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
consolidated financial statements and the related notes and other financial
information included elsewhere in this Annual Report on Form 10-K.
Some of the information contained in this discussion and analysis, including
information with respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties. You should
review the "Risk Factors" and "Note About Forward-Looking Statements" sections
of this Annual Report on Form 10-K for a discussion of important factors that
could cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis. We generally refer to loans, customers and other information and
data associated with each of 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 risky to
underwrite and serve with traditional approaches. We're succeeding at it - and
doing it responsibly - with best-in-class advanced technology and proprietary
risk analytics honed by serving more than 2.7 million customers with $9.8
billion in credit. Our current online credit products, Rise, Elastic and Today
Card, reflect our mission to provide customers with access to competitively
priced credit and services while helping them build a brighter financial future
with credit building and financial wellness features. We call this mission "Good
Today, Better Tomorrow."
Prior to June 29, 2020, we provided services in the United Kingdom ("UK")
through our wholly-owned subsidiary, Elevate Credit International Limited
("ECIL") under the brand name 'Sunny.' During the year ended December 31, 2018,
ECIL began to receive an increased number of customer complaints initiated by
claims management companies ("CMCs") related to the affordability assessment of
certain loans. The CMCs' campaign against the high cost lending industry
increased significantly during the third and fourth quarters of 2018 and
continued through 2019 and into the first half of 2020, resulting in a
significant increase in affordability claims against all companies in the
industry over this period. The Financial Conduct Authority ("FCA"), a regulator
in the UK financial services industry, began regulating the CMCs in April 2019
in order to ensure that the methods used by the CMCs are in the best interests
of the consumer and the industry. Separately, the FCA asked all industry
participants to review their lending practices to ensure that such companies are
using an appropriate affordability and creditworthiness analysis. However, there
continued to be a lack of clarity within the regulatory environment in the UK.
This lack of clarity, coupled with the ongoing impact of the Coronavirus Disease
2019 ("COVID-19") on the UK market for Sunny, led the ECIL board of directors to
place ECIL into administration under the UK Insolvency Act 1986 and appoint
insolvency practitioners from KPMG LLP to take control and management of the UK
business. As a result, we have deconsolidated ECIL and are presenting its
results as discontinued operations.
We earn revenues on the Rise installment loans, on the Rise and Elastic lines of
credit and on the Today Card credit card product. Our revenue primarily consists
of finance charges and line of credit fees. Finance charges are driven by our
average loan balances outstanding and by the average annual percentage rate
("APR") associated with those outstanding loan balances. We calculate our
average loan balances by taking a simple daily average of the ending loan
balances outstanding for each period. Line of credit fees are recognized when
they are assessed and recorded to revenue over the life of the loan. We present
certain key metrics and other information on a "combined" basis to reflect
information related to loans originated by us and by our bank partners that
license our brands, Republic Bank, FinWise Bank and Capital Community Bank
("CCB"), as well as loans originated by third-party lenders pursuant to CSO
programs, which loans originated through CSO programs are not recorded on our
balance sheets 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 December 31, 2021. See "-Liquidity and Capital Resources-Debt
facilities."
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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. Elevate is required to consolidate EF SPV as a
variable interest entity ("VIE") under US GAAP and the consolidated financial
statements include revenue, losses and loans receivable related to the 96% of
the Rise installment loans originated by FinWise Bank and sold to EF SPV.
Beginning in the third quarter of 2020, we also license our Rise installment
loan brand to an additional bank, CCB, which originates Rise installment loans
in three different states than FinWise Bank. Similar to the relationship with
FinWise Bank, CCB initially provides all of the funding, retains 5% of the
balances of all of the loans originated and sells the remaining 95% loan
participation in those Rise installment loans to a third-party SPV, EC SPV, Ltd.
("EC SPV"). These loan participation purchases are funded through a separate
financing facility (the "EC SPV Facility"), and through cash flows from
operations generated by EC SPV. The EC SPV Facility has a maximum total
borrowing amount available of $100 million. We do not own EC SPV, but we have a
credit default protection agreement with EC SPV whereby we provide credit
protection to the investors in EC SPV against Rise loan losses in return for a
credit premium. Elevate is required to consolidate EC SPV as a VIE under US GAAP
and the 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 consolidated financial results. The ESPV Facility has a maximum
total borrowing amount of $350 million as of December 31, 2021.
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 is very
strong, as we continue to see extremely high response rates, high customer
engagement, and positive customer satisfaction scores.
Our management evaluates our financial performance and our future strategic objectives using key indicators based primarily on the following three themes:
•Revenue growth. Key metrics related to revenue growth that we monitor by
product include the ending and average combined loan balances outstanding, the
effective APR of our product loan portfolios, the total dollar value of loans
originated, the number of new customer loans made, the ending number of customer
loans outstanding and the related customer acquisition costs ("CAC") associated
with each new customer loan made. We include CAC as a key metric when analyzing
revenue growth (rather than as a key metric within margin expansion).
•Stable credit quality. Since the time they were managing our legacy US
products, our management team has maintained stable credit quality across the
loan portfolio they were managing. Additionally, in the periods covered in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, we have maintained our strong credit quality. The credit quality
metrics we monitor include net charge-offs as a percentage of revenues, the
combined loan loss reserve as a percentage of outstanding combined loans, total
provision for loan losses as a percentage of revenues and the percentage of past
due combined loans receivable - principal.
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•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
and credit provisioning expense associated with this growth. As we continue to
rebuild and scale our portfolio from the impacts of COVID-19, we anticipate that
our direct marketing costs primarily associated with new customer acquisitions
will 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.
Impact of COVID-19
The COVID-19 pandemic and related restrictive measures taken by governments,
businesses and individuals caused unprecedented uncertainty, volatility and
disruption in financial markets and in governmental, commercial and consumer
activity in the United States, including the markets that we serve. As the
restrictive measures have been eased in certain geographic locations, the U.S.
economy has begun to recover, and with the availability and distribution of
COVID-19 vaccines, we anticipate continued improvements in commercial and
consumer activity and the U.S. economy. While positive signs exist, we recognize
that certain of our customers are experiencing varying degrees of financial
distress, which may continue, especially if new COVID-19 variant infections
increase and new economic restrictions are mandated.
In 2020, we experienced a significant decline in the loan portfolio due to a
lack of customer demand for loans resulting from the effects of COVID-19 and
related government stimulus programs. These impacts resulted in a lower level of
direct marketing expense and materially lower credit losses during 2020 and
continuing into early 2021. Beginning in the second quarter of 2021, we
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 is resulting
in compressed margins in 2021 due to the upfront costs associated with marketing
and credit provisioning expense related to growing and "rebuilding" the loan
portfolio from the impacts of COVID-19. We continue to target loan portfolio
originations within our target CACs of $250-$300 and credit quality metrics of
45-55% of revenue which, when combined with our expectation of continuing
customer loan demand for our portfolio products, we believe will allow us to
return to our historical performance levels prior to COVID-19 after initially
resulting in earnings compression.
Both we and the bank originators are closely monitoring the key credit quality
indicators such as payment defaults, continued payment deferrals, and line of
credit utilization. While we initially anticipated that the COVID-19 pandemic
would have a negative impact on our credit quality, instead the monetary
stimulus programs provided by the US government to our customer base have
generally allowed customers to continue making payments on their loans. At the
beginning of the pandemic, we expected an increase in net charge-offs as
compared to prior periods but experienced historically low net charge-offs as a
percentage of revenue in the second half of 2020 and early 2021. With the
increased volume of new customer loans expected to be originated as we grow our
loan portfolio back to our pre-pandemic size and the ending of government
assistance, we expect an initial increase in net charge-offs in excess of our
targeted range with a return of net charge-offs to our targeted range of 45-55%
of revenue as the portfolio becomes more seasoned with a balance of new and
returning customers. Further, we believe that the allowance for loan losses is
adequate to absorb the losses inherent in the portfolio as of December 31, 2021.
We have implemented a hybrid remote environment where employees may choose to
work primarily from the office or from home and gather collectively in the
office on a limited basis. We have sought to ensure our employees feel secure in
their jobs, have flexibility in their work location and have the resources they
need to stay safe and healthy. As 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.
COVID-19 has had a significant adverse impact on our business, and while
uncertainty still exists, we believe we are well-positioned to operate
effectively through the present economic environment and expect continued loan
portfolio growth and strong credit quality into the next year. We will continue
assessing our minimum cash and liquidity requirement, monitoring our debt
covenant compliance and implementing measures to ensure that our cash and
liquidity position is maintained through the current economic cycle.
KEY FINANCIAL AND OPERATIONAL INDICATORS
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.
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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 years ended the 31st of DecemberRevenues (in thousands of dollars, unless otherwise indicated)
2021 2020 2019
Revenues $ 416,637 $ 465,346 $ 638,873
Period-over-period revenue decrease (10) % (27) % (4) %
Ending combined loans receivable - principal(1) 558,759 399,822 607,149
Average combined loans receivable - principal(1)(2) 432,836 453,983 561,334
Total combined loans originated - principal 940,510 628,660 1,102,766
Average customer loan balance (in dollars)(3) 1,992 1,861 2,011
Number of new customer loans 168,339 68,245 159,725
Ending number of combined loans outstanding 280,506 214,848 301,959
Customer acquisition costs (in dollars) $ 247 $ 297 $ 241
Effective APR of combined loan portfolio 95 % 102 % 113 %
_________
(1)Combined loans receivable is defined as loans owned by us and consolidated
VIEs plus loans originated and owned by third-party lenders pursuant to our CSO
programs. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation of Combined loans receivable to Loans receivable, net, the most
directly comparable financial measure calculated in accordance with US GAAP.
(2)Average combined loans receivable - principal is calculated using an average
of daily Combined loans receivable - principal balances.
(3)Average customer loan balance is an average of all three products and is
calculated for each product by dividing the ending Combined loans receivable -
principal by the number of loans outstanding at period end.
Revenues. Our revenue is made up of Rise finance fees, Rise CSO fees (which are fees we receive from customers who obtain a loan through the CSO program for credit services, including loan guarantee, which we provide), revenue earned from the Elastic line of credit, and finance charges and fee revenue from the Today Card credit card product. See ”Components of Our Results of Operations – Revenues”.
Ending and average combined loans receivable - principal. We calculate the
average combined loans receivable - principal by taking a simple daily average
of the ending combined loans receivable - principal for each period. Key metrics
that drive the ending and average combined loans receivable - principal include
the amount of loans originated in a period and the average customer loan
balance. All loan balance metrics include only the 90% participation in the
related Elastic line of credit advances (we exclude the 10% held by Republic
Bank), the 96% participation in FinWise Bank originated Rise installment loans
and the 95% participation in CCB originated Rise installment loans and the 95%
participation in the CCB originated Today Card credit card receivables, but
include the full loan balances on CSO loans, which are not presented on our
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.
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:
($1,657.39 interest earned / $1,912.37 average outstanding balance) x 12 months per year = 130%
8 months
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In addition, as an example for Elastic, if a customer makes a $2,500 draw on the
customer's line of credit and this draw required bi-weekly minimum payments of
5% (equivalent to 20 bi-weekly payments), and if all minimum payments are made,
the draw would earn finance charges of $1,125. The effective APR for the line of
credit in this example is 107% over the payment period and is calculated as
follows:
($1,125.00 fees earned / $1,369.05 average unpaid balance) x 26 fortnight periods per year = 107%
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.
The following tables summarize the evolution of customer loans by product for the years ended December 31, 20212020 and 2019.
Year Ended December 31, 2021
Rise Elastic Today
(Installment (Lines of
Loans) Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 103,940 100,105 10,803 214,848
New customer loans originated 103,426 37,937 26,976 168,339
Former customer loans originated 64,896 525 - 65,421
Attrition (137,848) (27,939) (2,315) (168,102)
Ending number of combined loans
outstanding 134,414 110,628 35,464 280,506
Customer acquisition cost $ 287 $ 272 $ 57 $ 247
Average customer loan balance $ 2,310 $ 1,805 $ 1,370 $ 1,992
Year Ended December 31, 2020
Rise Elastic Today
(Installment (Lines of
Loans) Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 152,435 146,317 3,207 301,959
New customer loans originated 46,857 13,302 8,086 68,245
Former customer loans originated 56,427 348 - 56,775
Attrition (151,779) (59,862) (490) (212,131)
Ending number of combined loans
outstanding 103,940 100,105 10,803 214,848
Customer acquisition cost $ 324 $ 351 $ 52 $ 297
Average customer loan balance $ 2,197 $ 1,572 $ 1,306 $ 1,861
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Year Ended December 31, 2019
Rise Elastic Today
(Installment (Lines of
Loans) Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 142,758 165,950 447 309,155
New customer loans originated 108,813 47,677 3,235 159,725
Former customer loans originated 80,624 62 - 80,686
Attrition (179,760) (67,372) (475) (247,607)
Ending number of combined loans
outstanding 152,435 146,317 3,207 301,959
Customer acquisition cost $ 248 $ 240 $ 23 $ 241
Average customer loan balance $ 2,297 $ 1,727 $ 1,368 $ 2,011
Recent trends. Our revenues for the year ended December 31, 2021 totaled
$416.6 million, a decrease of 10% versus the prior year period. Our revenues for
the year ended December 31, 2020 totaled $465.3 million, a decrease of 27%
versus the prior year period. Both the Rise and Elastic products experienced a
year-over-year decline in revenues of 12% and 11%, respectively, which were
attributable to reductions in year-to-date average loan balances due to the
economic crisis created by the COVID-19 pandemic beginning in March 2020, which
resulted in substantial government assistance to our potential customers that
lowered demand for our products, and a lower Rise effective APR. This decline in
revenue was partially offset by a year-over-year increase in revenues for the
Today Card product, which more than tripled its average principal balance
outstanding year-over year. We believe Today Card balances have increased
despite the impact of COVID-19 due to the nature of the product (credit card
versus installment loan or lines of credit), the lower APR of the product
(effective APR of 31% for the year ended December 31, 2021, compared to Rise at
103% and Elastic at 94%) as customers receiving stimulus payments would be more
apt to pay down more expensive forms of credit, and the added convenience of
having a credit card for online purchases of day-to-day items such as groceries
or clothing (whereas the primary usage of a Rise installment loan or Elastic
line of credit is for emergency financial needs such as a medical deductible or
automobile repair).
We are currently experiencing an increase in new and former customers as demand
for the loan products provided by us and the bank originators began to return
during the second quarter of 2021. This is in contrast to 2020 and early 2021
when the portfolio of loan products experienced significantly decreased loan
demand for both new and former customers due to COVID-19, including the effects
of monetary stimulus provided by the US government reducing demand for loan
products. All three of our products experienced an increase in principal loan
balances in 2021 compared to a year ago. Rise and Elastic principal balances at
December 31, 2021 totaled $310.5 million and $199.7 million, respectively, up
$82.2 million and $42.3 million, respectively, from a year ago. Today Card
principal loan balances at December 31, 2021 totaled $48.6 million, up $34.5
million from a year ago.
Our CAC was lower in the year ended December 31, 2021 at $247 as compared to the
prior year at $297, with the prior year not reflective of our historical CAC due
to the significant reduction in new loan originations due to the COVID-19
pandemic. Our 2021 loan volume is being sourced from all our marketing channels
including direct mail, strategic partners and digital. We've seen a marked
improvement in loan volume from our strategic partners channel where we have
improved our technology and risk capabilities to interface with the strategic
partners via our application programming interface (APIs) that we developed
within our new technology platform, Blueprint™. Blueprint™ will allow us to more
efficiently acquire new customers within our targeted CAC range. We believe our
CAC in future quarters will continue to remain within or below our target range
of $250 to $300 as we continue to optimize the efficiency of our marketing
channels and continue to grow the Today Card which successfully generated new
customers at a sub-$100 CAC.
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Credit quality
As of and for the years ended December 31,
Credit quality metrics (dollars in thousands) 2021 2020 2019
Net charge-offs(1) $ 163,705 $ 189,823 $ 330,317
Additional provision for loan losses(1) 22,125 (32,913) (4,655)
Provision for loan losses $ 185,830 $ 156,910 325,662
Combined loans receivable past due – principal as a percentage of combined loans receivable – principal(2)
10 % 6 % 10 %
Net charge-offs as a percentage of revenues(1) 39 % 41 % 52 %
Total allowance for loan losses as a percentage of revenue
45 % 34 % 51 %
Combined loan loss reserve(3) $ 71,204 $ 49,079 $ 81,992
Combined loan loss reserve as a percentage of combined
loans receivable(3) 12 % 12 % 13 %
_________
(1)Net charge-offs and additional provision for loan losses are not financial
measures prepared in accordance with US GAAP. Net charge-offs include the amount
of principal and accrued interest on loans that are more than 60 days past due
(Rise and Elastic) or 120 days past due (Today Card), or sooner if we receive
notice that the loan will not be collected, such as a bankruptcy notice or
identified fraud, offset by any recoveries. Additional provision for loan losses
is the amount of provision for loan losses needed for a particular period to
adjust the combined loan loss reserve to the appropriate level in accordance
with our underlying loan loss reserve methodology. See "-Non-GAAP Financial
Measures" for more information and for a reconciliation to Provision for loan
losses, the most directly comparable financial measure calculated in accordance
with US GAAP.
(2)Combined loans receivable is defined as loans owned by us and consolidated
VIEs plus loans originated and owned by third-party lenders pursuant to our CSO
programs. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation of Combined loans receivable to Loans receivable, net, the most
directly comparable financial measure calculated in accordance with US GAAP.
(3)Combined loan loss reserve is defined as the loan loss reserve for loans
originated and owned by us plus the loan loss reserve for loans owned by
third-party lenders and guaranteed by us. See "-Non-GAAP Financial Measures" for
more information and for a reconciliation of Combined loan loss reserve to
Allowance for loan losses, the most directly comparable financial measure
calculated in accordance with US GAAP.
Net principal charge-offs as a
percentage of average combined loans First Third
receivable - principal (1)(2)(3) Quarter Second Quarter Quarter Fourth Quarter
2021 6% 5% 6% 10%
2020 11% 10% 4% 5%
2019 13% 10% 10% 12%
(1)Net principal charge-offs is comprised of gross principal charge-offs less
recoveries.
(2)Average combined loans receivable - principal is calculated using an average
of daily Combined loans receivable - principal balances during each quarter.
(3)Combined loans receivable is defined as loans owned by us and consolidated
VIEs plus loans originated and owned by third-party lenders pursuant to our CSO
programs. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation of Combined loans receivable to Loans receivable, net, the most
directly comparable financial measure calculated in accordance with US GAAP.
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.
Net principal charge-offs as a percentage of average combined loans
receivable-principal for the fourth quarter of 2021 has returned to the levels
consistent with 2019 due to the volume of new customers being originated as we
rebuild the portfolio from the impacts of the COVID-19 pandemic and return to a
more normalized credit profile.
In reviewing the credit quality of our loan portfolio, we break out our total
provision for loan losses that is presented on our statements of operations
under US GAAP into two separate items-net charge-offs and additional provision
for loan losses. Net charge-offs are indicative of the credit quality of our
underlying portfolio, while additional provision for loan losses is subject to
more fluctuation based on loan portfolio growth, recent credit quality trends
and the effect of normal seasonality on our business. The additional provision
for loan losses is the amount needed to adjust the combined loan loss reserve to
the appropriate amount at the end of each month based on our loan loss reserve
methodology.
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Net charge-offs. Net charge-offs comprise gross charge-offs offset by
recoveries on prior charge-offs. Gross charge-offs include the amount of
principal and accrued interest on loans that are more than 60 days past due
(Rise and Elastic) or 120 days (Today Card), or sooner if we receive notice that
the loan will not be collected, such as a bankruptcy notice or identified fraud.
Any payments received on loans that have been charged off are recorded as
recoveries and reduce the total amount of gross charge-offs. Recoveries are
typically less than 10% of the amount charged off, and thus, we do not view
recoveries as a key credit quality metric.
Net charge-offs as a percentage of revenues can vary based on several factors,
such as whether or not we experience significant growth or lower the APR of our
products. Additionally, although a more seasoned portfolio will typically result
in lower net charge-offs as a percentage of revenues, we do not intend to drive
down this ratio significantly below our historical ratios and would instead seek
to offer our existing products to a broader new customer base to drive
additional revenues.
Net charge-offs as a percentage of average combined loans receivable-principal
allow us to determine credit quality and evaluate loss experience trends across
our loan portfolio.
Additional provision for loan losses. Additional provision for loan losses is
the amount of provision for loan losses needed for a particular period to adjust
the combined loan loss reserve to the appropriate level in accordance with our
underlying loan loss reserve methodology.
Additional provision for loan losses relates to an increase in inherent losses
in the loan portfolio as determined by our loan loss reserve methodology. This
increase could be due to a combination of factors such as an increase in the
size of the loan portfolio or a worsening of credit quality or increase in past
due loans. It is also possible for the additional provision for loan losses for
a period to be a negative amount, which would reduce the amount of the combined
loan loss reserve needed (due to a decrease in the loan portfolio or improvement
in credit quality). The amount of additional provision for loan losses is
seasonal in nature, mirroring the seasonality of our new customer acquisition
and overall loan portfolio growth, as discussed above. The combined loan loss
reserve typically decreases during the first quarter or first half of the
calendar year due to a decrease in the loan portfolio from year end. Then, as
the rate of growth for the loan portfolio starts to increase during the second
half of the year, additional provision for loan losses is typically needed to
increase the reserve for future losses associated with the loan growth. Because
of this, our provision for loan losses can vary significantly throughout the
year without a significant change in the credit quality of our portfolio.
The following provides an example of the application of our loan loss reserve
methodology and the break-out of the provision for loan losses between the
portion associated with replenishing the reserve due to net charge-offs and the
amount related to the additional provision for loan losses. If the beginning
combined loan loss reserve were $25 million, and we incurred $10 million of net
charge-offs during the period and the ending combined loan loss reserve needed
to be $30 million according to our loan loss reserve methodology, our total
provision for loan losses would be $15 million, comprising $10 million in net
charge-offs (provision needed to replenish the combined loan loss reserve) plus
$5 million of additional provision related to an increase in future inherent
losses in the loan portfolio identified by our loan loss reserve methodology.
Example (dollars in thousands)
Beginning combined loan loss reserve $ 25,000
Less: Net charge-offs (10,000)
Provision for loan losses:
Provision for net charge-offs 10,000
Additional provision for loan losses 5,000
Total provision for loan losses 15,000
Ending combined loan loss reserve balance $ 30,000
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Loan loss reserve methodology. Our loan loss reserve methodology is calculated
separately for each product and, in the case of Rise loans originated under the
state lending model (including CSO program loans), is calculated separately
based on the state in which each customer resides to account for varying state
license requirements that affect the amount of the loan offered, repayment terms
and other factors. For each product, loss factors are calculated based on the
delinquency status of customer loan balances: current, 1 to 30 days past due, 31
to 60 days past due or 61-120 past due (for Today Card only). These loss factors
for loans in each delinquency status are based on average historical loss rates
by product (or state) associated with each of these three delinquency
categories. Hence, another key credit quality metric we monitor is the
percentage of past due combined loans receivable - principal, as an increase in
past due loans will cause an increase in our combined loan loss reserve and
related additional provision for loan losses to increase the reserve. For
customers that are not past due, we further stratify these loans into loss rates
by payment number, as a new customer that is about to make a first loan payment
has a significantly higher risk of loss than a customer who has successfully
made ten payments on an existing loan with us. Based on this methodology, during
the past three years we have seen our combined loan loss reserve as a percentage
of combined loans receivable fluctuate between approximately 10% and 14%
depending on the overall mix of new, former and past due customer loans.
Recent trends. Total loan loss provision for the year ended December 31, 2021
was 45% of revenues, which was within our targeted range of 45% to 55%, compared
to 34% in the prior year period. For the year ended December 31, 2021, net
charge-offs as a percentage of revenues totaled 39%, compared to 41% in the
prior year period. The increase in total loan loss provision as a percentage of
revenues in 2021 was due to the increase in new loan originations beginning in
the second quarter of 2021 and the loan loss provisioning associated with a
growing portfolio. We would expect to have higher charge-offs as a percent of
revenue, as compared to our targeted range, in the first quarter of 2022 due to
the heavier mix of new customer loans in the second half of 2021, which have a
higher loss profile. We expect to return within our targeted range beginning in
the second quarter as the portfolio seasons with a mix of new and returning
customers. While we initially anticipated that the COVID-19 pandemic would have
a negative impact on our credit quality, instead the large quantity of monetary
stimulus provided by the US government to our customer base has generally
allowed customers to continue making payments on their loans, which resulted in
a decrease in net charge-offs as a percentage of revenue compared to last year.
We continue to monitor the portfolio during the economic recovery resulting from
COVID-19 and will adjust our underwriting and credit policies to mitigate any
potential negative impacts as needed. As loan demand continues to return to
pre-pandemic levels and the loan portfolio grows, we expect our total loan loss
provision as a percentage of revenues to be within our targeted range of
approximately 45% to 55% of revenue.
The combined loan loss reserve as a percentage of combined loans receivable
totaled 12%, 12% and 13% as of December 31, 2021, 2020 and 2019, respectively.
The relatively steady loan loss reserve percentage reflects the stable credit
performance of the portfolio, and we would expect the loan loss reserve to
stabilize in the 12-13% range as we manage the portfolio to ensure a consistent
mix of new and returning customers within the portfolio and return the portfolio
to a normalized credit profile. Past due loan balances at December 31, 2021 were
10% of total combined loans receivable - principal, up from 6% from a year ago,
due to the number of new customers originated beginning in the second quarter of
2021, and is consistent with our historical past due percentages prior to the
pandemic. We, and the bank originators we support, are no longer offering
specific COVID-19 payment deferral programs, but continue to offer other payment
flexibility programs if certain qualifications are met. We are continuing to see
that most customers are meeting their scheduled payments once they exit the
payment deferral program. We anticipate the combined loan loss reserve as a
percentage of combined loans receivable, as well as our past due loan balances
as a percentage of total combined loans receivable-principal, will maintain at
their historic norms as we continue to grow our loan portfolio with a consistent
mix of new and returning customers.
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We also look at Rise and Elastic principal loan charge-offs (including both
credit and fraud losses) by loan vintage as a percentage of combined loans
originated-principal. As the below table shows, our cumulative principal loan
charge-offs for Rise and Elastic through December 31, 2021 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. During 2019,
we implemented new fraud tools that have helped lower fraud losses for the 2019
vintage and rolled out our next generation of credit models during the second
quarter of 2019 and continued refining the models during the third and fourth
quarters of 2019. Our payment deferral programs have also assisted in reducing
losses in our 2019 and 2020 vintages coupled with a lower volume of new loan
originations in our 2020 vintage. The 2019 and 2020 vintages are both performing
better than the 2017 and 2018 vintages. While still early, we would expect the
2021 vintage to be at or near 2018 levels or slightly lower given the increased
volume of new customer loans originated this year and a return of net
charge-offs to our targeted range of 45-55% of revenue. It is also possible that
the cumulative loss rates on all vintages will increase and may exceed our
recent historical cumulative loss experience due to the economic impact of a
prolonged crisis resulting from the COVID-19 pandemic.
[[Image Removed: elvt-20211231_g5.jpg]]
(1) The 2020 and 2021 vintages are not yet fully mature from a loss perspective.
(2) UK included in the 2013 to 2017 vintages only.
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We also look at Today Card principal loan charge-offs (including both credit and
fraud losses) by account vintage as a percentage of account principal
originations. As the below table shows, our cumulative principal credit card
charge-offs through December 31, 2021 for the 2020 account vintage is under 7%.
While our 2021 account vintage is currently performing better than 2020, we
expect the 2021 account vintage to have losses at or higher than the 2020
account vintage based on the volume of new customers originated in the second
half of 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. 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.
[[Image Removed: elvt-20211231_g6.jpg]]
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Margins
Twelve Months Ended December 31,
Margin metrics (dollars in thousands) 2021 2020 2019
Revenues $ 416,637 $ 465,346 $ 638,873
Net charge-offs(1) (163,705) (189,823) (330,317)
Additional provision for loan losses(1) (22,125) 32,913
4,655
Direct marketing costs (41,546) (20,282) (38,548)
Other cost of sales (13,951) (8,124) (10,083)
Gross profit 175,310 280,030 264,580
Operating expenses (155,980) (159,819) (163,011)
Operating income $ 19,330 $ 120,211 $ 101,569
As a percentage of revenues:
Net charge-offs 39 % 41 % 52 %
Additional provision for loan losses 6 (7) (1)
Direct marketing costs 10 4 6
Other cost of sales 3 2 2
Gross margin 42 60 41
Operating expenses 37 34 26
Operating margin 5 % 26 % 16 %
_________
(1) Non-GAAP measure. See “Non-GAAP Financial Measures – Net Write-offs and Additional Allowance for Loan Losses”.
Gross margin is calculated as revenues minus cost of sales, or gross profit,
expressed as a percentage of revenues, and operating margin is calculated as
operating income expressed as a percentage of revenues. Due to the negative
impact of COVID-19 on our loan balances and revenue, we are monitoring our
profit margins closely. Long-term, we intend to continue to manage the business
to a targeted 20% operating margin.
Recent operating margin trends. For the year ended December 31, 2021, our
operating margin was 5%, which was a decrease from 26% in the prior year period,
as well as a decrease from 16% in 2019. The margin decreases experienced in 2021
were primarily driven by the upfront costs associated with credit provisioning
and direct marketing expense associated with the increased new and former
customer loan origination volume as we grow and rebuild our loan portfolio from
the impacts of COVID-19. The margins achieved in 2020 were not reflective of our
historical performance as we experienced a significant decline in the loan
portfolio due to a lack of customer demand resulting from the effects of
COVID-19 and related government stimulus programs. These impacts resulted in a
lower level of direct marketing expense and materially lower credit losses
during 2020, leading to an increased gross margin.
Our operating expense metrics have been negatively impacted by the COVID-19
pandemic and its impact on loan balances and revenue. We began to see
improvements in our operating expense metric in the third and fourth quarter of
2021 due to the growth in the portfolio and associated increase in revenue
during those periods as we continued to manage and maintain a relatively
consistent operating expense between the two quarters. In the short term, with
the growth in the loan portfolio experienced in 2021, we expect our expense
metrics to continue to improve and move toward our target range as we focus on
growth to increase our new and former customer loan volume and continue to scale
the overall loan portfolio. In the long term, as we grow the loan portfolio
while actively managing our operating expenses, we expect to see our operating
expense metrics return to approximately 20-25% of revenue. However, management
will continue to look for opportunities to reduce our expenses to help offset
the increased loan origination and direct marketing expenses.
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NON-GAAP FINANCIAL MEASURES
We believe that the inclusion of the following non-GAAP financial measures in
this Annual Report on Form 10-K can provide a useful measure for
period-to-period comparisons of our core business, provide transparency and
useful information to investors and others in understanding and evaluating our
operating results, and enable investors to better compare our operating
performance with the operating performance of our competitors. Management uses
these non-GAAP financial measures frequently in its decision-making because they
provide supplemental information that facilitates internal comparisons to the
historical operating performance of prior periods and give an additional
indication of 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) represents our net earnings (loss) from continuing operations, adjusted to exclude:
• Uncertain tax position
• Possible losses related to legal issues
• Cumulative tax effect of adjustments
Adjusted diluted earnings (loss) per share is adjusted earnings (loss) divided by the diluted weighted average number of shares outstanding.
The following table presents a reconciliation of net income (loss) from
continuing operations and diluted earnings (loss) per share to Adjusted earnings
(loss) and Adjusted diluted earnings (loss) per share, which excludes the impact
of the contingent losses and uncertain tax position for each of the periods
indicated:
Twelve Months Ended December 31,
(Dollars in thousands except per share amounts) 2021 2020 2019
Net income (loss) from continuing operations $ (33,598) $ 36,202 $ 26,196
Impact of uncertain tax position 1,264 - -
Impact of contingent losses related to legal
matters 22,751 24,079 -
Cumulative tax effect of adjustments (4,007) (5,577) -
Adjusted earnings (loss) $ (13,590)
$54,704 $26,196
Diluted earnings (loss) per share - continuing
operations $ (0.98) $ 0.87 $ 0.59
Impact of uncertain tax position 0.04 - -
Impact of contingent losses related to legal
matters 0.66 0.58 -
Cumulative tax effect of adjustments (0.12) (0.14) -
Adjusted diluted earnings (loss) per share $ (0.40)
$1.31 $0.59
Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA represents our net income (loss) from continuing operations, adjusted to exclude:
• Net interest expense primarily associated with notes payable under credit facilities used to fund loan portfolios;
•Remuneration in shares;
• Depreciation of fixed assets and intangible assets;
• Gains and losses from disposals or potential losses related to legal issues included in non-operating loss; and
•Income taxes.
Adjusted EBITDA margin is Adjusted EBITDA divided by revenue.
Management believes that Adjusted EBITDA and Adjusted EBITDA margin are useful
supplemental measures to assist management and investors in analyzing the
operating performance of the business and provide greater transparency into the
results of operations of our core business.
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Adjusted EBITDA and Adjusted EBITDA margin should not be considered as
alternatives to net income from continuing operations or any other performance
measure derived in accordance with US GAAP. Our use of Adjusted EBITDA and
Adjusted EBITDA margin has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our results as
reported under US GAAP. Some of these limitations are:
•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 requirements; and
•Adjusted EBITDA does not reflect interest associated with notes payable used
for funding the loan portfolios, for other corporate purposes or tax payments
that may represent a reduction in cash available to us.
The following table presents a reconciliation of net income (loss) from
continuing operations to Adjusted EBITDA and Adjusted EBITDA margin for each of
the periods indicated:
Twelve Months Ended December 31,
(Dollars in thousands) 2021 2020 2019
Net income (loss) from continuing operations $ (33,598) $ 36,202 $ 26,196
Adjustments:
Net interest expense 38,479 49,020 62,533
Share-based compensation 6,640 8,110 9,875
Depreciation and amortization 18,470 18,133 15,879
Non-operating loss 22,232 24,079 681
Income tax expense (benefit) (7,783) 10,910 12,159
Adjusted EBITDA $ 44,440 $ 146,454 $ 127,323
Adjusted EBITDA margin 11 % 31 % 20 %
Free cash flow
Free cash flow (“FCF”) represents our net cash provided by continuing operating activities, adjusted to include:
• Net write-offs – capital loans combined; and
• Capital expenditures.
The following table provides a reconciliation of net cash provided by continuing operating activities to FCF for each of the periods indicated:
Twelve Months Ended December 31,
(Dollars in thousands) 2021 2020 2019
Net cash provided by continuing operating
activities(1) $ 156,159 $ 210,063 $ 333,316
Adjustments:
Net charge-offs - combined principal loans (123,073) (144,697) (258,250)
Capital expenditures (17,281) (16,069) (17,745)
FCF $ 15,805 $ 49,297 $ 57,321
_________
(1) Net cash from continuing operating activities includes net charges – combined finance costs.
Net write-offs and additional provision for loan losses
We break out our total provision for loan losses into two separate items-first,
the amount related to net charge-offs, and second, the additional provision for
loan losses needed to adjust the combined loan loss reserve to the appropriate
amount at the end of each month based on our loan loss provision methodology. We
believe this presentation provides more detail related to the components of our
total provision for loan losses when analyzing the gross margin of our business.
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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.
Additional provision for loan losses. Additional provision for loan losses is
the amount of provision for loan losses needed for a particular period to adjust
the combined loan loss reserve to the appropriate level in accordance with our
underlying loan loss reserve methodology.
Twelve Months Ended December 31,
(Dollars in thousands) 2021 2020 2019
Net charge-offs $ 163,705 $ 189,823 $ 330,317
Additional provision for loan losses 22,125 (32,913) (4,655)
Provision for loan losses $ 185,830 $ 156,910 $ 325,662
Combined loan information
The Elastic line of credit product is originated by a third-party lender,
Republic Bank, which initially provides all of the funding for that product.
Republic Bank retains 10% of the balances of all of the loans originated and
sells a 90% loan participation in the Elastic lines of credit to a third-party
SPV, Elastic SPV, Ltd. Elevate is required to consolidate Elastic SPV, Ltd. as a
VIE under US GAAP and the consolidated financial statements include revenue,
losses and loans receivable related to the 90% of Elastic lines of credit
originated by Republic Bank and sold to Elastic SPV.
Beginning in the fourth quarter of 2018, we started licensing our Rise
installment loan brand to a third-party lender, FinWise Bank, which originates
Rise installment loans in 17 states. FinWise Bank retains 4% of the balances of
all the loans originated and sells a 96% participation to a third-party SPV, EF
SPV, Ltd. We do not own EF SPV, but we are required to consolidate EF SPV as a
VIE under US GAAP and the consolidated financial statements include revenue,
losses and loans receivable related to the 96% of Rise installment loans
originated by FinWise Bank and sold to EF SPV.
Beginning in 2018, we started licensing the Today Card brand and our
underwriting services and platform to launch a credit card product originated by
CCB, which initially provides all of the funding for that product. CCB retains
5% of the credit card receivable balance of all the receivables originated and
sells a 95% participation in the Today Card lines of credit to us. The Today
Card program was expanded in 2020.
Beginning in the third quarter of 2020, we also license our Rise installment
loan brand to an additional bank, CCB, which originates Rise installment loans
in three different states than FinWise Bank. Similar to the relationship with
FinWise Bank, CCB retains 5% of the balances of all of the loans originated and
sells the remaining 95% loan participation in those Rise installment loans to EC
SPV. We do not own EC SPV, but we are required to consolidate EC SPV as a VIE
under US GAAP and the consolidated financial statements include revenue, losses
and loans receivable related to the 95% of the Rise installment loans originated
by CCB and sold to EC SPV.
The information presented in the tables below on a combined basis are non-GAAP
measures based on a combined portfolio of loans, which includes the total amount
of outstanding loans receivable that we own and that are on our balance sheets
plus outstanding loans receivable originated and owned by third parties that we
guarantee pursuant to CSO programs in which we participate. There were no new
loan originations in 2021 under our CSO programs, but we continued to have
obligations as the CSO until the wind-down of this portfolio was completed in
the third quarter of 2021. See "-Basis of Presentation and Critical Accounting
Policies-Allowance and liability for estimated losses on consumer loans."
We believe these non-GAAP measures provide investors with important information
needed to evaluate the magnitude of potential loan losses and the opportunity
for revenue performance of the combined loan portfolio on an aggregate basis. We
also believe that the comparison of the combined amounts from period to period
is more meaningful than comparing only the amounts reflected on our balance
sheets since both revenues and cost of sales as reflected in our financial
statements are impacted by the aggregate amount of loans we own and those CSO
loans we guaranteed.
Our use of total combined loans and fees receivable has limitations as an
analytical tool, and you should not consider it in isolation or as a substitute
for analysis of our results as reported under US GAAP. Some of these limitations
are:
• The Rise CSO loans were originated and held by a third party lender; and
• The Rise CSO loans were funded by a third party lender and were not part of the VPC Facility.
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At each of the period ends indicated, the following table presents a reconciliation of:
• Loans receivable, net, held by the company (which reconciles our consolidated balance sheets included elsewhere in this Annual Report on Form 10-K);
•Loans receivable, net, guaranteed by the Company (as disclosed in Note 3 of our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K);
•Loans receivable combined (which we use as a non-GAAP measure); and
•Combined loan loss reserve (which we use as a non-GAAP measure).
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2019 2020 2021
(Dollars in thousands)
December 31 March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
Company Owned Loans:
Loans receivable - principal, current,
company owned $
530 463 $486,396 $387,939 $346,380
$372,320 $331,251 $372,068 $466,140
$ 501,552
Loans receivable - principal, past due,
company owned 58,489 53,923 18,917 21,354 25,563 21,678 27,231 46,730 57,207
Loans receivable - principal, total,
company owned 588,952 540,319 406,856 367,734 397,883 352,929 399,299 512,870 558,759
Loans receivable - finance charges,
company owned 33,033 31,621 25,606 24,117 25,348 21,393 19,157 22,960 23,602
Loans receivable - company owned 621,985 571,940 432,462 391,851 423,231 374,322 418,456 535,830 582,361
Allowance for loan losses on loans
receivable, company owned (79,912) (76,188) (59,438) (49,909) (48,399) (39,037) (40,314) (56,209) (71,204)
Loans receivable, net, company owned $
542,073 $495,752 $373,024 $341,942
$374,832 $335,285 $378,142 $479,621
$ 511,157
Third-Party Loans Guaranteed by the
Company:
Loans receivable - principal, current,
guaranteed by company $
17,474 $12,606 $6,755 $9,129
$ 1,795 $ 145 $ 17 $ - $ -
Loans receivable - principal, past due,
guaranteed by company 723 564 117 314 144 15 4 - -
Loans receivable - principal, total,
guaranteed by company(1) 18,197 13,170 6,872 9,443 1,939 160 21 - -
Loans receivable - finance charges,
guaranteed by company(2) 1,395 1,150 550 679 299 22 4 - -
Loans receivable - guaranteed by
company 19,592 14,320 7,422 10,122 2,238 182 25 - -
Liability for losses on loans
receivable, guaranteed by company (2,080) (1,571) (1,156) (1,421) (680) (122) (7) - -
Loans receivable, net, guaranteed by
company(3) $
17,512 $12,749 $6,266 $8,701
$ 1,558 $ 60 $ 18 $ - $ -
Combined Loans Receivable(3):
Combined loans receivable - principal,
current $
547,937 $499,002 $394,694 $355,509
$374,115 $331,396 $372,085 $466,140
$ 501,552
Combined loans receivable - principal,
past due 59,212 54,487 19,034 21,668 25,707 21,693 27,235 46,730 57,207
Combined loans receivable - principal 607,149 553,489 413,728 377,177 399,822 353,089 399,320 512,870 558,759
Combined loans receivable - finance
charges 34,428 32,771 26,156 24,796 25,647 21,415 19,161 22,960 23,602
Combined loans receivable $
641,577 $586,260 $439,884 $401,973
$ 425,469 $ 374,504 $ 418,481 $ 535,830 $ 582,361
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2019 2020 2021
(Dollars in thousands) December 31 March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
Combined Loan Loss Reserve(3):
Allowance for loan losses on loans
receivable, company owned $
(79,912) ($76,188) ($59,438) ($49,909)
$ (48,399) $ (39,037) $ (40,314) $ (56,209) $ (71,204)
Liability for losses on loans receivable,
guaranteed by company (2,080) (1,571) (1,156) (1,421) (680) (122) (7) - -
Combined loan loss reserve $
(81,992) ($77,759) ($60,594) ($51,330)
$ (49,079) $ (39,159) $ (40,321) $ (56,209) $ (71,204)
Combined loans receivable - principal,
past due(3) $
59,212 $54,487 $19,034 $21,668
$25,707 $21,693 $27,235 $46,730 $57,207
Combined loans receivable – principal(3)
607,149 553,489 413,728 377,177 399,822 353,089 399,320 512,870 558,759
Percentage past due 10% 10% 5% 6% 6% 6% 7% 9% 10%
Combined loan loss reserve as a percentage
of combined loans receivable(3)(4) 13% 13% 14% 13% 12% 10% 10% 11% 12%
Allowance for loan losses as a percentage
of loans receivable - company owned 13% 13% 14% 13% 11% 10% 10% 11% 12%
_________
(1)Represents loans originated by third-party lenders through the CSO programs,
which are not included in our financial statements.
(2)Represents finance charges earned by third-party lenders through the CSO
programs, which are not included in our 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.
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COMPONENTS OF OUR OPERATING RESULTS
Revenue
Our revenues are composed of Rise finance charges and CSO fees (inclusive of
finance charges attributable to the participation in Rise installment loans
originated by FinWise Bank and CCB), cash advance fees attributable to the
participation in Elastic lines of credit that we consolidate, finance charges
and fee revenues related to the Today Card credit card product (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
Allowance for loan losses. Loan loss provision consists of amounts charged against income during the period related to net write-offs and additional loan loss provision necessary 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 costs of sales include data verification costs associated with signing up prospective customers and Automated Clearing House (“ACH”) transaction costs associated with funding and making loan payments to customers.
Operating Expenses
Operating expenses consist of compensation and benefits, professional services,
selling and marketing, occupancy and equipment, depreciation and amortization as
well as other miscellaneous expenses.
Compensation and benefits. Salaries and personnel-related costs, including
benefits, bonuses and share-based compensation expense, comprise a majority of
our operating expenses and these costs are driven by our number of employees.
Professional services. These operating expenses include costs associated with
legal, accounting and auditing, recruiting and outsourced customer support and
collections.
Selling and marketing. Selling and marketing costs include costs associated
with the use of agencies that perform creative services and monitor and measure
the performance of the various marketing channels. Selling and marketing costs
also include the production costs associated with media advertisements that are
expensed as incurred over the licensing or production period. These expenses do
not include direct marketing costs incurred to acquire customers, which
comprises CAC.
Occupancy and equipment. Occupancy and equipment includes rental charges for our leased facilities, as well as telephony and web hosting charges.
Depreciation and amortization. We capitalize all acquisitions of property and
equipment of $500 or greater as well as certain software development costs.
Costs incurred in the preliminary stages of software development are expensed.
Costs incurred thereafter, including external direct costs of materials and
services as well as payroll and payroll-related costs, are capitalized.
Post-development costs are expensed. Depreciation is computed using the
straight-line method over the estimated useful lives of the depreciable assets.
Other expense
Net interest expense. Net interest expense primarily includes the interest
expense associated with the VPC Facility that funds the Rise installment loans,
the ESPV Facility related to the Elastic lines of credit and related Elastic SPV
entity, the EF SPV and EC SPV Facilities that fund Rise installment loans
originated by FinWise Bank and CCB, respectively, and the TSPV facility used to
fund credit card receivable purchases. Interest expense also includes any
amortization of deferred debt issuance cost and prepayment penalties incurred
associated with the debt facilities.
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RESULTS OF OPERATIONS
This section of this Form 10-K generally discusses 2021 and 2020 items and
year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and
year-to-year comparisons between 2020 and 2019 that are not included in this
Form 10-K can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2020.
The following table sets forth our consolidated statements of operations data
for each of the periods indicated. Effective June 29, 2020, ECIL was placed into
administration in the UK, and we deconsolidated ECIL and present it as
discontinued operations for all periods presented.
Years ended December 31,
Consolidated statements of operations data (dollars in
thousands) 2021 2020 2019
Revenues $ 416,637 $ 465,346 $ 638,873
Cost of sales:
Provision for loan losses 185,830 156,910 325,662
Direct marketing costs 41,546 20,282 38,548
Other cost of sales 13,951 8,124 10,083
Total cost of sales 241,327 185,316 374,293
Gross profit 175,310 280,030 264,580
Operating expenses:
Compensation and benefits 76,408 84,103 89,417
Professional services 32,499 31,634 31,834
Selling and marketing 3,252 3,450 4,773
Occupancy and equipment 21,735 18,840 15,989
Depreciation and amortization 18,470 18,133 15,879
Other 3,616 3,659 5,119
Total operating expenses 155,980 159,819 163,011
Operating income 19,330 120,211 101,569
Other expense:
Net interest expense (38,479) (49,020) (62,533)
Non-operating loss (22,232) (24,079) (681)
Total other expense (60,711) (73,099) (63,214)
Income (loss) from continuing operations before taxes (41,381) 47,112 38,355
Income tax expense (benefit) (7,783) 10,910 12,159
Net income (loss) from continuing operations (33,598) 36,202 26,196
Net income (loss) from discontinued operations - (15,610) 5,987
Net income (loss) $ (33,598) $ 20,592 $ 32,183
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Years ended December 31,
As a percentage of revenues 2021 2020 2019
Cost of sales:
Provision for loan losses 45 % 34 % 51 %
Direct marketing costs 10 4 6
Other cost of sales 3 2 2
Total cost of sales 58 40 59
Gross profit 42 60 41
Operating expenses:
Compensation and benefits 18 18 14
Professional services 8 7 5
Selling and marketing 1 1 1
Occupancy and equipment 5 4 3
Depreciation and amortization 4 4 2
Other 1 1 1
Total operating expenses 37 34 26
Operating income 5 26 16
Other expense:
Net interest expense (9) (11) (10)
Non-operating loss (5) (5) -
Total other expense (15) (16) (10)
Income (loss) from continuing operations before taxes (10) 10 6
Income tax expense (benefit) (2) 2 2
Net income (loss) from continuing operations (8) 8 4
Net income (loss) from discontinued operations - (3) 1
Net income (loss) (8 %) 4 % 5 %
Comparison of years ended December 31, 2021 and 2020
Revenues
Years ended December 31,
2021 2020 Period-to-period change
Percentage of Percentage of
(Dollars in thousands) Amount revenues Amount revenues Amount Percentage
Finance charges $ 412,547 99 % $ 464,083 100 % $ (51,536) (11) %
Other 4,090 1 1,263 - 2,827 224
Revenues $ 416,637 100 % $ 465,346 100 % $ (48,709) (10) %
Revenues decreased by $48.7 million, or 10%, from $465.3 million for the year
ended December 31, 2020 to $416.6 million for the year ended December 31, 2021.
The decrease in revenue is primarily attributable to a lower average combined
loans receivable-principal balance coupled with lower effective APRs earned on
the loan portfolio.
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The tables below break out this change in revenue (including CSO fees and cash
advance fees) by product:
Year Ended December 31, 2021
Rise(1)
(Installment Elastic Today
(Dollars in thousands) Loans) (Lines of Credit) (Credit Cards) Total
Average combined loans receivable -
principal(2) $ 247,650 $ 160,142 $ 25,044 $ 432,836
Effective APR 103 % 94 % 31 % 95 %
Finance charges $ 253,895 $ 150,961 $ 7,691 $ 412,547
Other 711 664 2,715 4,090
Total revenue $ 254,606 $ 151,625 $ 10,406 $ 416,637
Year
Ended December 31, 2020
Rise(1)
(Installment Elastic Today
(Dollars in thousands) Loans) (Lines of Credit) (Credit Cards) Total
Average combined loans receivable -
principal(2) $ 263,162 $ 182,796 $ 8,025 $ 453,983
Effective APR 110 % 94 % 30 % 102 %
Finance charges $ 290,555 $ 171,086 $ 2,442 $ 464,083
Other 200 233 830 1,263
Total revenue $ 290,755 $ 171,319 $ 3,272 $ 465,346
_________
(1)Includes loans originated by third-party lenders through the CSO programs,
which are not included in our consolidated financial statements..
(2)Average combined loans receivable - principal is calculated using daily
Combined loans receivable - principal balances. Not a financial measure prepared
in accordance with US GAAP. See reconciliation table accompanying this release
for a reconciliation of non-GAAP financial measures to the most directly
comparable financial measure calculated in accordance with US GAAP.
Our average combined loans receivable principal decreased $21 million for the
year ended December 31, 2021 as compared to 2020. This decrease in average
balance is primarily due to lower combined loans receivable-principal balances
in the Rise and Elastic portfolios in the first half of 2021 which were impacted
by the COVID-19 pandemic and substantial government assistance to our customers
prior to the growth which commenced in late second quarter 2021. The decrease in
average balances accounted for approximately $32 million of the reduction in
revenue for the period. Our average APR declined from 102% for the year ended
December 31, 2020 to 95% for the year ended December 31, 2021. This reduction in
the effective APR is due to both the lower effective interest rates earned on
loans in a deferral status under the payment flexibility tools that were
implemented in response to the COVID-19 pandemic and the growth of Today Card
relative to the total loan portfolio, which has the lowest APR. The lower
effective APR accounted for approximately $20 million of the reduction in
revenue for the period. We expect the overall effective APR of the loan
portfolio to remain flat going forward.
Cost of sales
Years ended December 31, Period-to-period
2021 2020 change
Percentage of Percentage of
(Dollars in thousands) Amount revenues Amount revenues Amount Percentage
Cost of sales:
Provision for loan losses $ 185,830 45 % $ 156,910 34 % $ 28,920 18 %
Direct marketing costs 41,546 10 20,282 4 21,264 105
Other cost of sales 13,951 3 8,124 2 5,827 72
Total cost of sales $ 241,327 58 % $ 185,316 40 % $ 56,011 30 %
Allowance for loan losses. The provision for loan losses increased by $28.9 millioni.e. 18%, of $156.9 million for the year ended December 31, 2020 for
$185.8 million for the year ended December 31, 2021.
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The tables below detail these changes by loan product:
Year Ended December 31, 2021
Rise
(Installment Elastic Today
(Dollars in thousands) Loans) (Lines of Credit) (Credit Cards) Total
Combined loan loss reserve(1):
Beginning balance $ 33,968 $ 13,201 $ 1,910 $ 49,079
Net charge-offs (121,325) (38,240) (4,140) (163,705)
Provision for loan losses 135,576 41,737 8,517 185,830
Ending balance $ 48,219 $ 16,698 $ 6,287 $ 71,204
Combined loans receivable(1)(2) $ 324,290 $ 207,853 $ 50,218 $ 582,361
Combined loan loss reserve as a percentage
of ending combined loans receivable 15 % 8 % 13 % 12 %
Net charge-offs as a percentage of
revenues 48 % 25 % 40 % 39 %
Provision for loan losses as a percentage
of revenues 53 % 28 % 82 % 45 %
Year Ended December 31, 2020
Rise
(Installment Elastic Today
(Dollars in thousands) Loans) (Lines of Credit) (Credit Cards) Total
Combined loan loss reserve(1):
Beginning balance $ 52,099 $ 28,852 $ 1,041 $ 81,992
Net charge-offs (126,236) (61,639) (1,948) (189,823)
Provision for loan losses 108,105 45,988 2,817 156,910
Ending balance $ 33,968 $ 13,201 $ 1,910 $ 49,079
Combined loans receivable(1)(2) $ 247,797 $ 163,154 $ 14,518 $ 425,469
Combined loan loss reserve as a
percentage of ending combined loans
receivable 14 % 8 % 13 % 12 %
Net charge-offs as a percentage of
revenues 43 % 36 % 60 % 41 %
Provision for loan losses as a
percentage of revenues 37 % 27 % 86 % 34 %
_________
(1)Not a financial measure prepared in accordance with US GAAP. See "-Non-GAAP
Financial Measures" for more information and for a reconciliation to the most
directly comparable financial measure calculated in accordance with US GAAP.
(2)Includes loans originated by third-party lenders through the CSO programs,
which are not included in our financial statements.
Total loan loss provision for the year ended December 31, 2021 was 45% of
revenues, which was within our targeted range of 45% to 55%, and higher than 34%
for the year ended December 31, 2020. For the year ended December 31, 2021, net
charge-offs as a percentage of revenues was 39%, a decrease from 41% for the
comparable period in 2020. The increase in total loan loss provision as a
percentage of revenues in 2021 compared to last year was due to the increase in
new loan originations beginning in the second quarter of 2021 and charge-offs
and loan loss provisioning associated with a growing portfolio. While we
initially anticipated that the COVID-19 pandemic would have a negative impact on
our credit quality, instead the large quantity of monetary stimulus provided by
the US government to our customer base has generally allowed customers to
continue making payments on their loans, which resulted in a decrease in net
charge-offs as a percentage of revenue compared to last year. We continue to
monitor the portfolio during the economic recovery resulting from COVID-19 and
will adjust our underwriting and credit policies to mitigate any potential
negative impacts as needed. As loan demand continues to return to pre-pandemic
levels and the loan portfolio grows, we expect our total loan loss provision as
a percentage of revenues to be within our targeted range of approximately 45% to
55% of revenue.
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The combined loan loss reserve as a percentage of combined loans receivable
totaled 12% as of both December 31, 2021 and December 31, 2020. The loan loss
reserve percentage is flat at December 31, 2021, reflecting the stable credit
performance of the portfolio, and we would expect the loan loss reserve to
stabilize in the 12-13% range as we manage the portfolio to ensure a consistent
mix of new and returning customers within the portfolio and return the portfolio
to a normalized credit profile. Past due loan balances at December 31, 2021 were
10% of total combined loans receivable - principal, up significantly from 6%
from a year ago, due to the number of new customers originated beginning in the
second quarter of 2021, but is consistent with our historical past due
percentages prior to the pandemic.
Direct marketing costs. Direct marketing costs increased by approximately
$21.3 million, or 105%, from $20.3 million for the year ended December 31, 2020
to $41.5 million for the year ended December 31, 2021. We had limited marketing
activities and new loan origination volume in 2020 in response to the COVID-19
pandemic. We have seen a return to more normalized new customer acquisition in
all the three loan products in 2021 as the economy continues to recover from the
COVID-19 pandemic and demand for the loan products returns. For the year ended
December 31, 2021, the number of new customers acquired increased to 168,339
compared to 68,245 during the year ended December 31, 2020. We anticipate our
direct marketing costs will continue to increase as we focus on growing our loan
portfolio. Our CAC for the year ended December 31, 2021 was lower than the year
ended December 31, 2020 at $247 as compared to $297, with 2020 not reflective of
our historical CAC due to the significant reduction in new loan originations due
to the COVID-19 pandemic. We believe our CAC in future quarters will continue to
remain within or below our target range of $250 to $300 as we continue to
optimize the efficiency of our marketing channels and continue to grow the Today
Card which successfully generated new customers at a sub-$100 CAC.
Other cost of sales. Other cost of sales increased by approximately $5.8
million, or 72%, from $8.1 million for the year ended December 31, 2020 to $14.0
million for the year ended December 31, 2021 due to increased data verification
costs resulting from increased loan origination volume.
Operating expenses
Years ended December 31, Period-to-period
2021 2020 change
Percentage of Percentage of
(Dollars in thousands) Amount revenues Amount revenues Amount Percentage
Operating expenses:
Compensation and benefits $ 76,408 18 % $ 84,103 18 % $ (7,695) (9) %
Professional services 32,499 8 31,634 7 865 3
Selling and marketing 3,252 1 3,450 1 (198) (6)
Occupancy and equipment 21,735 5 18,840 4 2,895 15
Depreciation and amortization 18,470 4 18,133 4 337 2
Other 3,616 1 3,659 1 (43) (1)
Total operating expenses $ 155,980 37 % $ 159,819 34 % $ (3,839) (2) %
Compensation and benefits. Compensation and benefits decreased by $7.7
million, or 9%, from $84.1 million for the year ended December 31, 2020 to $76.4
million for the year ended December 31, 2021 primarily due to the reduction in
staff related to an operating expense reduction plan we implemented in the
second and third quarters of 2020 in response to the pandemic.
Professional services. Professional services increased by $0.9 million, or 3%,
from $31.6 million for the year ended December 31, 2020 to $32.5 million for the
year ended December 31, 2021 due to increased legal expenses, partially offset
by decreased board of directors' stock compensation expense.
Selling and marketing. Selling and marketing decreased by $0.2 million, or 6%,
from $3.5 million for the year ended December 31, 2020 to $3.3 million for the
year ended December 31, 2021 primarily due to decreased marketing agency fees.
Occupancy and equipment. Occupancy and equipment increased by $2.9 million, or
15%, from $18.8 million for the year ended December 31, 2020 to $21.7 million
for the year ended December 31, 2021 primarily due to increased web hosting,
partially offset by licenses and rentals expense.
Depreciation and amortization. Depreciation increased by approximately $0.3 millionor 2%, of $18.1 million for the year ended
December 31, 2020 for $18.5 million for the year ended December 31, 2021
primarily due to the acceleration of a board member’s non-competition covenant
$0.5 million with a slight decrease in the depreciation charge between the two years.
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Net interest expense
Years ended December 31, Period-to-period
2021 2020 change
Percentage of Percentage of
(Dollars in thousands) Amount revenues Amount revenues Amount Percentage
Net interest expense $ 38,479 9 % $ 49,020 11 % $ (10,541) (22) %
Net interest expense decreased $10.5 million, or 22%, during the year ended
December 31, 2021 versus the year ended December 31, 2020. Our average balance
of notes payable outstanding under the debt facilities for the year ended
December 31, 2021 decreased $74.7 million from $467.7 million for the year ended
December 31, 2020 to $393.0 million for the year ended December 31, 2021 due to
debt paydowns, including the maturity of one of our term notes, partially offset
by new draws to fund loan portfolio growth. This reduction resulted in a
decrease in interest expense of approximately $7.3 million. In addition, our
average effective cost of funds on our notes payable outstanding decreased from
10.5% for the year ended December 31, 2020 to 9.8% for the year ended
December 31, 2021, resulting in a decrease in interest expense of approximately
$3.2 million. At December 31, 2021, our effective cost of funds on new
borrowings on our VPC facilities is currently 8%, which is expected to reduce
our overall effective costs of funds as we continue to borrow on our debt
facilities in the future.
The following table shows the effective cost of funds of each debt facility for
the period:
Years ended December 31,
(Dollars in thousands) 2021 2020
VPC Facility
Average facility balance during the period $ 79,718 $ 157,484
Net interest expense 7,958 17,089
Effective cost of funds 10.0 % 10.9 %
ESPV Facility
Average facility balance during the period $ 167,442 $ 206,533
Net interest expense 16,925 21,489
Effective cost of funds 10.1 % 10.4 %
EF SPV Facility
Average facility balance during the period $ 100,265 $ 99,012
Net interest expense 9,285 9,938
Effective cost of funds 9.3 % 10.0 %
EC SPV Facility
Average facility balance during the period $ 39,148 $ 4,658
Net interest expense 3,814 504
Effective cost of funds 9.7 % 10.8 %
TSPV Facility
Average facility balance during the period(1) $ 28,963 $ -
Net interest expense 488 -
Effective cost of funds 7.6 % - %
(1) Average balance of the facility from inception to October 12, 2021 for December 31, 2021.
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In July 2020, we entered into a new facility, the EC SPV Facility. As of
December 31, 2021, we have drawn $55.5 million on the EC SPV facility. In
October 2021, we entered into a new facility, the TSPV facility, and have drawn
$37 million as of December 31, 2021. Per the terms of the February 2019
amendments and the July 31, 2020 EC SPV agreement, we qualified for a 25 bps
rate reduction on the VPC, ESPV, EF SPV, and EC SPV facilities effective January
1, 2021. We have evaluated the interest rates for our debt and believe they
represent market rates based on our size, industry, operations and recent
amendments. As a result, the carrying value for the debt approximates the fair
value. See "-Liquidity and Capital Resources-Debt facilities" for more
information.
Non-operating loss
Years ended December 31, Period-to-period
2021 2020 change
Percentage of Percentage of
(Dollars in thousands) Amount revenues Amount revenues Amount Percentage
Non-operating loss $ 22,232 5 % $ 24,079 5 % $ (1,847) (8) %
During the year ended December 31, 2021, we accrued $22.8 million in contingent
losses related to legal matters related to our spin-off from our predecessor
company in 2014 and a regulatory litigation matter, partially offset by a $0.5
million recovery related to an indemnification for a former executive of the
Company. During the year ended December 31, 2020, we recognized $24.1 million in
non-operating expenses related to an estimated $17 million contingent loss
associated with a legal matter related to our spin-off from our predecessor
company in 2014 and a separate $7 million indemnification accrual related to a
legal matter for a former executive of the Company.
Income tax expense (benefit)
Years ended December 31, Period-to-period
2021 2020 change
Percentage of Percentage of
(Dollars in thousands) Amount revenues Amount revenues Amount Percentage
Income tax expense (benefit) $ (7,783) (2) % $ 10,910 2 % $ (18,693) (171) %
Our income tax expense decreased $18.7 million, or 171%, from $10.9 million for
the year ended December 31, 2020 to a income tax benefit of $7.8 million for the
year ended December 31, 2021. We recognized an uncertain tax position of
$1.3 million in income tax expense due to a recent change in tax regulation in
the state of Texas that impacted our previously recognized research and
development state tax credits. Our effective tax rates for continuing operations
for the years ended December 31, 2021 and 2020 were 19% and 23%, respectively.
Our effective tax rates are different from the standard corporate federal income
tax rate of 21% primarily due to the uncertain tax position, of which
$1.2 million would impact our effective tax rate if realized, permanent
non-deductible items, and corporate state tax obligations in the states where we
have lending activities. Our US cash effective tax rate was approximately 0.3%
for 2021.
Net loss from discontinued operations
Our loss from discontinued operations on our UK entity (ECIL) for the year ended
December 31, 2020 consists of an investment loss of $28.0 million, operating
losses of $5.1 million, and a goodwill impairment loss of $9.3 million,
partially offset by an income tax benefit of $28.4 million.
Net income (loss)
Years ended December 31, Period-to-period
2021 2020 change
Percentage of Percentage of
(Dollars in thousands) Amount revenues Amount revenues Amount Percentage
Net income (loss) $ (33,598) (8) % $ 20,592 4 % $ (54,190) 263 %
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Our net income (loss) decreased $54.2 million, or 263%, from net income of $20.6
million for the year ended December 31, 2020 to a net loss of $33.6 million for
the year ended December 31, 2021 primarily due to the earnings compression
experienced due to loan portfolio growth (upfront costs associated with credit
provision and direct marketing expense) during the second half of 2021, as well
as non-operating losses related to litigation accruals.
CASH AND CAPITAL RESOURCES
As previously discussed, we are closely monitoring the impacts of the COVID-19
pandemic across our business, including the resulting uncertainties around
customer demand, credit performance of the loan portfolio, our levels of
liquidity and our ongoing compliance with debt covenants. We had cash and cash
equivalents available of $85 million at December 31, 2021, compared to cash and
cash equivalents available of $198 million at December 31, 2020, a decrease of
$113 million, primarily due to increased loan origination and participation
purchases. Our principal debt payment obligation of $18 million was paid off in
January 2021 prior to its maturity in February 2021, and there are no additional
required principal payments on our outstanding debt until January 2024.
Throughout the first half of 2021, we made additional net paydowns on the debt
facilities of approximately $70 million. As we are experiencing increased demand
for the loan products, resulting in increased origination volume, we are drawing
down on our available debt facilities to fund the loan portfolio growth. In the
second half of 2021, we made draws on the debt facilities of approximately $154
million. In January 2022, we entered into a sub-debt facility with Pine Hill
Finance LLC of $20 million to supplement our working capital.
While the ultimate impact of COVID-19 on our business, financial condition,
liquidity and results of operations is dependent on future developments which
are highly uncertain, we believe that our actions taken to date, future cash
provided by operating activities, availability under our debt facilities with
VPC and PCAM, and possibly the capital markets, as well as certain potential
measures within our control that could be put in place to maintain a sound
financial position and liquidity will provide adequate resources to fund our
operating and financing needs.
We are continuing to assess our minimum cash and liquidity requirements and
implementing measures to ensure that our cash and liquidity position is
maintained through the current economic cycle created by the COVID-19 pandemic.
We believe that our existing cash balances, together with the available
borrowing capacity under the debt facilities, will be sufficient to meet our
anticipated cash operating expense and capital expenditure requirements through
at least the next year. We principally rely on our working capital and our
credit facilities with VPC and PCAM to fund the loans we make to our customers.
At December 31, 2021, we have contractual obligations for our operating leases
and long-term debt totaling $4 million in 2022, and an additional $475 million
in total due in the next three years. We also are committed, among other things,
to pay $41 million in 2022 as a result of the Think Finance and District of
Columbia litigation settlements, as described further in Note 14 -
Commitments, Contingencies and Guarantees and Note 19 - Subsequent Events .
If our loan growth exceeds our expectations or other unexpected liquidity needs
arise, our available cash balances may be insufficient to satisfy our liquidity
requirements, and we may seek additional equity or debt financing. This
additional capital may not be available on reasonable terms, or at all.
Share buyback program
At December 31, 2021, we had an outstanding stock repurchase plan authorized by
our Board of Directors providing for the repurchase of up to $80 million of our
common stock through July 31, 2024, inclusive of two $25 million increases to
the plan authorized by the Board of Directors in January and October 2021. The
Board of Directors further authorized a $10 million increase to the annual
fiscal limit of repurchases in October 2021. During the year ended December 31,
2020, we repurchased $19.8 million of common stock. We repurchased 7,337,277
common shares at a total cost of $27.5 million during the year ended December
31, 2021. In January 2022, we repurchased an additional 47,981 of common shares
at a total cost of $148 thousand. Separately from the repurchase plan, have
repurchased approximately 925 thousand shares of common stock during the first
quarter of 2022 pursuant to the Think Finance litigation settlement agreement
executed in February 2022.
The amended stock repurchase program provides that up to a maximum aggregate
amount of $35 million shares may be repurchased in any given fiscal year.
Repurchases will be made in accordance with applicable securities laws from
time-to-time in the open market and/or in privately negotiated transactions at
our discretion, subject to market conditions and other factors. The share
repurchase program does not require the purchase of any minimum number of shares
and may be implemented, modified, suspended or discontinued in whole or in part
at any time without further notice. Any repurchased shares will be available for
use in connection with equity plans and for other corporate purposes.
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Cash and cash equivalents, restricted cash, loans (net of allowance for loan losses) and cash flow
The following table summarizes our cash and cash equivalents, restricted cash, loans receivable, net amount and cash flows for the periods indicated:
As of and for the years ended December 31,
(Dollars in thousands) 2021 2020 2019
Cash and cash equivalents $ 84,978 $ 197,983 71,215
Restricted cash 5,874 3,135 2,235
Loans receivable, net 511,157 374,832 542,073
Cash provided by (used in):
Operating activities - continuing operations 156,159 210,063 333,316
Investing activities - continuing operations (304,638) 25,640 (307,842)
Financing activities - continuing operations 38,213 (108,035) (2,907)
Our cash and cash equivalents at December 31, 2021 were held primarily for
working capital purposes. We may, from time to time, use excess cash and cash
equivalents to fund our lending activities, paydown debt or repurchase stock. We
do not enter into investments for trading or speculative purposes. Our policy is
to invest any cash in excess of our immediate working capital requirements in
investments designed to preserve the principal balance and provide liquidity.
Accordingly, our excess cash is invested primarily in demand deposit accounts
that are currently providing only a minimal return.
Net cash flow generated by operating activities
We generated $156.2 million in cash from our operating activities-continuing
operations for the year ended December 31, 2021 primarily from revenues derived
from our loan portfolio. This was down $53.9 million from the $210.1 million of
cash provided by operating activities-continuing operations during the year
ended December 31, 2020 due to a decrease in revenues resulting from a smaller
average loan portfolio and lower effective APR as compared to the prior year.
For the year ended December 31, 2020, net cash provided by operating activities
was down $123.33 million from the year ended December 31, 2019 due to a decrease
in revenues.
Net cash provided by (used in) investing activities
For the years ended December 31, 2021, 2020 and 2019, cash provided by (used in)
investing activities-continuing operations was $(304.6) million, $25.6 million
and $(307.8) million, respectively. The decrease for the year ended December 31,
2021 was primarily due to an increase in net loans issued to customers and a
growing loan portfolio compared to prior year. For the year ended December 31,
2020 net cash provided by investing activities increased from the year ended
December 31, 2019 primarily due to a decrease in net loans originated to
customers related to the COVID-19 pandemic.
The following table summarizes cash provided by (used in) investing activities – continuing operations for the periods indicated:
For the years ended December 31,
(Dollars in thousands) 2021 2020 2019
Cash provided by (used in) investing activities -
continuing operations
Net loans originated to consumers, less repayments $ (283,019) $ 45,537 $ (284,236)
Participation premium paid (5,588) (3,828) (5,861)
Purchases of property and equipment (17,281) (16,069) (17,745)
Proceeds from sale of intangible assets 1,250 - -
$ (304,638) $ 25,640 $ (307,842)
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Net cash provided by (used in) financing activities
Cash flows from financing activities-continuing operations primarily include
cash received from issuing notes payable, payments on notes payable, and
activity related to stock awards. For the years ended December 31, 2021, 2020
and 2019, cash provided by (used in) financing activities-continuing operations
was $38.2 million, $(108.0) million and $(2.9) million, respectively. The
following table summarizes cash provided by (used in) financing
activities-continuing operations for the periods indicated:
For the years ended December 31,
(Dollars in thousands) 2021 2020 2019
Cash provided by (used in) financing activities -
continuing operations
Proceeds from issuance of Notes payable, net $ 178,694 $ 31,247 $ 61,407
Payments on Notes payable (112,550) (119,000) (60,000)
Debt prepayment penalties paid - - (850)
Common stock repurchased (27,536) (19,819) (3,344)
Proceeds from issuance of stock, net 888 701 1,271
Taxes paid related to net share settlement $ (1,283) $ (1,164) $ (1,391)
$ 38,213 $ (108,035) $ (2,907)
The increase in cash provided by (used in) financing activities-continuing
operations for the year ended December 31, 2021 versus the comparable period of
2020 was primarily due to increased draws on our debt facilities during the year
ended December 31, 2021, which were partially offset by payments on the
facilities early in 2021. For the year ended December 31, 2020, net cash used in
financing activities increased compared to the prior year primarily due to
increased payments made on notes payable and increased repurchases of common
stock, which commenced in the third quarter of 2019.
Free movement of capital
In addition to the above, we also review FCF when analyzing our cash flows from
operations. We calculate free cash flow as cash flows from operating
activities-continuing operations, adjusted for the principal loan net
charge-offs and capital expenditures incurred during the period. While this is a
non-GAAP measure, we believe it provides a useful presentation of cash flows
derived from our core continuing operating activities.
For the years ended December 31,
(Dollars in thousands) 2021 2020 2019
Net cash provided by continuing operating activities $ 156,159 $ 210,063 $ 333,316
Adjustments:
Net charge-offs - combined principal loans (123,073) (144,697) (258,250)
Capital expenditures (17,281) (16,069) (17,745)
FCF $ 15,805 $ 49,297 $ 57,321
Our FCF was $15.8 million for the year ended December 31, 2021 compared to $49.3 million for the previous year. The decrease in our FCF is the result of lower cash provided by continuing operations and a slight increase in capital expenditures, partially offset by lower net write-offs – principal loans combined during the year ended December 31, 2021.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Borrowing facilities
We have debt facilities to support the loans we make directly to our customers
and the loan and credit card participations we, or our consolidated VIEs
purchase from the third-party banks that license our brands. Each of these
facilities have certain covenants for the Company overall, as well as certain
covenants for the underlying product portfolios. All of our assets are pledged
as collateral to secure one or more of the debt facilities. Previously, we had a
debt facility, the 4th Tranche Term note, used to fund working capital. This
facility was paid in full in early 2021.
See Note 7 – Notes payable, net in the Notes to the consolidated financial statements included in this report for more information.
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The outstanding balances of the debt facilities as of December 31, 2021 and 2020
are as follows:
(Dollars in thousands) 2021 2020
American term note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)
$
84,600 $104,500
4th Tranche Term Note bearing interest at the base rate + 13% - 18,050
ESPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)
192,100 199,500
EF SPV Term Note bearing interest at base rate +7.0% (2021) or +7.25% (2020)
137,800 93,500
EC SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)
55,500 25,000
TSPV Term Note bearing interest at the base rate + 3.60% 37,000 -
Total $ 507,000 $ 440,550
The following table presents the future maturities of the debt, at December 31, 2021:
Year (dollars in thousands) December 31, 2021
2022 -
2023 -
2024 470,000
2025 37,000
Thereafter -
Total $ 507,000
Other Commitments
We are a party to other contractual obligations involving commitments to make
payments to third parties. These obligations may impact our short-term or
long-term liquidity and capital resource needs. Our primary contractual
obligations include our operating leases, loss contingencies for legal matters
(including amounts payable pursuant to the Think Finance and District of
Columbia litigation settlements), and various compensation and benefit plans.
See No te 9 - Leases , Note 10 - Share-based Compensation and
Note 14 – Commitments, contingencies and guarantees included in this report for more information on our leases, loss contingencies and compensation plans, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
We previously provided services in connection with installment loans originated
by independent third-party lenders ("CSO lenders") whereby we acted as a credit
service organization/credit access business on behalf of consumers in accordance
with applicable state laws through our "CSO program." The CSO program included
arranging loans with CSO lenders, assisting in the loan application,
documentation and servicing processes. Under the CSO program, we guaranteed the
repayment of a customer's loan to the CSO lenders as part of the credit services
we provided to the customer. As of September 30, 2021, the CSO program has
completed its wind-down and we no longer have a guarantee under this program.
Prior to ECIL entering administration and being classified a discontinued
operation by us on June 29, 2020, the VPC Facility included the UK Term Note.
Upon deconsolidation of ECIL, this note was removed from our Consolidated
Balance Sheets and is presented within Liabilities from discontinued operations
in all prior periods presented. Under the terms of the VPC Facility, we had
provided a guarantee to VPC for the repayment of the debt of any subsidiary,
which included the outstanding debt of ECIL. ECIL completed payment of the UK
Term Note in the third quarter of 2020 and any guarantee obligation associated
with the UK Term Note was released with the repayment.
RECENT REGULATORY DEVELOPMENTS
Federal Regulations: The Consumer Financial Protection Bureau ("CFPB") amended
Regulation F, 12 CFR part 1006, which implements the Fair Debt Collection
Practices Act (FDCPA), to prescribe Federal rules governing certain activities
of debt collectors. The final rule, among other things, clarifies the
information that a debt collector must provide to a consumer at the outset of
debt collection communications and provides a model notice containing such
information, prohibits debt collectors from bringing or threatening to bring a
legal action against a consumer to collect a time-barred debt, and requires debt
collectors to take certain actions before furnishing information about a
consumer's debt to a consumer reporting agency. The rule became effective on
November 30, 2021.
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On March 31, 2021, the Federal Reserve Board, the CFPB, the Federal Deposit
Insurance Corporation ("FDIC"), the National Credit Union Administration
("NCUA") and the Office of the Comptroller of the Currency ("OCC") announced the
request for information ("RFI") to gain input from financial institutions, trade
associations, consumer groups, and other stakeholders on the growing use of
Artificial Intelligence ("AI") by financial institutions. The request seeks
comments regarding the use of AI, including machine learning, by financial
institutions; appropriate governance, risk management and controls over AI; as
well as challenges in developing, adopting and managing AI. The comment period
was extended from May 30, 2021 to July 1, 2021 and is now closed.
On July 13, 2021, the Federal Reserve, Office of the Comptroller of the
Currency, and the FDIC issued proposed guidance on managing risks associated
with third-party relationships, including relationships with fintech entities
and bank/fintech sponsorship arrangements. The guidance sets forth expectations
for managing risk throughout the life cycle of such arrangements, including
planning, due diligence and contract negotiation, oversight and accountability,
ongoing monitoring, and termination. We will continue to monitor this guidance
as it potentially becomes final.
On August 31, 2021, the U.S. District Court for the Western District of Texas
issued an order in Community Financial Services Association of America, LTD. v.
Consumer Financial Protection Bureau, granting the Bureau's motion for summary
judgment and staying the date for complying with the CFPB's Rulemaking on
Payday, Vehicle Title, and High-Cost Installment Loans for 286 days until June
13, 2022. On October 1, 2021, the trade groups appealed the Texas federal
district court's final judgment and argued that the compliance date should be
286 days after their appeal to the Fifth Circuit is resolved. On October 14,
2021, the Fifth Circuit Court of Appeals agreed to an extension of the
compliance date until after resolution of the appeal. Regardless of outcome of
the appeal, it is anticipated that the rule will increase costs and create
challenges in the Company's collection activities.
State Privacy Laws: The California Consumer Privacy Act went into effect Jan. 1,
2020, and enforcement by California's Office of the Attorney General began July
1, 2020. The California Privacy Rights Act ballot initiative passed in November
2020, with the majority of its provisions becoming operative Jan. 1, 2023.
Virginia passed the Consumer Data Protection Act which establishes a framework
for controlling and processing personal data in the Commonwealth. The bill
applies to all persons that conduct business in the Commonwealth and either (i)
control or process personal data of at least 100,000 consumers or (ii) derive
over 50 percent of gross revenue from the sale of personal data and control or
process personal data of at least 25,000 consumers. The bill outlines
responsibilities and privacy protection standards for data controllers and
processors and has a delayed effective date of January 1, 2023. On July 7, 2021,
Colorado Governor Jared Polis signed the Colorado Privacy Act into law that will
go into effect on July 1, 2023. Once effective, covered entities will be
required to provide Colorado residents with various privacy rights, including
the right to access, correct, and delete their personal data and to opt out of
the sale of their personal data. Covered entities also will need to provide
privacy policy disclosures and create data protection assessments for certain
types of processing activities. Ongoing implementation of and changes to
state-enacted privacy laws will increase the Company's costs and could create
challenges in the relevant markets. Many states have also introduced similar
legislation to govern privacy.
BASIS OF PRESENTATION AND CRITICAL ACCOUNTING PRINCIPLES
Revenue recognition
We recognize consumer loan fees as revenues for each of the loan products we
offer. Revenues on the Consolidated Statements of Operations include: finance
charges, lines of credit fees, fees for services provided through CSO programs
("CSO fees"), and interest, as well as any other fees or charges permitted by
applicable laws and pursuant to the agreement with the borrower. Other revenues
also include marketing and licensing fees received from the originating lender
related to the Elastic product and Rise bank-originated loans and from CSO fees
related to the Rise product. Revenues related to these fees are recognized when
the service is performed.
We accrue finance charges on installment loans on a constant yield basis over
their terms. We accrue and defer fixed charges such as CSO fees and lines of
credit fees when they are assessed and recognize them to earnings as they are
earned over the life of the loan. We accrue interest on credit cards based on
the amount of the credit card balance outstanding and their contractual interest
rate. Annual credit card membership fees are amortized to revenue over the card
membership period. Other credit card fees, such as late payment fees and
returned payment fees, are accrued when assessed. We do not accrue finance
charges and other fees on installment loans or lines of credit for which payment
is greater than 60 days past due. Credit card interest charges are recognized
based on the contractual provisions of the underlying arrangements and are not
accrued for which payment is greater than 90 days past due. Installment loans
and lines of credit are considered past due if a grace period has not been
requested and a scheduled payment is not paid on its due date. Credit cards have
a grace period of 25 days and are considered delinquent after the grace period.
Payments received on past due loans are applied against the loan and accrued
interest balance to bring the loan current. Payments are generally first applied
to accrued fees and interest, and then to the principal loan balance.
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The spread of COVID-19 since March 2020 has created a global public health
crisis that has resulted in unprecedented disruption to businesses and
economies. In response to the pandemic's effects and in accordance with federal
and state guidelines, we expanded our payment flexibility programs for our
customers, including payment deferrals. This program allows for a deferral of
payments for an initial period of 30-60 days, and generally up to a maximum of
180 days on a cumulative basis. The customer will return to their normal payment
schedule after the end of the deferral period with the extension of their
maturity date equivalent to the deferral period, which is generally not to
exceed an additional 180 days. Per FASB guidance, the finance charges will
continue to accrue at a lower effective interest rate over the expected term of
the loan considering the deferral period provided (not to exceed an amount
greater than the amount at which the borrower could settle the loan) or placed
on non-accrual status. The COVID-19 payment flexibility programs were no longer
offered effective July 1, 2021, eliminating any new payment deferrals up to 180
days. We and the bank originators continue to offer certain payment flexibility
programs if certain qualifications are met.
Our business is affected by seasonality, which can cause significant changes in
portfolio size and profit margins from quarter to quarter. Although this
seasonality does not impact our policies for revenue recognition, it does
generally impact our results of operations by potentially causing an increase in
its profit margins in the first quarter of the year and decreased margins in the
second through fourth quarters.
Provision and Liability for Estimated Losses on Consumer Loans
We have adopted Financial Accounting Standards Board ("FASB") guidance for
disclosures about the credit quality of financing receivables and the allowance
for loan losses ("allowance"). We maintain an allowance for loan losses for
loans and interest receivable for loans not classified as TDRs at a level
estimated to be adequate to absorb credit losses inherent in the outstanding
loans receivable. We primarily utilize historical loss rates by product,
stratified by delinquency ranges, to determine the allowance, but we also
consider recent collection and delinquency trends, as well as macro-economic
conditions that may affect portfolio losses. Additionally, due to the
uncertainty of economic conditions and cash flow resources of our customers, the
estimate of the allowance for loan losses is subject to change in the near-term
and could significantly impact the consolidated financial statements. If a loan
is deemed to be uncollectible before it is fully reserved, it is charged-off at
that time. For loans classified as TDRs, impairment is typically measured based
on the present value of the expected future cash flows discounted at the
original effective interest rate. We have elected to adopt the Current Expected
Credit Losses ("CECL") model as of January 1, 2022, which requires a broader
range of reasonable and supportable information to inform credit loss estimates.
See "- Recently Issued Accounting Pronouncements And JOBS Act Election" for more
information.
We classify loans as either current or past due. An installment loan or line of
credit customer in good standing may request a 16-day grace period when or
before a payment becomes due and, if granted, the loan is considered current
during the grace period. Credit card customers have a 25-day grace period for
each payment. Installment loans and lines of credit are considered past due if a
grace period has not been requested and a scheduled payment is not paid on its
due date. Credit cards are considered past due if the grace period has passed
and the scheduled payment has not been made. Increases in the allowance are
created by recording a Provision for loan losses in the Consolidated Statements
of Operations. Installment loans and lines of credit are charged off, which
reduces the allowance, when they are over 60 days past due or earlier if deemed
uncollectible. Credit cards are charged off, which reduces the allowance, when
they are over 120 days past due or earlier if deemed uncollectible. Recoveries
on losses previously charged to the allowance are credited to the allowance when
collected.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net tangible and identifiable intangible assets acquired in each business
combination. In accordance with Accounting Standards Codification ("ASC")
350-20-35, Goodwill-Subsequent Measurement, we perform a quantitative approach
method impairment review of goodwill and intangible assets with an indefinite
life annually at October 1 and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount.
Prior to the adoption of ASU No. 2017-04, Intangibles-Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), our
impairment evaluation of goodwill was already based on comparing the fair value
of our reporting units to their carrying value. The adoption of ASU 2017-04 as
of January 1, 2020 had no impact on our evaluation procedures. The fair value of
the reporting units is determined based on a weighted average of the income and
market approaches. The income approach establishes fair value based on estimated
future cash flows of the reporting units, discounted by an estimated
weighted-average cost of capital developed using the capital asset pricing
model, which reflects the overall level of inherent risk of the reporting units.
The income approach uses our projections of financial performance for a six to
nine-year period and includes assumptions about future revenues growth rates,
operating margins and terminal values. The market approach establishes fair
value by applying cash flow multiples to the reporting units' operating
performance. The multiples are derived from other publicly traded companies that
are similar but not identical from an operational and economic standpoint.
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Internal use software development costs
We capitalize certain costs related to software developed for internal use, primarily associated with the continuous development and improvement of our technology platform. Costs incurred in the preliminary and post-development stages are expensed. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally three years.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences and
benefits attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts that are more likely than not to be realized.
Relative to uncertain tax positions, we accrue for losses we believe are
probable and can be reasonably estimated. The amount recognized is subject to
estimate and management judgment with respect to the likely outcome of each
uncertain tax position. The amount that is ultimately sustained for an
individual uncertain tax position or for all uncertain tax positions in the
aggregate could differ from the amount recognized. If the amounts recorded are
not realized or if penalties and interest are incurred, we have elected to
record all amounts within income tax expense.
At December 31, 2021, we recorded a gross liability for an uncertain tax
position of $1.3 million. No liability was recorded at December 31, 2020. Tax
periods from fiscal years 2014 to 2020 remain open and subject to examination
for US federal and state tax purposes. As we had no operations nor had filed US
federal tax returns prior to May 1, 2014, there are no other US federal or state
tax years subject to examination.
Share-based compensation
In accordance with applicable accounting standards, all share-based payments,
consisting of stock options, and restricted stock units ("RSUs") issued to
employees are measured based on the grant-date fair value of the awards and
recognized as compensation expense on a straight-line basis over the period
during which the recipient is required to perform services in exchange for the
award (the requisite service period). We also offer an employee stock purchase
plan ("ESPP"). The determination of fair value of share-based payment awards and
ESPP purchase rights on the date of grant using option-pricing models is
affected by our stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited
to, the expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise activity, risk-free interest rate,
expected dividends and expected term. We use the Black-Scholes-Merton Option
Pricing Model to estimate the grant-date fair value of stock options. We also
use an equity valuation model to estimate the grant-date fair value of RSUs.
Additionally, the recognition of share-based compensation expense requires an
estimation of the number of awards that will ultimately vest and the number of
awards that will ultimately be forfeited.
RECENTLY RELEASED ACCOUNTING STATEMENTS AND JOBS ACT ELECTION
Under the Jumpstart Our Business Startups Act (the "JOBS Act"), we meet the
definition of an emerging growth company. We have irrevocably elected to opt out
of the extended transition period for complying with new or revised accounting
standards pursuant to Section 107(b) of the JOBS Act.
Recently Adopted Accounting Standards
See Note 1 - Summary of Significant Accounting Policies in the Notes to the
Consolidated Financial Statements included in this report for a discussion of
recent accounting pronouncements.
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