, and should not be considered an alternative
to any measures of financial performance calculated and presented in accordance
with US GAAP. Other companies may calculate these non-GAAP financial measures
differently than we do.
Adjusted Earnings (Loss)
Adjusted earnings (loss) for the three and nine months ended September 30, 2022
and 2021 represent our net loss from continuing operations adjusted to exclude
the impact of:
•Valuation allowance on deferred tax asset; and
•Uncertain tax position
Adjusted diluted earnings (loss) per share is Adjusted earnings (loss) divided by Diluted weighted average shares outstanding.
56
--------------------------------------------------------------------------------The following table presents a reconciliation of net loss and diluted earnings (loss) per share to Adjusted earnings (loss) and Adjusted diluted earnings (loss) per share, which excludes the impact of the valuation allowance and uncertain tax position for each of the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands except per share
amounts) 2022 2021 2022 2021
Net loss $ (15,034) $
(11,005) $ (35,502)
- 1,582 - 1,582
Impact of valuation allowance on
deferred tax asset, net 9,940 - 9,940 -
Adjusted earnings (loss) $ (5,094) $ (9,423) $ (25,562) $ 248
Diluted loss per share $ (0.48) $ (0.33) $ (1.14) $ (0.04)
Impact of uncertain tax position - 0.05 - 0.05
Impact of valuation allowance on
deferred tax asset net 0.32 - 0.32 -
Adjusted diluted earnings (loss) per
share $ (0.16) $ (0.28) $ (0.82) $ 0.01
Diluted weighted average shares
outstanding 31,068,846 33,786,968 31,237,730 34,841,624
Effect of potentially dilutive shares
outstanding(1) - - - 632,631
Adjusted diluted weighted average shares
outstanding 31,068,846 33,786,968 31,237,730 35,474,255
_________
(1)Represents potentially dilutive shares that had not been included in the
Company's nine months ended September 30, 2021 diluted weighted average shares
outstanding as the Company is in a net loss position under U.S. GAAP. Including
those shares would have been anti-dilutive when in a net loss position.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA represents our net loss adjusted to exclude:
•Net interest expense primarily associated with notes payable under the debt facilities used to fund the loan portfolios;
•Share-based compensation;
•Depreciation and amortization expense on fixed assets and intangible assets;
•Gains or losses from an equity method investment;
•Settlement related to a legal matter or gains and losses from dispositions included in non-operating income; and
•Income taxes.
Adjusted EBITDA margin is Adjusted EBITDA divided by revenue.
Management believes that Adjusted EBITDA and Adjusted EBITDA margin are useful
supplemental measures to assist management and investors in analyzing the
operating performance of the business and provide greater transparency into the
results of operations of our core business.
57
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Adjusted EBITDA and Adjusted EBITDA margin should not be considered as
alternatives to net income (loss) or any other performance measure derived in
accordance with US GAAP. Our use of Adjusted EBITDA and Adjusted EBITDA margin
has limitations as an analytical tool, and you should not consider it in
isolation or as a substitute for analysis of our results as reported under US
GAAP. Some of these limitations are:
•Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized may have to be replaced in the future, and Adjusted
EBITDA does not reflect expected cash capital expenditure requirements for such
replacements or for new capital assets;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and
•Adjusted EBITDA does not reflect interest associated with notes payable used for funding the loan portfolios, for other corporate purposes or tax payments that may represent a reduction in cash available to us.
The following table presents a reconciliation of net loss to Adjusted EBITDA and Adjusted EBITDA margin for each of the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 2022 2021 2022 2021
Net loss $ (15,034) $ (11,005) $ (35,502) $ (1,334)
Adjustments:
Net interest expense 13,655 9,544 37,951 26,897
Share-based compensation 1,238 1,559 5,176 4,948
Depreciation and amortization 4,520 4,544 13,001 14,339
Equity method investment loss 358 - 1,070 -
Non-operating income (loss) - 198 (1,747) (519)
Income tax expense (benefit) 9,861 (1,843) 5,058 1,829
Adjusted EBITDA $ 14,598 $ 2,997 $ 25,007 $ 46,160
Adjusted EBITDA margin 11.6 % 2.7 % 6.8 % 16.1 %
Unaudited pro-forma condensed consolidated financial information
The following unaudited pro-forma condensed consolidated statement of operations information reflects the adoption of ASU 2016-13 as ofJanuary 1, 2021 . Management has made significant estimates and assumptions in its determination of the pro-forma accounting adjustments based on certain currently available information and certain assumptions and methodologies that we believe are reasonable and consistent with US GAAP. Management believes the pro-forma financial information is a useful supplemental measure to assist management and investors in analyzing the operating performance of the business and provide greater transparency into the results of operations of our core business. 58 --------------------------------------------------------------------------------
Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021
Pro-forma Pro-forma
(Dollars in thousands except per Fair value financial Fair value financial
share amounts) As reported adjustments information As reported adjustments information
Revenues $ 112,835 $ - $ 112,835 $ 287,108 $ - $ 287,108
Cost of sales:
Provision for loan losses 54,903 (54,903) - 103,098 (103,098) -
Change in fair value of loans
receivable - 40,635 40,635 - 95,899 95,899
Direct marketing and other costs
of sales 20,172 - 20,172 40,071 - 40,071
Total costs of sales 75,075 (14,268) 60,807 143,169 (7,199) 135,970
Gross profit 37,760 14,268 52,028 143,939 7,199 151,138
Total operating expenses 40,866 - 40,866 117,066 - 117,066
Operating income (loss) (3,106) 14,268 11,162 26,873 7,199 34,072
Total other expense (9,742) - (9,742) (26,378) - (26,378)
Income (loss) before taxes (12,848) 14,268 1,420 495 7,199 7,694
Income tax expense (benefit) (1,843) 3,053 1,210 1,829 1,335 3,164
Net income (loss) $ (11,005) $ 11,215 $ 210 $ (1,334) $ 5,864 $ 4,530
Basic earnings (loss) per share $ (0.33) $ 0.34 $ 0.01 $ (0.04) $ 0.17 $ 0.13
Diluted earnings (loss) per
share $ (0.33) $ 0.34 $ 0.01 $ (0.04) $ 0.17 $ 0.13
Basic weighted average shares
outstanding 33,786,968 - 33,786,968 34,841,624 - 34,841,624
Diluted weighted average shares
outstanding (1) 33,786,968 545,509 34,332,477 34,841,624 632,631 35,474,255
Adjusted EBITDA $ 2,997 $ 14,268 $ 17,265 $ 46,160 $ 7,199 $ 53,359
Adjusted EBITDA margin 2.7 % 15.3 % 16.1 % 18.6 %
_________
(1)Represents potentially dilutive shares that were anti-dilutive in the
Company's three and nine months ended
Free cash flow
Free cash flow ("FCF") represents our net cash provided by operating activities, adjusted to include:
•Net charge-offs - combined principal loans; and
•Capital expenditures.
The following table presents a reconciliation of net cash provided by operating activities to FCF for each of the periods indicated:
Nine Months Ended September 30,
(Dollars in thousands) 2022 2021
Net cash provided by operating activities(1) $ 117,525 $ 111,566
Adjustments:
Net charge-offs - combined principal loans (167,544) (70,636)
Capital expenditures (16,371) (11,903)
FCF(2) $ (66,390) $ 29,027
_________
(1)Net cash provided by operating activities includes net charge-offs - combined
finance charges.
(2)FCF includes approximately $37 million in cash payments associated with legal
settlements for the nine months ended September 30, 2022 .
59
--------------------------------------------------------------------------------Net charge-offs and net change in fair value
We break out our total change in fair value into two separate items-first, the
amount related to net charge-offs, and second, the net change in fair value
needed to adjust the current period fair value mark from the fair value mark
from the beginning of the reporting period. We believe this presentation
provides more detail related to the components of our total change in fair value
when analyzing the gross margin of our business.
Net charge-offs. Net charge-offs comprise gross charge-offs offset by
recoveries on prior charge-offs. Gross charge-offs include the amount of
principal and accrued interest on loans that are more than 60 days past due
(Rise and Elastic) or 120 days (Today Card), or sooner if we receive notice that
the loan will not be collected, such as a bankruptcy notice or identified fraud.
Any payments received on loans that have been charged off are recorded as
recoveries and reduce total gross charge-offs.
Net change in fair value. The net change in fair value is the change in the
reporting period between the current period fair value mark as compared to the
beginning of period fair value mark. With all other assumptions held flat and
fair value premium associated with the combined loan portfolio, we would expect
the net change in fair value to be positive in periods of growth in the loan
portfolio and expect the net change in fair value to be negative in periods of
attrition in the loan portfolio.
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 2022 2021 (pro-forma)(1) 2022 2021 (pro-forma)(1)
Net charge-offs $ 73,607 $ 39,015 $ 215,476 $ 95,968
Net change in fair value (1,296) 1,620 2,450 (69)
Total change in fair value of loans
receivable $ 72,311 $ 40,635 $ 217,926 $ 95,899
_________
(1)We have provided pro-forma information reflecting the adoption of fair value
in the 2021 financial period to provide comparability to the 2022 financial
period. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation to previously reported amounts for 2021 calculated in accordance
with US GAAP. The pro-forma fair value adjustments reflect fair value
methodology acceptable with US GAAP.
Net charge-offs and additional provision for loan losses
Prior to the adoption of the fair value option, we also broke out our total
provision for loan losses. Just like our presentation of our total change in
fair value, we first presented the net charge-offs. We then presented the
additional provision for loan losses needed to adjust the combined loan loss
reserve to the appropriate amount at the end of each month based on our loan
loss provision methodology. We believed this presentation provided more detail
related to the components of our total provision for loan losses when analyzing
the gross margin of our business.
Additional provision for loan losses. Additional provision for loan losses is
the amount of provision for loan losses needed for a particular period to adjust
the combined loan loss reserve to the appropriate level in accordance with our
underlying loan loss reserve methodology.
Three Months Ended September Nine Months Ended
30, September 30,
(Dollars in thousands) 2021 2021
Net charge-offs $ 39,015 $ 95,968
Additional provision for loan losses 15,888 7,130
Provision for loan losses $ 54,903 $ 103,098
Combined loan information
The information presented in the tables below on a combined basis are non-GAAP
measures based on a combined portfolio of loans, which includes the total amount
of outstanding loans receivable that we own and that are on our balance sheets
plus outstanding loans receivable originated and owned by third parties that we
guarantee pursuant to CSO programs in which we participated. There were no new
loan originations in 2021 under our CSO programs, but we continued to have
obligations as the CSO until the wind-down of this portfolio was completed in
the third quarter of 2021. See "-Basis of Presentation and Critical Accounting
Policies-Allowance and liability for estimated losses on consumer loans."
We believe these non-GAAP measures provide investors with important information
needed to evaluate the magnitude of potential loan losses and the opportunity
for revenue performance of the combined loan portfolio on an aggregate basis. We
also believe that the comparison of the combined amounts from period to period
is more meaningful than comparing only the amounts reflected on our balance
sheet since both revenues and cost of sales as reflected in our financial
statements are impacted by the aggregate amount of loans we own and those CSO
loans we guaranteed.
60-------------------------------------------------------------------------------- Our use of total combined loans and fees receivable has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are:
•Rise CSO loans were originated and owned by a third-party lender; and
•Rise CSO loans were funded by a third-party lender and were not part of the VPC Facility.
As of each of the period ends indicated, the following table presents a reconciliation of:
•Loans receivable, net and at fair value, Company owned (which reconciles to our Condensed Consolidated Balance Sheets included elsewhere in this Quarterly Report on Form 10-Q);
•Loans receivable, net, guaranteed by the Company (as disclosed in Note 4 of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q);
•Combined loans receivable (which we use as a non-GAAP measure); and
•Combined loan loss reserve (which we use as a non-GAAP measure).
61
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2021 2022
(Dollars in thousands) September 30 December 31 March 31 June 30 September 30
Company Owned Loans:
Loans receivable - principal, current, company
owned $ 466,140
46,730 57,207 54,060 54,712 59,576
Loans receivable - principal, total, company
owned 512,870 558,759 511,319 532,433 545,818
Loans receivable - finance charges, company
owned 22,960 23,602 22,991 23,079 23,214
Loans receivable - company owned 535,830 582,361 534,310 555,512 569,032
Allowance for loan losses on loans receivable,
company owned(5) (56,209) (71,204) - - -
Fair value adjustment, loans receivable-
principal(7) - - 49,844 53,438 52,280
Loans receivable, net, company owned / Loans
receivable at fair value $ 479,621 $ 511,157 $ 584,154 $ 608,950 $ 621,312
Third Party Loans Guaranteed by the Company:
Loans receivable - principal, current,
guaranteed by company $ - $ - $ - $ - $ - Loans receivable - principal, past due, guaranteed by company
- - - - -
Loans receivable - principal, total,
guaranteed by company(1) - - - - -
Loans receivable - finance charges, guaranteed
by company(2) - - - - -
Loans receivable - guaranteed by company - - - - -
Liability for losses on loans receivable,
guaranteed by company - - - - -
Loans receivable, net, guaranteed by
company(3) $ - $ - $ - $ - $ - Combined Loans Receivable(3): Combined loans receivable - principal, current
$ 466,140
46,730 57,207 54,060 54,712 59,576
Combined loans receivable - principal 512,870 558,759 511,319 532,433 545,818
Combined loans receivable - finance charges 22,960 23,602 22,991 23,079 23,214
Combined loans receivable $ 535,830 $ 582,361 $ 534,310 $ 555,512 $ 569,032
Combined Loan Loss Reserve(3):
Allowance for loan losses on loans receivable,
company owned(5) $ (56,209)
- - - - -
Combined loan loss reserve(5) $ (56,209) $ 46,730
512,870 558,759 511,319 532,433 545,818
Percentage past due 9 % 10 % 11 % 10 % 11 %
Combined loan loss reserve as a percentage of combined loans receivable(3)(4)(5) 11 % 12 % - % - % -
%
Allowance for loan losses as a percentage of loans receivable - company owned(5) 11 % 12 % - % - % -
%
Fair value adjustment, combined loans receivable- principal(6)(7)$ 47,677
583,507 637,091 584,154 608,950 621,312
Fair value as a percentage of combined loans
receivable- principal(3)(6) 109 % 110 % 110 % 110 % 110 %
_________
(1)Represents loans originated by third-party lenders through the CSO programs,
which are not included in our condensed consolidated financial statements. The
wind-down of the CSO program was completed in the third quarter of 2021.
(2)Represents finance charges earned by third-party lenders through the CSO
programs, which are not included in our condensed consolidated financial
statements. The wind-down of the CSO program was completed in the third quarter
of 2021.
(3)Non-GAAP measure
(4)Combined loan loss reserve as a percentage of combined loans receivable is
determined using period-end balances.
(5)Effective January 1, 2022 , upon the election to carry the loan portfolio at
fair value, a combined loan loss reserve and allowance for loan losses is no
longer required as a loan loss assumption has been included in the fair value
assumptions for the loan portfolio.
(6)The periods of September 30, 2021 to December 31, 2021 include pro-forma
adjustments reflecting the combined loans receivable at fair value consistent
with a fair value methodology acceptable with U.S. GAAP.
(7)The period of September 30, 2022 includes a fair value adoption adjustment of
$2.4 million .
62--------------------------------------------------------------------------------
COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenues
Our revenues are composed of Rise finance charges and CSO fees (inclusive of finance charges attributable to the participation in Rise installment loans originated byFinWise Bank and CCB), cash advance fees attributable to the participation in Elastic lines of credit that we consolidate, finance charges and fee revenues related to the Today Card credit card product (inclusive of finance charges attributable to the participations in the credit card receivables originated by CCB), and marketing and licensing fees received from third-party lenders related to the Rise, Rise CSO, Elastic, and Today Card products. See "-Overview" above for further information on the structure of Elastic.
Cost of sales
Change in Fair value. BeginningJanuary 1, 2022 , we elected the fair value option for our loans receivable portfolio. As such, loans receivable are carried at fair value in the Condensed Consolidated Balance Sheets with changes in fair value recorded in the Condensed Consolidated Statements of Operations. To derive the fair value, we generally utilize discounted cash flow analyses that factor in estimated losses and prepayments over the estimated duration of the underlying assets. Loss and prepayment assumptions are determined using historical loss data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that we believe a market participant would require. Provision for loan losses. Prior toJanuary 1, 2022 , provision for loan losses consisted of amounts charged against income during the period related to net charge-offs and the additional provision for loan losses needed to adjust the loan loss reserve to the appropriate amount at the end of each month based on our loan loss methodology. Direct marketing costs. Direct marketing costs consist of online marketing costs such as sponsored search and advertising on social networking sites, and other marketing costs such as purchased television and radio advertising and direct mail print advertising. In addition, direct marketing cost includes affiliate costs paid to marketers in exchange for referrals of potential customers. All direct marketing costs are expensed as incurred.
Other cost of sales. Other cost of sales includes data verification costs associated with the underwriting of potential customers and automated clearing house transaction costs associated with customer loan funding and payments.
Operating expenses
Operating expenses consist of compensation and benefits, professional services, selling and marketing, occupancy and equipment, depreciation and amortization as well as other miscellaneous expenses.
Compensation and benefits. Salaries and personnel-related costs, including benefits, bonuses and share-based compensation expense, comprise a majority of our operating expenses and these costs are driven by our number of employees.
Professional services. These operating expenses include costs associated with legal, accounting and auditing, recruiting and outsourced customer support and collections. Selling and marketing. Selling and marketing costs include costs associated with the use of agencies that perform creative services and monitor and measure the performance of the various marketing channels. Selling and marketing costs also include the production costs associated with media advertisements that are expensed as incurred over the licensing or production period. These expenses do not include direct marketing costs incurred to acquire customers, which comprises CAC.
Occupancy and equipment. Occupancy and equipment include rent expense on our leased facilities, as well as telephony and web hosting expenses.
Depreciation and amortization. We capitalize all acquisitions of property and equipment of$500 or greater as well as certain software development costs. Costs incurred in the preliminary stages of software development are expensed. Costs incurred thereafter, including external direct costs of materials and services as well as payroll and payroll-related costs, are capitalized. Post-development costs are expensed. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. 63
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Other expense
Net interest expense. Net interest expense primarily includes the interest expense associated with our debt facilities and term notes. See Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in
Note 6 , "Notes Payable" for more information about our debt. Interest expense also includes any amortization of deferred debt issuance cost and prepayment penalties incurred associated with the debt facilities.
Equity method investment gain or loss. Equity method investment loss includes our portion of the earnings or loss associated with an investment in an unconsolidated subsidiary beginning in the first quarter of 2022.
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