UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019March 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission File Number 1-38315
CURO GROUP HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
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Delaware | | 90-0934597 |
(State or other jurisdiction Of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
3527 North Ridge Road, Wichita, KS | | 67205 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (316) 772-3801
Former name, former address and former fiscal year, if changed since last report: No Changes
Securities registered pursuant to Section 12(b) of the Act:
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| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, $0.001 par value per share | CURO | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | | | |
Smaller reporting company | ☒ | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
At NovemberMay 1, 20192020 there were 41,486,96540,789,687 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
FORM 10-Q
THIRDFIRST QUARTER ENDED SEPTEMBER 30, 2019MARCH 31, 2020
INDEX
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Item 1. | Financial Statements (unaudited) |
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| September 30, 2019March 31, 2020 and December 31, 20182019 | |
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| Three and nine months ended September 30,March 31, 2020 and 2019 and 2018 | |
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| Three and nine months ended September 30,March 31, 2020 and 2019 and 2018 | |
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| NineThree months ended September 30,March 31, 2020 and 2019 and 2018 | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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GLOSSARY
Terms and abbreviations used throughout this report are defined below.
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| | |
Term or abbreviation | | Definition |
12.00% Senior Secured Notes | | 12.00% Senior Secured Notes, issued in February and November 2017 for a total of $470.0 million due March 1, 2022, fully extinguished September 2018 |
2017 Tax Act | | Tax Cuts and Jobs Act of 2017 |
2019 Form 10-K | | Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 9, 2020. |
8.25% Senior Secured Notes | | 8.25% Senior Secured Notes, issued in August 2018 for $690.0 million, which mature on September 1, 2025 |
Ad Astra | | Ad Astra Recovery Services, Inc., our former provider of third-party collection services for the U.S. business that we acquired in January 2020 |
Adjusted EBITDA | | EBITDA plus or minus certain non-cash and other adjusting items; Refer to "Supplemental Non-GAAP Financial Information" for additional details. |
ALL | | Allowance for loan losses |
Allowance Build | | Incremental COVID-related provision expense as a result of additions to the Allowance for Loan Losses |
Allowance coverage | | Allowance for loan losses as a percentage of gross loans receivable |
AOCI | | Accumulated Other Comprehensive Income (Loss) |
ASC | | Accounting Standards Codification |
ASU | | Accounting Standards Update |
Average gross loans receivable | | Utilized to calculate product yield and NCO rates; calculated as average of beginning of quarter and end of quarter gross loans receivable |
CAB | | Credit access bureau |
CARES Act | | Coronavirus Aid, Relief, and Economic Security Act |
Cash Money | | Cash Money Cheque Cashing Inc., a Canadian subsidiary |
Cash Money Revolving Credit Facility | | C$10.0 million revolving credit facility with Royal Bank of Canada |
CECL | | Current expected credit loss |
CFTC | | CURO Financial Technologies Corp., a wholly-owned subsidiary of the Company |
CODM | | Chief Operating Decision Maker |
Condensed Consolidated Financial Statements | | The unaudited condensed consolidated financial statements presented in this Form 10-Q |
COVID-19 | | An infectious disease caused by the 2019 novel coronavirus disease |
CSO | | Credit services organization |
EBITDA | | Earnings Before Interest, Taxes, Depreciation and Amortization |
EPS | | Earnings per share |
Exchange Act | | Securities Exchange Act of 1934 |
FASB | | Financial Accounting Standards Board |
FFL | | Friedman Fleischer & Lowe Capital Partners II, L.P. and its affiliated investment funds, a related party to the Company |
Form 10-Q | | Quarterly Report on Form 10-Q |
Gross Combined Loans Receivable | | Gross loans receivable plus loans originated by third-party lenders which are Guaranteed by the Company |
Guaranteed by the Company | | Loans originated by third-party lenders through CSO program which we guarantee but are not include in the Condensed Consolidated Financial Statements |
Katapult | | Cognical Holdings, Inc. (formerly known as Zibby), a private lease-to-own platform for online, brick and mortar and omni-channel retailers |
NCO | | Net charge-off; total charge-offs less total recoveries |
NOL | | Net operating loss |
Non-Recourse Canada SPV Facility | | A four-year revolving credit facility with Waterfall Asset Management, LLC with capacity up to C$250.0 million |
Non-Recourse U.S. SPV Facility | | A four year, asset-backed revolving credit facility with Atalaya Capital Management with capacity up to $200.0 million if certain conditions are met |
ROU | | Right of use |
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Term or abbreviation | | Definition |
RSU | | Restricted Stock Unit |
SEC | | Securities and Exchange Commission |
Senior Revolver | | Senior Secured Revolving Loan Facility |
SRC | | Smaller Reporting Company |
Stride Bank | | In 2019, we partnered with Stride Bank, N.A. to launch a bank-sponsored Unsecured Installment loan originated by Stride Bank. We market and service loans on behalf of Stride Bank and the bank licenses our proprietary credit decisioning for Stride Bank's scoring and approval. |
U.S. | | United States of America |
US GAAP | | Generally accepted accounting principles in the United States |
VIE | | Variable Interest Entity; our wholly-owned, bankruptcy-remote special purpose subsidiary |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | September 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| (unaudited) | | |
ASSETS | Cash | $ | 62,207 |
| | $ | 61,175 |
| $ | 138,714 |
| | $ | 75,242 |
|
Restricted cash (includes restricted cash of consolidated VIEs of $21,897 and $12,840 as of September 30, 2019 and December 31, 2018, respectively) | 38,754 |
| | 25,439 |
| |
Gross loans receivable (includes loans of consolidated VIEs of $231,533 and $148,876 as of September 30, 2019 and December 31, 2018, respectively) | 657,615 |
| | 571,531 |
| |
Less: allowance for loan losses (includes allowance for losses of consolidated VIEs of $25,375 and $12,688 as of September 30, 2019 and December 31, 2018, respectively) | (108,385 | ) | | (73,997 | ) | |
Restricted cash (includes restricted cash of consolidated VIEs of $22,317 and $17,427 as of March 31, 2020 and December 31, 2019, respectively) | | 41,527 |
| | 34,779 |
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Gross loans receivable (includes loans of consolidated VIEs of $231,258 and $244,492 as of March 31, 2020 and December 31, 2019, respectively) | | 564,437 |
| | 665,828 |
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Less: allowance for loan losses (includes allowance for losses of consolidated VIEs of $27,421 and $24,425 as of March 31, 2020 and December 31, 2019, respectively) | | (99,842 | ) | | (106,835 | ) |
Loans receivable, net | 549,230 |
| | 497,534 |
| 464,595 |
|
| 558,993 |
|
Right of use asset - operating leases (Note 1) | 118,260 |
| | — |
| |
Deferred income taxes | 1,846 |
| | 1,534 |
| |
Income taxes receivable | 23,966 |
| | 16,741 |
| 24,435 |
| | 11,426 |
|
Prepaid expenses and other | 32,228 |
| | 43,588 |
| 34,120 |
| | 35,890 |
|
Property and equipment, net | 70,381 |
| | 76,750 |
| 66,787 |
| | 70,811 |
|
Right of use asset - operating leases | | 114,272 |
| | 117,453 |
|
Deferred tax assets | | — |
| | 5,055 |
|
Goodwill | 120,110 |
| | 119,281 |
| 132,825 |
| | 120,609 |
|
Other intangibles, net of accumulated amortization | 32,666 |
| | 29,784 |
| |
Other | 18,484 |
| | 12,930 |
| |
Assets from discontinued operations (Note 15) | — |
| | 34,861 |
| |
Other intangibles, net | | 33,944 |
| | 33,927 |
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Other assets | | 15,547 |
| | 17,710 |
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Total Assets | $ | 1,068,132 |
| | $ | 919,617 |
| $ | 1,066,766 |
| | $ | 1,081,895 |
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LIABILITIES AND STOCKHOLDERS' EQUITY | Accounts payable and accrued liabilities (includes accounts payable and accrued liabilities of consolidated VIEs of $7,259 and $4,980 as of September 30, 2019 and December 31, 2018, respectively) | $ | 63,685 |
| | $ | 49,146 |
| |
Liabilities | | | | |
Accounts payable and accrued liabilities (includes accounts payable and accrued liabilities of consolidated VIEs of $13,267 and $13,462 as of March 31, 2020 and December 31, 2019, respectively) | | $ | 53,603 |
| | $ | 60,083 |
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Deferred revenue | 9,052 |
| | 9,483 |
| 6,655 |
| | 10,170 |
|
Lease liability - operating leases (Note 1) | 126,048 |
| | — |
| |
Income taxes payable | — |
| | 1,579 |
| |
Accrued interest (includes accrued interest of consolidated VIEs of $777 and $831 as of September 30, 2019 and December 31, 2018, respectively) | 5,625 |
| | 20,904 |
| |
Lease liability - operating leases | | 121,715 |
| | 124,999 |
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Accrued interest (includes accrued interest of consolidated VIEs of $627 and $871 as of March 31, 2020 and December 31, 2019, respectively) | | 5,392 |
| | 19,847 |
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Liability for losses on CSO lender-owned consumer loans | 10,249 |
| | 12,007 |
| 9,189 |
| | 10,623 |
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Deferred rent | — |
| | 10,851 |
| |
Debt (includes debt and issuance costs of consolidated VIEs of $105,742 and $3,259 as of September 30, 2019 and $111,335 and $3,856 as of December 31, 2018, respectively) | 805,407 |
| | 804,140 |
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Subordinated stockholder debt | — |
| | 2,196 |
| |
Debt (includes debt and issuance costs of consolidated VIEs of $87,365 and $2,491 as of March 31, 2020 and $115,243 and $3,022 as of December 31, 2019, respectively) | | 788,451 |
| | 790,544 |
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Other long-term liabilities | 8,594 |
| | 5,800 |
| 9,095 |
| | 10,664 |
|
Deferred tax liabilities | 4,427 |
| | 13,730 |
| 13,095 |
| | 4,452 |
|
Liabilities from discontinued operations (Note 15) | — |
| | 8,882 |
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Total Liabilities | 1,033,087 |
| | 938,718 |
| 1,007,195 |
| | 1,031,382 |
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Commitments and contingencies (Note 13) |
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Stockholders' Equity |
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Preferred stock - $0.001 par value, 25,000,000 shares authorized; no shares were issued at either period end | — |
| | — |
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Common stock - $0.001 par value; 225,000,000 shares authorized; 46,503,406 and 46,412,231 shares issued as of September 30, 2019 and December 31, 2018, respectively; and 42,347,165 and 46,412,231 shares outstanding as of September 30, 2019 and December 31, 2018, respectively | 9 |
| | 9 |
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Treasury stock, at cost - 4,156,241 as of September 30, 2019 | (53,064 | ) | | — |
| |
Preferred stock - $0.001 par value, 25,000,000 shares authorized; no shares were issued | | — |
| | — |
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Common stock - $0.001 par value; 225,000,000 shares authorized; 46,934,750 and 46,770,765 shares issued; and 40,779,447 and 41,156,224 shares outstanding at the respective period ends | | 9 |
| | 9 |
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Treasury stock, at cost - 6,155,303 and 5,614,541 shares as of the respective period ends | | (77,852 | ) | | (72,343 | ) |
Paid-in capital | 67,579 |
| | 60,015 |
| 70,798 |
| | 68,087 |
|
Retained earnings (accumulated deficit) | 63,205 |
| | (18,065 | ) | |
Retained earnings | | 127,472 |
| | 93,423 |
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Accumulated other comprehensive loss | (42,684 | ) | | (61,060 | ) | (60,856 | ) | | (38,663 | ) |
Total Stockholders' Equity | 35,045 |
| | (19,101 | ) | 59,571 |
| | 50,513 |
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Total Liabilities and Stockholders' Equity | $ | 1,068,132 |
| | $ | 919,617 |
| $ | 1,066,766 |
| | $ | 1,081,895 |
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See accompanying Notes to unaudited Condensed Consolidated Financial Statements.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Revenue | $ | 297,264 |
| | $ | 269,482 |
| | $ | 839,503 |
| | $ | 757,494 |
| $ | 280,806 |
| | $ | 277,939 |
|
Provision for losses | 123,867 |
| | 127,692 |
| | 338,262 |
| | 290,922 |
| 113,536 |
| | 102,385 |
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Net revenue | 173,397 |
| | 141,790 |
| | 501,241 |
| | 466,572 |
| 167,270 |
| | 175,554 |
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Cost of providing services | | | | | | | | | | |
Salaries and benefits | 27,462 |
| | 26,515 |
| | 82,249 |
| | 80,341 |
| 26,007 |
| | 28,701 |
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Occupancy | 14,036 |
| | 13,522 |
| | 42,205 |
| | 40,269 |
| 14,016 |
| | 14,237 |
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Office | 5,993 |
| | 7,326 |
| | 16,563 |
| | 19,311 |
| 5,674 |
| | 5,113 |
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Other costs of providing services | 12,843 |
| | 12,484 |
| | 39,917 |
| | 38,516 |
| 9,655 |
| | 14,220 |
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Advertising | 16,424 |
| | 21,349 |
| | 36,990 |
| | 44,347 |
| 12,219 |
| | 7,786 |
|
Total cost of providing services | 76,758 |
| | 81,196 |
| | 217,924 |
| | 222,784 |
| 67,571 |
| | 70,057 |
|
Gross margin | 96,639 |
| | 60,594 |
| | 283,317 |
| | 243,788 |
| 99,699 |
| | 105,497 |
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Operating expense | | | | | | | | | | |
Corporate, district and other expenses | 38,665 |
| | 27,495 |
| | 123,043 |
| | 95,904 |
| 42,807 |
| | 49,088 |
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Interest expense | 17,364 |
| | 23,403 |
| | 52,077 |
| | 66,229 |
| 17,324 |
| | 17,690 |
|
Loss on extinguishment of debt | — |
| | 69,200 |
| | — |
| | 80,883 |
| |
Loss from equity method investment | 1,384 |
| | — |
| | 5,132 |
| | — |
| 1,618 |
| | — |
|
Total operating expense | 57,413 |
| | 120,098 |
| | 180,252 |
| | 243,016 |
| 61,749 |
| | 66,778 |
|
Income (loss) from continuing operations before income taxes | 39,226 |
| | (59,504 | ) | | 103,065 |
| | 772 |
| |
Provision (benefit) for income taxes | 11,239 |
| | (16,914 | ) | | 28,738 |
| | (269 | ) | |
Net income (loss) from continuing operations | 27,987 |
|
| (42,590 | ) | | 74,327 |
| | 1,041 |
| |
Net loss from discontinued operations, before income tax | — |
| | (4,293 | ) | | (39,048 | ) | | (8,518 | ) | |
Income from continuing operations before income taxes | | 37,950 |
| | 38,719 |
|
Provision for income taxes | | 1,937 |
| | 10,046 |
|
Net income from continuing operations | | 36,013 |
|
| 28,673 |
|
Net income (loss) from discontinued operations, before income tax | | 390 |
| | (39,048 | ) |
Income tax expense (benefit) related to disposition
| $ | 598 |
| | $ | 139 |
| | $ | (45,991 | ) | | $ | 278 |
| 98 |
| | (47,423 | ) |
Net (loss) income from discontinued operations | $ | (598 | ) | | $ | (4,432 | ) | | $ | 6,943 |
| | $ | (8,796 | ) | |
Net income (loss) | $ | 27,389 |
|
| $ | (47,022 | ) | | $ | 81,270 |
| | $ | (7,755 | ) | |
Net income from discontinued operations | | 292 |
| | 8,375 |
|
Net income | | $ | 36,305 |
|
| $ | 37,048 |
|
| | | | | | | | | | |
Basic earnings (loss) per share: | | | | | | | | |
Basic earnings per share: | | | | |
Continuing operations | $ | 0.63 |
| | $ | (0.93 | ) | | $ | 1.63 |
| | $ | 0.02 |
| $ | 0.88 |
| | $ | 0.62 |
|
Discontinued operations | (0.01 | ) | | (0.10 | ) | | 0.15 |
| | (0.19 | ) | 0.01 |
| | 0.18 |
|
Basic earnings per share | $ | 0.62 |
| | $ | (1.03 | ) | | $ | 1.78 |
| | $ | (0.17 | ) | $ | 0.89 |
| | $ | 0.80 |
|
| | | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | |
Diluted earnings per share: | | | | |
Continuing operations | $ | 0.61 |
| | $ | (0.93 | ) | | $ | 1.59 |
| | $ | 0.03 |
| $ | 0.86 |
| | $ | 0.61 |
|
Discontinued operations | (0.01 | ) | | (0.10 | ) | | 0.15 |
| | (0.19 | ) | 0.01 |
| | 0.18 |
|
Diluted earnings per share (1) | $ | 0.60 |
| | $ | (1.03 | ) | | $ | 1.74 |
| | $ | (0.16 | ) | |
Diluted earnings per share | | $ | 0.87 |
| | $ | 0.79 |
|
| | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | |
Basic | 44,422 |
| | 45,853 |
| | 45,759 |
| | 45,674 |
| 40,817 |
| | 46,424 |
|
Diluted (1) | 46,010 |
| | 45,853 |
| | 46,887 |
| | 48,061 |
| |
(1) As of December 31, 2018, the Company made certain insignificant adjustments to previously-reported Earnings Per Share ("EPS") to correctly reflect the effect of anti-dilutive shares on diluted EPS calculations in accordance with ASC 260. These changes were immaterial to the overall EPS calculation. Diluted loss per share for the three months ended September 30, 2018 of $0.97 was corrected to $1.03. | |
Diluted | | 41,892 |
| | 47,319 |
|
See accompanying Notes to unaudited Condensed Consolidated Financial Statements.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Net income (loss) | $ | 27,389 |
| | $ | (47,022 | ) | | $ | 81,270 |
| | $ | (7,755 | ) | |
Net income | | $ | 36,305 |
| | $ | 37,048 |
|
Other comprehensive (loss) income: |
| |
| |
| |
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| |
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Cash flow hedges, net of $0 tax in both periods | — |
| | (187 | ) | | — |
| | (572 | ) | |
Foreign currency translation adjustment, net of $0 tax in both periods | (1,954 | ) | | 2,649 |
| | 18,376 |
| | (7,015 | ) | (22,193 | ) | | 16,695 |
|
Other comprehensive (loss) income | (1,954 | ) | | 2,462 |
| | 18,376 |
| | (7,587 | ) | (22,193 | ) | | 16,695 |
|
Comprehensive income (loss) | $ | 25,435 |
| | $ | (44,560 | ) | | $ | 99,646 |
| | $ | (15,342 | ) | |
Comprehensive income | | $ | 14,112 |
| | $ | 53,743 |
|
See accompanying Notes to unaudited Condensed Consolidated Financial Statements.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands, unaudited)
| | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Cash flows from operating activities | | | | | | |
Net income from continuing operations | $ | 74,327 |
| | $ | 1,041 |
| $ | 36,013 |
| | $ | 28,673 |
|
Adjustments to reconcile net income to net cash provided by continuing operating activities: | | | | | | |
Depreciation and amortization | 14,180 |
| | 13,628 |
| 4,537 |
| | 4,920 |
|
Provision for loan losses | 338,262 |
| | 290,922 |
| 113,536 |
| | 102,385 |
|
Amortization of debt issuance costs and bond discount | 2,273 |
| | 2,923 |
| 688 |
| | 872 |
|
Deferred income tax (benefit) expense | (3,147 | ) | | 3,005 |
| 14,093 |
| | (10,343 | ) |
Loss on disposal of property and equipment | 47 |
| | 640 |
| 44 |
| | 991 |
|
Loss on extinguishment of debt | — |
| | 80,883 |
| |
Loss from equity method investment | 5,132 |
| | — |
| 1,618 |
| | — |
|
Share-based compensation | 7,587 |
| | 6,112 |
| 3,194 |
| | 2,172 |
|
Changes in operating assets and liabilities: | | | | | | |
Accrued interest on loans receivable | (11,446 | ) | | (5,986 | ) | 16,671 |
| | 1,937 |
|
Prepaid expenses and other assets | 14,275 |
| | 2,695 |
| 982 |
| | 9,938 |
|
Other assets | (8,439 | ) | | (2,458 | ) | 332 |
| | (6,374 | ) |
Accounts payable and accrued liabilities | 13,596 |
| | (4,862 | ) | (7,492 | ) | | 2,326 |
|
Deferred revenue | (533 | ) | | (1,984 | ) | (3,276 | ) | | (1,709 | ) |
Income taxes payable | 25,117 |
| | 326 |
| — |
| | 29,562 |
|
Income taxes receivable | 5,598 |
| | (12,908 | ) | (13,134 | ) | | (9,890 | ) |
Accrued interest | (15,303 | ) | | (18,060 | ) | (14,389 | ) | | (15,329 | ) |
Other liabilities | 2,767 |
| | 1,162 |
| (1,548 | ) | | 868 |
|
Net cash provided by continuing operating activities | 464,293 |
| | 357,079 |
| 151,869 |
| | 140,999 |
|
Net cash (used in) provided by discontinued operating activities | (504 | ) | | 5,562 |
| |
Net cash provided by (used in) discontinued operating activities | | 390 |
| | (504 | ) |
Net cash provided by operating activities | 463,789 |
| | 362,641 |
| 152,259 |
| | 140,495 |
|
Cash flows from investing activities | | | | | | |
Purchase of property, equipment and software | (8,667 | ) | | (8,030 | ) | (3,658 | ) | | (3,119 | ) |
Loans receivable originated or acquired | (1,369,644 | ) | | (1,624,881 | ) | (439,244 | ) | | (420,568 | ) |
Loans receivable repaid | 995,291 |
| | 1,212,446 |
| 378,843 |
| | 355,621 |
|
Investments in Cognical Holdings, Inc. ("Zibby") | (8,168 | ) | | (958 | ) | |
Investments in Katapult | | — |
| | (1,568 | ) |
Acquisition of Ad Astra, net of acquiree's cash received | | (14,418 | ) | | — |
|
Net cash used in continuing investing activities | (391,188 | ) | | (421,423 | ) | (78,477 | ) | | (69,634 | ) |
Net cash used in discontinued investing activities | (14,213 | ) | | (24,481 | ) | — |
| | (14,213 | ) |
Net cash used in investing activities | (405,401 | ) | | (445,904 | ) | (78,477 | ) | | (83,847 | ) |
Cash flows from financing activities | | | | | | |
Net proceeds from issuance of common stock | — |
| | 11,549 |
| |
Proceeds from Non-Recourse U.S. SPV facility | — |
| | 17,000 |
| |
Payments on Non-Recourse U.S. SPV facility | — |
| | (61,590 | ) | |
Proceeds from Non-Recourse Canada SPV facility | 15,992 |
| | 89,949 |
| 23,560 |
| | 3,762 |
|
Payments on Non-Recourse Canada SPV facility | (24,835 | ) | | — |
| (42,497 | ) | | (24,831 | ) |
Payments on 12.00% Senior Secured Notes | — |
| | (605,000 | ) | |
Proceeds from 8.25% Senior Secured Notes | — |
| | 690,000 |
| |
Debt issuance costs paid | (198 | ) | | (17,517 | ) | (150 | ) | | (199 | ) |
Proceeds from credit facilities | 179,811 |
| | 65,169 |
| 69,938 |
| | 30,478 |
|
Payments on credit facilities | (174,811 | ) | | (36,169 | ) | (44,938 | ) | | (50,478 | ) |
Payments on subordinated stockholder debt | (2,252 | ) | | — |
| |
Payments of call premiums from early debt extinguishments | — |
| | (63,350 | ) | |
Proceeds from exercise of stock options | 87 |
| | 408 |
| 126 |
| | 40 |
|
Payments to net share settle restricted stock units vesting | (110 | ) | | — |
| (609 | ) | | (37 | ) |
Repurchase of common stock | (52,172 | ) | | — |
| (5,908 | ) | | — |
|
Dividends paid to stockholders | | (2,247 | ) | | — |
|
Net cash used in financing activities (1) | | (2,725 | ) | | (41,265 | ) |
Effect of exchange rate changes on cash and restricted cash | | (837 | ) | | 1,938 |
|
Net increase in cash and restricted cash | | 70,220 |
| | 17,321 |
|
Cash and restricted cash at beginning of period | | 110,021 |
| | 99,857 |
|
Cash and restricted cash at end of period | | 180,241 |
| | 117,178 |
|
(1) Financing activities were not impacted by discontinued operations | | (1) Financing activities were not impacted by discontinued operations |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands, unaudited)
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the totals above:
|
| | | | | | | |
Net cash (used in) provided by financing activities (1) | (58,488 | ) | | 90,449 |
|
Effect of exchange rate changes on cash and restricted cash | 1,204 |
| | (4,080 | ) |
Net increase in cash and restricted cash | 1,104 |
| | 3,106 |
|
Cash and restricted cash at beginning of period | 99,857 |
| | 174,491 |
|
Cash and restricted cash at end of period | 100,961 |
| | 177,597 |
|
Less: Cash and restricted cash of discontinued operations at end of period | — |
| | 11,303 |
|
Cash and restricted cash of continuing operations at end of period | $ | 100,961 |
| | $ | 166,294 |
|
(1) Financing activities include continuing operations only, and were not impacted by discontinued operations |
|
| | | | | | | | |
| | March 31, |
| | 2020 | | 2019 |
Cash | | $ | 138,714 |
| | $ | 82,859 |
|
Restricted cash (includes restricted cash of consolidated VIEs of $22,317 and $15,460 as of March 31, 2020 and March 31, 2019, respectively) | | 41,527 |
| | 34,319 |
|
Total cash and restricted cash used in the Statements of Cash Flows | | 180,241 |
| | 117,178 |
|
See accompanying Notes to unaudited Condensed Consolidated Financial Statements.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Nature of Operations and Basis of Presentation
The terms “CURO" and the “Company” refer to CURO Group Holdings Corp. and its wholly-owned subsidiaries as a consolidated entity, except where otherwise stated.
CURO is a growth-oriented, technology-enabled, highly-diversified consumer finance company serving a wide range of underbanked consumers in the United States ("U.S."), Canada and, through February 25, 2019, the U.K.
U.K. Segment Placed into Administration
On February 25, 2019, the Company announced that a proposed Scheme of Arrangement ("SOA"), as described in the Company's Current Report on Form 8-K filed January 31, 2019, would not be implemented. In accordance with the provisions of the U.K. Insolvency Act 1986 and as approved by the boards of directors of the Company’s U.K. subsidiaries, Curo Transatlantic Limited and SRC Transatlantic Limited (collectively, “the U.K. Subsidiaries”), insolvency practitioners from KPMG were appointed as administrators (“Administrators”) for the U.K. Subsidiaries. The effect of the U.K. Subsidiaries’ entry into administration was to place their management, affairs, business and property under the direct control of the Administrators. Accordingly, the Company deconsolidated the U.K. Subsidiaries as of February 25, 2019 and presented the U.K. Subsidiaries as Discontinued Operations for all periods presented in this Form 10-Q.
Basis of Presentation
The terms “CURO" and the “Company” refer to CURO Group Holdings Corp. and its directly and indirectly owned subsidiaries as a consolidated entity, except where otherwise stated. The term "CFTC" refers to CURO Financial Technologies Corp., a wholly-owned subsidiary of the Company, and its directly and indirectly owned subsidiaries as a consolidated entity, except where otherwise stated.
The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements ("Condensed Consolidated Financial Statements") in accordance with accounting principles generally accepted in the United States of America (“US GAAP”),GAAP, and with the accounting policies described in its Annual Report on2019 Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (the "SEC")SEC on March 18, 2019 ("2018 Form 10-K"). Operating9, 2020. Interim results for the three and nine month periods ended September 30, 2019of operations are not necessarily indicative of the results that might be expected for any otherfuture interim periodperiods or for the fiscal year ending December 31, 2019.2020.
Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. Additionally, in September 2018, and subsequently expanded in June 2019,the Company qualifies as an SRC as defined by the SEC, changed the definition of a smaller reporting company ("SRC"). The change in definition of an SRCwhich allows more registrants to qualify to report information under scaled disclosure requirements. SRC status is determined on an annual basis as of the last business day of the most recently completed second fiscal quarter. Under these rules, CUROthe Company met the definition of an SRC as of June 30, 2019. Refer to "--FASB Definition2019, and it will reevaluate as of an SRC as related to the CECL standard and evaluation of the impact of the CECL standard" for information regarding the impact on the Company of meeting the definition of an SRC.June 30, 2020.
The Condensed Consolidated Financial Statements and the accompanying notes reflect all adjustments (consisting only of adjustments of a normal and recurring nature) which are, in the opinion of management, necessary to present fairly the Company's results of operations, financial position and cash flows for the periods presented.
COVID-19
A novel strain of coronavirus, COVID-19, surfaced in late 2019 and has subsequently spread worldwide, including to the U.S. and Canada. On February 25, 2019,March 11, 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. Macroeconomic conditions, in general, and the Company's United Kingdom ("U.K.") segment,operations have been significantly affected by the COVID-19 pandemic and there are no reliable estimates of how long the pandemic will last or the scope or magnitude of its near-term or long-term impact. In response, various governmental bodies have issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. However, CURO's operations have been designated as definedessential financial services by ASC 280, was placed into administration, resultingfederal guidelines and local regulations. As a provider of an essential service, the Company remains focused on protecting the health and wellbeing of its employees, customers and the communities in which it operates while assuring the continuity of its business operations. While CURO continues serving its customers through both store and online channels, store hours are reduced, enhanced cleaning protocols for all facilities are in place, and social distancing guidelines are in effect to aid in combating the spread of the pandemic.
On March 27, 2020, the U.S. government enacted the CARES Act, which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. The Company expects to delay payment of employer payroll taxes otherwise due in 2020 with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022.
In light of COVID-19, the Company also considered implications of the pandemic on its estimates and assumptions as of March 31, 2020. After review of the information available regarding conditions as of March 31, 2020, the Company increased its allowance for loan losses, as disclosed in Note 3, "Loans and Receivable and Revenue." The increase in volatility of foreign currency exchange rates between the U.S. dollar and Canadian dollar, as a result of COVID-19 and other factors such as oil price volatility, had a material impact on the Company's Condensed Consolidated Balance Sheet. Gross loans receivable in Canada decreased $26.5 million, or 8.7%, as a result of fluctuations in the treatment of it as discontinued operations per ASC 205-20. Throughout this Quarterly Report on Form 10-Q ("Form 10-Q"), currentforeign currency exchange rate from December 31, 2019 to March 31, 2020 between the U.S dollar and prior-period financial information presents the U.K. segment as discontinued operations as required. For further information about the placement of the segment into administration, refer to "--Nature of Operations" below.Canadian dollar.
The Condensed Consolidated Financial Statements shouldeffect of the COVID-19 pandemic will not be read in conjunction with the Consolidated Financial Statements and related Notes includedfully reflected in the 2018 Form 10-K. InterimCompany's results of operations are not necessarily indicativeand overall financial performance until future periods. The extent of results that may be expected for future interim periods or for the year ending December 31, 2019.impact of COVID-19 on the Company's business is highly uncertain and difficult to predict, as information is rapidly evolving with respect to the duration and severity of the pandemic.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of CURO and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Ad Astra Acquisition
On January 3, 2020, the Company acquired 100% of the outstanding stock of Ad Astra, a related party, for total consideration of $14.4 million, net of cash received. Prior to the acquisition, Ad Astra was the Company's exclusive provider of third-party collection services for owned and managed loans in the U.S. that are in later-stage delinquency. Ad Astra, now a wholly-owned subsidiary, is included in the Condensed Consolidated Financial Statements. Prior to the acquisition, all costs related to Ad Astra were included in "Other costs of providing services." Following the acquisition, operating costs for Ad Astra are included within "Corporate, district and other expenses," consistent with presentation of other internal collection costs. See Note 17, "Acquisition" for further information. U.K. Segment Placed into Administration
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)On February 25, 2019, the Company placed its U.K. segment into administration, which resulted in the treatment of the U.K. segment as discontinued operations for all periods presented. Throughout this Form 10-Q, current and prior period financial information is presented on a continuing operations basis, excluding the results and positions of the U.K. segment. See
Note 15, "Discontinued Operations" for additional information.
Equity Investment in Unconsolidated Entity
DuringThe Company holds an equity investment in Katapult, a private lease-to-own platform for online, brick and mortar and omni-channel retailers. Katapult provides customers with payment options in store or via the nine months ended September 30, 2019, the Company invested an additional $6.6 million in Cognical Holdings, Inc. ("Zibby"), offset byKatapult link on a $3.7 million carrying value adjustment as a result of the additional investment.retailer's website. As of September 30, 2019,March 31, 2020, the Company owned 42.3%42.5% of Zibby.Katapult. The Company records the equity method investment in "Other assets" on the Condensed Consolidated Balance Sheets. See Note 8, - "Fair Value Measurements" for additional detail on Zibby'sKatapult's fair value considerations for the nine months ended September 30, 2019.considerations.
Use of Estimates
The preparation of Condensed Consolidated Financial Statements in conformity with US GAAP requires management to make estimates and assumptions, such as those posed by COVID-19, that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods reported.presented. Some of the significant estimates that the Company made in the accompanying Condensed Consolidated Financial Statements include allowances for loan losses, certain assumptions related to equity investments, goodwill and intangibles, accruals related to self-insurance, credit services organization ("CSO")CSO liability for losses and estimated tax liabilities. Actual results may differ from those estimates.
Open-End Loss Recognition
Effective January 1, 2019, the Company modified the timeframe for which it charges-off Open-End loans and made related refinements to its loss provisioning methodology. Prior to January 1, 2019, the Company deemed Open-End loans uncollectible and charged-off when a customer missed a scheduled payment and the loan was considered past-due. Because of the continued shift to Open-End loans in Canada and analysis of payment patterns on early-stage versus late-stage delinquencies, the Company revised its estimates and now considers Open-End loans uncollectible when the loan has been contractually past-due for 90 consecutive days. Consequently, past-due Open-End loans and related accrued interest now remain in loans receivable for 90 days before being charged-off against the allowance for loan losses. All recoveries on charged-off loans are credited to the allowance for loan losses. Quarterly, the Company evaluates the adequacy of the allowance for loan losses compared to the related gross loans receivable balances that include accrued interest.Goodwill
The aforementioned change was treatedannual impairment review for goodwill, done on October 1, consists of performing a qualitative assessment to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount as a change in accounting estimatebasis for accounting purposesdetermining whether or not further testing is required. The Company may elect to bypass the qualitative assessment and applied prospectively effective January 1, 2019.
The change affects comparability with prior periods as follows:
Gross combined loans receivable: balances as of September 30, 2019 include $46.1 million of Open-End loans that are up to 90 days past-due with related accrued interest, while such balances for periods prior to March 31, 2019 do not include any past-due loans.
Revenues: for the three and nine months ended September 30, 2019, gross revenues include interest earned on past-due loan balances of approximately $15 million and $35 million, respectively, while revenues in prior-year periods do not include comparable amounts.
Provision for Losses: prospectively, from January 1, 2019, past-due, unpaid balances plus related accrued interest charge-off on day 91. Provision expense is affected by total charge-offs less total recoveries ("NCOs") plus changesproceed directly to the Allowancetwo-step process, for loan losses. Because NCOs prospectively include unpaid principalany reporting unit, in any period. The Company can resume the qualitative assessment for any reporting unit in any subsequent period. If the Company determines, on the basis of qualitative factors, that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, the Company will then apply a two-step process of (i) determining the fair value of the reporting unit and up(ii) comparing it to 90 daysthe carrying value of related accrued interest, NCO amountsthe net assets allocated to the reporting unit. When performing the two-step process, if the fair value of the reporting unit exceeds its carrying value, no further analysis or write-down of goodwill is required. In the event the estimated fair value of a reporting unit is less than the carrying value, the Company would recognize an impairment loss equal to such excess, which could significantly and rates are higheradversely impact reported results of operations and the Open-End Allowance for loan losses as a percentage of Open-End gross loans receivable is higher. The Open-End Allowance for loan losses as a percentage of Open-End gross loans receivable increased to 17.2% at September 30, 2019, compared to 9.8% in the comparable prior-year period.
Correction of Immaterial Errors in Previously-Issued Financial Statementsstockholders’ equity.
During the year ended December 31, 2018,fourth quarter of 2019, the Company corrected immaterial errors in its prior presentationperformed a quantitative assessment for the U.S. and Canada reporting units. Management concluded that the estimated fair values of cash flows for loan originations and collections on principal. Thethese two reporting units were greater than their respective carrying values. Due to COVID-19, the Company determined that a goodwill impairment evaluation triggering event occurred during the historical presentation was in error by not conforming to US GAAP because it included outflows for loan originations and receipts on collections in Cash provided by operating activities rather than in Cash used in investing activities. Accordingly, the Company corrected previously filed financial statements by reclassifying cash outflows for loan originations and receipts on collections of principal of $412.4 million from net Cash provided by operating activities to net Cash used in investing activities for the ninethree months ended September 30, 2018. Total cash flows for each period presented did not change. The Company concluded that the errors were immaterialMarch 31, 2020. After performing an interim review of impairment as of March 31, 2020, both reporting units continue to the unaudited Condensed Consolidated Financial Statements included in the Company’s Quarterly Report on Form 10-Q for the three and nine monthshave estimated fair values greater than their respective carrying values.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
ended September 30, 2018. The Company has revised its Condensed Consolidated Financial Statements
Refer to Note 16, "Goodwill" for the nine months ended September 30, 2018 presented in this Form 10-Q. A summary of the correction follows (in thousands):
|
| | | | |
| | Nine Months Ended September 30, 2018 |
As Reported:(1) | | |
Net cash used in continuing operating activities | | $ | (55,356 | ) |
Net cash used in continuing investing activities | | (8,988 | ) |
| | |
As Corrected: | | |
Net cash provided by continuing operating activities | | 357,079 |
|
Net cash used in continuing investing activities | | (421,423 | ) |
(1) "As reported" balances include amounts from continuing operations historically presented within these captions. |
further information.
Recently Adopted Accounting Pronouncements
ASU 2016-022018-15
In February 2016, the Financial Accounting Standards Board ("FASB") established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The Company adopted the standard as of January 1, 2019 using the alternative modified retrospective method, also known as the transition relief method, permitted under ASU 2018-11, which allows companies to not recast comparative periods in the period of adoption. The Company elected the package of practical expedients permitted under the transition guidance which, among other things, permits companies to not reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company also elected to combine lease and non-lease components and to exclude short-term leases, defined as having an initial term of 12 months or less, from the Condensed Consolidated Balance Sheets. The Company did not elect the hindsight practical expedient.
As of September 30, 2019, the Company held right of use assets ("ROU assets") and operating lease liabilities ("lease liabilities") of $118.3 million and $126.0 million, respectively. Prepaid rent of $2.7 million and deferred liabilities of $10.9 million were included in ROU assets and lease liabilities, respectively, at the time of adoption. During the three months ended September 30, 2019, the Company reduced initial opening balances for ROU assets and lease liabilities recorded on January 1, 2019 by $18.0 million as a result of a previous misapplication of certain provisions of Topic 842. The impact of this misapplication on the Company's financial position, results of operations, and cash flows was not material.
ASU 2018-02
In FebruaryAugust 2018, the FASB issued ASU 2018-02,2018-15, Income Statement - Reporting Comprehensive Income (Topic 220): ReclassificationCustomer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”). ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the non-cancellable term of Certain Tax Effects from Accumulated Other Comprehensive income ("ASU 2018-02"), which permits the reclassificationcloud computing arrangements plus any optional renewal periods (i) that are reasonably certain to retained earnings of disproportionate tax effects in accumulated other comprehensive income (loss) causedbe exercised by the Tax Cuts and Jobs Actcustomer or (ii) for which exercise of 2017 ("2017 Tax Act").the renewal option is controlled by the cloud service provider. The Company adopted ASU 2018-022018-15 on a prospective basis as of January 1, 2019,2020. The adoption of ASU 2018-15 did not have a material impact on the unaudited Condensed Consolidated Financial Statements.
ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The Company adopted ASU 2018-13 as of January 1, 2020, which did not have a material impact on the unaudited Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Accounting Pronouncements Related to the Current Expected Credit Loss ("CECL") Standard
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendments to the guidance: ASU 2018-19 in November 2018, ASU 2019-04 in April 2019, and ASU 2019-05 in May 2019.2019, ASU 2019-10 and 11 in November 2019, and ASU 2020-02 in February 2020. The standard, as amended, changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they currently do under the
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
other-than-temporary impairment model. The standard also simplifies the accounting model for purchased credit-impaired debt securities and loans. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2019-04 clarifies that equity instruments without readily determinable fair values for which an entity has elected the measurement alternative should be remeasured to fair value as of the date that an observable transaction occurred. ASU 2019-05 provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. ASU 2019-10 amends the mandatory effective date for ASU 2016-13. The amendments are effective for fiscal years beginning after December 15, 2022 for entities that are eligible to be defined by the SEC as a SRC, for which the Company qualifies. ASU 2019-11 provides clarity and improves the codification to ASU 2016-13. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. As issued, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is evaluating its alternatives with respect to the available accounting methods under ASU 2016‑2016 13, including the fair value option. If the fair value option is not utilized, adoption of ASU 2016-13 will increase the allowance for credit losses with a resulting negative adjustment to retained earnings on the date of adoption. Additionally, as disclosed below in "--FASB Definition of an SRC as relatedThe Company does not expect to the CECL standard and evaluation of the impact of the CECL standard", the Company expects to defer the adoption ofadopt ASU 2016-13 until at least January 1, 2021.2021 as permitted under ASU 2019-10. The Company is currently assessing the impact the adoption of ASU 2016-13 will have on its Consolidated Financial Statements.
ASU 2019-052020-01
In May 2019,January 2020, the FASB issued ASU 2019-05,2020-01, Financial Instruments Investments- Credit LossesEquity Securities (Topic 326)321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which amends (ASU 2020-01). ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13,2020-01 clarifies the fair value option on financial instruments that (i) were previously recorded at amortized cost and (ii) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05’s amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings in the statement of financial position asinteraction of the date that an entity adoptedaccounting for equity securities under Topic 321, the amendmentsaccounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. ASU 2016-13. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-05 are2020-01 is effective for fiscal years beginning after December 15, 2019, including2020, and interim periods therein. An entity may early adopt the ASU in any interim period after its issuance if the entity has adopted ASU 2016-13. For all other entities, the effective date will be the same as the effective date for ASU 2016-13. The Company expects to elect the option to defer adoption to a later effective date, as further described below in "--FASB Definition of an SRC as related to the CECL standard and evaluation of the impact of the CECL standard." within those fiscal years. The Company is currently evaluatingassessing the methods and impact the adoption of adopting this new standardASU 2020-01 will have on the Condensedits Consolidated Financial Statements.
ASU 2019-04
In May 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. The ASU’s amendments apply to all entities within the scope of the affected guidance. Accrued interest - Amortized cost basis is defined in ASU 2016-13 as "the amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, write-offs, foreign exchange, and fair value hedge accounting adjustments." To address stakeholders’ concerns that the inclusion of accrued interest in the definition of amortized cost basis could make application of the credit loss guidance operationally burdensome, ASU 2019-04 provides certain alternatives for the measurement of the allowance for credit losses ("ALL") on accrued interest receivable ("AIR"). These measurement alternatives include (i) measuring an ALL on AIR separately, (ii) electing to provide separate disclosure of the AIR component of amortized cost as a practical expedient, and (iii) making accounting policy elections to simplify certain aspects of the presentation and measurement of such AIR. As issued, for entities that have adopted ASU 2016-13, the amendments in ASU 2019-04 related to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, and interim periods therein. ASU 2019-04’s amendments should be applied "on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date an entity adopted the amendments in ASU 2016-13." Certain disclosures are also required. Due to the FASB's decision to allow a deferment option for SRCs applying ASU 2016-13, the Company expects to defer adoption of both ASU 2016-13 and ASU 2019-04.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
ASU 2020-04
In March 2020, the FASB Definition of an SRC as related to the CECL standard and evaluationissued ASU 2020-04, “Reference Rate Reform - Facilitation of the impactEffects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional expedients and exceptions to US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the CECL standardexpected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by this reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently assessing the impact the adoption of ASU 2020-04 will have on its Consolidated Financial Statements.
On October 16,ASU 2019-12
In December 2019, the FASB approved a proposalissued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” (Topic 740). The ASU intends to defer required adoptionsimplify various aspects related to accounting for income taxes and removes certain exceptions to the general principles in the standard. Additionally, the ASU clarifies and amends existing guidance to improve consistent application of its requirements. The amendments of the CECL standardASU are effective for SRCs until fiscal periodsyears beginning after December 15, 2022. Under current SEC definitions, CURO met the definition of an SRC as of June 30, 2019.2020, and interim periods within those fiscal years. Early adoption is permitted. The FASB further confirmed that for CECL, a company makes an evaluation of SRC status in accordance with SEC rules at the time of standard effectiveness (i.e., as of June 30, 2019) and that status is effective for purposes of adopting the CECL standard regardless of future changes in SRC status. The FASB is expected to codify the approved proposal with issuance of a new ASU during the fourth quarter of 2019. The Company will continue to monitor the standard-setting activities of the FASB and expects to elect to defer adoption of the CECL standard. The CompanyASU 2019-12 is currently evaluating the methods and impact of adopting the CECL standard on the Condensed Consolidated Financial Statements.
SEC Disclosure Update
In August 2018, the SEC adopted final rules under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that had become redundant, duplicative, overlapping, outdated or superseded. Other than the amendment's expanded disclosure requirement for interim financial statements to disclose both current and comparative quarter and year-to-date reconciliations of changes in stockholders' equity, it did not have a material impact on the Company's Condensed Consolidated Financial Statements or Notes thereto for the three and nine months ended September 30, 2019, nor is it expected to have a material impact on the Company's annual Consolidated Financial Statements or Notes thereto.Statements.
NOTE 2 - VARIABLE INTEREST ENTITIES
In August 2018, the Company closed the Non-Recourse Canada SPV facility, whereby certain loan receivables were sold to the wholly-owned bankruptcy-remote special purpose subsidiaries ("VIEs")VIE to collateralize debt incurred under the facility. See Note 5, "Debt" for additional details on the Non-Recourse Canada SPV facility.
As theThe Company has determined that it is the primary beneficiary of the VIEs, itVIE and is required to consolidate the entity. The Company includes the assets and liabilities related to the VIEsVIE in itsthe unaudited Condensed Consolidated Financial Statements.Balance Sheets. As required, the CompanyCURO parenthetically discloses on the unaudited Condensed Consolidated Balance Sheets the VIEs’VIE's assets that can only be used to settle the VIEs'VIE's obligations and liabilities if the VIEs’VIE's creditors have no recourse against the Company's general credit.
The carrying amounts of consolidated VIEs'VIE's assets and liabilities associated with the VIE subsidiariessubsidiary were as follows (in thousands):
| | | | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
Assets | | | | | | | | |
Restricted cash | | $ | 21,897 |
| | $ | 12,840 |
| | $ | 22,317 |
| | $ | 17,427 |
|
Gross loans receivable less allowance for loan losses | | 206,158 |
| | 136,187 |
| |
Loans receivable less allowance for loan losses | | | 203,837 |
| | 220,067 |
|
Total Assets | | $ | 228,055 |
| | $ | 149,027 |
| | $ | 226,154 |
| | $ | 237,494 |
|
Liabilities | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 7,259 |
| | $ | 4,980 |
| | $ | 13,267 |
| | $ | 13,462 |
|
Deferred revenue | | 44 |
| | 40 |
| | 39 |
| | 46 |
|
Accrued interest | | 777 |
| | 831 |
| | 627 |
| | 871 |
|
Intercompany payable | | 93,671 |
| | 44,330 |
| | 80,240 |
| | 69,639 |
|
Long-term debt | | 102,483 |
| | 107,479 |
| |
Debt | | | 84,874 |
| | 112,221 |
|
Total Liabilities | | $ | 204,234 |
| | $ | 157,660 |
| | $ | 179,047 |
| | $ | 196,239 |
|
On April 8, 2020, the Company entered into the Non-Recourse U.S. SPV Facility to provide financing for U.S. Unsecured Installment and Open-End receivables, including those generated under its technology, marketing and servicing relationship with Stride Bank. Refer to Note 19, "Subsequent Events" for additional details.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTE 3 – LOANS RECEIVABLE AND REVENUE
The following table summarizes revenue by product for the periods indicated (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Unsecured Installment | | $ | 137,233 |
| | $ | 137,660 |
| | $ | 395,119 |
| | $ | 377,976 |
|
Secured Installment | | 28,270 |
| | 28,562 |
| | 81,823 |
| | 81,195 |
|
Open-End | | 66,120 |
| | 40,290 |
| | 173,961 |
| | 94,735 |
|
Single-Pay | | 49,312 |
| | 50,614 |
| | 141,605 |
| | 169,296 |
|
Ancillary | | 16,329 |
| | 12,356 |
| | 46,995 |
| | 34,292 |
|
Total revenue | | $ | 297,264 |
| | $ | 269,482 |
| | $ | 839,503 |
| | $ | 757,494 |
|
The following tables summarize Loans receivable by product and the related delinquentCOVID-19 pandemic has impacted customers, which has resulted in past-due gross loans receivable at September 30, 2019 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Total |
Current loans receivable | | $ | 78,039 |
| $ | 127,952 |
| $ | 72,866 |
| $ | 268,918 |
| $ | 547,775 |
|
Delinquent loans receivable | | — |
| 46,537 |
| 17,250 |
| 46,053 |
| 109,840 |
|
Total loans receivable | | 78,039 |
| 174,489 |
| 90,116 |
| 314,971 |
| 657,615 |
|
Less: allowance for losses | | (5,662 | ) | (38,127 | ) | (10,363 | ) | (54,233 | ) | (108,385 | ) |
Loans receivable, net | | $ | 72,377 |
| $ | 136,362 |
| $ | 79,753 |
| $ | 260,738 |
| $ | 549,230 |
|
|
| | | | | | | | | | | | | |
| | September 30, 2019 |
| | Unsecured Installment | Secured Installment | Open-End | Total |
Delinquent loans receivable | | | | | |
0-30 days past due | | $ | 17,187 |
| $ | 7,456 |
| $ | 18,734 |
| $ | 43,377 |
|
31-60 days past due | | 13,890 |
| 4,711 |
| 13,283 |
| 31,884 |
|
61 + days past due | | 15,460 |
| 5,083 |
| 14,036 |
| 34,579 |
|
Total delinquent loans receivable | | $ | 46,537 |
| $ | 17,250 |
| $ | 46,053 |
| $ | 109,840 |
|
The following tables summarize Loans receivableand gross combined loans receivables guaranteed by product and the related delinquentCompany, as a percentage of total gross combined loans receivable, atto increase as of March 31, 2020 compared to December 31, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Total |
Current loans receivable | | $ | 80,823 |
| $ | 141,316 |
| $ | 75,583 |
| $ | 207,333 |
| $ | 505,055 |
|
Delinquent loans receivable | | — |
| 49,087 |
| 17,389 |
| — |
| 66,476 |
|
Total loans receivable | | 80,823 |
| 190,403 |
| 92,972 |
| 207,333 |
| 571,531 |
|
Less: allowance for losses | | (4,189 | ) | (37,716 | ) | (12,191 | ) | (19,901 | ) | (73,997 | ) |
Loans receivable, net | | $ | 76,634 |
| $ | 152,687 |
| $ | 80,781 |
| $ | 187,432 |
| $ | 497,534 |
|
2019. Additionally, it has created uncertainty regarding the performance of net-charge offs
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
over the loss-development period. The Company has maintained its historical allowance approach, but has adjusted future loss estimates for an increase in past-due gross loans receivable due to adverse market conditions at March 31, 2020 caused by COVID-19. The estimates and assumptions used to determine an appropriate allowance for loan losses and liability for losses on CSO lender-owned consumer loans are those that are available through the filing of this Form 10-Q and which are indicative of conditions occurring as of March 31, 2020. As a result of future loss estimates due to uncertainty caused by COVID-19, and the related impact to past due loans receivable as of March 31, 2020, CURO has determined an additional $12.0 million allowance for loan loss was required.
The following table summarizes revenue by product (in thousands):
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
Unsecured Installment | | $ | 122,409 |
| | $ | 135,778 |
|
Secured Installment | | 26,286 |
| | 27,477 |
|
Open-End | | 70,982 |
| | 52,869 |
|
Single-Pay | | 45,157 |
| | 46,761 |
|
Ancillary | | 15,972 |
| | 15,054 |
|
Total revenue(1) | | $ | 280,806 |
| | $ | 277,939 |
|
(1) Includes revenue from CSO programs of $68.1 million and $71.7 million for the three months ended March 31, 2020 and 2019, respectively. |
The following tables summarize loans receivable by product and the related delinquent loans receivable (in thousands):
|
| | | | | | | | | | | | | | | | |
| | March 31, 2020 |
| | Single-Pay(1) | Unsecured Installment | Secured Installment | Open-End | Total |
Current loans receivable | | $ | 54,728 |
| $ | 88,152 |
| $ | 57,284 |
| $ | 264,019 |
| $ | 464,183 |
|
Delinquent loans receivable | | — |
| 34,966 |
| 15,301 |
| 49,987 |
| 100,254 |
|
Total loans receivable | | 54,728 |
| 123,118 |
| 72,585 |
| 314,006 |
| 564,437 |
|
Less: allowance for losses | | (4,693 | ) | (28,965 | ) | (9,726 | ) | (56,458 | ) | (99,842 | ) |
Loans receivable, net | | $ | 50,035 |
| $ | 94,153 |
| $ | 62,859 |
| $ | 257,548 |
| $ | 464,595 |
|
(1) Of the $54.7 million of Single-Pay receivables, $16.4 million relate to mandated extended payment options for certain Canada Single-Pay loans. |
| | | | December 31, 2018 | | March 31, 2020 |
| | Unsecured Installment | Secured Installment | Total | | Unsecured Installment | Secured Installment | Open-End | Total |
Delinquent loans receivable | | |
|
| | | |
0-30 days past due | | $ | 17,850 |
| $ | 7,870 |
| $ | 25,720 |
| | $ | 12,511 |
| $ | 7,168 |
| $ | 21,381 |
| $ | 41,060 |
|
31-60 days past due | | 14,705 |
| 4,725 |
| 19,430 |
| | 9,566 |
| 3,991 |
| 12,390 |
| 25,947 |
|
61 + days past due | | 16,532 |
| 4,794 |
| 21,326 |
| | 12,889 |
| 4,142 |
| 16,216 |
| 33,247 |
|
Total delinquent loans receivable | | $ | 49,087 |
| $ | 17,389 |
| $ | 66,476 |
| | $ | 34,966 |
| $ | 15,301 |
| $ | 49,987 |
| $ | 100,254 |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Single-Pay(1) | Unsecured Installment | Secured Installment | Open-End | Total |
Current loans receivable | | $ | 81,447 |
| $ | 117,682 |
| $ | 70,565 |
| $ | 285,452 |
| $ | 555,146 |
|
Delinquent loans receivable | | — |
| 43,100 |
| 17,510 |
| 50,072 |
| 110,682 |
|
Total loans receivable | | 81,447 |
| 160,782 |
| 88,075 |
| 335,524 |
| 665,828 |
|
Less: allowance for losses | | (5,869 | ) | (35,587 | ) | (10,305 | ) | (55,074 | ) | (106,835 | ) |
Loans receivable, net | | $ | 75,578 |
| $ | 125,195 |
| $ | 77,770 |
| $ | 280,450 |
| $ | 558,993 |
|
(1) Of the $81.4 million of Single-Pay receivables, $22.4 million relate to mandated extended payment options for certain Canada Single-Pay loans. |
|
| | | | | | | | | | | | | |
| | December 31, 2019 |
| | Unsecured Installment | Secured Installment | Open-End | Total |
Delinquent loans receivable | | | | |
|
|
0-30 days past due | | $ | 15,369 |
| $ | 8,039 |
| $ | 21,823 |
| $ | 45,231 |
|
31-60 days past due | | 12,403 |
| 4,885 |
| 13,191 |
| 30,479 |
|
61 + days past due | | 15,328 |
| 4,586 |
| 15,058 |
| 34,972 |
|
Total delinquent loans receivable | | $ | 43,100 |
| $ | 17,510 |
| $ | 50,072 |
| $ | 110,682 |
|
The following tables summarize loans guaranteed by the Company under CSO programs and the related delinquent receivables at September 30, 2019 (in thousands):
| | | | September 30, 2019 | | March 31, 2020 |
| | Unsecured Installment | Secured Installment | Total | | Unsecured Installment | Secured Installment | Total |
Current loans receivable guaranteed by the Company | | $ | 58,862 |
| $ | 1,966 |
| $ | 60,828 |
| | $ | 44,865 |
| $ | 1,509 |
| $ | 46,374 |
|
Delinquent loans receivable guaranteed by the Company | | 11,842 |
| 396 |
| 12,238 |
| | 9,232 |
| 311 |
| 9,543 |
|
Total loans receivable guaranteed by the Company | | 70,704 |
| 2,362 |
| 73,066 |
| | 54,097 |
| 1,820 |
| 55,917 |
|
Less: Liability for losses on CSO lender-owned consumer loans | | (10,181 | ) | (68 | ) | (10,249 | ) | | (9,142 | ) | (47 | ) | (9,189 | ) |
Loans receivable guaranteed by the Company, net | | $ | 60,523 |
| $ | 2,294 |
| $ | 62,817 |
| | $ | 44,955 |
| $ | 1,773 |
| $ | 46,728 |
|
|
| | | | | | | | | | |
| | September 30, 2019 |
| | Unsecured Installment | Secured Installment | Total |
Delinquent loans receivable | | | |
|
|
0-30 days past due | | $ | 9,859 |
| $ | 330 |
| $ | 10,189 |
|
31-60 days past due | | 1,229 |
| 41 |
| 1,270 |
|
61+ days past due | | 754 |
| 25 |
| 779 |
|
Total delinquent loans receivable | | $ | 11,842 |
| $ | 396 |
| $ | 12,238 |
|
The following tables summarize loans guaranteed by the Company under CSO programs and the related delinquent receivables at December 31, 2018 (in thousands):
|
| | | | | | | | | | |
| | December 31, 2018 |
| | Unsecured Installment | Secured Installment | Total |
Current loans receivable guaranteed by the Company | | $ | 65,743 |
| $ | 2,504 |
| $ | 68,247 |
|
Delinquent loans receivable guaranteed by the Company | | 11,708 |
| 446 |
| 12,154 |
|
Total loans receivable guaranteed by the Company | | 77,451 |
| 2,950 |
| 80,401 |
|
Less: Liability for losses on CSO lender-owned consumer loans | | (11,582 | ) | (425 | ) | (12,007 | ) |
Loans receivable guaranteed by the Company, net | | $ | 65,869 |
| $ | 2,525 |
| $ | 68,394 |
|
|
| | | | | | | | | | |
| | March 31, 2020 |
| | Unsecured Installment | Secured Installment | Total |
Delinquent loans receivable | | | |
|
|
0-30 days past due | | $ | 7,589 |
| $ | 255 |
| $ | 7,844 |
|
31-60 days past due | | 939 |
| 32 |
| 971 |
|
61+ days past due | | 704 |
| 24 |
| 728 |
|
Total delinquent loans receivable | | $ | 9,232 |
| $ | 311 |
| $ | 9,543 |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
| | | | | | | | | | |
| | December 31, 2018 |
| | Unsecured Installment | Secured Installment | Total |
Delinquent loans receivable | | | | |
0-30 days past due | | $ | 9,684 |
| $ | 369 |
| $ | 10,053 |
|
31-60 days past due | | 1,255 |
| 48 |
| 1,303 |
|
61 + days past due | | 769 |
| 29 |
| 798 |
|
Total delinquent loans receivable | | $ | 11,708 |
| $ | 446 |
| $ | 12,154 |
|
|
| | | | | | | | | | |
| | December 31, 2019 |
| | Unsecured Installment | Secured Installment | Total |
Current loans receivable guaranteed by the Company | | $ | 61,840 |
| $ | 1,944 |
| $ | 63,784 |
|
Delinquent loans receivable guaranteed by the Company | | 12,477 |
| 392 |
| 12,869 |
|
Total loans receivable guaranteed by the Company | | 74,317 |
| 2,336 |
| 76,653 |
|
Less: Liability for losses on CSO lender-owned consumer loans | | (10,553 | ) | (70 | ) | (10,623 | ) |
Loans receivable guaranteed by the Company, net | | $ | 63,764 |
| $ | 2,266 |
| $ | 66,030 |
|
|
| | | | | | | | | | |
| | December 31, 2019 |
| | Unsecured Installment | Secured Installment | Total |
Delinquent loans receivable | | | | |
0-30 days past due | | $ | 10,392 |
| $ | 326 |
| $ | 10,718 |
|
31-60 days past due | | 1,256 |
| 40 |
| 1,296 |
|
61 + days past due | | 829 |
| 26 |
| 855 |
|
Total delinquent loans receivable | | $ | 12,477 |
| $ | 392 |
| $ | 12,869 |
|
The following table summarizes activity in the allowance for loan losses during the three months ended September 30, 2019 (in thousands):
| | | Three Months Ended September 30, 2019 | Three Months Ended March 31, 2020 |
| Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total |
Balance, beginning of period | $ | 4,941 |
| $ | 35,223 |
| $ | 9,996 |
| $ | 51,717 |
| $ | — |
| $ | 101,877 |
| $ | 5,869 |
| $ | 35,587 |
| $ | 10,305 |
| $ | 55,074 |
| $ | — |
| $ | 106,835 |
|
Charge-offs | (40,512 | ) | (34,252 | ) | (10,592 | ) | (31,993 | ) | (1,382 | ) | (118,731 | ) | (40,521 | ) | (38,558 | ) | (13,110 | ) | (43,509 | ) | (1,279 | ) | (136,977 | ) |
Recoveries | 26,599 |
| 5,279 |
| 2,445 |
| 3,791 |
| 845 |
| 38,959 |
| 30,004 |
| 5,783 |
| 2,909 |
| 6,411 |
| 575 |
| 45,682 |
|
Net charge-offs | (13,913 | ) | (28,973 | ) | (8,147 | ) | (28,202 | ) | (537 | ) | (79,772 | ) | (10,517 | ) | (32,775 | ) | (10,201 | ) | (37,098 | ) | (704 | ) | (91,295 | ) |
Provision for losses | 14,736 |
| 31,891 |
| 8,514 |
| 31,220 |
| 537 |
| 86,898 |
| 9,639 |
| 26,182 |
| 9,622 |
| 40,991 |
| 704 |
| 87,138 |
|
Effect of foreign currency translation | (102 | ) | (14 | ) | — |
| (502 | ) | — |
| (618 | ) | (298 | ) | (29 | ) | — |
| (2,509 | ) | — |
| (2,836 | ) |
Balance, end of period | $ | 5,662 |
| $ | 38,127 |
| $ | 10,363 |
| $ | 54,233 |
| $ | — |
| $ | 108,385 |
| $ | 4,693 |
| $ | 28,965 |
| $ | 9,726 |
| $ | 56,458 |
| $ | — |
| $ | 99,842 |
|
Allowance for loan losses as a percentage of gross loan receivables | 7.3 | % | 21.9 | % | 11.5 | % | 17.2 | % | N/A |
| 16.5 | % | 8.6 | % | 23.5 | % | 13.4 | % | 18.0 | % | N/A |
| 17.7 | % |
The following table summarizes activity in the liability for losses on CSO lender-owned consumer loans during the three months ended September 30, 2019 (in thousands):
|
| | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Unsecured Installment | Secured Installment | Total |
Balance, beginning of period | $ | 9,433 |
| $ | 71 |
| $ | 9,504 |
|
Charge-offs | (43,072 | ) | (888 | ) | (43,960 | ) |
Recoveries | 7,156 |
| 580 |
| 7,736 |
|
Net charge-offs | (35,916 | ) | (308 | ) | (36,224 | ) |
Provision for losses | 36,664 |
| 305 |
| 36,969 |
|
Balance, end of period | $ | 10,181 |
| $ | 68 |
| $ | 10,249 |
|
The following table summarizes activity in the allowance for loan losses and the liability for losses on CSO lender-owned consumer loans, in total, during the three months ended September 30, 2019 (in thousands):
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total |
Balance, beginning of period | $ | 4,941 |
| $ | 44,656 |
| $ | 10,067 |
| $ | 51,717 |
| $ | — |
| $ | 111,381 |
|
Charge-offs | (40,512 | ) | (77,324 | ) | (11,480 | ) | (31,993 | ) | (1,382 | ) | (162,691 | ) |
Recoveries | 26,599 |
| 12,435 |
| 3,025 |
| 3,791 |
| 845 |
| 46,695 |
|
Net charge-offs | (13,913 | ) | (64,889 | ) | (8,455 | ) | (28,202 | ) | (537 | ) | (115,996 | ) |
Provision for losses | 14,736 |
| 68,555 |
| 8,819 |
| 31,220 |
| 537 |
| 123,867 |
|
Effect of foreign currency translation | (102 | ) | (14 | ) | — |
| (502 | ) | — |
| (618 | ) |
Balance, end of period | $ | 5,662 |
| $ | 48,308 |
| $ | 10,431 |
| $ | 54,233 |
| $ | — |
| $ | 118,634 |
|
The following table summarizes activity in the allowance for loan losses during the three months ended September 30, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total |
Balance, beginning of period | $ | 3,604 |
| $ | 30,291 |
| $ | 10,386 |
| $ | 9,717 |
| $ | — |
| $ | 53,998 |
|
Charge-offs | (40,753 | ) | (32,115 | ) | (11,188 | ) | (32,770 | ) | (1,494 | ) | (118,320 | ) |
Recoveries | 27,861 |
| 4,807 |
| 2,325 |
| 9,191 |
| 931 |
| 45,115 |
|
Net charge-offs | (12,892 | ) | (27,308 | ) | (8,863 | ) | (23,579 | ) | (563 | ) | (73,205 | ) |
Provision for losses | 12,757 |
| 32,946 |
| 9,698 |
| 31,686 |
| 563 |
| 87,650 |
|
Effect of foreign currency translation | (179 | ) | 231 |
| — |
| 189 |
| — |
| 241 |
|
Balance, end of period | $ | 3,290 |
| $ | 36,160 |
| $ | 11,221 |
| $ | 18,013 |
| $ | — |
| $ | 68,684 |
|
Allowance for loan losses as a percentage of gross loan receivables | 4.3 | % | 19.5 | % | 12.3 | % | 9.8 | % | N/A |
| 12.8 | % |
The following table summarizes activity in the liability for losses on CSO lender-owned consumer loans during the three months ended September 30, 2018 (in thousands):
| | | Three Months Ended September 30, 2018 | Three Months Ended March 31, 2020 |
| Unsecured Installment | Secured Installment | Total | Unsecured Installment | Secured Installment | Total |
Balance, beginning of period | $ | 11,193 |
| $ | 426 |
| $ | 11,619 |
| $ | 10,553 |
| $ | 70 |
| $ | 10,623 |
|
Charge-offs | (44,896 | ) | (1,088 | ) | (45,984 | ) | (41,511 | ) | (862 | ) | (42,373 | ) |
Recoveries | 6,901 |
| 665 |
| 7,566 |
| 13,762 |
| 779 |
| 14,541 |
|
Net charge-offs | (37,995 | ) | (423 | ) | (38,418 | ) | (27,749 | ) | (83 | ) | (27,832 | ) |
Provision for losses | 39,552 |
| 490 |
| 40,042 |
| 26,338 |
| 60 |
| 26,398 |
|
Balance, end of period | $ | 12,750 |
| $ | 493 |
| $ | 13,243 |
| $ | 9,142 |
| $ | 47 |
| $ | 9,189 |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes activity in the allowance for loan losses and the liability for losses on CSO lender-owned consumer loans in total during the three months ended September 30, 2018 (in thousands):
| | | Three Months Ended September 30, 2018 | Three Months Ended March 31, 2020 |
| Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total |
Balance, beginning of period | $ | 3,604 |
| $ | 41,484 |
| $ | 10,812 |
| $ | 9,717 |
| $ | — |
| $ | 65,617 |
| $ | 5,869 |
| $ | 46,140 |
| $ | 10,375 |
| $ | 55,074 |
| $ | — |
| $ | 117,458 |
|
Charge-offs | (40,753 | ) | (77,011 | ) | (12,276 | ) | (32,770 | ) | (1,494 | ) | (164,304 | ) | (40,521 | ) | (80,069 | ) | (13,972 | ) | (43,509 | ) | (1,279 | ) | (179,350 | ) |
Recoveries | 27,861 |
| 11,708 |
| 2,990 |
| 9,191 |
| 931 |
| 52,681 |
| 30,004 |
| 19,545 |
| 3,688 |
| 6,411 |
| 575 |
| 60,223 |
|
Net charge-offs | (12,892 | ) | (65,303 | ) | (9,286 | ) | (23,579 | ) | (563 | ) | (111,623 | ) | (10,517 | ) | (60,524 | ) | (10,284 | ) | (37,098 | ) | (704 | ) | (119,127 | ) |
Provision for losses | 12,757 |
| 72,498 |
| 10,188 |
| 31,686 |
| 563 |
| 127,692 |
| 9,639 |
| 52,520 |
| 9,682 |
| 40,991 |
| 704 |
| 113,536 |
|
Effect of foreign currency translation | (179 | ) | 231 |
| — |
| 189 |
| — |
| 241 |
| (298 | ) | (29 | ) | — |
| (2,509 | ) | — |
| (2,836 | ) |
Balance, end of period | $ | 3,290 |
| $ | 48,910 |
| $ | 11,714 |
| $ | 18,013 |
| $ | — |
| $ | 81,927 |
| $ | 4,693 |
| $ | 38,107 |
| $ | 9,773 |
| $ | 56,458 |
| $ | — |
| $ | 109,031 |
|
The following table summarizes activity in the allowance for loan losses during the nine months ended September 30, 2019 (in thousands):
| | | Nine Months Ended September 30, 2019 | Three Months Ended March 31, 2019 |
| Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total |
Balance, beginning of period | $ | 4,189 |
| $ | 37,716 |
| $ | 12,191 |
| $ | 19,901 |
| $ | — |
| $ | 73,997 |
| $ | 4,189 |
| $ | 37,716 |
| $ | 12,191 |
| $ | 19,901 |
| $ | — |
| $ | 73,997 |
|
Charge-offs | (112,792 | ) | (115,825 | ) | (33,558 | ) | (66,319 | ) | (4,075 | ) | (332,569 | ) | (36,521 | ) | (44,237 | ) | (12,671 | ) | (3,638 | ) | (1,351 | ) | (98,418 | ) |
Recoveries | 78,811 |
| 16,963 |
| 8,261 |
| 14,487 |
| 2,565 |
| 121,087 |
| 27,911 |
| 6,318 |
| 3,123 |
| 5,159 |
| 898 |
| 43,409 |
|
Net charge-offs | (33,981 | ) | (98,862 | ) | (25,297 | ) | (51,832 | ) | (1,510 | ) | (211,482 | ) | (8,610 | ) | (37,919 | ) | (9,548 | ) | 1,521 |
| (453 | ) | (55,009 | ) |
Provision for losses | 35,450 |
| 99,250 |
| 23,469 |
| 85,910 |
| 1,510 |
| 245,589 |
| 8,268 |
| 33,845 |
| 7,153 |
| 25,317 |
| 453 |
| 75,036 |
|
Effect of foreign currency translation | 4 |
| 23 |
| — |
| 254 |
| — |
| 281 |
| 50 |
| 24 |
| — |
| 224 |
| — |
| 298 |
|
Balance, end of period | $ | 5,662 |
| $ | 38,127 |
| $ | 10,363 |
| $ | 54,233 |
| $ | — |
| $ | 108,385 |
| $ | 3,897 |
| $ | 33,666 |
| $ | 9,796 |
| $ | 46,963 |
| $ | — |
| $ | 94,322 |
|
Allowance for loan losses as a percentage of gross loan receivables | 7.3 | % | 21.9 | % | 11.5 | % | 17.2 | % | N/A |
| 16.5 | % | 5.6 | % | 20.8 | % | 12.1 | % | 19.5 | % | N/A |
| 17.0 | % |
The following table summarizes activity in the liability for losses on CSO lender-owned consumer loans during the nine months ended September 30, 2019 (in thousands):
| | | Nine Months Ended September 30, 2019 | Three Months Ended March 31, 2019 |
| Unsecured Installment | Secured Installment | Total | Unsecured Installment | Secured Installment | Total |
Balance, beginning of period | $ | 11,582 |
| $ | 425 |
| $ | 12,007 |
| $ | 11,582 |
| $ | 425 |
| $ | 12,007 |
|
Charge-offs | (118,617 | ) | (2,647 | ) | (121,264 | ) | (40,980 | ) | (1,076 | ) | (42,056 | ) |
Recoveries | 24,794 |
| 2,039 |
| 26,833 |
| 10,560 |
| 802 |
| 11,362 |
|
Net charge-offs | (93,823 | ) | (608 | ) | (94,431 | ) | (30,420 | ) | (274 | ) | (30,694 | ) |
Provision for losses | 92,422 |
| 251 |
| 92,673 |
| 27,422 |
| (73 | ) | 27,349 |
|
Balance, end of period | $ | 10,181 |
| $ | 68 |
| $ | 10,249 |
| $ | 8,584 |
| $ | 78 |
| $ | 8,662 |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes activity in the allowance for loan losses and the liability for losses on CSO lender-owned consumer loans, a non-GAAP metric, in total during the nine months ended September 30, 2019 (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total |
Balance, beginning of period | $ | 4,189 |
| $ | 49,298 |
| $ | 12,616 |
| $ | 19,901 |
| $ | — |
| $ | 86,004 |
|
Charge-offs | (112,792 | ) | (234,442 | ) | (36,205 | ) | (66,319 | ) | (4,075 | ) | (453,833 | ) |
Recoveries | 78,811 |
| 41,757 |
| 10,300 |
| 14,487 |
| 2,565 |
| 147,920 |
|
Net charge-offs | (33,981 | ) | (192,685 | ) | (25,905 | ) | (51,832 | ) | (1,510 | ) | (305,913 | ) |
Provision for losses | 35,450 |
| 191,672 |
| 23,720 |
| 85,910 |
| 1,510 |
| 338,262 |
|
Effect of foreign currency translation | 4 |
| 23 |
| — |
| 254 |
| — |
| 281 |
|
Balance, end of period | $ | 5,662 |
| $ | 48,308 |
| $ | 10,431 |
| $ | 54,233 |
| $ | — |
| $ | 118,634 |
|
The following table summarizes activity in the allowance for loan losses during the nine months ended September 30, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total |
Balance, beginning of period | $ | 5,204 |
| $ | 38,977 |
| $ | 13,472 |
| $ | 6,426 |
| $ | — |
| $ | 64,079 |
|
Charge-offs | (126,328 | ) | (98,946 | ) | (33,755 | ) | (76,926 | ) | (4,474 | ) | (340,429 | ) |
Recoveries | 88,945 |
| 15,110 |
| 7,487 |
| 30,451 |
| 2,728 |
| 144,721 |
|
Net charge-offs | (37,383 | ) | (83,836 | ) | (26,268 | ) | (46,475 | ) | (1,746 | ) | (195,708 | ) |
Provision for losses | 35,750 |
| 80,904 |
| 24,017 |
| 57,962 |
| 1,746 |
| 200,379 |
|
Effect of foreign currency translation | (281 | ) | 115 |
| — |
| 100 |
| — |
| (66 | ) |
Balance, end of period | $ | 3,290 |
| $ | 36,160 |
| $ | 11,221 |
| $ | 18,013 |
| $ | — |
| $ | 68,684 |
|
Allowance for loan losses as a percentage of gross loan receivables | 4.3 | % | 19.5 | % | 12.3 | % | 9.8 | % | N/A |
| 12.8 | % |
The following table summarizes activity in the liability for losses on CSO lender-owned consumer loans during the nine months ended September 30, 2018 (in thousands):
|
| | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Unsecured Installment | Secured Installment | Total |
Balance, beginning of period | $ | 17,073 |
| $ | 722 |
| $ | 17,795 |
|
Charge-offs | (119,632 | ) | (3,300 | ) | (122,932 | ) |
Recoveries | 25,227 |
| 2,610 |
| 27,837 |
|
Net charge-offs | (94,405 | ) | (690 | ) | (95,095 | ) |
Provision for losses | 90,082 |
| 461 |
| 90,543 |
|
Balance, end of period | $ | 12,750 |
| $ | 493 |
| $ | 13,243 |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes activity in the allowance for loan losses and the liability for losses on CSO lender-owned consumer loans, in total, during the nine months ended September 30, 2018 (in thousands):
| | | Nine Months Ended September 30, 2018 | Three Months Ended March 31, 2019 |
| Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total |
Balance, beginning of period | $ | 5,204 |
| $ | 56,050 |
| $ | 14,194 |
| $ | 6,426 |
| $ | — |
| $ | 81,874 |
| $ | 4,189 |
| $ | 49,298 |
| $ | 12,616 |
| $ | 19,901 |
| $ | — |
| $ | 86,004 |
|
Charge-offs | (126,328 | ) | (218,578 | ) | (37,055 | ) | (76,926 | ) | (4,474 | ) | (463,361 | ) | (36,521 | ) | (85,217 | ) | (13,747 | ) | (3,638 | ) | (1,351 | ) | (140,474 | ) |
Recoveries | 88,945 |
| 40,337 |
| 10,097 |
| 30,451 |
| 2,728 |
| 172,558 |
| 27,911 |
| 16,878 |
| 3,925 |
| 5,159 |
| 898 |
| 54,771 |
|
Net charge-offs | (37,383 | ) | (178,241 | ) | (26,958 | ) | (46,475 | ) | (1,746 | ) | (290,803 | ) | (8,610 | ) | (68,339 | ) | (9,822 | ) | 1,521 |
| (453 | ) | (85,703 | ) |
Provision for losses | 35,750 |
| 170,986 |
| 24,478 |
| 57,962 |
| 1,746 |
| 290,922 |
| 8,268 |
| 61,267 |
| 7,080 |
| 25,317 |
| 453 |
| 102,385 |
|
Effect of foreign currency translation | (281 | ) | 115 |
| — |
| 100 |
| — |
| (66 | ) | 50 |
| 24 |
| — |
| 224 |
| — |
| 298 |
|
Balance, end of period | $ | 3,290 |
| $ | 48,910 |
| $ | 11,714 |
| $ | 18,013 |
| $ | — |
| $ | 81,927 |
| $ | 3,897 |
| $ | 42,250 |
| $ | 9,874 |
| $ | 46,963 |
| $ | — |
| $ | 102,984 |
|
NOTE 4 – CREDIT SERVICES ORGANIZATION
The CSO fee receivables under CSO programs were $13.4$6.8 million and $14.3$14.7 million at September 30, 2019March 31, 2020 and December 31, 2018, respectively.2019, respectively, and are reflected in "Prepaid expenses and other" in the unaudited Condensed Consolidated Balance Sheets. The Company bears the risk of loss through its guarantee to purchase specific customer loans that are in default with the lenders. The terms of these loans range up to six months. See the 20182019 Form 10-K for further details of the Company's accounting policy.
As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the incremental maximum amount payable under all such guarantees was $60.4$45.7 million and $66.9$62.7 million, respectively. If the Company is required to pay any portion of the total amount of the loans it has guaranteed, it will attempt to recover some or the entire amount from the applicable customers. The Company holds no collateral in respect of the guarantees. The Company estimates a liability for losses associated with the guaranty provided to the CSO lenders using assumptions and methodologies similar to the Allowance for loan losses, which it recognizes for its consumer loans. Liability for incurred losses on CSO loans Guaranteed by the Company was $10.2$9.2 million and $12.0$10.6 million at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
The Company placed $5.9$5.7 million and $17.2$6.2 million in collateral accounts for the benefit of lenders at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, which is reflected in "Prepaid expenses and other" in the unaudited Condensed Consolidated Balance Sheets. The balances required to be maintained in these collateral accounts vary by lender, typically based on a percentage of the outstanding loan balances held by the lender. The percentage of outstanding loan balances required for collateral is negotiated between the Company and each such lender.
Deferred revenue associated with the CSO program was immaterial as of March 31, 2020 and December 31, 2019 and there were no costs to obtain, or costs to fulfill, capitalized under the program. See Note 3, "Loans Receivable and Revenue" for additional information related to loan balances and the revenue recognized under the program.
NOTE 5 – DEBT
Debt consisted of the following (in thousands):
| | | | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
8.25% Senior Secured Notes (due 2025) | | $ | 677,924 |
| | $ | 676,661 |
| | $ | 678,727 |
| | $ | 678,323 |
|
Non-Recourse Canada SPV Facility | | 102,483 |
| | 107,479 |
| | 84,724 |
| | 112,221 |
|
Senior Revolver | | 25,000 |
| | 20,000 |
| | 25,000 |
| | — |
|
Debt | | $ | 805,407 |
| | $ | 804,140 |
| | $ | 788,451 |
| | $ | 790,544 |
|
8.25% Senior Secured Notes
In August 2018, the Company issued $690.0 million of 8.25% Senior Secured Notes which mature on September 1, 2025 ("8.25% Senior Secured Notes").2025. Interest on the notes is payable semiannually, in arrears, on March 1 and September 1. In connection with the 8.25% Senior Secured Notes, the balance of capitalized financing costs of $12.1$11.3 million, net of amortization, is included in the unaudited Condensed Consolidated Balance Sheets as a component of "Debt." These costs are amortized over the term of the 8.25% Senior Secured Notes as a component of interest expense.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company used the proceeds of this issuance were used (i) to redeem the outstanding 12.00% Senior Secured Notes of CFTC, (ii) to repay a portion of the outstanding indebtedness under the five-year revolving credit facility of CURO Receivables Finance I, LLC, a wholly-
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
ownedwholly-owned subsidiary, which consisted of a term loan and revolving borrowing capacity, (iii) for general corporate purposes and (iv) to pay fees, expenses, premiums and accrued interest in connection therewith.
12.00% Senior Secured Notes
In February and November 2017, CFTC issued $470.0 million and $135.0 million, respectively, of 12.00% Senior Secured Notes due March 1, 2022. In connection with these 12.00% Senior Secured Notes, the Company capitalized financing costs of $18.3 million. These costs were being amortized over the term of the 12.00% Senior Secured Notes as a component of interest expense.
On March 7, 2018, CFTC redeemed $77.5 million of its 12.00% Senior Secured Notes using a portion of the proceeds from the Company's initial public offering, as required by the underlying indenture (the transaction whereby the 12.00% Senior Secured Notes were partially redeemed, the “Redemption”), at a price equal to 112.00% of the principal amount of the 12.00% Senior Secured Notes redeemed, plus accrued and unpaid interest paid thereon, to the date of Redemption. The Redemption price and the amortization of a corresponding portion of the capitalized financing costs resulted in a loss on Redemption of $11.7 million for the three months ended March 31, 2018. Following the Redemption, $527.5 million of the original outstanding principal amount of the 12.00% Senior Secured Notes remained outstanding. The Redemption was conducted pursuant to the Indenture governing the 12.00% Senior Secured Notes (the “Indenture”), dated as of February 15, 2017, by and among CFTC, the guarantors party thereto and TMI Trust Company, as trustee and collateral agent.
The remainder of the 12.00% Senior Secured Notes were extinguished effective September 7, 2018 using proceeds from the 8.25% Senior Secured Notes as described above. The early extinguishment of the 12.00% Senior Secured Notes resulted in a pretax loss of $69.2 million during the year ended December 31, 2018.
Non-Recourse Canada SPV Facility
On August 2, 2018, CURO Canada Receivables Limited Partnership, a newly created, bankruptcy-remote special purpose vehicle (the "Canada SPV Borrower") and a wholly-owned subsidiary, entered into a four-year revolving credit facility with Waterfall Asset Management, LLC that provided for C$175.0 million of initial borrowing capacity and the ability to expand such capacity up to C$250.0 million ("Non-Recourse Canada SPV Facility"). The loans bear interest at an annual rate of 6.75% plus the three-month CDOR. The Canada SPV Borrower also pays a 0.50% per annum commitment fee on the unused portion of the commitments. In April 2019, the facility's maturity date was extended one year, to September 2, 2023.
As of September 30, 2019,March 31, 2020, outstanding borrowings under the Non-Recourse Canada SPV Facility were $102.5$84.7 million, net of deferred financing costs of $3.3$2.6 million. For further information on the Non-Recourse Canada SPV, refer to Note 2, "Variable Interest Entities."
Senior Revolver
On September 1, 2017, the Company entered into a $25.0 million Senior Secured Revolving Loan Facility (the “Senior Revolver”). The terms of the Senior Revolver generally conform to the related provisions in the Indenture dated February 15, 2017 for the 12.00% Senior Secured Notes and complements the Company's other financing sources, while providing seasonal short-term liquidity.with $25.0 million of capacity. In February 2018, the Senior Revolver capacity was increased to $29.0 million as permitted by the Indenture to the 12.00% Senior Secured Notes, based upon consolidated tangible assets. Additionally, in November 2018, the Senior Revolver capacity was increased to $50.0 million as permitted by the Indenture to the 8.25% Senior Secured Notes. The Senior Revolver is now syndicated with participation by four banks.
Under the Senior Revolver, there is $50.0 million maximum availability, including up to $5.0 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The current term expireshas been extended to June 30, 2020.2021. The Senior Revolver accrues interest at one-month LIBOR plus 5.00% (subject to a 5% overall minimum) and is repayable on demand..
The terms of the Senior Revolver also require that its outstanding balance be zero for at least 30 consecutive days in each calendar year. The Senior Revolver is guaranteed by all subsidiaries that guarantee the 8.25% Senior Secured Notes and is secured by a lien on substantially all assets of CURO and the guarantor subsidiaries that is senior to the lien securing the 8.25% Senior Secured Notes. Additionally, the negative covenants of the Senior Revolver generally conform to the related provisions in the Indenture for the 8.25% Senior Secured Notes. The revolver had an outstanding balance of $25.0 million at September 30, 2019.March 31, 2020.
The Senior Revolver contains various conditions to borrowing and affirmative, negative and financial maintenance covenants. Certain of the more significant covenants are (i) minimum eligible collateral value, (ii) consolidated interest coverage ratio and (iii) consolidated leverage ratio. The Senior Revolver also contains various events of default, the occurrence of which could result in termination of the lenders’ commitments to lend and the acceleration of all obligations under the Senior Revolver.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Cash Money Revolving Credit Facility
Cash Money Cheque Cashing, Inc., a Canadian subsidiary ("Cash Money"), maintains a C$10.0 million revolving credit facility with Royal Bank of Canada (the "Cash Money Revolving Credit Facility"), which provides short-term liquidity required to meet the working capital needs of the Company's Canadian operations. Aggregate draws under the revolving credit facility are limited to the lesser of: (i) the borrowing base, which is defined as a percentage of cash, deposits in transit and accounts receivable, and (ii) C$10.0 million. As of September 30, 2019,March 31, 2020, the borrowing capacity under the Cash Money Revolving Credit Facility, which was C$9.79.9 million, net of C$0.30.1 million in outstanding stand-by-letters of credit.
The Cash Money Revolving Credit Facility is collateralized by substantially all of Cash Money’s assets and contains various covenants that require, among other things, that the aggregate borrowings outstanding under the facility not exceed the borrowing base, as well as restrictions on the encumbrance of assets and the creation of indebtedness. Borrowings under the Cash Money Revolving Credit Facility bear interest per annum at the prime rate of a Canadian chartered bank plus 1.95%.
The Cash Money Revolving Credit Facility was undrawn at September 30, 2019March 31, 2020 and December 31, 2018.
Subordinated Stockholder Debt
As part of the acquisition of Cash Money in 2011, the Company received indemnification for certain claims through issuance of an escrow note to the seller, bearing interest at 10.0% per annum with quarterly interest payments. This note matured and was paid during the second quarter of 2019.
Non-Recourse U.S. SPV Facility
In November 2016, CURO Receivables Finance I, LLC andRefer to Note 19, "Subsequent Events" for additional information regarding a wholly-owned subsidiarynew Asset-Backed Revolving Credit Facility entered into a five-year revolving credit facility with Victory Park Management, LLC and certain other lenders that provided for an $80.0 million term loan and $70.0 million revolving borrowing capacity that could expand over time (collectively, “Non-Recourse U.S. SPV Facility”). Borrowings under this facility bore interest at an annual rate of up to 12.00% plus the greater of (i) 1.0% per annum and (ii) the three-month LIBOR. The SPV Borrower also paid a 0.50% per annum fee on the unused portion of the commitments. In connection with this facility, the capitalized financing costs at the time of extinguishment, as discussed below, were $5.3 million, net of amortization. These capitalized financing costs were included in the Condensed Consolidated Balance Sheet as a component of "Debt" and were amortized over the term of the Non-Recourse U.S. SPV Facility.April 8, 2020.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
On September 30, 2018, a portion of the proceeds from the 8.25% Senior Secured Notes were used to extinguish the revolver's balance of $42.4 million. In October 2018, the Company extinguished the remaining term loan balance of $80.0 million and made the final termination payment of $2.7 million, resulting in a loss on the extinguishment of debt of $9.7 million during the year ended December 31, 2018.
NOTE 6 – SHARE-BASED COMPENSATION
The Company's stockholder-approved 2017 Incentive Plan provides for the issuance of up to 5.0 million shares, subject to certain adjustment provisions, which may be issued in the form of stock options, restricted stock awards, restricted stock units (“RSUs”),RSUs, stock appreciation rights, performance awards and other awards that may be settled in or based on common stock. Awards may be granted to officers, employees, consultants and directors. The 2017 Incentive Plan provides that shares of common stock subject to awards granted become available for re-issuance if such awards expire, terminate, are canceled for any reason or are forfeited by the recipient.
Restricted Stock Units
Grants of time-based RSUs are valued at the date of grant based on the valueclosing market price of common stock and are expensed using the straight-line method over the service period. These RSUs are subject to time-based vesting and typically vest over a three-year period.
Grants of market-based RSUs are valued using the Monte Carlo simulation pricing model. In March 2019, the Company awarded market-based RSUs designed to drive the performance of the management team toward achievement of key corporate objectives. The market-based RSUs vest after three years depending uponif the Company's total stockholder return over the three-year performance period meets a specified target relative to other companies in its selected peer group. Expense recognition for the market-based awards occurs over the service period using the straight-line method.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Grants of RSUs do not confer full stockholder rights such as voting rights and cash dividends, but provide for additional dividend equivalent RSU awards in lieu of cash dividends. Unvested shares of RSUs may be forfeited upon termination of employment depending on the circumstances of the termination, or failure to achieve the required performance condition, if applicable.
A summary of the statusactivity of time-based and market-based unvested RSUs as of September 30, 2019March 31, 2020 and changes during the ninethree months ended September 30, 2019March 31, 2020 are presented in the following table:
| | | Number of RSUs | | | Number of RSUs | | |
| Time-Based | Market-Based | | Weighted Average Grant Date Fair Value per Share | Time-Based | Market-Based | | Weighted Average Grant Date Fair Value per Share |
December 31, 2018 | 1,060,350 |
| — |
| | $ | 14.29 |
| |
December 31, 2019 | | 1,061,753 |
| 394,861 |
| | $ | 11.47 |
|
Granted | 598,114 |
| 397,752 |
| | 10.08 |
| 571,773 |
| 368,539 |
| | 10.55 |
|
Vested | (83,481 | ) | — |
| | 15.59 |
| (197,859 | ) | — |
| | 11.39 |
|
Forfeited | (68,778 | ) | — |
| | 14.05 |
| (12,756 | ) | (2,613 | ) | | 12.07 |
|
September 30, 2019 | 1,506,205 |
| 397,752 |
| | $ | 12.04 |
| |
March 31, 2020 | | 1,422,911 |
| 760,787 |
| | $ | 11.08 |
|
Share-based compensation expense for the three months ended September 30,March 31, 2020 and 2019, and 2018, which includes compensation costs from stock options and RSUs, was $2.8$3.2 million and $2.1 million, respectively, and during the nine months ended September 30, 2019 and 2018 was $7.6 million and $6.1$2.2 million, respectively, and is included in the unaudited Condensed Consolidated Statements of Operations as a component of "Corporate, district and other expenses."
As of September 30, 2019,March 31, 2020, there was $16.0$19.6 million of total unrecognized compensation cost related to stock options and RSUs, of which $12.9$13.8 million related to time-based RSUs and $2.8$5.6 million related to market-based RSUs. Total unrecognized compensation costs will be recognized over a weighted-average period of 1.72.1 years.
NOTE 7 – INCOME TAXES
The Company's effective income tax rate was 27.9%5.1% and (34.8)%25.9% for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively.
On December 22, 2017, the 2017 Tax Act became law, which reduced the statutory U.S. Federal corporate The decrease in effective income tax rate was primarily due to a tax benefit from 35%the CARES Act, which was enacted by the U.S. Federal government on March 27, 2020 in response to 21%, enacted a one-time “deemed repatriation” tax on unremitted earnings accumulatedthe COVID-19 pandemic. The CARES Act, among other things, allows NOLs incurred in non-U.S. jurisdictions2018, 2019 and imposed a new minimum tax on global intangible low-taxed income ("GILTI"). The Company provided an estimate2020 to be carried back to each of the deemed repatriation tax asfive preceding taxable years to generate a refund of December 31, 2017, and pursuant to further IRS guidance,previously-paid Federal income taxes. In the first quarter of 2020, the Company recorded an additional accrualincome tax benefit of $1.2$9.1 million duringrelated to the nine months ended September 30, 2018. The Company recorded an estimated GILTIcarry-back NOL from tax years 2018 and 2019, which will offset income earned in years prior to tax reform and generate a refund of $0.5 million and $0.6 million duringpreviously paid taxes at 35%. In addition, losses from the nine months ended September 30, 2019 and 2018, respectively.Company's equity method investment in Katapult are not tax deductible, thus increasing the March 31, 2020 effective tax rate.
The Company intends to reinvest Canada earnings indefinitely in its Canadian operations and therefore has not provided for any non-U.S. withholding tax that would be assessed on dividend distributions. If the earnings of $153.6$153.8 million were distributed to the U.S., the Company would be subject to Canadian withholding taxes of an estimated $7.7 million. In the event the earnings
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
were distributed to the U.S., the Company would adjust the income tax provision for the applicable period and would determine the amount of foreign tax credit that would be available.
NOTE 8 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company is required to use valuation techniques that are consistent with the market approach, income approach and/or cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability based on observable market data obtained from independent sources, or unobservable, meaning those that reflect the Company's own estimate about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are listed below.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has access to at the measurement date.
Level 2 – Inputs include quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 – Unobservable inputs reflecting the Company's own judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. The Company develops these inputs based on the best information available, including its own data.
Financial Assets and Liabilities Carried at Fair Value
The table below presents the assets and liabilities that were carried at fair value on the unaudited Condensed Consolidated Balance Sheets at September 30, 2019March 31, 2020 (in thousands):
| | | | Estimated Fair Value | | Estimated Fair Value |
| Carrying Value September 30, 2019 | Level 1 | Level 2 | Level 3 | Total | Carrying Value March 31, 2020 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | |
Cash Surrender Value of Life Insurance | $ | 5,799 |
| $ | 5,799 |
| $ | — |
| $ | — |
| $ | 5,799 |
| $ | 5,696 |
| $ | 5,696 |
| $ | — |
| $ | — |
| $ | 5,696 |
|
Financial liabilities: | | |
Non-qualified deferred compensation plan | $ | 4,333 |
| $ | 4,333 |
| $ | — |
| $ | — |
| $ | 4,333 |
| $ | 3,818 |
| $ | 3,818 |
| $ | — |
| $ | — |
| $ | 3,818 |
|
The table below presents the assets and liabilities that were carried at fair value on the unaudited Condensed Consolidated Balance Sheets at December 31, 20182019 (in thousands):
| | | | Estimated Fair Value | | Estimated Fair Value |
| Carrying Value December 31, 2018 | Level 1 | Level 2 | Level 3 | Total | Carrying Value December 31, 2019 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: (1) | | |
Cash Surrender Value of Life Insurance | $ | 4,790 |
| $ | 4,790 |
| $ | — |
| $ | — |
| $ | 4,790 |
| $ | 6,171 |
| $ | 6,171 |
| $ | — |
| $ | — |
| $ | 6,171 |
|
Financial liabilities: | | |
Non-qualified deferred compensation plan | $ | 3,639 |
| $ | 3,639 |
| $ | — |
| $ | — |
| $ | 3,639 |
| $ | 4,666 |
| $ | 4,666 |
| $ | — |
| $ | — |
| $ | 4,666 |
|
(1) Zibby was not included as of 12/31/18 as it was accounted for under the cost method. | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Financial Assets and Liabilities Not Carried at Fair Value
The table below presents the assets and liabilities that were not carried at fair value on the unaudited Condensed Consolidated Balance Sheets at September 30, 2019March 31, 2020 (in thousands):
| | | | Estimated Fair Value | | Estimated Fair Value |
| Carrying Value September 30, 2019 | Level 1 | Level 2 | Level 3 | Total | Carrying Value March 31, 2020 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | |
Cash | $ | 62,207 |
| $ | 62,207 |
| $ | — |
| $ | — |
| $ | 62,207 |
| $ | 138,714 |
| $ | 138,714 |
| $ | — |
| $ | — |
| $ | 138,714 |
|
Restricted cash | 38,754 |
| 38,754 |
| — |
| — |
| 38,754 |
| 41,527 |
| 41,527 |
| — |
| — |
| 41,527 |
|
Loans receivable, net | 549,230 |
| — |
| — |
| 549,230 |
| 549,230 |
| 464,595 |
| — |
| — |
| 464,595 |
| 464,595 |
|
Investment in Zibby | 11,231 |
| — |
| — |
| 11,231 |
| 11,231 |
| |
Equity method investment | | 8,450 |
| — |
| — |
| 8,450 |
| 8,450 |
|
Financial liabilities: | | |
Liability for losses on CSO lender-owned consumer loans | $ | 10,249 |
| $ | — |
| $ | — |
| $ | 10,249 |
| $ | 10,249 |
| $ | 9,189 |
| $ | — |
| $ | — |
| $ | 9,189 |
| $ | 9,189 |
|
8.25% Senior Secured Notes | 677,924 |
| — |
| 591,489 |
| — |
| 591,489 |
| 678,727 |
| — |
| 478,503 |
| — |
| 478,503 |
|
Non-Recourse Canada SPV facility | 102,483 |
| — |
| — |
| 105,742 |
| 105,742 |
| 84,724 |
| — |
| — |
| 87,365 |
| 87,365 |
|
Senior Revolver | 25,000 |
| — |
| — |
| 25,000 |
| 25,000 |
| 25,000 |
| — |
| — |
| 25,000 |
| 25,000 |
|
The table below presents the assets and liabilities that were not carried at fair value on the unaudited Condensed Consolidated Balance Sheets at December 31, 20182019 (in thousands):
| | | | Estimated Fair Value | | Estimated Fair Value |
| Carrying Value December 31, 2018 | Level 1 | Level 2 | Level 3 | Total | Carrying Value December 31, 2019 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | | | | | |
Cash | $ | 61,175 |
| $ | 61,175 |
| $ | — |
| $ | — |
| $ | 61,175 |
| $ | 75,242 |
| $ | 75,242 |
| $ | — |
| $ | — |
| $ | 75,242 |
|
Restricted cash | 25,439 |
| 25,439 |
| — |
| — |
| 25,439 |
| 34,779 |
| 34,779 |
| — |
| — |
| 34,779 |
|
Loans receivable, net | 497,534 |
| — |
| — |
| 497,534 |
| 497,534 |
| 558,993 |
| — |
| — |
| 558,993 |
| 558,993 |
|
Investment in Zibby | 6,558 |
| — |
| — |
| 6,558 |
| 6,558 |
| |
Equity method investment | | 10,068 |
| — |
| — |
| 10,068 |
| 10,068 |
|
Financial liabilities: | | |
Liability for losses on CSO lender-owned consumer loans | $ | 12,007 |
| $ | — |
| $ | — |
| $ | 12,007 |
| $ | 12,007 |
| $ | 10,623 |
| $ | — |
| $ | — |
| $ | 10,623 |
| $ | 10,623 |
|
8.25% Senior Secured notes | 676,661 |
| — |
| 531,179 |
| — |
| 531,179 |
| |
8.25% Senior Secured Notes | | 678,323 |
| — |
| 596,924 |
| — |
| 596,924 |
|
Non-Recourse Canada SPV facility | 107,479 |
| — |
| — |
| 111,335 |
| 111,335 |
| 112,221 |
| — |
| — |
| 115,243 |
| 115,243 |
|
Senior Revolver | 20,000 |
| — |
| — |
| 20,000 |
| 20,000 |
| |
Loans receivable are carried on the unaudited Condensed Consolidated Balance Sheets net of the Allowance for estimated loan losses. The unobservable inputs used to calculate the carrying values include quantitative factors, such as current default trends. Also considered in evaluating the accuracy of the models are changes to the loan portfolio mix, the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. The carrying value of loans receivable approximates their fair value. Refer to Note 3, "Loans Receivable and Revenue" for additional information.
During 2019, Katapult completed an incremental equity round at a value per share less than the value per share raised in prior raises. This round included additional investments from existing shareholders and investments by new investors, and was considered indicative of the fair value of shares in Katapult. Accordingly, the Company recognized a $3.7 million loss on its investment to adjust it to market value. As of March 31, 2020, the Company owned approximately 42.5% of the outstanding shares of Katapult.
In connection with CSO programs, the Company guarantees consumer loan payment obligations to unrelated third-party lenders for loans that the Company arranges for consumers on the third-party lenders’ behalf. The Company is required to purchase from the lender defaulted loans that it has guaranteed.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The carrying value was further adjusted by the Company's pro rata share of Zibby's losses during the period in which the Company held a greater than 20% investment, typically considered the threshold for equity method accounting. During the three months ended September 30, 2019, this carrying value adjustment was $1.4 million.
The 8.25% Senior Secured Notes fair value disclosure was transferred from Level 3, as previously reported, to Level 2 for September 30, 2019 and December 31, 2018. Upon management's review of the inputs, the Level 2 disclosure is appropriate given the limited trading activity in this public (observable) market.based on broker quotations. The fair values of the Non-Recourse Canada SPV facility and the Senior Revolver were based on the cash needed for their respective final settlements.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTE 9 – STOCKHOLDERS' EQUITY
The following table summarizes the changes in stockholders' equity for the three and nine months ended September 30, 2018March 31, 2020 and 2019 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid-in capital | | Retained Earnings (Deficit) | | AOCI (1) | | Total Stockholders' Equity |
| Shares Outstanding | | Par Value | | | | |
Balances at December 31, 2017 | 44,561,419 |
| | $ | 8 |
| | $ | 46,079 |
| | $ | 3,988 |
| | $ | (42,939 | ) | | $ | 7,136 |
|
Net income from continuing operations | — |
| | — |
| | — |
| | 24,913 |
| | — |
| | 24,913 |
|
Net loss from discontinued operations | — |
| | — |
| | — |
| | (1,621 | ) | | — |
| | (1,621 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (2,910 | ) | | (2,910 | ) |
Cash flow hedge expiration | — |
| | — |
| | — |
| | — |
| | 54 |
| | 54 |
|
Share based compensation expense | — |
| | — |
| | 1,842 |
| | — |
| | — |
| | 1,842 |
|
Initial Public Offering, Net Proceeds (2) (underwriter shares) | 1,000,000 |
| | 1 |
| | 13,135 |
| | — |
| | — |
| | 13,136 |
|
Balances at March 31, 2018 | 45,561,419 |
| | $ | 9 |
| | $ | 61,056 |
| | $ | 27,280 |
| | $ | (45,795 | ) | | $ | 42,550 |
|
Net income from continuing operations | — |
| | — |
| | — |
| | 18,718 |
| | — |
| | 18,718 |
|
Net loss from discontinued operations | — |
| | — |
| | — |
| | (2,743 | ) | | — |
| | (2,743 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (6,754 | ) | | (6,754 | ) |
Cash flow hedge expiration
| — |
| | — |
| | — |
| | — |
| | (439 | ) | | (439 | ) |
Share based compensation expense | — |
| | — |
| | 1,478 |
| | — |
| | — |
| | 1,478 |
|
Proceeds from exercise of stock options | 209,132 |
| | — |
| | 39 |
| | — |
| | — |
| | 39 |
|
Common stock issued for RSU's vesting | 49,994 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balances at June 30, 2018 | 45,820,545 |
| | $ | 9 |
| | $ | 62,573 |
| | $ | 43,255 |
| | $ | (52,988 | ) | | $ | 52,849 |
|
Net loss from continuing operations | — |
| | — |
| | — |
| | (42,590 | ) | | — |
| | (42,590 | ) |
Net loss from discontinued operations | — |
| | — |
| | — |
| | (4,432 | ) | | — |
| | (4,432 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | 2,649 |
| | 2,649 |
|
Cash flow hedge expiration
| — |
| | — |
| | — |
| | — |
| | (187 | ) | | (187 | ) |
Share based compensation expense | — |
| | — |
| | 2,792 |
| | — |
| | — |
| | 2,792 |
|
Proceeds from exercise of stock options | 222,432 |
| | — |
| | 369 |
| | — |
| | — |
| | 369 |
|
Initial Public Offering, Net Proceeds (underwriter shares) | — |
| | — |
| | (1,586 | ) | | — |
| | — |
| | (1,586 | ) |
Balance at September 30, 2018 | 46,042,977 |
| | $ | 9 |
| | $ | 64,148 |
| | $ | (3,767 | ) | | $ | (50,526 | ) | | $ | 9,864 |
|
(1) Accumulated other comprehensive income (loss)
|
(2) In connection with the Company's initial public offering in December 2017, the underwriters had a 30-day option to purchase up to an additional 1.0 million shares of the Company's common stock at the initial public offering price, less the underwriting discount for over-allotments, if any. The underwriters exercised this option and purchased 1.0 million shares on January 5, 2018. The exercise of this option provided additional proceeds of $13.1 million. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Paid-in capital | | Retained Earnings (Deficit) | | AOCI (1) | | Total Stockholders' Equity |
| Shares Outstanding | | Par Value | | | | | |
Balances at December 31, 2019 | 41,156,224 |
| | $ | 9 |
| | $ | (72,343 | ) | | $ | 68,087 |
| | $ | 93,423 |
| | $ | (38,663 | ) | | $ | 50,513 |
|
Net income from continuing operations | — |
| | — |
| | — |
| | — |
| | 36,013 |
| | — |
| | 36,013 |
|
Net income from discontinued operations | — |
| | — |
| | — |
| | — |
| | 292 |
| | — |
| | 292 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | (22,193 | ) | | (22,193 | ) |
Dividends | — |
| | — |
| | — |
| | — |
| | (2,256 | ) | — |
| — |
| | (2,256 | ) |
Share based compensation expense | — |
| | — |
| | — |
| | 3,194 |
| | — |
| | — |
| | 3,194 |
|
Proceeds from exercise of stock options | 42,094 |
| | — |
| | — |
| | 126 |
| | — |
| | — |
| | 126 |
|
Repurchase of common stock | (540,762 | ) | | — |
| | (5,509 | ) | | — |
| | — |
| | — |
| | (5,509 | ) |
Common stock issued for RSU's vesting, net of shares withheld and withholding paid for employee taxes
| 121,891 |
| | — |
| | — |
| | (609 | ) | | — |
| | — |
| | (609 | ) |
Balances at March 31, 2020 | 40,779,447 |
| | $ | 9 |
| | $ | (77,852 | ) | | $ | 70,798 |
|
| $ | 127,472 |
| | $ | (60,856 | ) | | $ | 59,571 |
|
(1) Accumulated other comprehensive income (loss)
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Paid-in capital | | Retained Earnings (Deficit) | | AOCI (1) | | Total Stockholders' Equity (Deficit) |
| Shares Outstanding | | Par Value | | | | | |
Balances at December 31, 2018 | 46,412,231 |
| | $ | 9 |
| | $ | — |
| | $ | 60,015 |
| | $ | (18,065 | ) | | $ | (61,060 | ) | | $ | (19,101 | ) |
Net income from continuing operations | — |
| | — |
| | — |
| | — |
| | 28,673 |
| | — |
| | 28,673 |
|
Net income from discontinued operations | — |
| | — |
| | — |
| | — |
| | 8,375 |
| | — |
| | 8,375 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 16,695 |
| | 16,695 |
|
Share based compensation expense | — |
| | — |
| | — |
| | 2,172 |
| | — |
| | — |
| | 2,172 |
|
Proceeds from exercise of stock options | 7,888 |
| | — |
| | — |
| | 40 |
| | — |
| | — |
| | 40 |
|
Common stock issued for RSU's vesting, net of shares withheld and withholding paid for employee taxes | 11,170 |
| | — |
| | — |
| | (110 | ) | | — |
| | — |
| | (110 | ) |
Balances at March 31, 2019 | 46,431,289 |
| | $ | 9 |
| | $ | — |
| | $ | 62,117 |
| | $ | 18,983 |
| | $ | (44,365 | ) | | $ | 36,744 |
|
(1) Accumulated other comprehensive income (loss) |
Dividend
On February 5, 2020, the Company's Board of Directors announced the initiation of a dividend program and declared its first cash dividend of $0.055 per share. A dividend of $2.2 million was paid on March 2, 2020 to stockholders of record as of the close of
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid-in capital | | Treasury Stock | | Retained Earnings (Deficit) | | AOCI (1) | | Total Stockholders' Equity |
| Shares Outstanding | | Par Value | | | | | |
Balances at December 31, 2018 | 46,412,231 |
| | $ | 9 |
| | $ | 60,015 |
| | $ | — |
| | $ | (18,065 | ) | | $ | (61,060 | ) | | $ | (19,101 | ) |
Net income from continuing operations | — |
| | — |
| | — |
| | — |
| | 28,673 |
| | — |
| | 28,673 |
|
Net income from discontinued operations | — |
| | — |
| | — |
| | — |
| | 8,375 |
| | — |
| | 8,375 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 16,695 |
| | 16,695 |
|
Share based compensation expense | — |
| | — |
| | 2,172 |
| | — |
| | — |
| | — |
| | 2,172 |
|
Proceeds from exercise of stock options | 7,888 |
| | — |
| | 40 |
| | — |
| | — |
| | — |
| | 40 |
|
Common stock issued for RSU's vesting, net of shares withheld and withholding paid for employee taxes | 11,170 |
| | — |
| | (110 | ) | | — |
| | — |
| | — |
| | (110 | ) |
Balances at March 31, 2019 | 46,431,289 |
| | $ | 9 |
| | $ | 62,117 |
| | $ | — |
| | $ | 18,983 |
| | $ | (44,365 | ) | | $ | 36,744 |
|
Net income from continuing operations | — |
| | — |
| | — |
| | — |
| | 17,667 |
| | — |
| | 17,667 |
|
Net loss from discontinued operations | — |
| | — |
| | — |
| | — |
| | (834 | ) | | — |
| | (834 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 3,635 |
| | 3,635 |
|
Share based compensation expense | — |
| | — |
| | 2,644 |
| | — |
| | — |
| | — |
| | 2,644 |
|
Proceeds from exercise of stock options | 4,908 |
| | — |
| | 29 |
| | — |
| | — |
| | — |
| | 29 |
|
Repurchase of common stock | (244,200 | ) | | — |
| | — |
| | (2,507 | ) | | — |
| | — |
| | (2,507 | ) |
Common stock issued for RSU's vesting, net of shares withheld and withholding paid for employee taxes | 63,285 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balances at June 30, 2019 | 46,255,282 |
| | $ | 9 |
| | $ | 64,790 |
| | $ | (2,507 | ) | | $ | 35,816 |
| | $ | (40,730 | ) | | $ | 57,378 |
|
Net income from continuing operations | — |
| | — |
| | — |
| | — |
| | 27,987 |
| | — |
| | 27,987 |
|
Net loss from discontinued operations | — |
| | — |
| | — |
| | — |
| | (598 | ) | | — |
| | (598 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | (1,954 | ) | | (1,954 | ) |
Share based compensation expense | — |
| | — |
| | 2,771 |
| | — |
| | — |
| | — |
| | 2,771 |
|
Proceeds from exercise of stock options | 3,924 |
| | — |
| | 18 |
| | — |
| | — |
| | — |
| | 18 |
|
Repurchase of common stock (2) | (3,912,041 | ) | | — |
| | — |
| | (50,557 | ) | | — |
| | — |
| | (50,557 | ) |
Balances at September 30, 2019 | 42,347,165 |
| | $ | 9 |
| | $ | 67,579 |
| | $ | (53,064 | ) | | $ | 63,205 |
| | $ | (42,684 | ) | | $ | 35,045 |
|
(1) Accumulated other comprehensive income (loss) |
(2) Includes the repurchase of 2,000,000 shares of common stock from FFL for $13.55 per share. See Note 17 - "Share Repurchase Program" for additional information. |
business on February 18, 2020. Subsequently, on April 30, 2020, the Company's Board of Directors declared a dividend. See Note 19, "Subsequent Events" for more information.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTE 10 – EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per share (in thousands, except per share amounts):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2019 | | 2018(1) | | 2019 | | 2018 | 2020 | | 2019 |
Net income (loss) from continuing operations | $ | 27,987 |
| | $ | (42,590 | ) | | $ | 74,327 |
| | $ | 1,041 |
| |
Net (loss) income from discontinued operations, net of tax | (598 | ) | | (4,432 | ) | | $ | 6,943 |
| | $ | (8,796 | ) | |
Net income (loss) | $ | 27,389 |
| | $ | (47,022 | ) | | $ | 81,270 |
| | $ | (7,755 | ) | |
Net income from continuing operations | | $ | 36,013 |
| | $ | 28,673 |
|
Net income from discontinued operations, net of tax | | 292 |
| | 8,375 |
|
Net income | | $ | 36,305 |
| | $ | 37,048 |
|
| | | | | | | | | | |
Weighted average common shares - basic | 44,422 |
| | 45,853 |
| | 45,759 |
| | 45,674 |
| 40,817 |
| | 46,424 |
|
Dilutive effect of stock options and restricted stock units | 1,588 |
| | — |
| | 1,128 |
| | 2,387 |
| 1,075 |
| | 895 |
|
Weighted average common shares - diluted | 46,010 |
| | 45,853 |
| | 46,887 |
| | 48,061 |
| 41,892 |
| | 47,319 |
|
| | | | | | | | | | |
Basic earnings (loss) per share: | | | | | | | | |
Basic earnings per share: | | | | |
Continuing operations | $ | 0.63 |
| | $ | (0.93 | ) | | $ | 1.63 |
| | $ | 0.02 |
| $ | 0.88 |
| | $ | 0.62 |
|
Discontinued operations | (0.01 | ) | | (0.10 | ) | | 0.15 |
| | (0.19 | ) | 0.01 |
| | 0.18 |
|
Basic earnings per share | $ | 0.62 |
|
| $ | (1.03 | ) |
| $ | 1.78 |
| | $ | (0.17 | ) | $ | 0.89 |
|
| $ | 0.80 |
|
| | | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | |
Diluted earnings per share: | | | | |
Continuing operations | $ | 0.61 |
| | $ | (0.93 | ) | | $ | 1.59 |
| | $ | 0.03 |
| $ | 0.86 |
| | $ | 0.61 |
|
Discontinued operations | (0.01 | ) | | (0.10 | ) | | 0.15 |
| | (0.19 | ) | 0.01 |
| | 0.18 |
|
Diluted earnings per share | $ | 0.60 |
| | $ | (1.03 | ) | | $ | 1.74 |
| | $ | (0.16 | ) | $ | 0.87 |
| | $ | 0.79 |
|
(1) As of December 31, 2018, the Company made certain insignificant adjustments to previously-reported Earnings Per Share ("EPS") to correctly reflect the effect of anti-dilutive shares on diluted EPS calculations in accordance with ASC 260. These changes were immaterial to the overall EPS calculation. Diluted loss per share for the three months ended September 30, 2018 of $0.97 was corrected to $1.03. | |
Potential shares of common stock that would have the effect of increasing diluted earnings per share or decreasing diluted loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating "Diluted earnings per share." For the three and nine months ended September 30,March 31, 2020 and March 31, 2019, there were 0.11.3 million and 0.31.4 million, respectively, of potential shares of common stock excluded from the calculation of Diluted earnings per share because their effect was anti-dilutive. For the three months ended September 30, 2018, there were 2.5 million potential shares of common stock excluded from the calculation of Diluted earnings per share because their effect was anti-dilutive. There was no effect for the nine months ended September 30, 2018.
The Company utilizes the "control number" concept in the computation of Diluted earnings per share to determine whether potential common stock instruments are dilutive. The control number used is income from continuing operations. The control number concept requires that the same number of potentially dilutive securities applied in computing Diluted earnings per share from continuing operations be applied to all other categories of income or loss, regardless of their anti-dilutive effect on such categories.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTE 11 – SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental cash flow information (in thousands):
| | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Cash paid for: | | | | | | |
Interest | $ | 65,627 |
| | $ | 80,748 |
| $ | 31,184 |
| | $ | 32,195 |
|
Income taxes, net of refunds | 2,029 |
| | 15,868 |
| 1,065 |
| | 1,456 |
|
Non-cash investing activities: | | | | | | |
Property and equipment accrued in accounts payable | $ | 604 |
| | $ | 1,240 |
| $ | 869 |
| | $ | 349 |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 – SEGMENT REPORTING
Segment information is prepared on the same basis that the Company's Chief Operating Decision Maker ("CODM") reviews financial information for operational decision making purposes. Duringpurposes, including revenues, net revenue, gross margin, segment operating income and other items.
U.S. As of March 31, 2020, the first quarterCompany operated a total of 2019, the U.K. Subsidiaries met discontinued operations criteria, resulting214 U.S. retail locations and has an online presence in two remaining reportable operating segments:27 states. The Company provides Single-Pay loans, Installment loans and Open-End loans, vehicle title loans, check cashing, money transfer services, reloadable prepaid debit cards and a number of other ancillary financial products and services to its customers in the U.S. As disclosed in Note 17, "Acquisition," the acquisition of Ad Astra closed during the three months ended March 31, 2020. The results of Ad Astra are included within the U.S. reporting segment.
Canada. As of March 31, 2020, the Company operated a total of 202 stores across seven Canadian provinces and territories and has an online presence in five provinces. The Company provides Single-Pay loans, Installment loans and Open-End loans, check cashing, money transfer services, foreign currency exchange, reloadable prepaid debit cards and a number of other ancillary financial products and services to its customers in Canada.
Management’s evaluation of performance utilizes gross margin and operating profit before the allocation of interest expense and professional services. The following reporting segment results reflect this basis for evaluation and were determined in accordance with the same accounting principles used in the Condensed Consolidated Financial Statements.
The following table illustrates summarized financial information concerning reportable segments (in thousands):
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
Revenues by segment:(1) | | | | | | | | | | | | |
U.S. | | $ | 237,069 |
| | $ | 223,273 |
| | $ | 673,234 |
| | $ | 617,992 |
| | $ | 221,768 |
| | $ | 226,119 |
|
Canada | | 60,195 |
| | 46,209 |
| | 166,269 |
| | 139,502 |
| | 59,038 |
| | 51,820 |
|
Consolidated revenue | | $ | 297,264 |
| | $ | 269,482 |
| | $ | 839,503 |
| | $ | 757,494 |
| | $ | 280,806 |
| | $ | 277,939 |
|
Net revenues by segment: | | | | | |
U.S. | | | $ | 135,727 |
| | $ | 141,139 |
|
Canada | | | 31,543 |
| | 34,415 |
|
Consolidated net revenue | | | $ | 167,270 |
| | $ | 175,554 |
|
Gross margin by segment: | | | | | | | | | | | | |
U.S. | | $ | 77,250 |
| | $ | 60,105 |
| | $ | 232,120 |
| | $ | 215,497 |
| | $ | 87,540 |
| | $ | 89,803 |
|
Canada | | 19,389 |
| | 489 |
| | 51,197 |
| | 28,291 |
| | 12,159 |
| | 15,694 |
|
Consolidated gross margin | | $ | 96,639 |
| | $ | 60,594 |
| | $ | 283,317 |
| | $ | 243,788 |
| | $ | 99,699 |
| | $ | 105,497 |
|
Segment operating income (loss): | | | | | | | | | | | | |
U.S. | | $ | 28,092 |
| | $ | (53,624 | ) | | $ | 76,316 |
| | $ | (11,430 | ) | | $ | 33,426 |
| | $ | 31,195 |
|
Canada | | 11,134 |
| | (5,880 | ) | | 26,749 |
| | 12,202 |
| | 4,524 |
| | 7,524 |
|
Consolidated operating profit | | $ | 39,226 |
| | $ | (59,504 | ) | | $ | 103,065 |
| | $ | 772 |
| | $ | 37,950 |
| | $ | 38,719 |
|
Expenditures for long-lived assets by segment: | | | | | | | | | | | | |
U.S. | | $ | 2,890 |
| | $ | 4,483 |
| | $ | 7,888 |
| | $ | 6,466 |
| | $ | 4,280 |
| | $ | 2,430 |
|
Canada | | 216 |
| | 590 |
| | 1,382 |
| | 1,564 |
| | 553 |
| | 689 |
|
Consolidated expenditures for long-lived assets | | $ | 3,106 |
| | $ | 5,073 |
| | $ | 9,270 |
| | $ | 8,030 |
| | $ | 4,833 |
| | $ | 3,119 |
|
| | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table provides the proportion of gross loans receivable by segment (in thousands):
| | | | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
U.S. | | $ | 370,967 |
| | $ | 361,473 |
| | $ | 288,127 |
| | $ | 363,453 |
|
Canada | | 286,648 |
| | 210,058 |
| | 276,310 |
| | 302,375 |
|
Total gross loans receivable | | $ | 657,615 |
| | $ | 571,531 |
| | $ | 564,437 |
| | $ | 665,828 |
|
The following table providesrepresents the Company's net long-lived assets, comprised of property and equipment, by segment. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located (in thousands):
| | | | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
U.S. | | $ | 42,937 |
| | $ | 47,918 |
| | $ | 42,536 |
| | $ | 43,618 |
|
Canada | | 27,444 |
| | 28,832 |
| | 24,251 |
| | 27,193 |
|
Total net long-lived assets | | $ | 70,381 |
| | $ | 76,750 |
| | $ | 66,787 |
| | $ | 70,811 |
|
The Company's CODM does not review total assets by segment for purposes of allocating resources or decision-making purposes; therefore, total assets by segment are not disclosed.
NOTE 13 – CONTINGENT LIABILITIESCOMMITMENTS AND CONTENGENCIES
Securities Litigation
On December 5, 2018, a putative securities fraud class action lawsuit was filed against the Company and its chief executive officer, chief financial officer and chief operating officer in the United States District Court for the District of Kansas, captioned Yellowdog Partners, LP v. CURO Group Holdings Corp., Donald F. Gayhardt, William Baker and Roger W. Dean, Civil Action No. 18-2662. On May 31, 2019, plaintiffs filed a consolidated complaint naming Doug Rippel, Chad Faulkner, Mike McKnight, Friedman Fleischer & Lowe Capital Partners II, L.P., FFL Executive Partners II, L.P., and FFL Parallel Fund II, L.P. as additional defendants. The complaint alleges that the Company and the individual defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and that certain defendants also violated Section 20(a) of the Exchange Act as "control persons" of CURO. Plaintiffs purport to bring these claims on behalf of a class of investors who purchased Company common stock between April 27, 2018 and October 24, 2018.
Plaintiffs allege generally that, during the putative class period, the Company made misleading statements and omitted material information regarding its efforts to transition the Canadian inventory of products from Single-Pay loans to Open-End loans. Plaintiffs assert that the Company and the individual defendants made these misstatements and omissions to keep the stock price high. Plaintiffs seek unspecified damages and other relief. The Company filed a motion to dismiss the lawsuit on August 15, 2019.
While the Company is vigorously contesting this lawsuit, it cannot determine the final resolution or when it might be resolved. In addition to the expenses incurred in defending this litigation and any damages that may be awarded in the event of an adverse ruling, management’s efforts and attention may be diverted from the ordinary business operations to address these claims. Regardless of the outcome, this litigation may have a material adverse impact on results because of defense costs, including costs related to indemnification obligations, diversion of resources and other factors.
During the first quarter of 2019, the Company received an inquiry from the SEC regarding the Company's public disclosures surrounding its efforts to transition the Canadian inventory of products from Single-Pay loans to Open-End loans.
City of Austin
The Company was cited in July 2016 by the City of Austin, Texas for alleged violations of the Austin ordinance addressing products offered by CSOs. The Austin ordinance regulates aspects of products offered under the Company's credit access bureau ("CAB")CAB program, including loan sizes and repayment terms. The Company believes that: (i) the Austin ordinance (similar to its counterparts elsewhere in Texas) conflicts with Texas state law and (ii) in any event, the Company's product complies with the ordinance, when the ordinance is properly construed. The Austin Municipal Court agreed with the Company's position that the ordinance conflicts with Texas law and, accordingly, did not address the second argument. In September 2017, the Travis County Court reversed the Municipal Court’s decision and remanded the case for further proceedings. To date, a hearing and trial on the merits have not been scheduled. The Company does not anticipate having a final determination of the lawfulness of its CAB program under the Austin ordinance (and similar ordinances in other Texas cities) in the near future. A final adverse decision could potentiallyresult in material monetary liability
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
result in material monetary liability in Austin and elsewhere in Texas, and would force the Company to restructure the loans it originates in Austin and elsewhere in Texas.
Other Legal Matters
The Company is a defendant in certain litigation matters encountered from time-to-time in the ordinary course of business. Certain of these matters may be covered to an extent by insurance. InWhile it is difficult to predict the opinionoutcome of management, based uponany particular proceeding, the advice of legal counsel,Company does not believe the likelihood is remote that the impactresult of any of these pending litigation matters either individually or in the aggregate, wouldwill have a material adverse effect on the Company's consolidated financial condition,business, results of operations or cash flows.financial condition.
NOTE 14 – LEASES
The CompanyOperating leases entered into operatingby the Company are primarily for retail stores in certain U.S. states and Canadian provinces. Leases classified as finance are immaterial to the Company as of March 31, 2020. Operating leases for the buildings in which it operates that expire at various times through 2033.2032. The Company determines if an arrangement is a lease at inception. Operating leases are included in "Right of use asset - operating leases" and "Lease liability - operating leases" inon the Condensed Consolidated Balance Sheets.
Typically, a contract is or contains a lease if it conveys the right to control the use of an identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. To determine whether a contract conveys the right to control the use of an identified asset for a period of time, an entity shall assess whether, throughout the period of use, the customer has both (i) the right to obtain substantially all of the economic benefits from use of the identified asset and (ii) the right to direct the use of the identified asset. If the customer has the right to control the use of an identified asset for only a portion of the term of the contract, the contract contains a lease for that portion of the term.
The Company recognizes ROU assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. The rate implicit in the Company's leases typically are not readily determinable. As most of the Company’s leases do not provide an implicit rate of return,a result, the Company uses its estimated incremental borrowing rate, based on the information available at commencement dateas allowed by ASC 842, in determining the present value of lease payments. The incremental borrowing rate is based on internal and external information available at the lease commencement date and is determined using a portfolio approach based on(i.e. using the weighted average terms of all leases in the Company's portfolio). This rate of interestis the theoretical rate the Company would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. term as that of the portfolio.
The Company uses quoted interest rates obtained from financial institutions as an input, adjusted for Company specific factors, to derive the incremental borrowing rate as the discount rate for the lease.leases. As new leases are added each period, the Company evaluates whether the incremental borrowing rate has changed. If the incremental borrowing rate has changed, the Company will apply the rate to new leases if not doing so would result in a material difference to the ROU asset and lease liability presented on the balance sheet.
The majority of the leases have an original term of five years with two five-year renewal options. ForThe consumer price index is used in determining future lease payments and for purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Most of the leases have escalation clauses and certain leases also require payment of period costs, including maintenance, insurance and property taxes. Some of the leases are with related parties and have terms similar to the non-related party leases. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The following table summarizes the operating lease costs for the three and nine months ended September 30, 2019 (in thousands):
|
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2019 |
Operating lease costs: | | | |
Third-Party | $ | 7,687 |
| | $ | 23,000 |
|
Related-Party | 865 |
| | 2,595 |
|
Total | $ | 8,552 |
| | $ | 25,595 |
|
During the nine months ended September 30, 2019, cash paid for amounts included in the measurement of the liabilities and the operating cash flows were $26.0 million. ROU assets obtained in exchange for lease liabilities were $11.1 million.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the operating lease costs and other information for the three months ended March 31, 2020 and March 31,2019 (in thousands):
|
| | | | | | |
| Three Months Ended March 31, |
| 2020 | 2019 |
Operating lease costs: | | |
Third-Party | $ | 7,626 |
| $ | 7,621 |
|
Related-Party | 864 |
| 847 |
|
Total operating lease costs | $ | 8,490 |
| $ | 8,468 |
|
| | |
Operating cash flow - Operating leases | $ | 8,433 |
| $ | 8,615 |
|
New ROU assets - Operating leases | $ | 5,647 |
| $ | — |
|
Weighted average remaining lease term - Operating leases | 6.3 years |
| 6.1 years |
|
Weighted average discount rate - Operating leases | 10.3 | % | 10.3 | % |
The following table summarizes the aggregate operating lease maturities that the Company is contractually obligated to make under operating leases as of September 30, 2019March 31, 2020 (in thousands):
|
| | | | | | | | | | | | |
| | Third-Party | | Related-Party | | Total |
Remainder of 2019 | | $ | 7,698 |
| | $ | 922 |
| | $ | 8,620 |
|
2020 | | 29,596 |
| | 3,752 |
| | 33,348 |
|
2021 | | 26,450 |
| | 3,772 |
| | 30,222 |
|
2022 | | 23,387 |
| | 3,669 |
| | 27,056 |
|
2023 | | 18,674 |
| | 1,313 |
| | 19,987 |
|
2024 | | 14,088 |
| | 963 |
| | 15,051 |
|
Thereafter | | 35,697 |
| | 3,414 |
| | 39,111 |
|
Total | | 155,590 |
| | 17,805 |
| | 173,395 |
|
Less: Imputed interest | | (42,920 | ) | | (4,427 | ) | | (47,347 | ) |
Operating lease liabilities | | $ | 112,670 |
| | $ | 13,378 |
| | $ | 126,048 |
|
In accordance with the prior guidance, ASC 840, Leases, the future minimum lease payments by fiscal year as determined prior to the adoption of ASC 842, Leases, as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, were as follows (in thousands):
| | | | Third Party | | Related Party | | Total | | Third-Party | | Related-Party | | Total |
2019 | | $ | 24,211 |
| | $ | 3,330 |
| | $ | 27,541 |
| |
2020 | | 20,547 |
| | 3,285 |
| | 23,832 |
| |
Remainder of 2020 | | | $ | 22,437 |
| | $ | 2,809 |
| | $ | 25,246 |
|
2021 | | 17,301 |
| | 3,324 |
| | 20,625 |
| | 27,464 |
| | 3,767 |
| | 31,231 |
|
2022 | | 14,558 |
| | 3,322 |
| | 17,880 |
| | 24,640 |
| | 3,661 |
| | 28,301 |
|
2023 | | 10,269 |
| | 705 |
| | 10,974 |
| | 19,995 |
| | 1,316 |
| | 21,311 |
|
2024 | | | 15,343 |
| | 962 |
| | 16,305 |
|
2025 | | | 11,178 |
| | 861 |
| | 12,039 |
|
Thereafter | | 13,446 |
| | 730 |
| | 14,176 |
| | 30,416 |
| | 2,655 |
| | 33,071 |
|
Total (1) | | $ | 100,332 |
| | $ | 14,696 |
| | $ | 115,028 |
| |
(1) Future minimum lease payments exclude the U.K. as all U.K. subsidiaries were placed into administration effective February 25, 2019. | |
Total | | | 151,473 |
| | 16,031 |
| | 167,504 |
|
Less: Imputed interest | | | (41,963 | ) | | (3,826 | ) | | (45,789 | ) |
Operating lease liabilities | | | $ | 109,510 |
| | $ | 12,205 |
| | $ | 121,715 |
|
As a result of September 30, 2019, the weighted average remaining lease term was 6.3 years, andCOVID-19 pandemic that began during the weighted average operating discount ratethree months ended March 31, 2020, CURO reviewed ROU assets for indicators of impairment. Under US GAAP, the model used to determinereview ROU assets for impairment is consistent to that used for other long-lived assets, such as fixed assets. In applying the operating lease liability remained 10.3%.appropriate guidance, the Company noted there was no indicators of impairment as of March 31, 2020 related to its ROU assets.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTE 15 – DISCONTINUED OPERATIONS
On February 25, 2019, in accordance with the provisions of the U.K. Insolvency Act 1986 and as approved by the boardsBoards of directorsDirectors of the U.K. Subsidiaries, insolvency practitioners from KPMG were appointed as Administrators for the U.K. Subsidiaries. The effect of the U.K. Subsidiaries’ entry into administration was to place their management, affairs, business and property of the U.K. Subsidiaries under the direct control of the Administrators. Accordingly, the Company deconsolidated the U.K. Subsidiaries, which comprised the U.K. reportable operating segment, as of February 25, 2019 and classified them as Discontinued Operations for all periods presented.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table presents the results of operations of the U.K. Subsidiaries, which meet the criteria of Discontinued Operations and, therefore, are excluded from the Company's results of continuing operations (in thousands):
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019(1) |
Revenue | | $ | — |
| | $ | 6,957 |
|
Provision for losses | | �� |
| | 1,703 |
|
Net revenue | | — |
| | 5,254 |
|
| | | | |
Cost of providing services | | | | |
Office | | — |
| | 246 |
|
Other costs of providing services | | — |
| | 61 |
|
Advertising | | — |
| | 775 |
|
Total cost of providing services | | — |
| | 1,082 |
|
Gross margin | | — |
| | 4,172 |
|
Operating (income) expense | | | | |
Corporate, district and other expenses | | — |
| | 3,810 |
|
Interest income | | — |
| | (4 | ) |
(Gain) loss on disposition | | (390 | ) | | 39,414 |
|
Total operating (income) expense | | (390 | ) | | 43,220 |
|
Pre-tax income (loss) from operations of discontinued operations | | 390 |
| | (39,048 | ) |
Income tax expense (benefit) related to disposition | | 98 |
| | (47,423 | ) |
Net income from discontinued operations | | $ | 292 |
| | $ | 8,375 |
|
(1) Includes U.K. Subsidiaries financial results from January 1, 2019 to February 25, 2019. |
Revenue and expenses related to discontinued operations included activity prior to the deconsolidation of the U.K. Subsidiariessubsidiaries effective February 25, 2019. For the ninethree months ended September 30,March 31, 2019, "Loss"(Gain) loss on disposition" of $39.4 million included the non-cash effect of eliminating assets and liabilities of the U.K. Subsidiaries as of the date of deconsolidation, as well as the effect of cumulative currency exchange rate differences on the U.S. investment in the U.K.
In connection with the disposition of the U.K. Subsidiaries, the U.S. entity that owned the Company's interests in the U.K. Subsidiaries recognized a loss on investment. This loss resulted in an estimated U.S. federalFederal and state income tax benefit of $46.0$47.4 million which willas of March 31, 2019, to be available to offsetapplied against future income tax obligations. Subsequently, in 2019, the Company's futureCompany revised the estimated U.S. federalFederal and state income tax obligations.benefit to $46.6 million. During the three months ended September 30,March 31, 2020, the Company received $0.4 million of disbursements from the Administrator related to the wind-down of the U.K. Subsidiaries.
As of March 31, 2020 and December 31, 2019, the Company revised the estimate of the tax basis inunaudited Condensed Consolidated Balance Sheets were not impacted by the U.K. Subsidiaries resulting in a $0.6 million reduction inas all balances were written off when the income tax benefit initially recorded inU.K. segment entered into administration during the first quarter of 2019.
The following table presents financial resultscash flows of the U.K. Subsidiaries which meet the criteria of Discontinued Operations and, therefore, are excluded from the Company's results of continuing operations (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, 2019 |
| | 2019 | | 2018 | | 2019(1) | | 2018 |
Revenue | | $ | — |
| | $ | 13,522 |
| | $ | 6,957 |
| | $ | 36,251 |
|
Provision for losses | | — |
| | 6,831 |
| | 1,703 |
| | 16,618 |
|
Net revenue | | — |
| | 6,691 |
| | 5,254 |
| | 19,633 |
|
| | | | | | | | |
Cost of providing services | | | | | | | | |
Office | | — |
| | 416 |
| | 246 |
| | 1,490 |
|
Other costs of providing services | | — |
| | 120 |
| | 61 |
| | 1,213 |
|
Advertising | | — |
| | 2,765 |
| | 775 |
| | 7,077 |
|
Total cost of providing services | | — |
| | 3,301 |
| | 1,082 |
| | 9,780 |
|
Gross margin | | — |
| | 3,390 |
| | 4,172 |
| | 9,853 |
|
Operating expense (income) | | | | | | | | |
Corporate, district and other expenses | | — |
| | 7,690 |
| | 3,810 |
| | 18,390 |
|
Interest income | | — |
| | (7 | ) | | (4 | ) | | (19 | ) |
Loss on disposition | | — |
| | — |
| | 39,414 |
| | — |
|
Total operating expense | | — |
| | 7,683 |
| | 43,220 |
| | 18,371 |
|
Pre-tax loss from operations of discontinued operations | | — |
| | (4,293 | ) | | (39,048 | ) | | (8,518 | ) |
Income tax expense (benefit) related to disposition | | 598 |
| | 139 |
| | (45,991 | ) | | 278 |
|
Net (loss) income from discontinued operations | | $ | (598 | ) | | $ | (4,432 | ) | �� | $ | 6,943 |
| | $ | (8,796 | ) |
(1) Includes U.K. Subsidiaries financial results from January 1, 2019 to February 25, 2019. |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019(1) |
Net cash provided by (used in) discontinued operating activities | $ | 390 |
| | $ | (504 | ) |
Net cash used in discontinued investing activities | — |
| | (14,213 | ) |
Net cash used in discontinued financing activities | — |
| | — |
|
(1) Includes U.K. Subsidiaries financial results from January 1, 2019 to February 25, 2019. | | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16 – GOODWILL
The change in the carrying amount of Goodwill by operating segment for the three months ended March 31, 2020 was as follows (in thousands):
|
| | | | | | | | | | | |
| U.S. | | Canada | | Total |
Goodwill at December 31, 2019 | $ | 91,131 |
| | $ | 29,478 |
| | $ | 120,609 |
|
Acquisition (Note 17) | 14,791 |
| | — |
| | 14,791 |
|
Foreign currency translation | — |
| | (2,575 | ) | | (2,575 | ) |
Goodwill at March 31, 2020 | 105,922 |
| | 26,903 |
| | 132,825 |
|
The Company tests goodwill at least annually for impairment (the Company has elected to annually test for potential impairment of goodwill on October 1) and more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The indicators include, among others, declines in sales, earning or cash flows or the development of a material adverse change in business climate. The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a reporting unit. See Note 1, "Summary of Significant Accounting Policies and Nature of Operations" of the 2019 Form 10-K filed with the SEC on March 9, 2020, for additional information on the Company's policy for assessing goodwill for impairment.
U.S. and Canada Reporting Units
During the three months ended March 31, 2020, the Company determined a triggering event had occurred for the U.S. and Canada reporting units as a result of COVID-19. The global crisis caused by the pandemic drove significant declines in macroeconomic market conditions and altered the assumptions used in the Company's forecast for both reporting units. After performing an interim review, the Company concluded that the fair value of each reporting unit was in excess of its respective carrying value.
Ad Astra Acquisition
The Company completed the acquisition of Ad Astra on January 3, 2020. Goodwill of $14.8 million was recorded on the U.S. reporting unit during the three months ended March 31, 2020, based on the excess of the purchase price of the business combination over the fair value of the acquired net assets. See Note 17, "Acquisition" for more information related to the business combination.
NOTE 17 – ACQUISITION
On January 3, 2020, the Company acquired 100% of the outstanding stock of Ad Astra, a related party, for total consideration of $14.4 million, net of cash received. Prior to the acquisition, Ad Astra was the Company's exclusive provider of third-party collection services for owned and managed loans in the U.S. that are in later-stage delinquency.
The Company began consolidating the financial results of this acquisition in the unaudited Condensed Consolidated Financial Statements on January 3, 2020. For the three months ended March 31, 2019, prior to the acquisition, $4.7 million of costs related to Ad Astra were included in "Other costs of providing services." Subsequent to the acquisition, operating costs for Ad Astra are included within "Corporate, district and other expenses," consistent with presentation of other internal collection costs. Ad Astra incurred $3.5 million of operating expense during the three months ended March 31, 2020.
The transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The Company was the acquirer for purposes of accounting for the business combination. The values assigned to the assets acquired and liabilities assumed are based on their estimates of fair value available as of March 31, 2020. As of March 31, 2020, the Company completed the determination of the fair values of the acquired identifiable assets and liabilities based on the information available.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table presentssummarizes the aggregate carrying amountsallocation of the estimated fair values of the assets acquired and liabilities assumed at the date of the U.K. Subsidiaries (in thousands):acquisition:
|
| | | | | | |
| September 30, 2019 | December 31, 2018 |
ASSETS |
Cash | $ | — |
| $ | 9,859 |
|
Restricted cash | — |
| 3,384 |
|
Gross loans receivable | — |
| 25,256 |
|
Less: allowance for loan losses | — |
| (5,387 | ) |
Loans receivable, net | — |
| 19,869 |
|
Prepaid expenses and other | — |
| 1,482 |
|
Other | — |
| 267 |
|
Total assets classified as discontinued operations in the Condensed Consolidated Balance Sheets | $ | — |
| $ | 34,861 |
|
LIABILITIES |
Accounts payable and accrued liabilities | $ | — |
| $ | 8,136 |
|
Deferred revenue | — |
| 180 |
|
Accrued interest | — |
| (5 | ) |
Deferred rent | — |
| 149 |
|
Other long-term liabilities | — |
| 422 |
|
Total liabilities classified as discontinued operations in the Condensed Consolidated Balance Sheets | $ | — |
| $ | 8,882 |
|
|
| | | |
(in thousands) | Amounts acquired on January 3, 2020 |
Cash consideration transferred: | $ | 17,811 |
|
| |
Cash and cash equivalents | 3,360 |
|
Accounts receivable | 465 |
|
Property and equipment | 358 |
|
Intangible assets | 1,101 |
|
Goodwill | 14,791 |
|
Operating lease asset | 235 |
|
Accounts payable and accrued liabilities | (2,264 | ) |
Operating lease liabilities | (235 | ) |
Total | $ | 17,811 |
|
The following table presents cash flows
Goodwill of $14.8 million represents the excess over the fair value of the U.K. Subsidiaries (in thousands):
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2019(1) | | 2018 |
Net cash (used in) provided by discontinued operating activities | $ | (504 | ) | | $ | 5,562 |
|
Net cash used in discontinued investing activities | (14,213 | ) | | (24,481 | ) |
Net cash used in discontinued financing activities | — |
| | — |
|
(1) Includes U.K. Subsidiaries financial results from January 1, 2019 to February 25, 2019. | | |
net tangible and intangible assets acquired. Goodwill is not deductible for income tax purposes.
NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed consolidating financial information is presented separately for:
| |
(i) | The Company's subsidiary guarantors, which are comprised of its domestic subsidiaries, including CFTC as the issuer of the 12.00% Senior Secured Notes that were redeemed in August 2018, CURO Intermediate, and U.S. SPV as the issuer of the Non-Recourse U.S. SPV Facility that was extinguished in October 2018, and excluding Canada SPV (the “Subsidiary Guarantors”), on a consolidated basis, which are 100% owned by CURO, and which are guarantors of the 8.25% Senior Secured Notes issued in August 2018; |
| |
(ii) | The Company's other subsidiaries on a consolidated basis, which are not guarantors of the 8.25% Senior Secured Notes (the “Subsidiary Non-Guarantors”); |
| |
(iii) | The Non-recourse Canada SPV facility, a wholly-owned, bankruptcy-remote special purpose subsidiary; |
| |
(iv) | CURO as the issuer of the 8.25% Senior Secured Notes; |
| |
(v) | Consolidating and eliminating entries representing adjustments to: |
| |
a. | eliminate intercompany transactions between or among us, the Subsidiary Guarantors and the Subsidiary Non-Guarantors; and |
| |
b. | eliminate the investments in subsidiaries; |
| |
(vi) | The Company and its subsidiaries on a consolidated basis. |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Condensed Consolidating Balance Sheets
|
| | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
(dollars in thousands) | Subsidiary Guarantors | Subsidiary Non-Guarantors | Canada SPV | CURO | Eliminations | CURO Consolidated |
Assets: | | | | | | |
Cash | $ | 40,683 |
| $ | 21,524 |
| $ | — |
| $ | — |
| $ | — |
| $ | 62,207 |
|
Restricted cash | 13,773 |
| 3,084 |
| 21,897 |
| — |
| — |
| 38,754 |
|
Loans receivable, net | 293,711 |
| 49,362 |
| 206,157 |
| — |
| — |
| 549,230 |
|
Right of use asset - operating leases | 76,165 |
| 42,095 |
| — |
| — |
| — |
| 118,260 |
|
Deferred income taxes | (9,086 | ) | — |
| — |
| 10,932 |
| — |
| 1,846 |
|
Income taxes receivable | (960 | ) | 3,974 |
| — |
| 20,952 |
| — |
| 23,966 |
|
Prepaid expenses and other | 24,148 |
| 8,083 |
| (3 | ) | — |
| — |
| 32,228 |
|
Property and equipment, net | 42,937 |
| 27,444 |
| — |
| — |
| — |
| 70,381 |
|
Goodwill | 91,131 |
| 28,979 |
| — |
| — |
| — |
| 120,110 |
|
Other intangibles, net | 10,687 |
| 21,979 |
| — |
| — |
| — |
| 32,666 |
|
Intercompany receivable | 112,413 |
| — |
| — |
| — |
| (112,413 | ) | — |
|
Investment in subsidiaries | — |
| — |
| — |
| 37,131 |
| (37,131 | ) | — |
|
Other | 17,805 |
| 679 |
| — |
| — |
| — |
| 18,484 |
|
Total assets | $ | 713,407 |
| $ | 207,203 |
| $ | 228,051 |
| $ | 69,015 |
| $ | (149,544 | ) | $ | 1,068,132 |
|
Liabilities and Stockholders' equity: | | | | | | |
Accounts payable and accrued liabilities | $ | 48,657 |
| $ | 6,773 |
| $ | 7,259 |
| $ | 996 |
| $ | — |
| $ | 63,685 |
|
Deferred revenue | 5,639 |
| 3,369 |
| 44 |
| — |
| — |
| 9,052 |
|
Lease liability - operating leases | 83,891 |
| 42,157 |
| — |
| — |
| — |
| 126,048 |
|
Income taxes payable | (4,030 | ) | — |
| — |
| 4,030 |
| — |
| — |
|
Accrued interest | 104 |
| — |
| 777 |
| 4,744 |
| — |
| 5,625 |
|
Payable to CURO Holdings Corp. | 657,895 |
| — |
| — |
| (657,895 | ) | — |
| — |
|
CSO liability for losses | 10,249 |
| — |
| — |
| — |
| — |
| 10,249 |
|
Debt | 25,000 |
| — |
| 102,483 |
| 677,924 |
| — |
| 805,407 |
|
Intercompany payable | — |
| 18,742 |
| 93,671 |
| — |
| (112,413 | ) | — |
|
Other liabilities | 8,114 |
| 480 |
| — |
| — |
| — |
| 8,594 |
|
Deferred tax liabilities | (4,171 | ) | 4,427 |
| — |
| 4,171 |
| — |
| 4,427 |
|
Total liabilities | 831,348 |
| 75,948 |
| 204,234 |
| 33,970 |
| (112,413 | ) | 1,033,087 |
|
Stockholders' equity | (117,941 | ) | 131,255 |
| 23,817 |
| 35,045 |
| (37,131 | ) | 35,045 |
|
Total liabilities and stockholders' equity | $ | 713,407 |
| $ | 207,203 |
| $ | 228,051 |
| $ | 69,015 |
| $ | (149,544 | ) | $ | 1,068,132 |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
| | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
(dollars in thousands) | Subsidiary Guarantors | Subsidiary Non-Guarantors | Canada SPV | CURO | Eliminations | CURO Consolidated |
Assets: | | | | | | |
Cash | $ | 42,403 |
| $ | 18,772 |
| $ | — |
| $ | — |
| $ | — |
| $ | 61,175 |
|
Restricted cash | 9,993 |
| 2,606 |
| 12,840 |
| — |
| — |
| 25,439 |
|
Loans receivable, net | 304,542 |
| 56,805 |
| 136,187 |
| — |
| — |
| 497,534 |
|
Deferred income taxes | — |
| 1,534 |
| — |
| — |
| — |
| 1,534 |
|
Income taxes receivable | 7,190 |
| — |
| — |
| 9,551 |
| — |
| 16,741 |
|
Prepaid expenses and other | 37,866 |
| 5,722 |
| — |
| — |
| — |
| 43,588 |
|
Property and equipment, net | 47,918 |
| 28,832 |
| — |
| — |
| — |
| 76,750 |
|
Goodwill | 91,131 |
| 28,150 |
| — |
| — |
| — |
| 119,281 |
|
Other intangibles, net | 8,418 |
| 21,366 |
| — |
| — |
| — |
| 29,784 |
|
Intercompany receivable | 77,009 |
| — |
| — |
| — |
| (77,009 | ) | — |
|
Investment in subsidiaries | — |
| — |
| — |
| (101,665 | ) | 101,665 |
| — |
|
Other | 12,253 |
| 677 |
| — |
| — |
| — |
| 12,930 |
|
Assets from discontinued operations | — |
| 2,406 |
| — |
| — |
| 32,455 |
| 34,861 |
|
Total assets | $ | 638,723 |
| $ | 166,870 |
| $ | 149,027 |
| $ | (92,114 | ) | $ | 57,111 |
| $ | 919,617 |
|
Liabilities and Stockholder's equity: | | | | | | |
Accounts payable and accrued liabilities | $ | 38,240 |
| $ | 5,734 |
| $ | 4,980 |
| $ | 192 |
| $ | — |
| $ | 49,146 |
|
Deferred revenue | 5,981 |
| 3,462 |
| 40 |
| — |
| — |
| 9,483 |
|
Income taxes payable | — |
| 1,579 |
| — |
| — |
| — |
| 1,579 |
|
Accrued interest | 149 |
| — |
| 831 |
| 19,924 |
| — |
| 20,904 |
|
Payable to CURO Holdings Corp. | 768,345 |
| — |
| — |
| (768,345 | ) | — |
| — |
|
CSO liability for losses | 12,007 |
| — |
| — |
| — |
| — |
| 12,007 |
|
Deferred rent | 9,559 |
| 1,292 |
| — |
| — |
| — |
| 10,851 |
|
Debt | 20,000 |
| — |
| 107,479 |
| 676,661 |
| — |
| 804,140 |
|
Subordinated shareholder debt | — |
| 2,196 |
| — |
| — |
| — |
| 2,196 |
|
Intercompany payable | — |
| 224 |
| 44,330 |
| — |
| (44,554 | ) | — |
|
Other liabilities | 4,967 |
| 833 |
| — |
| — |
| — |
| 5,800 |
|
Deferred tax liabilities | 15,175 |
| — |
| — |
| (1,445 | ) | — |
| 13,730 |
|
Liabilities from discontinued operations | — |
| 8,882 |
| — |
| — |
| — |
| 8,882 |
|
Total liabilities | 874,423 |
| 24,202 |
| 157,660 |
| (73,013 | ) | (44,554 | ) | 938,718 |
|
Stockholders' equity | (235,700 | ) | 142,668 |
| (8,633 | ) | (19,101 | ) | 101,665 |
| (19,101 | ) |
Total liabilities and stockholders' equity | $ | 638,723 |
| $ | 166,870 |
| $ | 149,027 |
| $ | (92,114 | ) | $ | 57,111 |
| $ | 919,617 |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Condensed Consolidating Statements of Operations |
| | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
(dollars in thousands) | Subsidiary Guarantors | Subsidiary Non-Guarantors | Canada SPV | CURO | Eliminations | CURO Consolidated |
Revenue | $ | 237,069 |
| $ | 29,984 |
| $ | 30,211 |
| $ | — |
| $ | — |
| $ | 297,264 |
|
Provision for losses | 102,997 |
| 7,191 |
| 13,679 |
| — |
| — |
| 123,867 |
|
Net revenue | 134,072 |
| 22,793 |
| 16,532 |
| — |
| — |
| 173,397 |
|
Cost of providing services: | | | | | |
|
|
Salaries and benefits | 18,301 |
| 9,161 |
| — |
| — |
| — |
| 27,462 |
|
Occupancy | 8,249 |
| 5,787 |
| — |
| — |
| — |
| 14,036 |
|
Office | 4,611 |
| 1,382 |
| — |
| — |
| — |
| 5,993 |
|
Other costs of providing services | 11,475 |
| 1,368 |
| — |
| — |
| — |
| 12,843 |
|
Advertising | 14,186 |
| 2,238 |
| — |
| — |
| — |
| 16,424 |
|
Total cost of providing services | 56,822 |
| 19,936 |
| — |
| — |
| — |
| 76,758 |
|
Gross margin | 77,250 |
| 2,857 |
| 16,532 |
| — |
| — |
| 96,639 |
|
Operating expense (income) : | | | | | |
|
|
Corporate, district and other expenses | 29,930 |
| 5,296 |
| 472 |
| 2,967 |
| — |
| 38,665 |
|
Intercompany management fee | (3,276 | ) | 3,268 |
| 8 |
| — |
| — |
| — |
|
Interest expense | 258 |
| 24 |
| 2,463 |
| 14,619 |
| — |
| 17,364 |
|
Loss from equity method investment | 1,384 |
| — |
| — |
| — |
| — |
| 1,384 |
|
Intercompany interest (income) expense | (1,462 | ) | 893 |
| 569 |
| — |
| — |
| — |
|
Total operating expense | 26,834 |
| 9,481 |
| 3,512 |
| 17,586 |
| — |
| 57,413 |
|
Income (loss) from continuing operations before income taxes | 50,416 |
| (6,624 | ) | 13,020 |
| (17,586 | ) | — |
| 39,226 |
|
Provision (benefit) for income tax expense | 13,700 |
| 1,986 |
| — |
| (4,447 | ) | — |
| 11,239 |
|
Net income (loss) from continuing operations | 36,716 |
| (8,610 | ) | 13,020 |
| (13,139 | ) | ��� |
| 27,987 |
|
Net loss on discontinued operations | — |
| (598 | ) | — |
| — |
| — |
| (598 | ) |
Net (loss) income | 36,716 |
| (9,208 | ) | 13,020 |
| (13,139 | ) | — |
| 27,389 |
|
Equity in net income (loss) of subsidiaries: | | | | | | |
CFTC | — |
| — |
| — |
| 40,528 |
| (40,528 | ) | — |
|
Guarantor Subsidiaries | 36,716 |
| — |
| — |
| — |
| (36,716 | ) | — |
|
Non-Guarantor Subsidiaries | (9,208 | ) | — |
| — |
| — |
| 9,208 |
| — |
|
SPV Subs | 13,020 |
| — |
| — |
| — |
| (13,020 | ) | — |
|
Net income (loss) attributable to CURO | $ | 77,244 |
| $ | (9,208 | ) | $ | 13,020 |
| $ | 27,389 |
| $ | (81,056 | ) | $ | 27,389 |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
(dollars in thousands) | CFTC | CURO Intermediate | Subsidiary Guarantors | Subsidiary Non-Guarantors | SPV Subs | Eliminations | CFTC Consolidated | CURO | Eliminations | CURO Consolidated |
Revenue | $ | — |
| $ | — |
| $ | 141,385 |
| $ | 39,814 |
| $ | 88,283 |
| $ | — |
| $ | 269,482 |
| $ | — |
| $ | — |
| $ | 269,482 |
|
Provision for losses | — |
| — |
| 58,514 |
| 5,860 |
| 63,318 |
| — |
| 127,692 |
| — |
| — |
| 127,692 |
|
Net revenue | — |
| — |
| 82,871 |
| 33,954 |
| 24,965 |
| — |
| 141,790 |
| — |
| — |
| 141,790 |
|
Cost of providing services: | | | | | | | | | |
|
|
Salaries and benefits | — |
| — |
| 17,579 |
| 8,936 |
| — |
| — |
| 26,515 |
| — |
| — |
| 26,515 |
|
Occupancy | — |
| — |
| 7,875 |
| 5,647 |
| — |
| — |
| 13,522 |
| — |
| — |
| 13,522 |
|
Office | — |
| — |
| 5,586 |
| 1,740 |
| — |
| — |
| 7,326 |
| — |
| — |
| 7,326 |
|
Other store operating expenses | — |
| — |
| 10,650 |
| 1,244 |
| 590 |
| — |
| 12,484 |
| — |
| — |
| 12,484 |
|
Advertising | — |
| — |
| 17,632 |
| 3,717 |
| — |
| — |
| 21,349 |
| — |
| — |
| 21,349 |
|
Total cost of providing services | — |
| — |
| 59,322 |
| 21,284 |
| 590 |
| — |
| 81,196 |
| — |
| — |
| 81,196 |
|
Gross Margin | — |
| — |
| 23,549 |
| 12,670 |
| 24,375 |
| — |
| 60,594 |
| — |
| — |
| 60,594 |
|
Operating (income) expense: | | | | | | | | | |
|
|
Corporate, district and other expenses | (886 | ) | 48 |
| 20,663 |
| 5,134 |
| 60 |
| — |
| 25,019 |
| 2,476 |
| — |
| 27,495 |
|
Intercompany management fee | — |
| — |
| (6,761 | ) | 2,516 |
| 4,245 |
| — |
| — |
| — |
| — |
| — |
|
Interest expense | 12,503 |
| — |
| (149 | ) | (38 | ) | 5,276 |
| — |
| 17,592 |
| 5,811 |
| — |
| 23,403 |
|
Intercompany interest (income) expense | — |
| (916 | ) | (455 | ) | 1,371 |
| — |
| — |
| — |
| — |
| — |
| — |
|
Loss on extinguishment of debt | 69,200 |
| — |
| — |
| — |
| — |
| — |
| 69,200 |
| — |
| — |
| 69,200 |
|
Total operating expense | 80,817 |
| (868 | ) | 13,298 |
| 8,983 |
| 9,581 |
| — |
| 111,811 |
| 8,287 |
| — |
| 120,098 |
|
(Loss) income from continuing operations before income taxes | (80,817 | ) | 868 |
| 10,251 |
| 3,687 |
| 14,794 |
| — |
| (51,217 | ) | (8,287 | ) | — |
| (59,504 | ) |
(Benefit) provision for income tax expense | (17,930 | ) | 6,803 |
| (2,177 | ) | (1,508 | ) | — |
| — |
| (14,812 | ) | (2,102 | ) | — |
| (16,914 | ) |
Net (loss) income from continuing operations | (62,887 | ) | (5,935 | ) | 12,428 |
| 5,195 |
| 14,794 |
| — |
| (36,405 | ) | (6,185 | ) | — |
| (42,590 | ) |
Net loss from discontinued operations | — |
| — |
| — |
| (4,432 | ) | — |
| — |
| (4,432 | ) | — |
| — |
| (4,432 | ) |
Net (loss) income | (62,887 | ) | (5,935 | ) | 12,428 |
| 763 |
| 14,794 |
| — |
| (40,837 | ) | (6,185 | ) | — |
| (47,022 | ) |
Equity in net income (loss) of subsidiaries: | | | | | | | | | |
|
|
CFTC | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (40,837 | ) | 40,837 |
| — |
|
CURO Intermediate | (5,935 | ) | — |
| — |
| — |
| — |
| 5,935 |
| — |
| — |
| — |
| — |
|
Guarantor Subsidiaries | 12,428 |
| — |
| — |
| — |
| — |
| (12,428 | ) | — |
| — |
| — |
| — |
|
Non-Guarantor Subsidiaries | 763 |
| — |
| — |
| — |
| — |
| (763 | ) | — |
| — |
| — |
| — |
|
SPV Subs | 14,794 |
| — |
| — |
| — |
| — |
| (14,794 | ) | — |
| — |
| — |
| — |
|
Net (loss) income attributable to CURO | $ | (40,837 | ) | $ | (5,935 | ) | $ | 12,428 |
| $ | 763 |
| $ | 14,794 |
| $ | (22,050 | ) | $ | (40,837 | ) | $ | (47,022 | ) | $ | 40,837 |
| $ | (47,022 | ) |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
(dollars in thousands) | Subsidiary Guarantors | Subsidiary Non-Guarantors | Canada SPV | CURO | Eliminations | CURO Consolidated |
Revenue | $ | 673,234 |
| $ | 84,920 |
| $ | 81,349 |
| $ | — |
| $ | — |
| $ | 839,503 |
|
Provision for losses | 280,529 |
| 17,634 |
| 40,099 |
| — |
| — |
| 338,262 |
|
Net revenue | 392,705 |
| 67,286 |
| 41,250 |
| — |
| — |
| 501,241 |
|
Cost of providing services: | | | | | | |
Salaries and benefits | 55,675 |
| 26,574 |
| — |
| — |
| — |
| 82,249 |
|
Occupancy | 24,292 |
| 17,913 |
| — |
| — |
| — |
| 42,205 |
|
Office | 12,504 |
| 4,059 |
| — |
| — |
| — |
| 16,563 |
|
Other costs of providing services | 36,395 |
| 3,522 |
| — |
| — |
| — |
| 39,917 |
|
Advertising | 31,719 |
| 5,271 |
| — |
| — |
| — |
| 36,990 |
|
Total cost of providing services | 160,585 |
| 57,339 |
| — |
| — |
| — |
| 217,924 |
|
Gross margin | 232,120 |
| 9,947 |
| 41,250 |
| — |
| — |
| 283,317 |
|
Operating expense (income): | | | | | | |
Corporate, district and other expenses | 98,486 |
| 16,900 |
| (283 | ) | 7,940 |
| — |
| 123,043 |
|
Intercompany management fee | (9,576 | ) | 9,553 |
| 23 |
| — |
| — |
| — |
|
Interest expense | 575 |
| 103 |
| 7,728 |
| 43,671 |
| — |
| 52,077 |
|
Loss from equity method investment | 5,132 |
| — |
| — |
| — |
| — |
| 5,132 |
|
Intercompany interest (income) expense | (3,855 | ) | 2,663 |
| 1,192 |
| — |
| — |
| — |
|
Total operating expense | 90,762 |
| 29,219 |
| 8,660 |
| 51,611 |
| — |
| 180,252 |
|
Income (loss) from continuing operations before income taxes | 141,358 |
| (19,272 | ) | 32,590 |
| (51,611 | ) | — |
| 103,065 |
|
Provision (benefit) for income tax expense | 37,309 |
| 4,115 |
| — |
| (12,686 | ) | — |
| 28,738 |
|
Net income (loss) from continuing operations | 104,049 |
| (23,387 | ) | 32,590 |
| (38,925 | ) | — |
| 74,327 |
|
Net loss on discontinued operations | — |
| 6,943 |
| — |
| — |
| — |
| 6,943 |
|
Net income (loss) | 104,049 |
| (16,444 | ) | 32,590 |
| (38,925 | ) | — |
| 81,270 |
|
Equity in net income (loss) of subsidiaries: | | | | | | |
CFTC | — |
| — |
| — |
| 120,195 |
| (120,195 | ) | — |
|
Guarantor Subsidiaries | 104,049 |
| — |
| — |
| — |
| (104,049 | ) | — |
|
Non-Guarantor Subsidiaries | (16,444 | ) | — |
| — |
| — |
| 16,444 |
| — |
|
SPV Subs | 32,590 |
| — |
| — |
| — |
| (32,590 | ) | — |
|
Net income (loss) attributable to CURO | $ | 224,244 |
| $ | (16,444 | ) | $ | 32,590 |
| $ | 81,270 |
| $ | (240,390 | ) | $ | 81,270 |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
(dollars in thousands) | CFTC | CURO Intermediate | Subsidiary Guarantors | Subsidiary Non-Guarantors | SPV Subs | Eliminations | CFTC Consolidated | CURO | Eliminations | CURO Consolidated |
Revenue | $ | — |
| $ | — |
| $ | 387,827 |
| $ | 133,107 |
| $ | 236,560 |
| $ | — |
| $ | 757,494 |
| $ | — |
| $ | — |
| $ | 757,494 |
|
Provision for losses | — |
| — |
| 140,603 |
| 32,770 |
| 117,549 |
| — |
| 290,922 |
| — |
| — |
| 290,922 |
|
Net revenue | — |
| — |
| 247,224 |
| 100,337 |
| 119,011 |
| — |
| 466,572 |
| — |
| — |
| 466,572 |
|
Cost of providing services: | | | | | | | | | | |
Salaries and benefits | — |
| — |
| 53,667 |
| 26,674 |
| — |
| — |
| 80,341 |
| — |
| — |
| 80,341 |
|
Occupancy | — |
| — |
| 23,164 |
| 17,105 |
| — |
| — |
| 40,269 |
| — |
| — |
| 40,269 |
|
Office | — |
| — |
| 15,416 |
| 3,895 |
| — |
| — |
| 19,311 |
| — |
| — |
| 19,311 |
|
Other store operating expenses | — |
| — |
| 33,934 |
| 3,045 |
| 1,537 |
| — |
| 38,516 |
| — |
| — |
| 38,516 |
|
Advertising | — |
| — |
| 35,200 |
| 9,147 |
| — |
| — |
| 44,347 |
| — |
| — |
| 44,347 |
|
Total cost of providing services | — |
| — |
| 161,381 |
| 59,866 |
| 1,537 |
| — |
| 222,784 |
| — |
| — |
| 222,784 |
|
Gross Margin | — |
| — |
| 85,843 |
| 40,471 |
| 117,474 |
| — |
| 243,788 |
| — |
| — |
| 243,788 |
|
Operating expense (income): | | | | | | | | | | |
Corporate, district and other expenses | 20 |
| 73 |
| 74,038 |
| 14,789 |
| 137 |
| — |
| 89,057 |
| 6,847 |
| — |
| 95,904 |
|
Intercompany management fee | — |
| — |
| (19,718 | ) | 8,425 |
| 11,293 |
| — |
| — |
| — |
| — |
| — |
|
Interest expense | 47,410 |
| — |
| (321 | ) | 26 |
| 13,303 |
| — |
| 60,418 |
| 5,811 |
| — |
| 66,229 |
|
Intercompany interest (income) expense | — |
| (2,700 | ) | (526 | ) | 3,226 |
| — |
| — |
| — |
| — |
| — |
| — |
|
Loss on extinguishment of debt | 80,883 |
| — |
| — |
| — |
| — |
| — |
| 80,883 |
| — |
| — |
| 80,883 |
|
Total operating expense | 128,313 |
| (2,627 | ) | 53,473 |
| 26,466 |
| 24,733 |
| — |
| 230,358 |
| 12,658 |
| — |
| 243,016 |
|
(Loss) income from continuing operations before income taxes | (128,313 | ) | 2,627 |
| 32,370 |
| 14,005 |
| 92,741 |
| — |
| 13,430 |
| (12,658 | ) | — |
| 772 |
|
(Benefit) provision for income tax expense | (30,189 | ) | 38,830 |
| (8,220 | ) | 2,521 |
| — |
| — |
| 2,942 |
| (3,211 | ) | — |
| (269 | ) |
Net (loss) income from continuing operations | (98,124 | ) | (36,203 | ) | 40,590 |
| 11,484 |
| 92,741 |
| — |
| 10,488 |
| (9,447 | ) | — |
| 1,041 |
|
Net loss from discontinued operations | — |
| — |
| — |
| (8,796 | ) | — |
| — |
| (8,796 | ) | — |
| — |
| (8,796 | ) |
Net (loss) income | (98,124 | ) | (36,203 | ) | 40,590 |
| 2,688 |
| 92,741 |
| — |
| 1,692 |
| (9,447 | ) | — |
| (7,755 | ) |
Equity in net (loss) income of subsidiaries: | | | | | | | | | | |
CFTC | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,692 |
| (1,692 | ) | — |
|
CURO Intermediate | (36,203 | ) | — |
| — |
| — |
| — |
| 36,203 |
| — |
| — |
| — |
| — |
|
Guarantor Subsidiaries | 40,590 |
| — |
| — |
| — |
| — |
| (40,590 | ) | — |
| — |
| — |
| — |
|
Non-Guarantor Subsidiaries | 2,688 |
| — |
| — |
| — |
| — |
| (2,688 | ) | — |
| — |
| — |
| — |
|
SPV Subs | 92,741 |
| — |
| — |
| — |
| — |
| (92,741 | ) | — |
| — |
| — |
| — |
|
Net income (loss) attributable to CURO | $ | 1,692 |
| $ | (36,203 | ) | $ | 40,590 |
| $ | 2,688 |
| $ | 92,741 |
| $ | (99,816 | ) | $ | 1,692 |
| $ | (7,755 | ) | $ | (1,692 | ) | $ | (7,755 | ) |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Condensed Consolidating Statements of Cash Flows
|
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
(dollars in thousands) | Subsidiary Guarantors | Subsidiary Non-Guarantors | Canada SPV | CURO | Eliminations | CURO Consolidated |
Cash flows from operating activities: |
|
|
|
|
|
| | | |
Net cash provided by continuing operating activities | $ | 273,564 |
| $ | 17,201 |
| $ | 119,898 |
| $ | 52,311 |
| $ | 1,319 |
| $ | 464,293 |
|
Net cash used in discontinued operating activities | — |
| (504 | ) | — |
| — |
| — |
| (504 | ) |
Cash flows from investing activities: |
|
|
|
|
|
| | |
|
|
Purchase of property, equipment and software | (7,351 | ) | (1,316 | ) | — |
| — |
| — |
| (8,667 | ) |
Originations of loans, net | (261,073 | ) | (11,042 | ) | (102,238 | ) | — |
| — |
| (374,353 | ) |
Investment in Zibby | (8,168 | ) | — |
| — |
| — |
| — |
| (8,168 | ) |
Net cash used in continuing investing activities | (276,592 | ) | (12,358 | ) | (102,238 | ) | — |
| — |
| (391,188 | ) |
Net cash used in discontinued investing activities | — |
| (14,213 | ) | — |
| — |
| — |
| (14,213 | ) |
Cash flows from financing activities: |
|
|
|
|
|
| | |
|
|
Proceeds from Non-Recourse Canada SPV facility | — |
| — |
| 15,992 |
| — |
| — |
| 15,992 |
|
Payments on Non-Recourse Canada SPV facility | — |
| — |
| (24,835 | ) | — |
| — |
| (24,835 | ) |
Proceeds from credit facilities | 120,000 |
| 59,811 |
| — |
| — |
| — |
| 179,811 |
|
Payments on credit facilities | (115,000 | ) | (59,811 | ) | — |
| — |
| — |
| (174,811 | ) |
Payments on subordinated stockholder debt | — |
| (2,252 | ) | — |
| — |
| — |
| (2,252 | ) |
Payments to net share settle RSUs | — |
| — |
| — |
| (110 | ) | — |
| (110 | ) |
Proceeds from exercise of stock options | 87 |
| — |
| — |
| — |
| — |
| 87 |
|
Debt issuance costs paid | — |
| — |
| (169 | ) | (29 | ) | — |
| (198 | ) |
Repurchase of common stock | — |
| — |
| — |
| (52,172 | ) | — |
| (52,172 | ) |
Net cash used in provided by financing activities (1) | 5,087 |
| (2,252 | ) | (9,012 | ) | (52,311 | ) | — |
| (58,488 | ) |
| | | | | | |
Effect of exchange rate changes on cash and restricted cash | — |
| 2,114 |
| 409 |
| — |
| (1,319 | ) | 1,204 |
|
Net increase (decrease) in cash and restricted cash | 2,059 |
| (10,012 | ) | 9,057 |
| — |
| — |
| 1,104 |
|
Cash and restricted cash at beginning of period | 52,397 |
| 34,620 |
| 12,840 |
| — |
| — |
| 99,857 |
|
Cash at end of period | $ | 54,456 |
| $ | 24,608 |
| $ | 21,897 |
| $ | — |
| $ | — |
| $ | 100,961 |
|
(1) Financing activities include continuing operations only and were not impacted by discontinued operations |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
(dollars in thousands) | CFTC | Subsidiary Guarantors | Subsidiary Non-Guarantors | SPV Subs | Eliminations | CFTC Consolidated | CURO | CURO Consolidated |
Cash flows from operating activities: | | | | | | | | |
Net cash provided by (used in) continuing operating activities | $ | 628,468 |
| $ | 167,265 |
| $ | (5,013 | ) | $ | 221,222 |
| $ | 22,344 |
| $ | 1,034,286 |
| $ | (677,207 | ) | $ | 357,079 |
|
Net cash provided by (used in) discontinued operating activities | — |
| — |
| 23,737 |
| — |
| (18,175 | ) | 5,562 |
| — |
| 5,562 |
|
Net cash provided by (used in) operating activities | 628,468 |
| 167,265 |
| 18,724 |
| 221,222 |
| 4,169 |
| 1,039,848 |
| (677,207 | ) | 362,641 |
|
Cash flows from investing activities: | | | | | | | | |
Purchase of property, equipment and software | — |
| (6,466 | ) | (1,564 | ) | — |
| — |
| (8,030 | ) | — |
| (8,030 | ) |
Originations of loans, net | — |
| (162,031 | ) | (558 | ) | (249,846 | ) | — |
| (412,435 | ) | — |
| (412,435 | ) |
Investment in Zibby | (958 | ) | — |
| — |
| — |
| — |
| (958 | ) | — |
| (958 | ) |
Net cash used in continuing investing activities | (958 | ) | (168,497 | ) | (2,122 | ) | (249,846 | ) | — |
| (421,423 | ) | — |
| (421,423 | ) |
Net cash used in discontinued investing activities | — |
| — |
| (24,481 | ) | — |
| — |
| (24,481 | ) | — |
| (24,481 | ) |
Net cash used in investing activities | (958 | ) | (168,497 | ) | (26,603 | ) | (249,846 | ) | — |
| (445,904 | ) | — |
| (445,904 | ) |
Cash flows from financing activities: | | | | | | | | |
Proceeds from Non-Recourse U.S. and Canada SPV facilities | — |
| — |
| — |
| 106,949 |
| — |
| 106,949 |
| — |
| 106,949 |
|
Payments on Non-Recourse U.S. and Canada SPV facilities | — |
| — |
| — |
| (61,590 | ) | — |
| (61,590 | ) | — |
| (61,590 | ) |
Proceeds from credit facilities | 39,000 |
| — |
| 26,169 |
| — |
| — |
| 65,169 |
| — |
| 65,169 |
|
Payments on credit facilities | (10,000 | ) | — |
| (26,169 | ) | — |
| — |
| (36,169 | ) | — |
| (36,169 | ) |
Net proceeds from issuance of common stock | 11,549 |
| — |
| — |
| — |
| — |
| 11,549 |
| — |
| 11,549 |
|
Proceeds from exercise of stock options | 408 |
| — |
| — |
| — |
| — |
| 408 |
| — |
| 408 |
|
Payments on 12.00% Senior Secured Notes | (605,000 | ) | — |
| — |
| — |
| — |
| (605,000 | ) | — |
| (605,000 | ) |
Payments of call premiums from early debt extinguishments | (63,350 | ) | — |
| — |
| — |
| — |
| (63,350 | ) | — |
| (63,350 | ) |
Debt issuance costs paid | (117 | ) | — |
| — |
| (4,527 | ) | — |
| (4,644 | ) | (12,873 | ) | (17,517 | ) |
Net cash (used in) provided by financing activities (1) | (627,510 | ) | — |
| — |
| 40,832 |
| — |
| (586,678 | ) | 677,127 |
| 90,449 |
|
| | | | | | | | |
Effect of exchange rate changes on cash | — |
| — |
| 61 |
| 28 |
| (4,169 | ) | (4,080 | ) | — |
| (4,080 | ) |
Net (decrease) increase in cash and restricted cash | — |
| (1,232 | ) | (7,818 | ) | 12,236 |
| — |
| 3,186 |
| (80 | ) | 3,106 |
|
Cash and restricted cash at beginning of period | — |
| 119,056 |
| 48,484 |
| 6,871 |
| — |
| 174,411 |
| 80 |
| 174,491 |
|
Cash and restricted cash at end of period | — |
| 117,824 |
| 40,666 |
| 19,107 |
| — |
| 177,597 |
| — |
| 177,597 |
|
Less: Cash and restricted cash at end of period of Discontinued Operations | — |
| — |
| 11,303 |
| — |
| — |
| 11,303 |
| — |
| 11,303 |
|
Cash and restricted cash at end of period of Continuing Operations | $ | — |
| $ | 117,824 |
| $ | 29,363 |
| $ | 19,107 |
| $ | — |
| $ | 166,294 |
| $ | — |
| $ | 166,294 |
|
(1) Financing activities include continuing operations only and were not impacted by discontinued operations. |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTE 1718 – SHARE REPURCHASE PROGRAM
In February 2020, the Company's Board of Directors authorized a new share repurchase program for up to $25.0 million of its common stock. Under the program, shares were repurchased in the open market or in privately negotiated transactions at times and amounts considered appropriate by CURO. Due to uncertainty caused by COVID-19, the Board suspended the program on March 15, 2020. There were no material purchases in the program during the three months ended March 31, 2020.
In April 2019, the Company's Board of Directors authorized a share repurchase program providing for the repurchase of up to $50.0 million of its common stock. The repurchase program, which commenced June 2019, will continue untilwas completed or terminated. CURO expectsin February 2020. Under this program, the purchases to beCompany repurchased 455,255 shares of its common stock at an average price of $10.45 per share for total consideration of $4.8 million during the three months ended March 31, 2020. Purchases under the program were made from time-to-time in the open market, in privately negotiated transactions, or both, at the Company's discretion and subject to market conditions and other factors. Any repurchased shares will beare available for use in connection with equity plans or other corporate purposes.
Under this program, the Company repurchased 2,156,241 shares of common stock through September 30, 2019. The table below summarizes share repurchase activity during the three and nine months ended September 30, 2019 (in thousands, except for per share amounts and number of share amounts):
|
| | | | | | | |
| | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 |
Total number of shares repurchased | | 1,912,041 |
| 2,156,241 |
|
Average price paid per share | | $ | 12.27 |
| $ | 12.04 |
|
Total value of shares repurchased | | $ | 23,455 |
| $ | 25,962 |
|
| | | |
Total authorized repurchase amount for the period presented | | $ | 47,493 |
| $ | 50,000 |
|
Total value of shares repurchased | | 23,455 |
| 25,962 |
|
Total remaining authorized repurchase amount | | $ | 24,038 |
| $ | 24,038 |
|
Separately, in August 2019, the Company entered into a Share Repurchase Agreement (the “Share Repurchase Agreement”) with Friedman Fleischer & Lowe Capital Partners II, L.P. and its affiliated investment funds (“FFL”),FFL, a related party to the Company.party. Pursuant to the Share Repurchase Agreement, the Company repurchased 2,000,000 shares of its common stock, par value $0.001 per share, owned by FFL, in a private transaction at a purchase price equal to $13.55 per share of Common Stock. The purchase price was determined by using the Company's closing common stock price on August 29, 2019 of $13.97, less a discount of 3.0%. This transaction occurred outside of the share repurchase program authorized in April 2019.
NOTE 1819 – SUBSEQUENT EVENTS
Share Repurchase ProgramNew Non-Recourse U.S. SPV Facility
On April 8, 2020, the Company entered into a Non-Recourse U.S. SPV Facility to provide financing for U.S. Unsecured Installment and Open-End receivables, including those generated under its technology, marketing and servicing relationship with Stride Bank. The Non-Recourse U.S. SPV Facility provides for $100.0 million of borrowing capacity, subject to the borrowing base of eligible collateral and certain other conditions. Concurrent with the closing, the Company repurchased 868,100 shares from October 1, 2019 through November 1, 2019 (in thousands, exceptdrew $35.2 million on the facility.
Dividend
On April 30, 2020, the Company's Board of Directors declared a dividend under its previously announced dividend program, of $0.055 per share amounts and numberto be paid on May 27, 2020 to stockholders of share amounts):
|
| | | | |
| | October 1 - November 1 |
| | 2019 |
Total number of shares repurchased | | 868,100 |
|
Average price paid per share | | $ | 13.03 |
|
Total value of shares repurchased | | $ | 11,311 |
|
record as of the close of business on May 13, 2020.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of financial condition, results of operations, liquidity and capital resources and certain factors that may affect future results, including company-specific, economic and industry-wide factors, should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and accompanying notes included herein. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Except as required by applicable law and regulations, we undertake no obligation to update any forward-looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made. Please see “Risk Factors” in our Annual Report on2019 Form 10-K for the year ended December 31, 20182019 filed with the Securities and Exchange Commissions (the "SEC")SEC on March 18, 2019 ("9, 2020 and our Current Report on Form 8-K, filed with the "2018 Form 10-K")SEC on April 8, 2020, for a discussion of the uncertainties, risks and assumptions associated with these statements.
Overview
We are a growth-oriented, technology-enabled, highly-diversified, multi-channel and multi-product consumer finance company serving a wide range of underbanked consumers in the United States ("U.S."), Canada and through February 25, 2019, the United Kingdom ("U.K.").Canada.
History
CURO was founded in 1997 to meet the growing needs of underbanked consumers looking for access to credit. With more than 20 years of experience, we seek to offer a variety of convenient, easily-accessible financial and loan services in all of our markets.
CURO Financial Technologies Corp., previously known as Speedy Cash Holdings Corp. ("CFTC"), was incorporated in Delaware in July 2008. CURO Group Holdings Corp., previously known as Speedy Group Holdings Corp., was incorporated in Delaware in 2013 as the parent company of CFTC. The terms “CURO," "we,” “our,” “us” and the “Company” refer to CURO Group Holdings Corp. and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated. The term "CFTC" refers to CURO Financial Technologies Corp., our wholly-owned subsidiary, and its directly and indirectly owned subsidiaries as a consolidated entity, except where otherwise stated.
Our growth has been fueled by acquisitions inIn the U.S., our stores operate under "Speedy Cash" and Canada, as well as organically, including"Rapid Cash." In the launchsecond quarter of new brands. Recent brand launches include the March 2016 launch of LendDirect, a primarily online Installment and Open-End brand in Alberta, Canada, the June 2017, launch of Aviowe launched "Avio Credit," an online Installment and Open-End Loan brand in the U.S. market that is currently available in 11 states, and the February 2019 launch of Revolve Finance, discussed below.
Recent Developments
Share Repurchase Program. Our Board of Directors authorized a share repurchase program in April 2019 providing for the repurchase of up to $50.0 million of our common stock. The repurchase program, which commenced June 2019, will continue until completed or terminated. We expect the purchases to be made from time-to-time in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. Any repurchased shares will be available for use in connection with equity plans and for other corporate purposes. Under this program, the Company repurchased 2,156,241 shares of common stock for total consideration of $26.0 million through September 30, 2019.
FFL Repurchase. In August 2019, the Company entered into a Share Repurchase Agreement (the “Share Repurchase Agreement”) with Friedman Fleischer & Lowe Capital Partners II, L.P. and its affiliated investment funds (“FFL”), a related party. Pursuant to the Share Repurchase Agreement, the Company repurchased 2,000,000 shares of its common stock, par value $0.001 per share, owned by FFL, in a private transaction at a purchase price equal to $13.55 per share of Common Stock. This transaction occurred outside of the share repurchase program authorized in April 2019.
Revolve Finance. brand. In February 2019, we launched Revolve Finance, sponsored by Republic Bank of Chicago, which is being introduced across the Company's U.S. stores. This product provides customers a checking account solution, with FDIC-insured deposits, that combines a Visa-branded debit card, a number of technology-enabled tools and optional overdraft protection. In Canada, our stores are branded "Cash Money" and we offer "LendDirect" Installment and Open-End loans online and at certain stores. As of March 31, 2020, our network consisted of 416 locations across 14 U.S. states and seven Canadian provinces and we offered our online services in 27 U.S. states and five Canadian provinces.
Recent Developments
COVID-19. A novel strain of coronavirus, known as COVID-19, surfaced in late 2019 and has spread around the world, including to the U.S. and Canada. In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. In response to the COVID-19 pandemic, various governmental bodies have issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. However, CURO's operations have been designated as essential financial services by federal guidelines and local regulations. As a provider of an essential service, we remain focused on protecting the health and wellbeing of our employees, customers, and the communities in which we operate while assuring the continuity of our business operations. In response to the pandemic, we have taken the following steps to ensure our financial stability while maintaining the health and wellbeing of our employees and customers:
Full-year 2020 earnings guidance was withdrawn.
Cancellation of the 2020 Short-Term Incentive Plan.
Suspension of our $25 million share repurchase program, previously announced in February 2020.
Establishment of an enhanced Customer Care Program to better serve our customers as they face unprecedented economic challenges and uncertainties. The program enables our team members to provide relief to customers in various ways, ranging from due date extensions, interest or fee forgiveness, payment waivers or extended payment plans, depending on a customer’s individual circumstances. We also temporarily suspended all returned item fees.
Designation of most stores across both the U.S. and Canada as an essential service, allowing stores to remain open during local governments' lock down orders.
Adjustment of our credit underwriting models to tighten approval rates and enhance our employment and income verification practices for both the store and on-line lending platforms.
Implementation of work-from-home for virtually all 1,100 of the Company’s contact center and corporate support personnel in Wichita, Toronto and Chicago.
Ad Astra Acquisition. On January 3, 2020, we acquired Ad Astra, previously our exclusive provider of third-party collection services for the U.S. business. The acquisition allows us to bring all U.S. servicing and recovery in-house, drive operational and financial synergies to ensure all aspects of the recovery portfolio are coordinated, reduce operational redundancy and increase peak volume management, improve compliance synergies, and facilitate integrated and personalized CRM strategies and campaign management across the servicing and recovery lifecycle. See Note 17, "Acquisition" of the Notes to the unaudited Condensed Consolidated Financial Statements for additional information.
Bank Partnerships.Credit Facilities In September 2019,. On April 8, 2020, we terminatedentered into incremental asset-backed revolving credit facility to provide financing for U.S. Installment and Open-End receivables, including those generated under our technology, marketing and servicing relationship with Stride Bank. The credit facility provides for an initial borrowing capacity of $100.0 million, dependent upon the previously disclosed agreement with MetaBank, a wholly-owned subsidiaryborrowing base of Metaeligible collateral and certain other conditions, as described in Note 19, "Subsequent Events." For recent developments related to our Senior Secured Notes, Non-Recourse Canada SPV facility and other capital resources, see “Management’s Discussion and Analysis of Financial Group, Inc.Condition and Results of Operations—Liquidity and Capital Resources.”
California Assembly Bill 539:539. On September 13, 2019, the California legislature passed Assembly Bill 539, which imposes an interest rate cap on all consumer loans between $2,500 and $10,000 of 36%, plus the Federal Funds Rate. On October 10, 2019, Governor Newsom signed theThe bill into law and it is scheduled to becomebecame effective on January 1, 2020. Revenue from California Unsecured and Secured Installment loans amounted to 13.0%8.8% of total revenue from continuing operations for the trailing 12three months ended September 30, 2019.March 31, 2020. See "Regulatory Environment and Compliance" in our 2019 10-K for additional details.
Credit Facilities. For recent developments related to our Senior Secured Notes, SPV facilities and other capital resources, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
U.K. Developments. On February 25, 2019, we announced that a proposed Scheme of Arrangement ("SOA"), as described in our Current Report on Form 8-K filed with the SEC on January 31, 2019, related to Curo Transatlantic Limited and SRC Transatlantic Limited (collectively the "U.K. Subsidiaries"), would not be implemented. We also announced that effective February 25, 2019, in accordance with the provisions of the U.K. Insolvency Act 1986 and as approved by the boards of directors of our U.K. Subsidiaries, insolvency practitioners from KPMG were appointed as administrators ("Administrators") for the U.K. Subsidiaries. The effect of the U.K. Subsidiaries’ entry into administration was to place the management, affairs, business and property of the U.K. Subsidiaries under the direct control of the Administrators. As a result, we deconsolidated the U.K. Subsidiaries as of February 25, 2019 and presented the U.K. Subsidiaries as Discontinued Operations in this Quarterly Report on Form 10-Q ("Form 10-Q").
In our Current Report on Form 8-K filed with the SEC on January 31, 2019, our results of operations included a $30.3 million expense comprised of (i) a proposed $23.6 million fund to settle historical redress claims and (ii) $6.7 million in advisory and other costs that would be required to execute the SOA. We subsequently concluded that pursuant to ASC 450, Contingencies, the SOA did not represent an estimate of loss for the redress loss contingency but instead was offered in ongoing negotiation of a potential compromised settlement with creditors. Therefore, the settlement offered through the SOA did not meet the recognition threshold pursuant to ASC 450 and should not have been accrued as a contingent liability for customer redress claims as of December 31, 2018. Our Current Report on Form 8-K filed with the SEC on March 1, 2019 appropriately included $4.6 million of fourth quarter 2018 redress costs and related charges which represented known claims as of December 31, 2018. See "Controls and Procedures" in our 2018 Form 10-K for further discussion.
Refer to the “Regulatory Environment and Compliance” below for additional information regarding recent regulatory developments that may impact our business.
Revenue by Product and Segment and Related Loan Portfolio Performance
Revenue by Product
Year-over-year comparisons for Open-End were affected by the Q1 2019 Open-End Loss Recognition Change. Additionally, throughout this release, we removedWe exclude financial results of our former U.K. operations for all periods presented, as it wasthey were discontinued for accounting and reporting purposes in February 2019. See “Results of Discontinued Operations” within this releaseNote 15, "Discontinued Operations" for additional information.details.
The following tables summarize revenue by product, including credit services organization ("CSO")CSO fees, for the periods indicated (in thousands, unaudited):
| | | | For the Three Months Ended | | For the Three Months Ended |
| | September 30, 2019 | | September 30, 2018 | | March 31, 2020 | | March 31, 2019 |
| | U.S. | Canada | Total | | U.S. | Canada | Total | | U.S. | Canada | Total | | U.S. | Canada | Total |
Unsecured Installment | | $ | 135,541 |
| $ | 1,692 |
| $ | 137,233 |
| | $ | 135,028 |
| $ | 2,632 |
| $ | 137,660 |
| | $ | 120,829 |
| $ | 1,580 |
| $ | 122,409 |
| | $ | 134,003 |
| $ | 1,775 |
| $ | 135,778 |
|
Secured Installment | | 28,270 |
| — |
| 28,270 |
| | 28,562 |
| — |
| 28,562 |
| | 26,286 |
| — |
| 26,286 |
| | 27,477 |
| — |
| 27,477 |
|
Open-End | | 39,605 |
| 26,515 |
| 66,120 |
| | 27,554 |
| 12,736 |
| 40,290 |
| | 41,990 |
| 28,992 |
| 70,982 |
| | 32,593 |
| 20,276 |
| 52,869 |
|
Single-Pay | | 29,140 |
| 20,172 |
| 49,312 |
| | 27,792 |
| 22,822 |
| 50,614 |
| | 28,154 |
| 17,003 |
| 45,157 |
| | 27,168 |
| 19,593 |
| 46,761 |
|
Ancillary | | 4,513 |
| 11,816 |
| 16,329 |
| | 4,337 |
| 8,019 |
| 12,356 |
| | 4,509 |
| 11,463 |
| 15,972 |
| | 4,878 |
| 10,176 |
| 15,054 |
|
Total revenue | | $ | 237,069 |
| $ | 60,195 |
| $ | 297,264 |
| | $ | 223,273 |
| $ | 46,209 |
| $ | 269,482 |
| | $ | 221,768 |
| $ | 59,038 |
| $ | 280,806 |
| | $ | 226,119 |
| $ | 51,820 |
| $ | 277,939 |
|
During the three months ended September 30, 2019,March 31, 2020, total revenue grew $27.8$2.9 million, or 10.3%1.0%, to $297.3$280.8 million, compared to the prior-year period, predominantly drivenperiod. Geographically, the 1.9% decline in U.S. revenues was offset by growtha 13.9% increase in Open-End loans in both countries. Geographically, total revenue in the U.S. and Canada grew 6.2% and 30.3%, respectively.revenues. From a product perspective, Unsecured Installment revenues rose 0.4% in the U.S., offset by a decrease in Canada of 35.7% due to the continued transition to Open-End loans.and Secured Installment revenues decreased 9.8% and related receivables were consistent year-over-year. Single-Pay loan balances stabilized in Canada sequentially but year-over-year Single-Pay usage and product profitability were impacted negatively by4.3%, respectively, due to regulatory changes in OntarioCalifornia, effective JulyJanuary 1, 2018,2020, and our strategic transition of qualifying customersregulatory changes for CSOs in Ohio, effective May 1, 2019. Single-Pay revenue declined $1.6 million, or 3.4%, for the three months ended March 31, 2020 compared to Open-End loansthe prior-year period, primarily due to lower volume during the thirdlast two weeks of the first quarter of 2018.2020 attributable primarily to the impact of COVID-19. Open-End loans in Canada grew $18.1$56.2 million, or 8.3%, sequentially (defined within this Form 10-Q as the change from the second quarter of 2019 to the third quarter of 2019, or comparable periods for 2018 sequential metrics). Open-End loans in Canada grew $98.6 million, or 71.1%30.5%, from September 30, 2018, resulting in year-over-yearMarch 31, 2019, with related revenue growth of $13.8$8.7 million, or 108.2%43.0%. U.S. Open-End revenue rose 43.7%28.8% on related loan growth of 71.2%$17.0 million, or 30.0%.
Ancillary revenues increased 32.2%6.1% versus the same quarter a year ago,prior-year period, primarily due to the sale of insurance products to InstallmentOpen-End and Open-EndInstallment loan customers in Canada.
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended |
| | September 30, 2019 | | September 30, 2018 |
| | U.S. | Canada | Total | | U.S. | Canada | Total |
Unsecured Installment | | $ | 390,026 |
| $ | 5,093 |
| $ | 395,119 |
| | $ | 366,749 |
| $ | 11,227 |
| $ | 377,976 |
|
Secured Installment | | 81,823 |
| — |
| 81,823 |
| | 81,195 |
| — |
| 81,195 |
|
Open-End | | 104,516 |
| 69,445 |
| 173,961 |
| | 76,649 |
| 18,086 |
| 94,735 |
|
Single-Pay | | 82,733 |
| 58,872 |
| 141,605 |
| | 78,835 |
| 90,461 |
| 169,296 |
|
Ancillary | | 14,136 |
| 32,859 |
| 46,995 |
| | 14,565 |
| 19,727 |
| 34,292 |
|
Total revenue | | $ | 673,234 |
| $ | 166,269 |
| $ | 839,503 |
| | $ | 617,993 |
| $ | 139,501 |
| $ | 757,494 |
|
For the nine months ended September 30, 2019, total revenue grew $82.0 million, or 10.8%, to $839.5 million, compared to the prior-year period, predominantly driven by growth in Open-End loans in both countries. Geographically, total Ancillary revenue in Canada for the U.S. and Canada grew 8.9% and 19.2%, respectively. From a product perspective, Unsecured Installment revenues rose 6.3% in the U.S., offset by a decrease in Canadafirst quarter of 54.6% due to the continued transition to Open-End loans. Secured Installment revenues and2020 included $9.1 million of revenue related receivables remained consistent year-over-year. Canadian Single-Pay usage and product profitability were impacted negatively year-over-year by regulatory changes in Ontario effective July 1, 2018, and the strategic transition of qualifying customers to Open-End loans. Open-End revenues rose 83.6% on related loan growth in both countries. Ancillary revenues increased 37.0% versus the same quarter a year ago, primarily due to the sale of insurance products. The $9.1 million of revenue is comprised of $5.8 million of commissions earned from the sale of third-party insurance premiums at the time of sale and $3.3 million from a profit-sharing arrangement with this third-party. The amount we earn under the profit-sharing arrangement is dependent upon the level of claims adjudicated, which are related to Installmentour customers. We maintain no guarantees as to the level of profit earned by the third party and Open-End loan customers in Canada.do not have any
obligations under the terms of the agreement with the third-party. Recoveries under the insurance program are recognized as they are approved by the insurance provider.
The following charts presentdepict the revenue composition,contribution, including CSO fees, of the products and services that we currently offer for the periods indicated:
For the three months ended September 30,March 31, 2020 and 2019, and 2018, revenue generated through our online channel was 46%47% and 44%46%, respectively, of consolidated revenue.
For the nine months ended September 30, 2019 and 2018, revenue generated through our online channel was 45% and 42%, respectively, of consolidated revenue.Gross Combined Loans Receivable
The following table reconciles Company Owned gross loans receivable, a GAAP-basis balance sheet measure, with reconciliation to Gross combined loans receivable, a non-GAAP measure(1). Gross combined loans receivables includes loans originated by third-party lenders through CSO programs, which are not included in our unaudited Condensed Consolidated Financial Statements but from which we earn revenue by providing a guarantee to the unaffiliated lender (in millions, unaudited):
|
| | | | | | | | | | | | | | | |
| As of |
| March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 |
Company Owned gross loans receivable | $ | 564.4 |
| $ | 665.8 |
| $ | 657.6 |
| $ | 609.6 |
| $ | 553.2 |
|
Gross loans receivable Guaranteed by the Company | 55.9 |
| 76.7 |
| 73.1 |
| 67.3 |
| 61.9 |
|
Gross combined loans receivable (1) | $ | 620.3 |
| $ | 742.5 |
| $ | 730.7 |
| $ | 676.9 |
| $ | 615.1 |
|
(1) See "Non-GAAP Financial Measures" below for definition and additional information. |
Gross combined loans receivable by product is presented below:
Gross combined loans receivable increased $5.3 million, or 0.9%, to $620.4 million as of March 31, 2020 from $615.1 million as of March 31, 2019, as growth in Open-End loans of 30.0% and 30.5% in the U.S. and Canada, respectively, offset the decline in Installment CSO and Single-Pay loans and any decrease in volume in the last two weeks of March 2020 as a result of COVID-19. Gross combined loans receivable performance by product is explained further in the following sections.
Loan Volume and Portfolio Performance Analysis
Unsecured Installment Loans
Unsecured Installment revenue and related gross combined loans receivable decreased $13.4 million, or 9.8%, and $44.2 million, or 20.0%, respectively, from the comparable prior-year quarterperiod, primarily due to the continued mix shift to Open-Endregulatory changes in California, effective January 1, 2020.
Unsecured Installment loans in Canada and portfolio optimization in California to manage upcoming January 1, 2020 regulatory changes.represented $51.5 million, or 41.8%, of total Company Owned Unsecured Installment gross combinedloans as of March 31, 2020, a decrease of $38.1 million from $89.6 million, or 55.4%, as of March 31, 2019. Excluding California, Company Owned Unsecured Installment loans receivable decreased $15.7$0.5 million, or 6.0%0.7%, compared to September 30, 2018. from the prior-year period, while revenues increased $0.1 million, or 0.3%, year-over-year.
Unsecured Installment loans Guaranteed by the Company declined $5.1$5.6 million year-over-year due to
regulatory changechanges in Ohio, effective May 1, 2019. As a result, we no longer operate as a CSO in Ohio, which became effectiveaccounted for $5.1 million of Unsecured Installment loans Guaranteed by the Company as of March 31, 2019. Unsecured Installment loan balances Guaranteed by the Company declined in April 2019, and the subsequent conversionlast two weeks of Ohio CSO volumethe first quarter of 2020 due primarily to Company-Owned loans, partially offset by growth in Texas.the impacts of COVID-19.
The NCO rate for Company Owned Unsecured Installment gross loans receivablesreceivable in the thirdfirst quarter of 20192020 increased approximately 125 bps from the third quarter of 2018 due to geographic mix shift from Canada to the U.S., and increases in U.S. NCO rates due to product and credit policy decisions. The NCO rate in the U.S. rose from 16.8% in the third quarter of 2018 to 18.5% in the third quarter of 2019,155 basis points ("bps") year-over-year, primarily due to credit limit increases. While credit limit increases generallya mix shift away from California as a result in modestly higherof regulatory changes. California NCO rates in the related loan vintages,for Unsecured Installment loans are historically the growth in net revenue over the lifelower than our other major states. California comprised 46.4% of such vintages has more than covered the higher NCO rates.total U.S. Company Owned Unsecured Installment loans as of March 31, 2020 compared to 60.7% as of March 31, 2019.
The Unsecured Installment Allowance for loan losses as a percentage of Company Owned Unsecured Installment gross loans receivable ("allowance coverage")coverage increased year-over-year, from 19.5%20.8% as of September 30, 2018March 31, 2019 to 21.9%23.5% as of September 30, 2019,March 31, 2020, primarily as a result of related higherthe previously mentioned increase in U.S. NCO rates. Past due receivablesrates and Allowance Build. Sequentially (described within this release as a percentagethe change from the fourth quarter of total Gross Receivables remained consistent with2019 to the samefirst quarter a year ago. Sequentially, theof 2020), allowance coverage and past-due balances increased slightly, from 21.4%22.1% to 21.9%23.5% and from 26.8% to 28.4%, respectively, as of September 30, 2019.March 31, 2020.
NCO rates for Unsecured Installment loans Guaranteed by the Company improved nearly 60115 bps compared to the same quarter a year ago.prior-year period. The CSO liability for losses remained consistent sequentiallyincreased year-over-year, from 14.5% to 14.4% for the thirdfirst quarter of 2019.
2019 to 16.9% for the first quarter of 2020, due primarily to Allowance Build. Sequentially, allowance coverage and past-due balances increased from 14.2% to 16.9% and from 16.8% to 17.1%, respectively, for the three months ended March 31, 2020.
| | | 2019 | | 2018 | 2020 | | 2019 |
(dollars in thousands, unaudited) | Third Quarter | Second Quarter | First Quarter | | Fourth Quarter | Third Quarter | First Quarter | | Fourth Quarter | Third Quarter | Second Quarter | First Quarter |
Unsecured Installment loans: | | | | | | |
Revenue - Company Owned | $ | 65,809 |
| $ | 59,814 |
| $ | 65,542 |
| | $ | 69,748 |
| $ | 64,146 |
| $ | 55,569 |
| | $ | 63,428 |
| $ | 65,809 |
| $ | 59,814 |
| $ | 65,542 |
|
Provision for losses - Company Owned | 31,891 |
| 33,514 |
| 33,845 |
| | 39,565 |
| 32,946 |
| 26,182 |
| | 33,183 |
| 31,891 |
| 33,514 |
| 33,845 |
|
Net revenue - Company Owned | $ | 33,918 |
| $ | 26,300 |
| $ | 31,697 |
| | $ | 30,183 |
| $ | 31,200 |
| $ | 29,387 |
| | $ | 30,245 |
| $ | 33,918 |
| $ | 26,300 |
| $ | 31,697 |
|
Net charge-offs - Company Owned | $ | 28,973 |
| $ | 31,970 |
| $ | 37,919 |
| | $ | 37,951 |
| $ | 27,308 |
| $ | 32,775 |
| | $ | 35,729 |
| $ | 28,973 |
| $ | 31,970 |
| $ | 37,919 |
|
Revenue - Guaranteed by the Company | $ | 71,424 |
| $ | 62,298 |
| $ | 70,236 |
| | $ | 75,559 |
| $ | 73,514 |
| $ | 66,840 |
| | $ | 72,183 |
| $ | 71,424 |
| $ | 62,298 |
| $ | 70,236 |
|
Provision for losses - Guaranteed by the Company | 36,664 |
| 28,336 |
| 27,422 |
| | 37,352 |
| 39,552 |
| 26,338 |
| | 34,858 |
| 36,664 |
| 28,336 |
| 27,422 |
|
Net revenue - Guaranteed by the Company | $ | 34,760 |
| $ | 33,962 |
| $ | 42,814 |
| | $ | 38,207 |
| $ | 33,962 |
| $ | 40,502 |
| | $ | 37,325 |
| $ | 34,760 |
| $ | 33,962 |
| $ | 42,814 |
|
Net charge-offs - Guaranteed by the Company | $ | 35,916 |
| $ | 27,486 |
| $ | 30,421 |
| | $ | 38,522 |
| $ | 37,995 |
| $ | 27,749 |
| | $ | 34,486 |
| $ | 35,916 |
| $ | 27,486 |
| $ | 30,421 |
|
Unsecured Installment gross combined loans receivable: | | | | | | |
Company Owned | $ | 174,489 |
| $ | 164,722 |
| $ | 161,716 |
| | $ | 190,403 |
| $ | 185,130 |
| $ | 123,118 |
| | $ | 160,782 |
| $ | 174,489 |
| $ | 164,722 |
| $ | 161,716 |
|
Guaranteed by the Company (1)(2) | 70,704 |
| 65,055 |
| 59,740 |
| | 77,451 |
| 75,807 |
| 54,097 |
| | 74,317 |
| 70,704 |
| 65,055 |
| 59,740 |
|
Unsecured Installment gross combined loans receivable (1)(2) | $ | 245,193 |
| $ | 229,777 |
| $ | 221,456 |
| | $ | 267,854 |
| $ | 260,937 |
| $ | 177,215 |
| | $ | 235,099 |
| $ | 245,193 |
| $ | 229,777 |
| $ | 221,456 |
|
Average gross loans receivable: | | | | | | |
Average Unsecured Installment gross loans receivable - Company Owned (3) | $ | 169,606 |
| $ | 163,219 |
| $ | 176,060 |
| | $ | 187,767 |
| $ | 172,708 |
| $ | 141,950 |
| | $ | 167,636 |
| $ | 169,606 |
| $ | 163,219 |
| $ | 176,060 |
|
Average Unsecured Installment gross loans receivable - Guaranteed by the Company (3) | $ | 67,880 |
| $ | 62,398 |
| $ | 68,596 |
| | $ | 76,629 |
| $ | 71,079 |
| $ | 64,207 |
| | $ | 72,511 |
| $ | 67,880 |
| $ | 62,398 |
| $ | 68,596 |
|
Allowance for loan losses and CSO liability for losses: | | | | | | |
Unsecured Installment Allowance for loan losses (3) | $ | 38,127 |
| $ | 35,223 |
| $ | 33,666 |
| | $ | 37,716 |
| $ | 36,160 |
| $ | 28,965 |
| | $ | 35,587 |
| $ | 38,127 |
| $ | 35,223 |
| $ | 33,666 |
|
Unsecured Installment CSO liability for losses (3) | $ | 10,181 |
| $ | 9,433 |
| $ | 8,584 |
| | $ | 11,582 |
| $ | 12,750 |
| $ | 9,142 |
| | $ | 10,553 |
| $ | 10,181 |
| $ | 9,433 |
| $ | 8,583 |
|
Unsecured Installment Allowance for loan losses as a percentage of Unsecured Installment gross loans receivable | 21.9 | % | 21.4 | % | 20.8 | % | | 19.8 | % | 19.5 | % | 23.5 | % | | 22.1 | % | 21.9 | % | 21.4 | % | 20.8 | % |
Unsecured Installment CSO liability for losses as a percentage of Unsecured Installment gross loans guaranteed by the Company | 14.4 | % | 14.5 | % | 14.4 | % | | 15.0 | % | 16.8 | % | 16.9 | % | | 14.2 | % | 14.4 | % | 14.5 | % | 14.4 | % |
Unsecured Installment past-due balances: | | | | | | |
Unsecured Installment gross loans receivable | $ | 46,537 |
| $ | 38,037 |
| $ | 40,801 |
| | $ | 49,087 |
| $ | 49,637 |
| $ | 34,966 |
| | $ | 43,100 |
| $ | 46,537 |
| $ | 38,037 |
| $ | 40,801 |
|
Unsecured Installment gross loans guaranteed by the Company | $ | 11,842 |
| $ | 10,087 |
| $ | 7,967 |
| | $ | 11,708 |
| $ | 12,120 |
| $ | 9,232 |
| | $ | 12,477 |
| $ | 11,842 |
| $ | 10,087 |
| $ | 7,967 |
|
Past-due Unsecured Installment gross loans receivable -- percentage (2) | 26.7 | % | 23.1 | % | 25.2 | % | | 25.8 | % | 26.8 | % | 28.4 | % | | 26.8 | % | 26.7 | % | 23.1 | % | 25.2 | % |
Past-due Unsecured Installment gross loans guaranteed by the Company -- percentage (2) | 16.7 | % | 15.5 | % | 13.3 | % | | 15.1 | % | 16.0 | % | 17.1 | % | | 16.8 | % | 16.7 | % | 15.5 | % | 13.3 | % |
Unsecured Installment other information: | | | | | | |
Originations - Company Owned | $ | 107,275 |
| $ | 102,792 |
| $ | 78,515 |
| | $ | 114,182 |
| $ | 121,415 |
| $ | 55,941 |
| | $ | 87,080 |
| $ | 107,275 |
| $ | 102,792 |
| $ | 78,515 |
|
Originations - Guaranteed by the Company (1) | $ | 89,644 |
| $ | 80,445 |
| $ | 68,899 |
| | $ | 89,319 |
| $ | 91,828 |
| $ | 64,836 |
| | $ | 91,004 |
| $ | 89,644 |
| $ | 80,445 |
| $ | 68,899 |
|
Unsecured Installment ratios: | | | | | | |
Provision as a percentage of gross loans receivable - Company Owned | 18.3 | % | 20.3 | % | 20.9 | % | | 20.8 | % | 17.8 | % | 21.3 | % | | 20.6 | % | 18.3 | % | 20.3 | % | 20.9 | % |
Provision as a percentage of gross loans receivable - Guaranteed by the Company | 51.9 | % | 43.6 | % | 45.9 | % | | 48.2 | % | 52.2 | % | 48.7 | % | | 46.9 | % | 51.9 | % | 43.6 | % | 45.9 | % |
(1) Includes loans originated by third-party lenders through CSO programs, which are not included in the Condensed Consolidated Financial Statements. | |
(1) Includes loans originated by third-party lenders through CSO programs, which are not included in our unaudited Condensed Consolidated Financial Statements. | | (1) Includes loans originated by third-party lenders through CSO programs, which are not included in our unaudited Condensed Consolidated Financial Statements. |
(2) Non-GAAP measure. For a description of each non-GAAP metric, see "Non-GAAP Financial Measures." | (3) Average gross loans receivable calculated as average of beginning of quarter and end of quarter gross loans receivable. | |
(4) Allowance for loan losses is reported as a contra-asset reducing gross loans receivable while the CSO liability for losses is reported as a liability on the Condensed Consolidated Balance Sheets. | |
(3) We calculate Average gross loans receivable, which we utilize to calculate product yield and NCO rates, as average of beginning of quarter and end of quarter gross loans receivable. | | (3) We calculate Average gross loans receivable, which we utilize to calculate product yield and NCO rates, as average of beginning of quarter and end of quarter gross loans receivable. |
(4) We report Allowance for loan losses as a contra-asset reducing gross loans receivable and the CSO liability for losses as a liability on our unaudited Condensed Consolidated Balance Sheets. | | (4) We report Allowance for loan losses as a contra-asset reducing gross loans receivable and the CSO liability for losses as a liability on our unaudited Condensed Consolidated Balance Sheets. |
Secured Installment Loans
Secured Installment revenue and the related gross combined loans receivable balancefor the three months ended March 31, 2020 decreased 4.3% and 10.4%, respectively, compared to the prior-year period, primarily as a result of regulatory changes in California, effective January 1, 2020. California accounted for $28.6 million, or 38.5%, of total Secured Installment gross combined loans receivable as of September 30, 2019 remained consistent year-over-year.March 31, 2020, a decrease of $14.8 million from $43.5 million, or 52.3%, as of March 31, 2019. Secured Installment Allowance for loan losses and CSO liability for losses as a percentage of Secured Installment gross combined loans receivable decreasedincreased year-over-year from 12.4% to 11.3% for the third quarter of 201911.9%, and decreased sequentially from 11.5% to 11.3% during13.1% for the third quarter of 2019, primarily as a result of an 80 bps improvement in the NCO rate.three months ended March 31, 2020, due to Allowance Build.
| | | 2019 | | 2018 | 2020 | | 2019 |
(dollars in thousands, unaudited) | Third Quarter | Second Quarter | First Quarter | | Fourth Quarter | Third Quarter | First Quarter | | Fourth Quarter | Third Quarter | Second Quarter | First Quarter |
Secured Installment loans: | | | | | | |
Revenue | $ | 28,270 |
| $ | 26,076 |
| $ | 27,477 |
| | $ | 29,482 |
| $ | 28,562 |
| $ | 26,286 |
| | $ | 28,690 |
| $ | 28,270 |
| $ | 26,076 |
| $ | 27,477 |
|
Provision for losses | 8,819 |
| 7,821 |
| 7,080 |
| | 12,035 |
| 10,188 |
| 9,682 |
| | 11,492 |
| 8,819 |
| 7,821 |
| 7,080 |
|
Net revenue | $ | 19,451 |
| $ | 18,255 |
| $ | 20,397 |
| | $ | 17,447 |
| $ | 18,374 |
| $ | 16,604 |
| | $ | 17,198 |
| $ | 19,451 |
| $ | 18,255 |
| $ | 20,397 |
|
Net charge-offs | $ | 8,455 |
| $ | 7,630 |
| $ | 9,822 |
| | $ | 11,132 |
| $ | 9,285 |
| $ | 10,284 |
| | $ | 11,548 |
| $ | 8,455 |
| $ | 7,630 |
| $ | 9,822 |
|
Secured Installment gross combined loan balances: | | | | | | |
Secured Installment gross combined loans receivable (1)(2) | $ | 92,478 |
| $ | 87,718 |
| $ | 83,087 |
| | $ | 95,922 |
| $ | 94,194 |
| $ | 74,405 |
| | $ | 90,411 |
| $ | 92,478 |
| $ | 87,718 |
| $ | 83,087 |
|
Average Secured Installment gross combined loans receivable (3) | $ | 90,098 |
| $ | 85,403 |
| $ | 89,505 |
| | $ | 95,058 |
| $ | 90,814 |
| $ | 82,408 |
| | $ | 91,445 |
| $ | 90,098 |
| $ | 85,403 |
| $ | 89,505 |
|
Secured Installment Allowance for loan losses and CSO liability for losses (2)(4) | $ | 10,431 |
| $ | 10,067 |
| $ | 9,874 |
| | $ | 12,616 |
| $ | 11,714 |
| $ | 9,773 |
| | $ | 10,375 |
| $ | 10,431 |
| $ | 10,067 |
| $ | 9,874 |
|
Secured Installment Allowance for loan losses and CSO liability for losses as a percentage of Secured Installment gross combined loans receivable | 11.3 | % | 11.5 | % | 11.9 | % | | 13.2 | % | 12.4 | % | 13.1 | % | | 11.5 | % | 11.3 | % | 11.5 | % | 11.9 | % |
Secured Installment past-due balances: | | | | | | |
Secured Installment past-due gross loans receivable and gross loans guaranteed by the Company | $ | 17,645 |
| $ | 14,570 |
| $ | 13,866 |
| | $ | 17,835 |
| $ | 17,754 |
| $ | 15,612 |
| | $ | 17,902 |
| $ | 17,645 |
| $ | 14,570 |
| $ | 13,866 |
|
Past-due Secured Installment gross loans receivable and gross loans guaranteed by the Company -- percentage (1)(2) | 19.1 | % | 16.6 | % | 16.7 | % | | 18.6 | % | 18.8 | % | 21.0 | % | | 19.8 | % | 19.1 | % | 16.6 | % | 16.7 | % |
Secured Installment other information: | | | | | | |
Originations (4)(2) | $ | 45,990 |
| $ | 49,051 |
| $ | 33,490 |
| | $ | 49,217 |
| $ | 51,742 |
| $ | 20,990 |
| | $ | 40,961 |
| $ | 45,990 |
| $ | 49,051 |
| $ | 33,490 |
|
Secured Installment ratios: | | | | | | |
Provision as a percentage of gross combined loans receivable | 9.5 | % | 8.9 | % | 8.5 | % | | 12.5 | % | 10.8 | % | 13.0 | % | | 12.7 | % | 9.5 | % | 8.9 | % | 8.5 | % |
(1) Non-GAAP measure. For a description of each non-GAAP metric, see "Non-GAAP Financial Measures." | (2) Allowance for loan losses is reported as a contra-asset reducing gross loans receivable while the CSO liability for losses is reported as a liability on the Condensed Consolidated Balance Sheets. | |
(3) Average gross loans receivable calculated as beginning of quarter and end of quarter gross loans receivable. | |
(4) Includes loans originated by third-party lenders through CSO programs, which are not included in the Condensed Consolidated Financial Statements. | |
(2) Includes loans originated by third-party lenders through CSO programs, which are not included in our unaudited Condensed Consolidated Financial Statements. | | (2) Includes loans originated by third-party lenders through CSO programs, which are not included in our unaudited Condensed Consolidated Financial Statements. |
(3) We calculate Average gross loans receivable, which we utilize to calculate product yield and NCO rates, as beginning of quarter and end of quarter gross loans receivable. | | (3) We calculate Average gross loans receivable, which we utilize to calculate product yield and NCO rates, as beginning of quarter and end of quarter gross loans receivable. |
(4) We report Allowance for loan losses as a contra-asset reducing gross loans receivable and the CSO liability for losses as a liability on our unaudited Condensed Consolidated Balance Sheets. | | (4) We report Allowance for loan losses as a contra-asset reducing gross loans receivable and the CSO liability for losses as a liability on our unaudited Condensed Consolidated Balance Sheets. |
Open-End Loans
Open-End loan balances as of September 30, 2019March 31, 2020 increased by $130.9$73.2 million, whenor 30.4% ($89.7 million, or 37.2%, on a constant-currency basis), compared to September 30, 2018, primarily due to the continuedMarch 31, 2019, on 30.5% (39.5% on a constant-currency basis) growth in Canada. The Q1 2019 Open-End Loss Recognition Change, discussed further below, impacted comparability as Canada included $19.2 million of past-due Open-End loans as of September 30, 2019 that would have been charged off under the former policy. Sequentially, Open-End balances in Canada grew $18.1 million ($20.9 million on a constant currency basis) due to organic growth of the product and the introduction of Open-End loans in British Columbia during the third quarter of 2019. Remaining year-over-year loan growth was driven by the organic30.0% growth in seasoned U.S. markets, such as Tennessee and Kansas, and the relatively newer Virginia market. Similar to Canada, the Q1 2019 Open-End Loss Recognition Change affected comparability in the U.S., with the inclusion of $26.8 million of past-due Open-End loans as of September 30, 2019 that would have been charged off under the former policy.
TheConsolidated Open-End NCO rate during the third quarter of 2019 was 9.4%, compared to 17.1% inthree months ended March 31, 2020 improved 160 bps versus the same quarter in the prior year,prior-year period, primarily as a result of a modest improvement in the U.S. and seasoning of the Canada portfolio. Sequentially,portfolio, which improved 165 bps year-over-year on a non-GAAP pro forma basis as described below, NCO rates improved 130 bps, primarily on portfolio improvements in Canada.below. The Open-End Allowance for loan losses as a percentage of Open-End gross loans receivable increased sequentially from 16.4% to 18.0% for the three months ended March 31, 2020 because of Allowance Build.
Q1 2019 Open-End Loss Recognition Change
Effective January 1, 2019, we modified the timeframe inover which we charge-off Open-End loans and made related refinements to our loss provisioning methodology. Prior to January 1, 2019, we deemed Open-End loans uncollectible and charged-off when a customer missed a scheduled payment and the loan was considered past-due. Because of our continuing shift to Open-End loans in Canada and our analysis of payment patterns on early-stage versus late-stage delinquencies, we revised our estimates and now consider Open-End loans uncollectible when the loan has been contractually past-due for 90 consecutive days. Consequently, past-due Open-End loans and related accrued interest now remain in loans receivable for 90 days before being charged off against the allowance for loan losses. All recoveries on charged-off loans are credited to the allowance for loan losses. We evaluate the adequacy of the allowance for loan losses compared to the related gross loans receivable balances that include accrued interest.
Prospectively from January 1, 2019, past-due, unpaid balances plus related accrued interest charge-off on day 91.
The aforementioned change was treated as a change in accounting estimate for accounting purposes and applied prospectively beginning January 1, 2019.
The change affects comparability to prior periods as follows:
Gross combined loans receivable: balances as of September 30, 2019 include $46.1 million of Open-End loans that are up to 90 days past-due with related accrued interest, while such balances for periods prior to March 31, 2019 do not include any past-due loans.
Revenues: for the three and nine months ended September 30, 2019, gross revenues include interest earned on past-due loan balances of approximately $15 million and $35 million, respectively, while revenues in prior-year periods do not include comparable amounts.
Provision for Losses: prospectively from January 1, 2019, past-due, unpaid balances plus related accrued interest charge-off on day 91. Provision expense is affected by NCOs (total charge-offs less total recoveries) plus changes to the Allowance for loan losses. Because NCOs prospectively include unpaid principal and up to 90 days of related accrued interest, NCO amounts and rates are higher and the Open-End Allowance for loan losses as a percentage of Open-End gross loans receivable is higher. The Open-End Allowance for loan losses as a percentage of Open-End gross loans receivable increased to 17.2% at September 30, 2019, compared to 9.8% in the comparable prior-year period.
The following table reports 2019 Open-End loan performance including the effect of the Q1 2019 Open-End Loss Recognition Change:
| | | 2019 | | 2018 | 2020 | | 2019 |
(dollars in thousands, unaudited) | Third Quarter | Second Quarter | First Quarter | | Fourth Quarter | Third Quarter | First Quarter | | Fourth Quarter | Third Quarter | Second Quarter | First Quarter |
Open-End loans: | | | | | | |
Revenue | $ | 66,120 |
| $ | 54,972 |
| $ | 52,869 |
| | $ | 47,228 |
| $ | 40,290 |
| $ | 70,982 |
| | $ | 71,295 |
| $ | 66,120 |
| $ | 54,972 |
| $ | 52,869 |
|
Provision for losses | 31,220 |
| 29,373 |
| 25,317 |
| | 28,337 |
| 31,686 |
| 40,991 |
| | 37,816 |
| 31,220 |
| 29,373 |
| 25,317 |
|
Net revenue | $ | 34,900 |
| $ | 25,599 |
| $ | 27,552 |
| | $ | 18,891 |
| $ | 8,604 |
| $ | 29,991 |
| | $ | 33,479 |
| $ | 34,900 |
| $ | 25,599 |
| $ | 27,552 |
|
Net charge-offs (1) | $ | 28,202 |
| $ | 25,151 |
| $ | (1,521 | ) | | $ | 25,218 |
| $ | 23,579 |
| $ | 37,098 |
| | $ | 37,426 |
| $ | 28,202 |
| $ | 25,151 |
| $ | (1,521 | ) |
Open-End gross loan balances: | | | | | | |
Open-End gross loans receivable | $ | 314,971 |
| $ | 283,311 |
| $ | 240,790 |
| | $ | 207,333 |
| $ | 184,067 |
| $ | 314,006 |
| | $ | 335,524 |
| $ | 314,971 |
| $ | 283,311 |
| $ | 240,790 |
|
Average Open-End gross loans receivable (1) | $ | 299,141 |
| $ | 262,051 |
| $ | 224,062 |
| | $ | 195,700 |
| $ | 137,550 |
| $ | 324,765 |
| | $ | 325,248 |
| $ | 299,141 |
| $ | 262,051 |
| $ | 224,062 |
|
Open-End allowance for loan losses: | | | | | | |
Allowance for loan losses | $ | 54,233 |
| $ | 51,717 |
| $ | 46,963 |
| | $ | 19,901 |
| $ | 18,013 |
| $ | 56,458 |
| | $ | 55,074 |
| $ | 54,233 |
| $ | 51,717 |
| $ | 46,963 |
|
Open-End Allowance for loan losses as a percentage of Open-End gross loans receivable | 17.2 | % | 18.3 | % | 19.5 | % | | 9.6 | % | 9.8 | % | 18.0 | % | | 16.4 | % | 17.2 | % | 18.3 | % | 19.5 | % |
Open-End past-due balances: | | | | | | |
Open-End past-due gross loans receivable | $ | 46,053 |
| $ | 35,395 |
| $ | 32,444 |
| | $ | — |
| $ | — |
| $ | 49,987 |
| | $ | 50,072 |
| $ | 46,053 |
| $ | 35,395 |
| $ | 32,444 |
|
Past-due Open-End gross loans receivable - percentage | 14.6 | % | 12.5 | % | 13.5 | % | | — | % | — | % | 15.9 | % | | 14.9 | % | 14.6 | % | 12.5 | % | 13.5 | % |
(1) Average gross loans receivable calculated as average of beginning of quarter and end of quarter gross loans receivable. | |
(1) We calculate Average gross loans receivable, which we utilize to calculate product yield and NCO rates, as average of beginning of quarter and end of quarter gross loans receivable. | | (1) We calculate Average gross loans receivable, which we utilize to calculate product yield and NCO rates, as average of beginning of quarter and end of quarter gross loans receivable. |
In addition, theThe following table illustrates, on a non-GAAP pro forma basis, the 2019 quarterly results as if the Q1 2019 Open-End Loss Recognition Change had been applied to our outstanding Open-End loan portfolio as of December 31, 2018. This table is illustrative of retrospective application to determine the NCOs that would have been incurred in each quarter of 2019 from the December 31, 2018 loan book. The primary purpose of this pro forma illustration is to provide a representative level of NCO rates from applying the Q1 2019 Open-End Loss Recognition Change.
|
| | | | | | | | | | |
Pro Forma | | 2019 |
(dollars in thousands, unaudited) | | Third Quarter | Second Quarter | First Quarter |
Open-End loans: | | | | |
Revenue | | $ | 66,120 |
| $ | 54,972 |
| $ | 52,869 |
|
Provision for losses | | 31,220 |
| 29,373 |
| 25,317 |
|
Net revenue | | $ | 34,900 |
| $ | 25,599 |
| $ | 27,552 |
|
Net charge-offs | | $ | 29,762 |
| $ | 29,648 |
| $ | 31,788 |
|
Open-End gross loan balances: | | | | |
Open-End gross loans receivable | | $ | 314,971 |
| $ | 283,311 |
| $ | 240,790 |
|
Average Open-End gross loans receivable (1) | | $ | 299,141 |
| $ | 262,051 |
| $ | 245,096 |
|
Net-charge offs as a percentage of average gross loans receivable | | 9.9 | % | 11.3 | % | 13.0 | % |
Open-End allowance for loan losses: | | | | |
Allowance for loan losses | | $ | 54,233 |
| $ | 51,717 |
| $ | 46,963 |
|
Open-End Allowance for loan losses as a percentage of Open-End gross loans receivable | | 17.2 | % | 18.3 | % | 19.5 | % |
Open-End past-due balances: | | | | |
Open-End past-due gross loans receivable | | $ | 46,053 |
| $ | 35,395 |
| $ | 32,444 |
|
Past-due Open-End gross loans receivable - percentage | | 14.6 | % | 12.5 | % | 13.5 | % |
(1) Average gross loans receivable calculated as average of beginning of quarter and end of quarter gross loans receivable.
|
|
| | | | | | | | | | | | | |
Pro Forma | | 2019 |
(dollars in thousands, unaudited) | | Fourth Quarter | Third Quarter | Second Quarter | First Quarter |
Open-End loans: | | | | | |
Pro Forma Net charge-offs | | $ | 38,748 |
| $ | 29,762 |
| $ | 29,648 |
| $ | 31,788 |
|
Open-End gross loan balances: | | | | | |
Open-End gross loans receivable | | $ | 335,524 |
| $ | 314,971 |
| $ | 283,311 |
| $ | 240,790 |
|
Pro Forma Average Open-End gross loans receivable (1) | | $ | 325,248 |
| $ | 299,141 |
| $ | 262,051 |
| $ | 245,096 |
|
Pro Forma Net-charge offs as a percentage of average gross loans receivable | | 11.9 | % | 9.9 | % | 11.3 | % | 13.0 | % |
(1) We calculate Average gross loans receivable, which we utilize to calculate product yield and NCO rates, as average of beginning of quarter and end of quarter gross loans receivable. |
Single-Pay
Single-Pay revenue duringdeclined $1.6 million, or 3.4%, for the three months ended September 30, 2019 decreasedMarch 31, 2020 compared to the three months ended September 30, 2018,prior-year period, primarily due to regulatory changes in Canada (rate and product changes in Ontario and British Columbia) that acceleratedlower volume during the shift to Open-End products. U.S. Single-Pay receivables increased $1.7 million, or 4.1%, offset by a decrease in Canada receivableslast two weeks of $1.0 million, or 2.8%. Canada Single-Pay balances were stable sequentially from the secondfirst quarter of 2019.2020, attributable primarily to the impact of COVID-19. The Single-Pay Allowance for loan losses as a percentage of Single-Pay gross loans receivable increased sequentially from 6.5%7.2% to 7.3%, and the NCO rate increased 215 bps year-over-year, as a result8.6% because of mandated extended payment options for certain Canada Single-Pay loans.Allowance Build.
| | | 2019 | | 2018 | 2020 | | 2019 |
(dollars in thousands, unaudited) | Third Quarter | Second Quarter | First Quarter | | Fourth Quarter | Third Quarter | First Quarter | | Fourth Quarter | Third Quarter | Second Quarter | First Quarter |
Single-pay loans: | | | | | | |
Revenue | $ | 49,312 |
| $ | 45,528 |
| $ | 46,761 |
| | $ | 49,696 |
| $ | 50,614 |
| $ | 45,157 |
| | $ | 49,844 |
| $ | 49,312 |
| $ | 45,528 |
| $ | 46,761 |
|
Provision for losses | 14,736 |
| 12,446 |
| 8,268 |
| | 12,825 |
| 12,757 |
| 9,639 |
| | 12,289 |
| 14,736 |
| 12,446 |
| 8,268 |
|
Net revenue | $ | 34,576 |
| $ | 33,082 |
| $ | 38,493 |
| | $ | 36,871 |
| $ | 37,857 |
| $ | 35,518 |
| | $ | 37,555 |
| $ | 34,576 |
| $ | 33,082 |
| $ | 38,493 |
|
Net charge-offs | $ | 13,913 |
| $ | 11,458 |
| $ | 8,610 |
| | $ | 11,838 |
| $ | 12,892 |
| $ | 10,517 |
| | $ | 12,145 |
| $ | 13,913 |
| $ | 11,458 |
| $ | 8,610 |
|
Single-Pay gross loan balances: | | | | | | |
Single-Pay gross loans receivable | $ | 78,039 |
| $ | 76,126 |
| $ | 69,753 |
| | $ | 80,823 |
| $ | 77,390 |
| $ | 54,728 |
| | $ | 81,447 |
| $ | 78,039 |
| $ | 76,126 |
| $ | 69,753 |
|
Average Single-Pay gross loans receivable (1) | $ | 77,083 |
| $ | 72,940 |
| $ | 75,288 |
| | $ | 79,107 |
| $ | 81,028 |
| $ | 68,088 |
| | $ | 78,787 |
| $ | 77,083 |
| $ | 72,940 |
| $ | 75,288 |
|
Single-Pay Allowance for loan losses | $ | 5,662 |
| $ | 4,941 |
| $ | 3,897 |
| | $ | 4,189 |
| $ | 3,293 |
| $ | 4,693 |
| | $ | 5,869 |
| $ | 5,662 |
| $ | 4,941 |
| $ | 3,897 |
|
Single-Pay Allowance for loan losses as a percentage of Single-Pay gross loans receivable | 7.3 | % | 6.5 | % | 5.6 | % | | 5.2 | % | 4.3 | % | 8.6 | % | | 7.2 | % | 7.3 | % | 6.5 | % | 5.6 | % |
(1) Average gross loans receivable calculated as average of beginning of quarter and end of quarter gross loans receivable. | |
(1) We calculate Average gross loans receivable, which we utilize to calculate product yield and NCO rates, as average of beginning of quarter and end of quarter gross loans receivable. | | (1) We calculate Average gross loans receivable, which we utilize to calculate product yield and NCO rates, as average of beginning of quarter and end of quarter gross loans receivable. |
Gross Combined Loans Receivable
The following table reconciles Company Owned gross loans receivable, a GAAP-basis balance sheet measure, to Gross combined loans receivable, a non-GAAP measure(1). Gross combined loans receivables include loans originated by third-party lenders through CSO programs, which are not included in our Condensed Consolidated Financial Statements but from which we earn revenue by providing a guarantee to the unaffiliated lender (in millions, unaudited):
|
| | | | | | | | | | | | | | | |
| As of |
| September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 |
Company Owned gross loans receivable | $ | 657.6 |
| $ | 609.6 |
| $ | 553.2 |
| $ | 571.5 |
| $ | 537.8 |
|
Gross loans receivable Guaranteed by the Company | 73.1 |
| 67.3 |
| 61.9 |
| 80.4 |
| 78.8 |
|
Gross combined loans receivable (1) | $ | 730.7 |
| $ | 676.9 |
| $ | 615.1 |
| $ | 651.9 |
| $ | 616.6 |
|
(1) See "Non-GAAP Financial Measures" below for definition and additional information. |
Gross combined loans receivable by product are presented below (year-over-year sequential comparisons for Open-End are affected by the Q1 2019 Open-End Loss Recognition Change):
Gross combined loans receivable increased $114.1 million, or 18.5%, to $730.7 million as of September 30, 2019 from $616.6 million as of September 30, 2018. Geographically, gross combined loans receivable grew 5.0% and 48.1%, respectively, in the U.S. and Canada, explained further by product in the following sections.
Consolidated Results of Operations - CURO Group Consolidated Operations
Condensed Consolidated Statements of Operations
(in thousands, unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
2019 | 2018 | Change $ | Change % | | 2019 | 2018 | Change $ | Change % | 2020 | 2019 | Change $ | Change % |
Revenue | $ | 297,264 |
| $ | 269,482 |
| $ | 27,782 |
| 10.3 | % | | $ | 839,503 |
| $ | 757,494 |
| $ | 82,009 |
| 10.8 | % | $ | 280,806 |
| $ | 277,939 |
| $ | 2,867 |
| 1.0 | % |
Provision for losses | 123,867 |
| 127,692 |
| (3,825 | ) | (3.0 | )% | | 338,262 |
| 290,922 |
| 47,340 |
| 16.3 | % | 113,536 |
| 102,385 |
| 11,151 |
| 10.9 | % |
Net revenue | 173,397 |
| 141,790 |
| 31,607 |
| 22.3 | % | | 501,241 |
| 466,572 |
| 34,669 |
| 7.4 | % | 167,270 |
| 175,554 |
| (8,284 | ) | (4.7 | )% |
Advertising costs | 16,424 |
| 21,349 |
| (4,925 | ) | (23.1 | )% | | 36,990 |
| 44,347 |
| (7,357 | ) | (16.6 | )% | 12,219 |
| 7,786 |
| 4,433 |
| 56.9 | % |
Non-advertising costs of providing services | 60,334 |
| 59,847 |
| 487 |
| 0.8 | % | | 180,934 |
| 178,437 |
| 2,497 |
| 1.4 | % | 55,352 |
| 62,271 |
| (6,919 | ) | (11.1 | )% |
Total cost of providing services | 76,758 |
| 81,196 |
| (4,438 | ) | (5.5 | )% | | 217,924 |
| 222,784 |
| (4,860 | ) | (2.2 | )% | 67,571 |
| 70,057 |
| (2,486 | ) | (3.5 | )% |
Gross margin | 96,639 |
| 60,594 |
| 36,045 |
| 59.5 | % | | 283,317 |
| 243,788 |
| 39,529 |
| 16.2 | % | 99,699 |
| 105,497 |
| (5,798 | ) | (5.5 | )% |
| | | | | | | |
Operating expense | | | | | | | |
Corporate, district and other expenses | 38,665 |
| 27,495 |
| 11,170 |
| 40.6 | % | | 123,043 |
| 95,904 |
| 27,139 |
| 28.3 | % | 42,807 |
| 49,088 |
| (6,281 | ) | (12.8 | )% |
Interest expense | 17,364 |
| 23,403 |
| (6,039 | ) | (25.8 | )% | | 52,077 |
| 66,229 |
| (14,152 | ) | (21.4 | )% | 17,324 |
| 17,690 |
| (366 | ) | (2.1 | )% |
Loss on extinguishment of debt | — |
| 69,200 |
| (69,200 | ) | # |
| | — |
| 80,883 |
| (80,883 | ) | # |
| |
Loss from equity method investment | 1,384 |
| — |
| 1,384 |
| # |
| | 5,132 |
| — |
| 5,132 |
| # |
| 1,618 |
| — |
| 1,618 |
| # |
|
Total operating expense | 57,413 |
| 120,098 |
| (62,685 | ) | (52.2 | )% | | 180,252 |
| 243,016 |
| (62,764 | ) | (25.8 | )% | 61,749 |
| 66,778 |
| (5,029 | ) | (7.5 | )% |
Net income (loss) from continuing operations before income taxes | 39,226 |
| (59,504 | ) | 98,730 |
| # |
| | 103,065 |
| 772 |
| 102,293 |
| # |
| |
Provision (benefit) for income taxes | 11,239 |
| (16,914 | ) | 28,153 |
| # |
| | 28,738 |
| (269 | ) | 29,007 |
| # |
| |
Net income (loss) from continuing operations | 27,987 |
| (42,590 | ) | 70,577 |
| # |
| | 74,327 |
| 1,041 |
| 73,286 |
| # |
| |
Net (loss) income from discontinued operations, net of tax | (598 | ) | (4,432 | ) | 3,834 |
| (86.5 | )% | | 6,943 |
| (8,796 | ) | 15,739 |
| # |
| |
Net income (loss) | $ | 27,389 |
| $ | (47,022 | ) | $ | 74,411 |
| # |
| | $ | 81,270 |
| $ | (7,755 | ) | $ | 89,025 |
| # |
| |
Income from continuing operations before income taxes | | 37,950 |
| 38,719 |
| (769 | ) | (2.0 | )% |
Provision for income taxes | | 1,937 |
| 10,046 |
| (8,109 | ) | (80.7 | )% |
Net income from continuing operations | | 36,013 |
| 28,673 |
| 7,340 |
| 25.6 | % |
Net income from discontinued operations, net of tax | | 292 |
| 8,375 |
| (8,083 | ) | (96.5 | )% |
Net income | | $ | 36,305 |
| $ | 37,048 |
| $ | (743 | ) | (2.0 | )% |
# - Variance greater than 100% or not meaningful |
For the three months ended September 30,March 31, 2020 and 2019 and 2018
Revenue and Net Revenue
Revenue increased $27.8$2.9 million, or 10.3%1.0%, to $297.3$280.8 million for the three months ended September 30, 2019,March 31, 2020, from $269.5$277.9 million for the three months ended September 30, 2018. RevenueMarch 31, 2019. U.S. revenue decreased 1.9% primarily due to regulatory changes in California. Excluding California, U.S. revenue increased 4.6%, primarily driven by Open-End growth. Canadian revenue increased 13.9% primarily due to growth in Open-End loans and the sale of payment protection insurance to Canadian Installment and Open-End customers.
Provision for losses increased by $11.2 million, or 10.9%, for the three months ended September 30, 2019 included interest earned on past-due Open-EndMarch 31, 2020 compared to the prior-year period. The increase in provision for loan balanceslosses was primarily from $12.0 million of approximately $15 million from the Q1 2019 Open-End Loss Recognition Change. U.S. revenue increased 6.2%, driven by volume growth. Canadian revenue increased 30.3% (31.6% on a constant currency basis),Allowance Build, as volume growth offset yield compression from negative regulatory impacts on Single-Pay loan rates and the significant product mix-shift to Open-End loans.
Provision for losses decreased $3.8 million, or 3.0%, to $123.9 million for the three months ended September 30, 2019, from $127.7 million for the three months ended September 30, 2018. This decrease included incremental provision expense from the Q1 2019 Open-End Loss Recognition Change, consistent with the incremental revenue impact. Excluding the impact of the Q1 2019 Open-End Loss Recognition Change, provision expense declined year-over-year, primarily due to lower sequential loan growth thandiscussed in more detail in the prior-year's quarter. For the three months ended September 30, 2019, gross combined loans receivable grew sequentially by $53.7 million, or 7.9%, compared to sequential growth of $126.8 million, or 25.9% for the three months ended September 30, 2018."—Loan Volume and Portfolio Performance Analysis" above and "—Segment Analysis" below.
Cost of Providing Services
The total costNon-advertising costs of providing services decreased $4.4$6.9 million, or 5.5%11.1%, to $76.8$55.4 million in the three months ended September 30, 2019,March 31, 2020, compared to $81.2$62.3 million in the three months ended September 30, 2018, primarilyMarch 31, 2019. Of the $6.9 million decrease, $4.7 million is related to third-party collection costs, incurred in 2019 related to Ad Astra, which were included in Non-advertising costs of providing services. Following our acquisition of Ad Astra on January 3, 2020, its operating costs are included within "Corporate, district and other expenses," consistent with presentation of our other internal collection costs. The remaining decrease year-over-year in Non-advertising costs of providing services is from headcount reductions in the three months ended March 31, 2019 and discretionary variable compensation comparisons.
Advertising costs increased $4.4 million, or 56.9%, year-over-year. We historically reduced advertising and customer acquisition costs seasonally in the first quarter of the year (concentrated in February) because of lower advertising costs. The decline inthe impact on customers of U.S. federal income tax refunds. In the three months ended March 31, 2020, based on improved underwriting and evaluation of the seasonal opportunity, we increased advertising costs was primarilythrough the result of repositioning our California Installment loan portfolio in advance of regulatory changes and mix-shift, and stability in our Canadian portfolio following the Ontario deployment of Open-End loanstraditional tax refund season. We subsequently reduced advertising costs in the third quarterlast three weeks of 2018.March 2020 because of COVID-19-related considerations.
Operating Expenses
Excluding share-based compensationCorporate, district and other expenses were $42.8 million for the three months ended March 31, 2020, a decrease of $2.8$6.3 million, legalor 12.8%, compared to the three months ended March 31, 2019. Corporate, district and other expenses in the three months ended March 31, 2020 include $3.5 million of collection costs related to Ad Astra, which were included in Non-advertising costs of $0.9 million and U.K. related costs of $0.3 million,providing services prior to its acquisition. For the three months ended March 31, 2020, corporate, district and other expenses increased $8.1include (i) $1.1 million or 30.4%,of legal and other costs described in our reconciliation to Adjusted Net Income in "—Supplemental Non-GAAP Financial Information" below, and (ii) $3.2 million of share-based compensation costs. For the three months ended March 31, 2019, corporate district and other expenses include (i) U.K. related costs of $7.8 million and severance costs of $1.8 million as described in our reconciliation to Adjusted Net Income in "—Supplemental Non-GAAP Financial Information" below, and (ii) share-based compensation costs of $2.2 million.
Excluding Ad Astra costs, share-based compensation expense and other costs described above, comparable corporate, district and other expenses decreased $2.4 million year-over-year, primarily due to higherthe timing and extent of variable compensation tied to our financial performance.in the three months ended March 31, 2019 and market-based changes in deferred compensation plan assets and liabilities.
OurWe account for our investment in Cognical Holdings, Inc. ("Zibby") is accounted forKatapult under the equity method. We record our pro rata share of Zibby'sKatapult's income or losses in the income statementunaudited Condensed Consolidated Statement of Operations with a corresponding adjustment to the carrying value of our investment in "Other""Other assets" on the unaudited Condensed Consolidated Balance Sheet. Estimated losses recorded inFor the three months ended September 30, 2019 was $1.4 million and representsMarch 31, 2020, our share of losses during the period in which we held a greater than 20% investment, typically considered the threshold for equity method accounting.Katapult's loss was $1.6 million.
Interest Expense
Interest expense for the third quarter of 2019 decreased by $6.0 million compared tothree months ended March 31, 2020 remained consistent with the prior-year period primarily due to our refinancing activities in 2018. During the third quarter of 2018, we issued $690.0 million of 8.25% Senior Secured Notes and used the proceeds from the issuance to extinguish our $527.5 million 12.00% Senior Secured Notes and our Non-Recourse U.S. SPV Facility. In addition, we entered into a Non-Recourse Canada SPV Facility in the third quarter of 2018 with a lower interest rate than our previous Non-Recourse U.S. SPV Facility.on flat year-over-year average borrowing.
Provision for Income Taxes
The effective income tax rate for the three months ended September 30, 2019March 31, 2020 was 28.7%5.1%, compared to 28.4%a tax rate of 25.9% for the three months ended September 30, 2018.March 31, 2019. The third quarter 2019decrease in effective income tax rate included unfavorable impactswas primarily due to a tax benefit from the non-tax deductible lossCARES Act, which was enacted on March 27, 2020 in response to the COVID-19 pandemic. The CARES Act, among other things, allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid Federal income taxes. In the first quarter of 2020, we recorded an income tax benefit of $9.1 million related to the carry-back of NOL from tax years 2018 and 2019, which will offset pre-tax reform years and generate a refund of previously paid taxes at 35%. In addition, losses from our equity method investment and changes in state income apportionment and a mix shift in taxable income between the U.S. and Canada.Katapult are not tax deductible. Excluding the impact of the loss on equity method investment, theCARES Act and Katapult, our adjusted effective income tax rate for the three months ended September 30, 2019March 31, 2020 was 27.7%27.9%.
For the nine months ended September 30, 2019 and 2018
Revenue and Net Revenue
Revenue increased $82.0 million, or 10.8%, to $839.5 million for the nine months ended September 30, 2019 from $757.5 million for the nine months ended September 30, 2018. Revenue for the nine months ended September 30, 2019 included interest earned on past-due Open-End loan balances of approximately $35 million from the Q1 2019 Open-End Loss Recognition Change, offset by a higher provision rate and the higher allowance discussed further below. U.S. revenue increased 8.9%, driven by volume growth. Canadian revenue increased 19.2% (23.1% on a constant currency basis), as volume growth more than offset yield compression from negative regulatory impacts on Single-Pay loan rates and the significant product mix-shift to Open-End loans.
Provision for losses increased $47.3 million, or 16.3%, to $338.3 million for the nine months ended September 30, 2019, from $290.9 million for the nine months ended September 30, 2018, primarily due to the Q1 2019 Open-End Loss Recognition Change. The nine months ended September 30, 2018 included $14.6 million of provision benefit from changes which included allowance coverage rates whereas the nine months ended 2019 included $5.1 million of benefit. Excluding the impact of the allowance coverage change, provision for losses increased $37.9 million, or 12.4%, because of the Q1 2019 Open-End Loss Recognition Change and increased earning asset volume year-over-year as further described in "Segment Analysis" below.
Cost of Providing Services
The total cost of providing services decreased $4.9 million, or 2.2%, to $217.9 million in the nine months ended September 30, 2019, compared to $222.8 million in the nine months ended September 30, 2018, primarily because of lower advertising costs, offset by increased loan servicing costs on higher volume. The decline in advertising costs was primarily the result of repositioning our California Installment loan portfolio in advance of regulatory changes and mix-shift, and stability in our Canadian portfolio following the Ontario deployment of Open-End loans in the third quarter of 2018.
Operating Expenses
Corporate, district and other expenses increased $27.1 million, or 28.3%, primarily as a result of $8.8 million for obtaining the consent of our holders of the 8.25% Senior Secured Notes and our bondholders associated with discontinuing our U.K. operations and other related U.K. separation costs, $2.0 million of legal and related costs as described above, $1.8 million of restructuring costs from our reduction-in-force implemented in January 2019 and $1.5 million of additional share-based compensation. Excluding these aforementioned costs, corporate, district and other expenses increased by $13.0 million, or 14.3%, primarily due to higher professional fees associated with our second year-end for full compliance with Sarbanes-Oxley and higher variable compensation tied to our financial performance.
Our investment in Zibby is accounted for under the equity method. We record our pro rata share of Zibby's income or losses in the income statement with a corresponding adjustment to the carrying value of our investment in "Other" on the Condensed Consolidated Balance Sheet. Our share of estimated losses for the nine months ended September 30, 2019 was $5.1 million, which includes a $3.7 million loss to adjust the Company's carrying value of Zibby. The carrying value was further adjusted by the Company's pro rata share of Zibby's losses during the period in which the Company held a greater than 20% investment, typically considered the threshold for equity method accounting.
Interest Expense
Interest expense decreased by $14.2 million compared to the prior-year period, primarily due to our refinancing activities in 2018. During the third quarter of 2018, we issued $690.0 million of 8.25% Senior Secured Notes and used the proceeds from the issuance to extinguish our $527.5 million 12.00% Senior Secured Notes and our Non-Recourse U.S. SPV Facility. In addition, we entered into a Non-Recourse Canada SPV Facility in the third quarter of 2018 with a lower interest rate than our previous Non-Recourse U.S. SPV Facility.
Provision for Income Taxes
The effective income tax rate for the nine months ended September 30, 2019 was 27.9%, compared to (34.8%) for the nine months ended September 30, 2018. Excluding the non-tax-deductible loss from our equity method investment, the effective income tax rate from continuing operations for the nine months ended September 30, 2019 was 26.6%. Excluding non-GAAP adjustments to Net income related to the 2017 Tax Act as presented in the reconciliation of Net Income to Adjusted Net Income, the effective income tax rate from continuing operations for the nine months ended September 30, 2018 was 24.1%.
Segment Analysis
We report financial results for two reportable segments: the U.S. and Canada. Following is a summary of results of operations for the segment and period indicated (in thousands, unaudited):
| | U.S. Segment Results | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2019 | 2018 | Change $ | Change % | | 2019 | 2018 | Change $ | Change % | 2020 | 2019 | Change $ | Change % |
Revenue | $ | 237,069 |
| $ | 223,273 |
| $ | 13,796 |
| 6.2 | % | | $ | 673,234 |
| $ | 617,992 |
| $ | 55,242 |
| 8.9 | % | $ | 221,768 |
| $ | 226,119 |
| $ | (4,351 | ) | (1.9 | )% |
Provision for losses | 102,997 |
| 103,256 |
| (259 | ) | (0.3 | )% | | 280,529 |
| 239,576 |
| 40,953 |
| 17.1 | % | 86,041 |
| 84,980 |
| 1,061 |
| 1.2 | % |
Net revenue | 134,072 |
| 120,017 |
| 14,055 |
| 11.7 | % | | 392,705 |
| 378,416 |
| 14,289 |
| 3.8 | % | 135,727 |
| 141,139 |
| (5,412 | ) | (3.8 | )% |
Advertising costs | 14,186 |
| 17,632 |
| (3,446 | ) | (19.5 | )% | | 31,719 |
| 35,200 |
| (3,481 | ) | (9.9 | )% | 10,945 |
| 6,354 |
| 4,591 |
| 72.3 | % |
Non-advertising costs of providing services | 42,636 |
| 42,280 |
| 356 |
| 0.8 | % | | 128,866 |
| 127,719 |
| 1,147 |
| 0.9 | % | 37,242 |
| 44,982 |
| (7,740 | ) | (17.2 | )% |
Total cost of providing services | 56,822 |
| 59,912 |
| (3,090 | ) | (5.2 | )% | | 160,585 |
| 162,919 |
| (2,334 | ) | (1.4 | )% | 48,187 |
| 51,336 |
| (3,149 | ) | (6.1 | )% |
Gross margin | 77,250 |
| 60,105 |
| 17,145 |
| 28.5 | % | | 232,120 |
| 215,497 |
| 16,623 |
| 7.7 | % | 87,540 |
| 89,803 |
| (2,263 | ) | (2.5 | )% |
Corporate, district and other expenses | 32,897 |
| 22,360 |
| 10,537 |
| 47.1 | % | | 106,426 |
| 81,113 |
| 25,313 |
| 31.2 | % | 37,650 |
| 43,880 |
| (6,230 | ) | (14.2 | )% |
Interest expense | 14,877 |
| 22,169 |
| (7,292 | ) | (32.9 | )% | | 44,246 |
| 64,931 |
| (20,685 | ) | (31.9 | )% | 14,846 |
| 14,728 |
| 118 |
| 0.8 | % |
Loss on extinguishment of debt | — |
| 69,200 |
| (69,200 | ) | # |
| | — |
| 80,883 |
| (80,883 | ) | # |
| |
Loss from equity method investment | 1,384 |
| — |
| 1,384 |
| # |
| | 5,132 |
| — |
| 5,132 |
| # |
| 1,618 |
| — |
| 1,618 |
| # |
|
Total operating expense | 49,158 |
| 113,729 |
| (64,571 | ) | (56.8 | )% | | 155,804 |
| 226,927 |
| (71,123 | ) | (31.3 | )% | 54,114 |
| 58,608 |
| (4,494 | ) | (7.7 | )% |
Segment operating income (loss) | 28,092 |
| (53,624 | ) | 81,716 |
| # |
| | 76,316 |
| (11,430 | ) | 87,746 |
| # |
| |
Segment operating income | | 33,426 |
| 31,195 |
| 2,231 |
| 7.2 | % |
Interest expense | 14,877 |
| 22,169 |
| (7,292 | ) | (32.9 | )% | | 44,246 |
| 64,931 |
| (20,685 | ) | (31.9 | )% | 14,846 |
| 14,728 |
| 118 |
| 0.8 | % |
Depreciation and amortization | 3,390 |
| 3,536 |
| (146 | ) | (4.1 | )% | | 10,553 |
| 10,322 |
| 231 |
| 2.2 | % | 3,377 |
| 3,726 |
| (349 | ) | (9.4 | )% |
EBITDA | 46,359 |
| (27,919 | ) | 74,278 |
| # |
| | 131,115 |
| 63,823 |
| 67,292 |
| # |
| 51,649 |
| 49,649 |
| 2,000 |
| 4.0 | % |
Loss on extinguishment of debt | — |
| 69,200 |
| (69,200 | ) | | | — |
| 80,883 |
| (80,883 | ) | | |
Restructuring costs | — |
| — |
| — |
| | | 1,617 |
| — |
| 1,617 |
| | |
Legal and related costs | 870 |
| (1,297 | ) | 2,167 |
| | | 870 |
| (1,297 | ) | 2,167 |
| | |
Legal and other costs | | 1,149 |
| 1,617 |
| (468 | ) | |
Other adjustments | 42 |
| (99 | ) | 141 |
| | | (206 | ) | (224 | ) | 18 |
| | (141 | ) | (105 | ) | (36 | ) | |
U.K. related costs | 348 |
| — |
| 348 |
| | | 8,844 |
| — |
| 8,844 |
| | — |
| 7,817 |
| (7,817 | ) | |
Share-based compensation | 2,771 |
| 2,089 |
| 682 |
| | | 7,587 |
| 6,112 |
| 1,475 |
| | 3,194 |
| 2,172 |
| 1,022 |
| |
Loss from equity method investment | 1,384 |
| — |
| 1,384 |
| | | 5,132 |
| — |
| 5,132 |
| | 1,618 |
| — |
| 1,618 |
| |
Adjusted EBITDA | $ | 51,774 |
| $ | 41,974 |
| $ | 9,800 |
| 23.3 | % | | $ | 154,959 |
| $ | 149,297 |
| $ | 5,662 |
| 3.8 | % | $ | 57,469 |
| $ | 61,150 |
| $ | (3,681 | ) | (6.0 | )% |
# - Variance greater than 100% or not meaningful. | # - Variance greater than 100% or not meaningful. | | | | # - Variance greater than 100% or not meaningful. |
U.S. Segment Results - For the three months ended September 30,March 31, 2020 and 2019 and 2018
Third quarter 2019 U.S. revenues increaseddecreased by $13.8$4.4 million, or 6.2%1.9%, to $237.1$221.8 million, compared to the prior-year period. U.S. revenue growth was driven by a $21.0 million, or 5.0%, increase in gross combined loans receivable to $444.0 million at
September 30, 2019, compared to $423.0 million at September 30, 2018. Additionally, U.S. revenueperiod for the three months ended September 30, 2019 included interest earned on past-dueMarch 31, 2020, primarily due to regulatory changes in California. Excluding California, U.S. revenues increased by $7.8 million, or 4.6%, driven by a $17.0 million, or 30.0%, increase in Open-End loan balances of approximately $13 million from the Q1 2019 Open-End Loss Recognition Change.growth.
The provision for losses was consistent year-over-year despite the increase in loan receivables. The year-over-year provision change included incremental provision expense from the Q1 2019 Open-End Loss Recognition Change, consistent with the incremental revenue impact. Excluding the impactdecreased $1.1 million, or 1.2%, as a result of the Q1 2019 Open-End Loss Recognition Change, provision expense declined year-over-year due to lower sequential growthdecline in gross loans receivable compared to the prior year, offset by the aforementioned NCO rate increases. U.S.total gross combined loans receivable, grew $35.7because of California regulatory changes, offset by changes in NCO rates and $5.3 million or 8.7%, sequentially duringAllowance Build. For the third quarter of 2019,three months ended March 31, 2020, quarterly NCO rates increased approximately 140 bps compared to sequential growth of $55.3 million, or 15.0%, during the pro-forma prior-year period.period due to the Installment portfolio mix shift to higher loss states, as well as loan balance declines late in March 2020 from COVID-19 impacts, which affected simple-average NCO rate calculations.
U.S. costNon-advertising costs of providing services for the three months ended September 30, 2019 was $56.8March 31, 2020 of $37.2 million, a decreasedecreased of $3.1$7.7 million, or 5.2%17.2%, compared to $59.9$45.0 million for the three months ended September 30, 2018,March 31, 2019. The decrease was primarily duedriven by the aforementioned $4.7 million of Ad Astra costs subsequent to lowerour acquisition of it. The remaining decrease year-over-year in Non-advertising costs of providing services was from headcount reductions in the three months ended March 31, 2019 and discretionary variable compensation comparisons.
Advertising costs increased $4.6 million, or 72.3%, year-over-year. We historically reduced advertising costs associated with repositioning our California Installment loan portfolioand customer acquisition costs seasonally in advancethe first quarter of regulatory changes.the year (concentrated in February) because of the impact on customers of U.S. Federal income tax refunds. In the three months ended March 31, 2020, based on improved underwriting and evaluation of the seasonal opportunity, we increased advertising costs through the traditional tax refund season. We subsequently reduced advertising costs in the last three weeks of March 2020 because of COVID-19-related considerations.
Corporate, district and other operating expenses increased $10.5were $37.7 million for the three months ended March 31, 2020, a decrease of $6.2 million, or 47.1%14.2%, compared to the same periodthree months ended March 31, 2019. Corporate, district and other expenses for the three months ended March 31, 2020 include $3.5 million of collection costs related to Ad Astra, which were historically included in Non-advertising costs of providing services. For the prior year,three months ended March 31, 2020, corporate, district and other expenses include (i) $1.1 million of legal and other costs described in our reconciliation to Adjusted Net Income in "—Supplemental Non-GAAP Financial Information" below and (ii) $3.2 million of share-based compensation costs. For the three months ended March 31, 2019, corporate, district and other expenses include (i) U.K. related costs of $7.8 million and severance costs of $1.4 million as described in our reconciliation to Adjusted Net Income in "—Supplemental Non-GAAP Financial Information" below, and (ii) share-based compensation costs of $2.2 million.
Excluding these aforementioned items, comparable corporate district and other expenses decreased $2.6 million year-over-year, primarily due to $5.3 millionthe timing and extent of higher performance-based variable compensation costs, $0.9 million related to certain litigation mattersfor the three months ended March 31, 2019 and $0.7 million of additional share-based compensation.market-based changes in deferred compensation plan assets and liabilities.
U.S. interest expense for the third quarter of 2019 decreased by $7.3 million compared tothree months ended March 31, 2020 remained consistent with the prior-year period, primarily due to our refinancing activities in 2018. During the third quarter of 2018, we issued $690.0 million of 8.25% Senior Secured Notes and used the proceeds from the issuance to extinguish our $527.5 million 12.00% Senior Secured Notes and U.S. SPV facility.
U.S. Segment Results - For the nine months ended September 30, 2019 and 2018
For the nine months ended September 30, 2019, U.S. revenues increased by $55.2 million, or 8.9%, to $673.2 million. U.S. revenue growth was driven by a $21.0 million, or 5.0%, increase in gross combined loans receivable, to $444.0 million at September 30, 2019, compared to $423.0 million at September 30, 2018. Additionally, U.S. revenue for the nine months ended September 30, 2019 included interest earned on past-due Open-End loan balances of approximately $30 million from the Q1 2019 Open-End Loss Recognition Change, offset by related higher provision rate and higher provision for losses.
The provision for losses' increase of $41.0 million, or 17.1%, was primarily due to changes in allowance coverage in the prior year. The nine months ended September 30, 2018 included $12.5 million of provision benefit from changes in allowance coverage rates, whereas the nine months ended September 30, 2019 included $1.7 million of incremental expense. Excluding the impact of the allowance coverage change, provision for losses increased $30.1 million, or 12.0%, because of the Q1 2019 Open-End Loss Recognition Change.
U.S. cost of providing services for the nine months ended September 30, 2019 was $160.6 million, a decrease of $2.3 million, or 1.4%, compared to $162.9 million for the nine months ended September 30, 2018, primarily due to lower advertising costs associated with repositioning our California Installment loan portfolio in advance of regulatory changes.
Corporate, district and other operating expenses increased $25.3 million, or 31.2%, compared to the same period in the prior year, primarily due to $8.8 million of U.K. disposition-related costs, $7.7 million higher performance-based variable compensation costs, $3.1 million higher professional fees and $1.6 million of restructuring costs.
U.S. interest expense for the first nine months of 2019 decreased by $20.7 million compared to the prior-year period, primarily due to our refinancing activities in 2018. During the third quarter of 2018, we issued $690.0 million of 8.25% Senior Secured Notes and used the proceeds from the issuance to extinguish our $527.5 million 12.00% Senior Secured Notes and our U.S. SPV facility.
period.
| | Canada Segment Results | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2019 | 2018 | Change $ | Change % | | 2019 | 2018 | Change $ | Change % | 2020 | 2019 | Change $ | Change % |
Revenue | $ | 60,195 |
| $ | 46,209 |
| $ | 13,986 |
| 30.3 | % | | $ | 166,269 |
| $ | 139,502 |
| $ | 26,767 |
| 19.2 | % | $ | 59,038 |
| $ | 51,820 |
| $ | 7,218 |
| 13.9 | % |
Provision for losses | 20,870 |
| 24,436 |
| (3,566 | ) | (14.6 | )% | | 57,733 |
| 51,346 |
| 6,387 |
| 12.4 | % | 27,495 |
| 17,405 |
| 10,090 |
| 58.0 | % |
Net revenue | 39,325 |
| 21,773 |
| 17,552 |
| 80.6 | % | | 108,536 |
| 88,156 |
| 20,380 |
| 23.1 | % | 31,543 |
| 34,415 |
| (2,872 | ) | (8.3 | )% |
Advertising costs | 2,238 |
| 3,717 |
| (1,479 | ) | (39.8 | )% | | 5,271 |
| 9,147 |
| (3,876 | ) | (42.4 | )% | 1,274 |
| 1,432 |
| (158 | ) | (11.0 | )% |
Non-advertising costs of providing services | 17,698 |
| 17,567 |
| 131 |
| 0.7 | % | | 52,068 |
| 50,718 |
| 1,350 |
| 2.7 | % | 18,110 |
| 17,289 |
| 821 |
| 4.7 | % |
Total cost of providing services | 19,936 |
| 21,284 |
| (1,348 | ) | (6.3 | )% | | 57,339 |
| 59,865 |
| (2,526 | ) | (4.2 | )% | 19,384 |
| 18,721 |
| 663 |
| 3.5 | % |
Gross margin | 19,389 |
| 489 |
| 18,900 |
| # |
| | 51,197 |
| 28,291 |
| 22,906 |
| 81.0 | % | 12,159 |
| 15,694 |
| (3,535 | ) | (22.5 | )% |
Corporate, district and other expenses | 5,768 |
| 5,135 |
| 633 |
| 12.3 | % | | 16,617 |
| 14,791 |
| 1,826 |
| 12.3 | % | 5,157 |
| 5,208 |
| (51 | ) | (1.0 | )% |
Interest expense | 2,487 |
| 1,234 |
| 1,253 |
| # |
| | 7,831 |
| 1,298 |
| 6,533 |
| # |
| 2,478 |
| 2,962 |
| (484 | ) | (16.3 | )% |
Total operating expense | 8,255 |
| 6,369 |
| 1,886 |
| 29.6 | % | | 24,448 |
| 16,089 |
| 8,359 |
| 52.0 | % | 7,635 |
| 8,170 |
| (535 | ) | (6.5 | )% |
Segment operating income (loss) | 11,134 |
| (5,880 | ) | 17,014 |
| # |
| | 26,749 |
| 12,202 |
| 14,547 |
| # |
| 4,524 |
| 7,524 |
| (3,000 | ) | (39.9 | )% |
Interest expense | 2,487 |
| 1,234 |
| 1,253 |
| # |
| | 7,831 |
| 1,298 |
| 6,533 |
| # |
| 2,478 |
| 2,962 |
| (484 | ) | (16.3 | )% |
Depreciation and amortization | 1,219 |
| 1,087 |
| 132 |
| 12.1 | % | | 3,627 |
| 3,306 |
| 321 |
| 9.7 | % | 1,160 |
| 1,194 |
| (34 | ) | (2.8 | )% |
EBITDA | 14,840 |
| (3,559 | ) | 18,399 |
| # |
| | 38,207 |
| 16,806 |
| 21,401 |
| # |
| 8,162 |
| 11,680 |
| (3,518 | ) | (30.1 | )% |
Restructuring costs | — |
| — |
| — |
|
|
| | 135 |
| — |
| 135 |
| | |
Legal and related costs | — |
| 119 |
| (119 | ) |
|
| | — |
| 119 |
| (119 | ) |
|
| |
Legal and other costs | | — |
| 135 |
| (135 | ) |
|
|
Other adjustments | 441 |
| 50 |
| 391 |
| | | 297 |
| 223 |
| 74 |
| | 156 |
| (111 | ) | 267 |
| |
Adjusted EBITDA | $ | 15,281 |
| $ | (3,390 | ) | $ | 18,671 |
| # |
| | $ | 38,639 |
| $ | 17,148 |
| $ | 21,491 |
| # |
| $ | 8,318 |
| $ | 11,704 |
| $ | (3,386 | ) | (28.9 | )% |
# - Change greater than 100% or not meaningful. | # - Change greater than 100% or not meaningful. | | | | | | # - Change greater than 100% or not meaningful. | | |
Canada Segment Results - For the three months ended September 30,March 31, 2020 and 2019 and 2018
Canada revenue increased $14.0$7.2 million, or 30.3%13.9% ($7.7 million, or 14.9%, on a constant-currency basis), to $60.2$59.0 million for the three months ended September 30, 2019,March 31, 2020, from $46.2$51.8 million in the prior year due to loan growth.
Canada non-Single-Pay revenue increased $9.8 million, or 30.4% ($10.2 million, or 31.7%, on a constant-currency basis), to $42.0 million, compared to $32.2 million in the prior-year period. On a constant currency basis, revenue increased $14.6period, on growth of $54.2 million, or 27.3% ($71.5 million, or 31.6%. Revenue36.1%, on a constant-currency basis), in related loan balances. The increase was driven by continued significant growth in Canada was impacted favorably by the significant asset growth and the product transition from Single-Pay and Unsecured Installment loans toof Open-End loans. Additionally, Canada revenue for the three months ended September 30, 2019 included interest earned on past-duewith increased Open-End loan balancesvolume and customer acquisition, ancillary revenue increased $1.3 million versus the prior-year period, primarily driven by an increase in sales of approximately $2 million from the Q1 2019insurance to Open-End Loss Recognition Change.loan customers.
Single-Pay revenue decreased $2.7$2.6 million, or 11.6%13.2% ($2.5 million, or 12.6%, on a constant-currency basis), to $20.2$17.0 million for the three months ended September 30, 2019,March 31, 2020, and Single-Pay receivables decreased $1.0$9.6 million, or 2.8%28.7% ($8.0 million, or 23.8% on a constant-currency basis), to $35.1$23.8 million from $36.1$33.4 million, in the prior year. The decreases in Single-Pay revenue and receivables were due to the continued product mix shift in Canada from Single-Pay loans to Open-End loans, a significant decline in demand over the last two weeks of March attributable to COVID-19, and by regulatory changes effective January and July 2018 that lowered Single Pay pricing year-over-year.in Canada's currency exchange rate.
Canada non-Single-Pay revenue increased $16.6 million, or 71.1%, to $40.0 million compared to $23.4 million the same quarter a year ago, on growth of $94.1 million, or 59.8%, in related loan balances. The increase was primarily related to the launch of Open-End products in Alberta and Ontario in the fourth quarter of 2017, and significant expansion of the Open-End product in Ontario in late 2018. Additionally, as a result of the increase in Open-End loans, ancillary revenue increased $3.8 million versus the same quarter a year ago, primarily driven by an increase in sales of insurance to Open-End loan customers.
The provision for losses decreased $3.6increased $10.1 million, or 14.6%58.0% ($10.5 million, or 60.4%, on a constant-currency basis), to $20.9$27.5 million for the three months ended September 30, 2019,March 31, 2020, compared to $24.4$17.4 million in the prior-year period. This decrease includedThe increase in provision for loan losses was primarily a result of $6.7 million of Allowance Build. On a quarterly basis, despite the impact of lower demand over the last two weeks of March 2020 and unfavorable currency exchange rates on ending receivable balances, loss rates improved approximately 100 bps year over year. Excluding the aforementioned incremental provision expense fromas a result of changes in the Q1 2019 Open-End Loss Recognition Change, consistent with the incremental revenue impact. Excluding the impact of the Q1 2019 Open-End Loss Recognition Change,Allowance for Loan Losses, due to lower loss rates, provision expense declined year-over-year because of lower sequential gross receivable growth and seasoning of the Open-End loans. Total Open-End and Installment loans grew $18.0increased $3.3 million sequentially during the third quarter of 2019, compared to sequential growth of $82.7 million during the same prior-year period. Total Canada NCO rates improved 425 bps year-over-year due to the seasoning of Open-End loans. On a constant currency basis, provision for losses decreased by $3.4 million, or 13.8%, compared to the prior-year period.$7.2 million increase in revenue.
Canada cost of providing services for the three months ended September 30, 2019 was $19.9March 31, 2020 were $19.4 million, a decreasean increase of $1.3$0.7 million, or 6.3%3.5% ($0.8 million, or 4.4%, on a constant-currency basis), compared to $21.3$18.7 million for the three months ended September 30, 2019,March 31, 2019.
Canada operating expenses for the three months ended March 31, 2020 were $7.6 million, a decrease of $0.5 million, or 6.5%, compared to $8.2 million in the prior-year period, primarily duerelated to lower advertising costs from mix-shift and stability in our Canadian portfolio following the Ontario deployment of Open-End loans in the third quarter of 2018.interest expense. There was no material impact on the cost of providing services from exchange rate changes.
Canada operating expenses increased $1.9 million, or 29.6%, to $8.3 million in the three months ended September 30, 2019 from $6.4 million in the prior-year period, primarily due to interest expense on the Non-Recourse Canada SPV Facility that began in August 2018.
Canada Segment Results - For the nine months ended September 30, 2019 and 2018
Canada revenue increased $26.8 million, or 19.2%, to $166.3 million for the nine months ended September 30, 2019 from $139.5 million in the prior-year period. On a constant currency basis, revenue increased $32.2 million, or 23.1%. Revenue growth in Canada was impacted favorably by the significant asset growth and product transition from Single-Pay and Unsecured Installment loans to Open-End loans that have a lower yield. Additionally, Canada revenues for the nine months ended September 30, 2019 included interest earned on past-due Open-End loan balances of approximately $5 million from the Q1 2019 Open-End Loss Recognition Change, offset by higher provision rate and higher provision for losses.
Single-Pay revenue decreased $31.6 million, or 34.9%, to $58.9 million for the nine months ended September 30, 2019, and Single-Pay receivables decreased $1.0 million, or 2.8%, to $35.1 million from $36.1 million in the prior year. The decreases in Single-Pay revenue and receivables were due to the continued product mix shift in Canada from Single-Pay loans to Open-End loans and by regulatory changes effective January and July 2018 that lowered Single Pay pricing year-over-year.
Canada non-Single-Pay revenue increased $58.4 million, or 119.0%, to $107.4 million compared to $49.0 million for the prior-year period, on $94.1 million, or 59.8%, growth in related loan balances. The increase was primarily related to the launch of Open-End products in Alberta and Ontario in the fourth quarter of 2017, and significant expansion of the Open-End product in Ontario in late 2018. As a result of the increase in Open-End loans, ancillary revenue increased $13.1 million versus the same period a year ago, primarily driven by an increase in sales of insurance to Open-End loan customers.
The provision for losses increased $6.4 million, or 12.4%, to $57.7 million for the nine months ended September 30, 2019 compared to $51.3 million in the prior-year period primarily due to provisioning on Open-End loans and mix shift from Single-Pay loans and Unsecured Installment to Open-End loans. Total Open-End loans grew by $18.1 million sequentially during the third quarter of 2019, compared to sequential growth of $87.4 million in the third quarter of 2018. On a constant currency basis, provision for losses increased by $8.3 million, or 16.1%, compared to the prior-year period.
The total cost of providing services in Canada decreased $2.5 million, or 4.2%, to $57.3 million for the nine months ended September 30, 2019 compared to $59.9 million in the prior-year period. Advertising costs decreased by $3.9 million, or 42.4%, primarily from mix-shift and stability in our Canadian portfolio following the Ontario deployment of Open-End loans in the third quarter of 2018, partially offset by an increase in non-advertising cost of providing services of $1.4 million. There was no material impact on the cost of providing services from exchange rate changes.
Canada operating expenses increased $8.4 million, or 52.0%, to $24.4 million in the nine months ended September 30, 2019 from $16.1 million in the prior-year period primarily due to interest expense on the Non-Recourse Canada SPV Facility that began in August 2018.constant-currency basis.
Supplemental Non-GAAP Financial Information
Non-GAAP Financial Measures
In addition to the financial information prepared in conformity with U.S.US GAAP, we provide certain “non-GAAP financial measures,” including:
Adjusted Net Income and Adjusted Earnings Per Share, or the Adjusted Earnings Measures (net income from continuing operations plus or minus gain (loss) on extinguishment of debt, restructuring and other costs, certain legal and related costs, loss from equity method investment, goodwill and intangible asset impairments, certain costs related to the disposition of U.K., transaction-related costs, share-based compensation, intangible asset amortization and cumulative tax effect of applicable adjustments, on a total and per share basis);
EBITDA (earnings(net income from continuing operations before interest, income taxes, depreciation and amortization);
Adjusted EBITDA (EBITDA plus or minus certain non-cash and other adjusting items);
Adjusted effective income tax rate (effective tax rate plus or minus certain non-cash and other adjusting items); and
Gross Combined Loans Receivable (includes loans originated by third-party lenders through CSO programs which are not included in our unaudited Condensed Consolidated Financial Statements).
We believe that presentation of non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of the Company's operations. We believe that these non-GAAP financial measures offer another way to view aspects of our business that, when viewed with our US GAAP results, provide a more complete understanding of factors and trends affecting our business.
We believe that investors regularly rely on non-GAAP financial measures, such as Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA, to assess operating performance and that such measures may highlight trends in the business that may not otherwise be apparent when relying on financial measures calculated in accordance with U.S.US GAAP. In addition, we believe that the adjustments shown below are useful to investors in order to allow them to compare our financial results during the periods shown without the effect of each of these income or expense items. In addition, we believe that Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors
and other interested parties in the evaluation of public companies in our industry, many of which present Adjusted Net Income, Adjusted Earnings per Share, EBITDA and/or Adjusted EBITDA when reporting their results.
In addition to reporting loans receivable information in accordance with U.S.US GAAP, we provide Gross Combined Loans Receivable consisting of ownedCompany-Owned loans receivable plus loans originated by third-party lenders through the CSO programs, which we guarantee but do not include in the unaudited Condensed Consolidated Financial Statements.Statements ("Guaranteed by the Company"). Management believes this analysis provides investors with important information needed to evaluate overall lending performance.
We provide non-GAAP financial information for informational purposes and to enhance understanding of our U.S.US GAAP Condensed Consolidated Financial Statements. Adjusted Net Income, Adjusted Earnings per Share, EBITDA, Adjusted EBITDA and Gross Combined Loans Receivable should not be considered as alternatives to income from continuing operations, segment operating income or any other performance measure derived in accordance with U.S.US GAAP, or as an alternative to cash flows from operating activities or any other liquidity measure derived in accordance with U.S.US GAAP. Readers should consider the information in addition to, but not instead of or superior to, the financial statements prepared in accordance with U.S.US GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
Description and Reconciliations of Non-GAAP Financial Measures
Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our income or cash flows as reported under U.S.US GAAP. Some of these limitations are:
they do not include cash expenditures or future requirements for capital expenditures or contractual commitments;
they do not include changes in, or cash requirements for, working capital needs;
they do not include the interest expense, or the cash requirements necessary to service interest or principal payments on debt;
depreciation and amortization are non-cash expense items reported in the statements of cash flows; and
other companies in our industry may calculate these measures differently, limiting their usefulness as comparative measures.
We calculate Adjusted Earnings per Share utilizing diluted shares outstanding at year-end. If we record a loss from continuing operations under US GAAP, shares outstanding utilized to calculate Diluted Earnings per Share from continuing operations are equivalent to basic shares outstanding. Shares outstanding utilized to calculate Adjusted Earnings per Share from continuing operations reflect the number of diluted shares we would have reported if reporting net income from continuing operations under US GAAP.
As noted above, Gross Combined Loans Receivable includes loans originated by third-party lenders through CSO programs which are not included in the unaudited Condensed Consolidated Financial Statements but from which we earn revenue and for which we provide a guarantee to the lender. Management believes this analysis provides investors with important information needed to evaluate overall lending performance.
We evaluate our stores based on revenue per store, provision for losses at each store and store-level EBITDA, with consideration given to the length of time a store has been open and its geographic location. We monitor newer stores for their progress to profitability and their rate of revenue growth.
We believe Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA are used by investors to analyze operating performance and evaluate our ability to incur and service debt and the capacity for making capital expenditures. Adjusted EBITDA is also useful to investors to help assess our estimated enterprise value. The computation of Adjusted EBITDA as presented in this Form 10-Q may differ from the computation of similarly-titled measures provided by other companies.
Reconciliation of Net income from continuing operations and Diluted Earnings per Share to Adjusted Net income and Adjusted Diluted Earnings per Share, non-GAAP measures (in thousands, except per share data, unaudited) |
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | 2018 | Change $ | Change % | | 2019 | 2018 | Change $ | Change % |
Net income (loss) from continuing operations | $ | 27,987 |
| $ | (42,590 | ) | $ | 70,577 |
| # | | $ | 74,327 |
| $ | 1,041 |
| $ | 73,286 |
| # |
|
Adjustments: | | | |
| | | | |
|
|
Loss on extinguishment of debt (1) | — |
| 72,165 |
| |
| | — |
| 83,848 |
| |
|
|
Restructuring costs (2) | — |
| — |
| |
| | 1,752 |
| — |
| |
|
|
Legal and related costs (3) | 870 |
| (1,178 | ) | |
| | 870 |
| (1,178 | ) | |
|
|
U.K. related costs (4) | 348 |
| — |
| |
| | 8,844 |
| — |
| |
|
|
Loss from equity method investment (5) | 1,384 |
| — |
| |
| | 5,132 |
| — |
| |
|
|
Share-based compensation (6) | 2,771 |
| 2,089 |
| |
| | 7,587 |
| 6,112 |
| |
|
|
Intangible asset amortization | 751 |
| 714 |
| |
| | 2,308 |
| 2,017 |
| |
|
|
Impact of tax law changes (7) | — |
| (600 | ) | |
| | — |
| 1,200 |
| |
|
|
Cumulative tax effect of adjustments | (1,232 | ) | (19,185 | ) | |
| | (5,554 | ) | (23,579 | ) | |
|
|
Adjusted Net Income | $ | 32,879 |
| $ | 11,415 |
| $ | 21,464 |
| # | | $ | 95,266 |
| $ | 69,461 |
| $ | 25,805 |
| 37.2 | % |
| | | |
| | | | |
|
|
Net income (loss) from continuing operations | $ | 27,987 |
| $ | (42,590 | ) | |
| | $ | 74,327 |
| $ | 1,041 |
| |
|
|
Diluted Weighted Average Shares Outstanding | 46,010 |
| 45,853 |
| |
| | 46,887 |
| 48,061 |
| |
|
|
Adjusted Diluted Average Shares Outstanding | 46,010 |
| 48,352 |
| |
| | 46,887 |
| 48,061 |
| |
|
|
Diluted Earnings per Share from continuing operations | $ | 0.61 |
| $ | (0.93 | ) | $ | 1.54 |
| # | | $ | 1.59 |
| $ | 0.03 |
| $ | 1.56 |
| # |
|
Per Share impact of adjustments to Net Income | 0.10 |
| 1.17 |
| |
| | 0.44 |
| 1.42 |
| |
|
|
Adjusted Diluted Earnings per Share | $ | 0.71 |
| $ | 0.24 |
| $ | 0.47 |
| # | | $ | 2.03 |
| $ | 1.45 |
| $ | 0.58 |
| 40.0 | % |
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | 2019 | Change $ | Change % |
Net income from continuing operations | $ | 36,013 |
| $ | 28,673 |
| $ | 7,340 |
| 25.6 | % |
Adjustments: | | | |
|
|
Legal and related costs (1) | 1,149 |
| 1,752 |
| |
|
|
U.K. related costs (2) | — |
| 7,817 |
| |
|
|
Loss from equity method investment (3) | 1,618 |
| — |
| |
|
|
Share-based compensation (4) | 3,194 |
| 2,172 |
| |
|
|
Intangible asset amortization | 737 |
| 796 |
| |
|
|
Impact of tax law changes (5) | (9,114 | ) | — |
| |
|
|
Cumulative tax effect of adjustments (6) | (1,321 | ) | (3,260 | ) | |
|
|
Adjusted Net Income | $ | 32,276 |
| $ | 37,950 |
| $ | (5,674 | ) | (15.0 | )% |
| | | |
|
|
Net income from continuing operations | $ | 36,013 |
| $ | 28,673 |
| |
|
|
Diluted Weighted Average Shares Outstanding | 41,892 |
| 47,319 |
| |
|
|
Diluted Earnings per Share from continuing operations | $ | 0.86 |
| $ | 0.61 |
| $ | 0.25 |
| 41.0 | % |
Per Share impact of adjustments to Net income | (0.09 | ) | 0.19 |
| |
|
|
Adjusted Diluted Earnings per Share | $ | 0.77 |
| $ | 0.80 |
| $ | (0.03 | ) | (3.8 | )% |
Note: Footnotes follow Reconciliation of Adjusted EBITDA table immediately below. |
Reconciliation of Net income (loss) from continuing operations to EBITDA and Adjusted EBITDA, non-GAAP measures (in thousands, except per share data, unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | 2018 | Change $ | Change % | | 2019 | 2018 | Change $ | Change % |
Net income (loss) from continuing operations | $ | 27,987 |
| $ | (42,590 | ) | $ | 70,577 |
| # |
| | $ | 74,327 |
| $ | 1,041 |
| $ | 73,286 |
| # |
|
Provision for income taxes | 11,239 |
| (16,914 | ) | 28,153 |
| # |
| | 28,738 |
| (269 | ) | 29,007 |
| # |
|
Interest expense | 17,364 |
| 23,403 |
| (6,039 | ) | (25.8 | )% | | 52,077 |
| 66,229 |
| (14,152 | ) | (21.4 | )% |
Depreciation and amortization | 4,609 |
| 4,623 |
| (14 | ) | (0.3 | )% | | 14,180 |
| 13,628 |
| 552 |
| 4.1 | % |
EBITDA | 61,199 |
| (31,478 | ) | 92,677 |
| # |
| | 169,322 |
| 80,629 |
| 88,693 |
| # |
|
Loss on extinguishment of debt (1) | — |
| 69,200 |
| |
|
| | — |
| 80,883 |
| |
|
|
Restructuring costs (2) | — |
| — |
| |
|
| | 1,752 |
| — |
| |
|
|
Legal and related costs (3) | 870 |
| (1,178 | ) | |
|
| | 870 |
| (1,178 | ) | |
|
|
U.K. related costs (4) | 348 |
| — |
| |
|
| | 8,844 |
| — |
| |
|
|
Loss from equity method investment (5) | 1,384 |
| — |
| |
|
| | 5,132 |
| — |
| |
|
|
Share-based compensation (6) | 2,771 |
| 2,089 |
| |
|
| | 7,587 |
| 6,112 |
| |
|
|
Other adjustments (8) | 483 |
| (49 | ) | |
|
| | 91 |
| (1 | ) | |
|
|
Adjusted EBITDA | $ | 67,055 |
| $ | 38,584 |
| $ | 28,471 |
| 73.8 | % | | $ | 193,598 |
| $ | 166,445 |
| $ | 27,153 |
| 16.3 | % |
Adjusted EBITDA Margin | 22.6 | % | 14.3 | % | | | | 23.1 | % | 22.0 | % | | |
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | 2019 | Change $ | Change % |
Net income from continuing operations | $ | 36,013 |
| $ | 28,673 |
| $ | 7,340 |
| 25.6 | % |
Provision for income taxes | 1,937 |
| 10,046 |
| (8,109 | ) | (80.7 | )% |
Interest expense | 17,324 |
| 17,690 |
| (366 | ) | (2.1 | )% |
Depreciation and amortization | 4,537 |
| 4,920 |
| (383 | ) | (7.8 | )% |
EBITDA | 59,811 |
| 61,329 |
| (1,518 | ) | (2.5 | )% |
Legal and related costs (1) | 1,149 |
| 1,752 |
| |
|
|
U.K. related costs (2) | — |
| 7,817 |
| |
|
|
Loss from equity method investment (3) | 1,618 |
| — |
| |
|
|
Share-based compensation (4) | 3,194 |
| 2,172 |
| |
|
|
Other adjustments (7) | 15 |
| (216 | ) | |
|
|
Adjusted EBITDA | $ | 65,787 |
| $ | 72,854 |
| $ | (7,067 | ) | (9.7 | )% |
Adjusted EBITDA Margin | 23.4 | % | 26.2 | % | | |
|
| |
(1) | For the nine months ended September 30, 2018, the $80.9 million of loss on extinguishment of debt is comprised of (i) $11.7 million incurred in the first quarter of 2018 for the redemption of $77.5 million of the CURO Financial Technologies Corp.'s ("CFTC") 12.00% Senior Secured Notes due 2022Legal and (ii) $69.2 million incurred in the third quarter of 2018 for the redemption of the remaining $525.7 million of these notes. The $69.2 million of third quarter loss on extinguishment of debt is comprised of $54.0 million make whole premium and $15.2 million of deferred financing costs, net of premium/discounts. An additional $3.0 million is included in relatedother costs for the three and nine months ended September 30, 2018March 31, 2020 include (i) costs related to certain securities litigation and related matter, (ii) severance costs for duplicative interest paid through September 30, 2018 priorcertain corporate employees and (iii) legal and advisory costs related to repaymentthe purchase of the remaining 12.00% Senior Secured Notes and the Non-Recourse U.S. SPV Facility.Ad Astra.
|
(2) | RestructuringLegal and other costs of $1.8 million for the ninethree months ended September 30,March 31, 2019 were due to eliminating 121 positions in North America. The store employee reductions helphelped better align store staffing with in-store customer traffic and volume patterns, as more of our growth comes from online channels and as store customers require less time in stores as they conduct more of the follow-up activities online. The elimination of certain corporate positions relaterelated to efficiency initiatives and has allowed the Company to reallocate investment to strategic growth activities. |
(3)(2) | Legal and related costs for the three and nine months ended September 30, 2019 include costs related to certain securities litigation and related matters of $0.6 million and legal and advisory costs of $0.3 million related to the repurchase of shares from FFL. Legal and related costs for the three and nine months ended September 30, 2018 includes (i) a $1.8 million reduction of the liability related to our offer to reimburse certain bank overdraft or non-sufficient funds fees because of possible borrower confusion about certain electronic payments we initiated on their loans and (ii) settlement of certain matters in California and Canada. For more information, see Note 18 - "Contingent Liabilities" of the Notes to Consolidated Financial Statements included in our Form 10-K filed with the SEC on March 18, 2019. |
(4) | U.K. related costs of $8.8$7.8 million for the ninethree months ended September 30,March 31, 2019 relate to placing the U.K. subsidiaries into administration on February 25, 2019, which included $7.6 million to obtain consent from the holders of the 8.25% Senior Secured Notes to deconsolidate the U.K. Segment and $1.2$0.2 million for other costs.
|
(5)(3) | The Loss from equity method investment for the ninethree months ended September 30, 2019March 31, 2020 of $5.1$1.6 million includes (i) our share of the estimated GAAP net loss of Zibby and (ii) a $3.7 million loss recognized during the second quarter of 2019. From April through July of 2019, Zibby completed an equity raising round at a value per share less than the value per share raised in prior raises.Katapult. As of September 30, 2019,March 31, 2020, we owned 42.3%42.5% of the outstanding shares of Zibby on a fully diluted basis.Katapult. |
(6)(4) | We approved the adoption of share-based compensation plans during 2010 and 2017 for key members of senior management. The estimated fair value of share-based awards is recognized as non-cash compensation expense on a straight-line basis over the vesting period. |
(7)(5) | As a resultOn March 27, 2020, the CARES Act was enacted by the U.S. Federal government in response to the COVID-19 pandemic. The CARES Act, among other things, allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the Tax Cuts and Jobs Actfive preceding taxable years to generate a refund of 2017 ("2017 Tax Act"), which became law on December 22, 2017, we providedpreviously paid income taxes. We recorded an estimateincome tax benefit of $9.1 million related to the new repatriationcarryback of NOL from tax as of December 31, 2017. Subsequent to further guidance published in the first quarter of 2018, we booked additional tax expense of $1.2 million for the 2017 repatriation tax. Additionally, the 2017 Tax Act provided for a new Global Intangible Low-Taxed Income tax starting inyears 2018 and we estimated and provided tax expense of $0.6 million in the first quarter of 2018.We revised this expense in the third quarter of 2018 based on changes in our geographic mix of income.2019. |
(8)(6) | Cumulative tax effect of adjustments included in Reconciliation of Net income from continuing operations to EBITDA and Adjusted EBITDA table is calculated using the estimated incremental tax rate by country. |
(7) | Other adjustments primarily include deferred rent and the intercompany foreign exchange impact. Deferred rent represents the non-cash component of rent expense. |
Currency Information
We operate in the U.S. and Canada and our consolidated results are reported in U.S. dollars.
Changes in our reported revenues and net income include the effect of changes in currency exchange rates. We translate all balance sheet accounts into U.S. dollars at the currency exchange rate in effect at the end of each period. We translate the statement of operations at the average rates of exchange for the period. We record currency translation adjustments as a component of Accumulated Other Comprehensive Income in Stockholders’ Equity.
Constant Currency Analysis
We have operations in the U.S. and Canada. In the three months ended September 30,March 31, 2020 and 2019, 21.0% and 2018, 20.2% and 17.1%18.6%, respectively, of our revenues from continuing operations were originated in Canadian Dollars. As a result, changes in our reported results include the impacts of changes in foreign currency exchange rates for the Canadian Dollar.
Income Statement - Three Months Ended March 31, 2020 and 2019
|
| | | | | | | | | | | | |
| Average Exchange Rates | | |
| Three Months Ended March 31, | | Change |
| 2020 | 2019 | | $ | % |
Canadian Dollar | $ | 0.7456 |
| $ | 0.7525 |
| |
| ($0.0069 | ) | (0.9 | )% |
Three Months Ended September 30,Balance Sheet - Exchange rate as of March 31, 2020 and December 31, 2019 and 2018
|
| | | | | | | | | | | | |
| Average Exchange Rates | | |
| Three Months Ended September 30, | | Change |
| 2019 | 2018 | | $ | % |
Canadian Dollar | $ | 0.7576 |
| $ | 0.7652 |
| |
| ($0.0076 | ) | (1.0 | )% |
Nine Months Ended September 30, 2019 and 2018
|
| | | | | | | | | | | | |
| Average Exchange Rates | | |
| Nine Months Ended September 30, | | Change |
| 2019 | 2018 | | $ | % |
Canadian Dollar | $ | 0.7526 |
| $ | 0.7771 |
| |
| ($0.0245 | ) | (3.2 | )% |
|
| | | | | | | | | | | | |
| Exchange Rate as of | | |
| March 31, | December 31, | | Change |
| 2020 | 2019 | | $ | % |
Canadian Dollar | $ | 0.7012 |
| $ | 0.7683 |
| |
| ($0.0671 | ) | (8.7 | )% |
The following constant currency analysis removes the impact of the fluctuation in foreign exchange rates and utilizes constant currency results in our analysis of segment performance. Our constant currency assessment assumes foreign exchange rates in the current fiscal periods remained the same as in the prior fiscal periods. All conversion rates below are based on the U.S. Dollar equivalent to the Canadian Dollar. We believe that the constant currency assessment below is a useful measure in assessing the comparable growth and profitability of our operations.
TheWe calculated the revenues and gross margin below during the three months ended September 30, 2019 were calculatedMarch 31, 2020 using the actual average exchange rate during the three months ended September 30, 2018 (in thousands, unaudited).March 31, 2019.
| | | | Three Months Ended September 30, | | Change | | Three Months Ended March 31, | | Change |
| | 2019 | | 2018 | | $ | | % | |
(in thousands, unaudited) | | | 2020 | | 2019 | | $ | | % |
Canada – constant currency basis: | | | | | | | | | | | | | | | | |
Revenues | | $ | 60,805 |
| | $ | 46,209 |
| | $ | 14,596 |
| | 31.6 | % | | $ | 59,563 |
| | $ | 51,820 |
| | $ | 7,743 |
| | 14.9 | % |
Gross Margin | | 19,597 |
| | 489 |
| | 19,108 |
| | # |
| | 12,090 |
| | 15,694 |
| | (3,604 | ) | | (23.0 | )% |
# - variance greater than 100% or not meaningful | |
The revenues and
We calculated gross marginloans receivable below during the nine months ended September 30, 2019 were calculatedas of March 31, 2020 using the actual average exchange rate during the nine months ended September 30, 2018 (in thousands, unaudited).as of December 31, 2019.
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Change |
| | 2019 | | 2018 | | $ | | % | |
Canada – constant currency basis: | | | | | | | | | |
Revenues | | $ | 171,664 |
| | $ | 139,502 |
| | $ | 32,162 |
| | 23.1 | % | |
Gross Margin | | 52,861 |
| | 28,291 |
| | 24,570 |
| | 86.8 | % | |
|
| | | | | | | | | | | | | | |
| | March 31, | December 31, | | Change |
(in thousands, unaudited) | | 2020 | 2019 | | $ | | % |
Canada – constant currency basis: | | | | | | | |
Gross loans receivable | | $ | 302,762 |
| $ | 302,376 |
| | $ | 386 |
| | 0.1 | % |
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity to fund the loans we make to our customers are cash provided by operations, our Senior Revolver, our Cash Money Revolving Credit Facility, funds from third-party lenders under our CSO programs, and our Non-Recourse Canada SPV Facility (defined below).Facility. During August 2018, we issued $690.0 million 8.25% Senior Secured Notes due September 2025 ("8.25% Senior Secured Notes") (i) to redeem the outstanding 12.00% Senior Secured Notes due 2022 of CFTC, (ii) to repay a portion of the outstanding indebtedness under the five-year revolving credit facility of CURO Receivables Finance I, LLC, our wholly-owned subsidiary, which consists of a term loan and revolving borrowing capacity, (iii) for general corporate purposes and (iv) to pay fees, expenses, premiums and accrued interest in connection with the foregoing.
As of September 30, 2019,March 31, 2020, we were in compliance with all financial ratios, covenants and other requirements set forth in our debt agreements. We anticipate that our primary use of cash will be to fund growth in our working capital, finance capital expenditures, and meet our debt obligations, and fundobligations. As we did for our share repurchase program. programs announced in April 2019 and February 2020 (which we have suspended as previously disclosed), we may also use cash to fund a return on capital for our stockholders through share repurchase programs, or as we announced in February 2020, in the form of dividends.
Our level of cash flow provided by operating activities typically experiences some seasonal fluctuation related to our levels of net income and changes in working capital levels, particularly loans receivable.
Unexpected changes in our financial condition or other unforeseen factors may result in our inability to obtain third-party financing or could increase our borrowing costs in the future. We have the ability to adjust our volume of lending to consumers which would reduce cash outflow requirements while increasing cash inflows through loan repayments to the extent we experience any short-term or long-term funding shortfalls. We may also sell or securitize our assets, draw on our available revolving credit facility or line of credit, enter into additional refinancing agreements and reduce our capital spending in order to generate additional liquidity. We believe our cash on hand and available borrowings provide us with sufficient liquidity for at least the next 12 months.
Borrowings
Our debt consisted of the following as of September 30, 2019 and DecemberMarch 31, 20182020 (net of deferred financing costs) (in thousands):
|
| | | | | | |
| September 30, | December 31, |
| 2019 | 2018 |
8.25% Senior Secured Notes (due 2025) | $ | 677,924 |
| $ | 676,661 |
|
Non-Recourse Canada SPV Facility | 102,483 |
| 107,479 |
|
Senior Revolver | 25,000 |
| 20,000 |
|
Debt | $ | 805,407 |
| $ | 804,140 |
|
Credit Facilities and Other Resources |
| | | | | | | | |
| | Capacity | Interest Rate | Maturity | Counter-parties | Balance as of March 31, 2020 |
Non-Recourse Canada SPV Facility (1) | | C$175.0 million | 3-Mo CDOR + 6.75% | September 2, 2023 | Waterfall Asset Management | $ | 84,724 |
|
Senior Secured Revolving Credit Facility | | $50.0 million | 1-Mo LIBOR + 5.00% | June 30, 2021 | BayCoast Bank; Stride Bank; Hancock-Whitney Bank; Metropolitan Commercial Bank | 25,000 |
|
Non-Recourse U.S. SPV Facility (2) | | $100.0 million | 1-Mo LIBOR + 5.75% or 9.75%(3) | April 8, 2024 | Atalaya Capital Management | — |
|
Cash Money Revolving Credit Facility (1) | | C$10.0 million | Canada Prime Rate +1.95% | On-demand | Royal Bank of Canada | — |
|
8.25% Senior Secured Notes (due 2025) | | $690.0 million | 8.25% | September 1, 2025 | | $ | 678,727 |
|
(1) Capacity amounts are denominated in Canadian dollars, while outstanding balances as of March 31, 2020 are denominated in U.S. dollars. |
(2) We entered into the Non-Recourse U.S. SPV Facility on April 8, 2020, and drew $35.2 million on the facility at such time. |
(3) The Non-Recourse U.S. SPV Facility provides for $100.0 million of borrowing capacity and, subject to obtaining additional commitments thereunder, the ability to expand such capacity up to $200.0 million. Prior to the increase in commitments, interest accrues at an annual rate of one-month LIBOR plus 9.75% and after the increase in commitments, one-month LIBOR plus 5.75%.
|
8.25% Senior Secured Notes
As noted above, we issuedRefer to Note 5, "Debt," for details on each of our 8.25% Senior Secured Notes in August 2018. Interestcredit facilities and resources. Refer to Note 19, "Subsequent Events" for additional details on the notes is payable semiannually, in arrears, on March 1 and September 1 of each year. In connection with the 8.25% Senior Secured Notes, we capitalized financing costs of $12.9 million, the balance of which is included in the Condensed Consolidated Balance Sheets as a component of Debt, and is being amortized over the term of the 8.25% Senior Secured Notes and included as a component of interest expense.
12.00% Senior Secured Notes
In February and November 2017, CFTC issued $470.0 million and $135.0 million, respectively, of 12.00% Senior Secured Notes ("12.00% Senior Secured Notes"). Interest on the 12.00% Senior Secured Notes is payable semiannually, in arrears, on March 1 and September 1 of each year, beginning on September 1, 2017. The February 2017 issuance refinanced similar notes that were nearing maturity. The extinguishment of the existing notes resulted in a pretax loss of $80.9 million during September 2018. In connection with these 2017 debt issuances we capitalized financing costs of $18.3 million, the balance of which is included in the Condensed Consolidated Balance Sheets as a component of Debt, and is being amortized over the term of the 12.00% Senior Secured Notes as a component of interest expense.
On March 7, 2018, CFTC redeemed $77.5 million of its 12.00% Senior Secured Notes using a portion of the proceeds from our initial public offering as required by the underlying indentures (the transaction whereby the 12.00% Senior Secured Notes were partially redeemed, the “Redemption”) at a price equal to 112.00% of the principal amount of the 12.00% Senior Secured Notes redeemed, plus accrued and unpaid interest paid thereon to the date of Redemption. Following the Redemption, $527.5 million of the original outstanding principal amount of the 12.00% Senior Secured Notes remain outstanding. The Redemption was conducted pursuant to the Indenture governing the 12.00% Senior Secured Notes (the “Indenture”), dated as of February 15, 2017, by and among CFTC, the guarantors party thereto and TMI Trust Company, as trustee and collateral agent.
The remainder of the 12.00% Senior Secured Notes were extinguished effective September 7, 2018 as a result of the issuance of the 8.25% Senior Secured Notes as described above.
Non-Recourse U.S. SPV Facility
In November 2016, CURO Receivables Finance I, LLC, a Delaware limited liability company (the “SPV Borrower”) and a wholly-owned subsidiary, entered into a five-year revolving credit facility with Victory Park Management, LLC and certain other lenders that provided for an $80.0 million term loan and $70.0 million of revolving borrowing capacity that could expand over time (“Non-Recourse U.S. SPV Facility”). The loans bore interest at an annual rate of up to 12.00% plus the greater of (i) 1.0% per annum and (ii) three-month LIBOR. The SPV Borrower also pays a 0.50% per annum fee on the unused portion of the commitments. In connection with this facility, the capitalized financing costs at the time of extinguishment, as discussed below, were $5.3 million, net of amortization. These capitalized financing costs were included in the Condensed Consolidated Balance Sheet as a component of "Debt" and were amortized over the term of the Non-Recourse U.S. SPV Facility. During September 2018, a portionFacility that we closed on April 8, 2020.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed consolidating financial information is presented separately for:
| |
(i) | CURO as the issuer of the 8.25% Senior Secured Notes; |
| |
(ii) | The Company's subsidiary guarantors, which are comprised of certain of its domestic subsidiaries, including (x) CFTC, as the issuer of the 12.00% Senior Secured Notes that were redeemed in August 2018, (y) CURO Intermediate and (z) U.S. SPV as the issuer of the Non-Recourse U.S. SPV Facility that was extinguished in October 2018, but excluding Canada SPV (the “Subsidiary Guarantors”), on a consolidated basis, which are 100% owned by CURO, and which are guarantors of the 8.25% Senior Secured Notes issued in August 2018; |
| |
(iii) | The Non-Recourse Canada SPV facility, a wholly-owned, bankruptcy-remote special purpose subsidiary; |
| |
(iv) | The Company's other subsidiaries on a consolidated basis, which are not guarantors of the 8.25% Senior Secured Notes (the “Subsidiary Non-Guarantors”); |
| |
(v) | Consolidating and eliminating entries representing adjustments to: |
| |
a. | eliminate intercompany transactions between or among us, the Subsidiary Guarantors, the Non-Recourse Canada SPV facility and the Subsidiary Non-Guarantors; and |
| |
b. | eliminate the investments in subsidiaries; and |
| |
(vi) | The Company and its subsidiaries on a consolidated basis. |
Condensed Consolidating Balance Sheets
|
| | | | | | | | | | | | | | | | | | |
| March 31, 2020 |
(dollars in thousands) | CURO | Subsidiary Guarantors | Canada SPV | Subsidiary Non-Guarantors | Eliminations | CURO Consolidated |
Assets: | | | | | | |
Cash | $ | — |
| $ | 107,208 |
| $ | — |
| $ | 31,506 |
| $ | — |
| $ | 138,714 |
|
Restricted cash | — |
| 17,069 |
| 22,317 |
| 2,141 |
| — |
| 41,527 |
|
Loans receivable, net | — |
| 221,408 |
| 203,837 |
| 39,350 |
| — |
| 464,595 |
|
Right of use asset - operating leases | — |
| 76,528 |
| — |
| 37,744 |
| — |
| 114,272 |
|
Deferred income taxes | 13,190 |
| (13,190 | ) | — |
| — |
| — |
| — |
|
Income taxes receivable | 47,236 |
| (24,444 | ) | — |
| 1,643 |
| — |
| 24,435 |
|
Prepaid expenses and other | — |
| 26,008 |
| — |
| 8,112 |
| — |
| 34,120 |
|
Property and equipment, net | — |
| 42,536 |
| — |
| 24,251 |
| — |
| 66,787 |
|
Goodwill | — |
| 105,922 |
| — |
| 26,903 |
| — |
| 132,825 |
|
Other intangibles, net | — |
| 13,540 |
| — |
| 20,404 |
| — |
| 33,944 |
|
Intercompany receivable | — |
| 135,608 |
| — |
| — |
| (135,608 | ) | — |
|
Investment in subsidiaries | 91,206 |
| — |
| — |
| — |
| (91,206 | ) | — |
|
Other assets | — |
| 14,910 |
| — |
| 637 |
| — |
| 15,547 |
|
Total assets | $ | 151,632 |
| $ | 723,103 |
| $ | 226,154 |
| $ | 192,691 |
| $ | (226,814 | ) | $ | 1,066,766 |
|
Liabilities and Stockholders' equity (deficit): | | | | | | |
Accounts payable and accrued liabilities | $ | (2 | ) | $ | 43,133 |
| $ | 13,267 |
| $ | (2,795 | ) | $ | — |
| $ | 53,603 |
|
Deferred revenue | — |
| 4,427 |
| 39 |
| 2,189 |
| — |
| 6,655 |
|
Lease liability - operating leases | — |
| 84,135 |
| — |
| 37,580 |
| — |
| 121,715 |
|
Accrued interest | 4,744 |
| 21 |
| 627 |
| — |
| — |
| 5,392 |
|
Payable to CURO Holdings Corp. | (600,336 | ) | 600,336 |
| — |
| — |
| — |
| — |
|
CSO liability for losses | — |
| 9,189 |
| — |
| — |
| — |
| 9,189 |
|
Debt | 678,727 |
| 24,850 |
| 84,874 |
| — |
| — |
| 788,451 |
|
Intercompany payable | — |
| — |
| 80,240 |
| 55,368 |
| (135,608 | ) | — |
|
Other liabilities | — |
| 8,932 |
| — |
| 163 |
| — |
| 9,095 |
|
Deferred tax liabilities | 8,928 |
| — |
| — |
| 4,167 |
| — |
| 13,095 |
|
Total liabilities | 92,061 |
| 775,023 |
| 179,047 |
| 96,672 |
| (135,608 | ) | 1,007,195 |
|
Stockholders' equity (deficit) | 59,571 |
| (51,920 | ) | 47,107 |
| 96,019 |
| (91,206 | ) | 59,571 |
|
Total liabilities and stockholders' equity | $ | 151,632 |
| $ | 723,103 |
| $ | 226,154 |
| $ | 192,691 |
| $ | (226,814 | ) | $ | 1,066,766 |
|
|
| | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
(dollars in thousands) | CURO | Subsidiary Guarantors | Canada SPV | Subsidiary Non-Guarantors | Eliminations | CURO Consolidated |
Assets: | | | | | | |
Cash | $ | — |
| $ | 44,727 |
| $ | — |
| $ | 30,515 |
| $ | — |
| $ | 75,242 |
|
Restricted cash | — |
| 14,958 |
| 17,427 |
| 2,394 |
| — |
| 34,779 |
|
Loans receivable, net | — |
| 286,881 |
| 220,067 |
| 52,045 |
| — |
| 558,993 |
|
Right of use asset - operating leases | — |
| 74,845 |
| — |
| 42,608 |
| — |
| 117,453 |
|
Deferred tax asset | 8,561 |
| (3,506 | ) | — |
| — |
| — |
| 5,055 |
|
Income taxes receivable | 19,690 |
| (8,987 | ) | — |
| 723 |
| — |
| 11,426 |
|
Prepaid expenses and other | — |
| 26,623 |
| — |
| 9,267 |
| — |
| 35,890 |
|
Property and equipment, net | — |
| 43,618 |
| — |
| 27,193 |
| — |
| 70,811 |
|
Goodwill | — |
| 91,131 |
| — |
| 29,478 |
| — |
| 120,609 |
|
Other intangibles, net | — |
| 11,569 |
| — |
| 22,358 |
| — |
| 33,927 |
|
Intercompany receivable | — |
| 113,599 |
| — |
| — |
| (113,599 | ) | — |
|
Investment in subsidiaries | 84,514 |
| — |
| — |
| — |
| (84,514 | ) | — |
|
Other assets | — |
| 17,006 |
| — |
| 704 |
| — |
| 17,710 |
|
Total assets | $ | 112,765 |
| $ | 712,464 |
| $ | 237,494 |
| $ | 217,285 |
| $ | (198,113 | ) | $ | 1,081,895 |
|
Liabilities and Stockholder's equity: | | | | | | |
Accounts payable and accrued liabilities | $ | 465 |
| $ | 48,333 |
| $ | 13,462 |
| $ | (2,177 | ) | $ | — |
| $ | 60,083 |
|
Deferred revenue | — |
| 6,828 |
| 46 |
| 3,296 |
| — |
| 10,170 |
|
Lease liability - operating leases | — |
| 82,593 |
| — |
| 42,406 |
| — |
| 124,999 |
|
Accrued interest | 18,975 |
| 1 |
| 871 |
| — |
| — |
| 19,847 |
|
Payable to CURO Holdings Corp. | (635,511 | ) | 635,511 |
| — |
| — |
| — |
| — |
|
CSO liability for losses | — |
| 10,623 |
| — |
| — |
| — |
| 10,623 |
|
Debt | 678,323 |
| — |
| 112,221 |
| — |
| — |
| 790,544 |
|
Intercompany payable | — |
| — |
| 69,639 |
| 43,960 |
| (113,599 | ) | — |
|
Other liabilities | — |
| 10,285 |
| — |
| 379 |
| — |
| 10,664 |
|
Liabilities from discontinued operations | — |
| — |
| — |
| 4,452 |
| — |
| 4,452 |
|
Total liabilities | (73,013 | ) | 794,174 |
| 196,239 |
| 142,668 |
| (113,599 | ) | 1,031,382 |
|
Stockholders' equity | 50,513 |
| (81,710 | ) | 41,255 |
| $ | 124,969 |
| (84,514 | ) | 50,513 |
|
Total liabilities and stockholders' equity | $ | (92,114 | ) | $ | 712,464 |
| $ | 237,494 |
| $ | 267,637 |
| $ | (198,113 | ) | $ | 1,081,895 |
|
Condensed Consolidating Statements of the proceeds from the 8.25% Senior Secured Notes were used to extinguish the revolver's balanceOperations |
| | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
(dollars in thousands) | CURO | Subsidiary Guarantors | Canada SPV | Subsidiary Non-Guarantors | Eliminations | CURO Consolidated |
Revenue | $ | — |
| $ | 221,768 |
| $ | 34,026 |
| $ | 25,012 |
| $ | — |
| $ | 280,806 |
|
Provision for losses | — |
| 86,041 |
| 19,732 |
| 7,763 |
| — |
| 113,536 |
|
Net revenue | — |
| 135,727 |
| 14,294 |
| 17,249 |
| — |
| 167,270 |
|
Cost of providing services: | | | | | |
|
|
Salaries and benefits | — |
| 16,912 |
| — |
| 9,095 |
| — |
| 26,007 |
|
Occupancy | — |
| 7,825 |
| — |
| 6,191 |
| — |
| 14,016 |
|
Office | — |
| 4,301 |
| — |
| 1,373 |
| — |
| 5,674 |
|
Other costs of providing services | — |
| 8,204 |
| — |
| 1,451 |
| — |
| 9,655 |
|
Advertising | — |
| 10,945 |
| — |
| 1,274 |
| — |
| 12,219 |
|
Total cost of providing services | — |
| 48,187 |
| — |
| 19,384 |
| — |
| 67,571 |
|
Gross margin | — |
| 87,540 |
| 14,294 |
| (2,135 | ) | — |
| 99,699 |
|
Operating expense (income): | | | | | |
|
|
Corporate, district and other expenses | 3,395 |
| 34,255 |
| 174 |
| 4,983 |
| — |
| 42,807 |
|
Intercompany management fee | — |
| (3,800 | ) | 730 |
| 3,070 |
| — |
| — |
|
Interest expense | 14,636 |
| 210 |
| 2,620 |
| (142 | ) | — |
| 17,324 |
|
Loss from equity method investment | — |
| 1,618 |
| — |
| — |
| — |
| 1,618 |
|
Intercompany interest (income) expense | — |
| (1,441 | ) | 550 |
| 891 |
| — |
| — |
|
Total operating expense | 18,031 |
| 30,842 |
| 4,074 |
| 8,802 |
| — |
| 61,749 |
|
Income (loss) from continuing operations before income taxes | (18,031 | ) | 56,698 |
| 10,220 |
| (10,937 | ) | — |
| 37,950 |
|
Provision (benefit) for income tax expense | (23,247 | ) | 24,998 |
| — |
| 186 |
| — |
| 1,937 |
|
Net income (loss) from continuing operations | 5,216 |
| 31,700 |
| 10,220 |
| (11,123 | ) | — |
| 36,013 |
|
Discontinued operations: | | | | | | |
Net income on discontinued operations | — |
| — |
| — |
| 292 |
| — |
| 292 |
|
Net income (loss) | 5,216 |
| 31,700 |
| 10,220 |
| (10,831 | ) | — |
| 36,305 |
|
Equity in net income (loss) of subsidiaries: | | | | | | |
CFTC | 31,089 |
| — |
| — |
| — |
| (31,089 | ) | — |
|
Guarantor Subsidiaries | — |
| 31,700 |
| — |
| — |
| (31,700 | ) | — |
|
Non-Guarantor Subsidiaries | — |
| (10,831 | ) | — |
| — |
| 10,831 |
| — |
|
SPV Subs | | 10,220 |
| — |
| — |
| (10,220 | ) | — |
|
Net income (loss) attributable to CURO | $ | 36,305 |
| $ | 62,789 |
| $ | 10,220 |
| $ | (10,831 | ) | $ | (62,178 | ) | $ | 36,305 |
|
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 |
(dollars in thousands) | CURO | Subsidiary Guarantors | Canada SPV | Subsidiary Non-Guarantors | Eliminations | CURO Consolidated |
Revenue | $ | — |
| $ | 226,119 |
| $ | 25,046 |
| $ | 26,774 |
| $ | — |
| $ | 277,939 |
|
Provision for losses | — |
| 84,980 |
| 13,306 |
| 4,099 |
| — |
| 102,385 |
|
Net revenue | — |
| 141,139 |
| 11,740 |
| 22,675 |
| — |
| 175,554 |
|
Cost of providing services: | | | | | | |
Salaries and benefits | — |
| 19,951 |
| — |
| 8,750 |
| — |
| 28,701 |
|
Occupancy | — |
| 8,010 |
| — |
| 6,227 |
| — |
| 14,237 |
|
Office | — |
| 3,889 |
| — |
| 1,224 |
| — |
| 5,113 |
|
Other costs of providing services | — |
| 13,132 |
| — |
| 1,088 |
| — |
| 14,220 |
|
Advertising | — |
| 6,354 |
| — |
| 1,432 |
| — |
| 7,786 |
|
Total cost of providing services | — |
| 51,336 |
| — |
| 18,721 |
| — |
| 70,057 |
|
Gross margin | — |
| 89,803 |
| 11,740 |
| 3,954 |
| — |
| 105,497 |
|
Operating expense (income): | | | | | | |
Corporate, district and other expenses | 2,342 |
| 41,538 |
| 25 |
| 5,183 |
| — |
| 49,088 |
|
Intercompany management fee | — |
| (3,403 | ) | 8 |
| 3,395 |
| — |
| — |
|
Interest expense | 14,438 |
| 290 |
| 2,891 |
| 71 |
| — |
| 17,690 |
|
Intercompany interest (income) expense | — |
| (1,071 | ) | — |
| 1,071 |
| — |
| — |
|
Total operating expense | 16,780 |
| 37,354 |
| 2,924 |
| 9,720 |
| — |
| 66,778 |
|
Income (loss) from continuing operations before income taxes | (16,780 | ) | 52,449 |
| 8,816 |
| (5,766 | ) | — |
| 38,719 |
|
Provision (benefit) for income tax expense | (5,008 | ) | 14,020 |
| — |
| 1,034 |
| — |
| 10,046 |
|
Net (loss) income from continuing operations | (11,772 | ) | 38,429 |
| 8,816 |
| (6,800 | ) | — |
| 28,673 |
|
Discontinued operations: | | | | | |
|
|
Net loss on discontinued operations | — |
| — |
| — |
| 8,375 |
| — |
| 8,375 |
|
Net (loss) income | (11,772 | ) | 38,429 |
| 8,816 |
| 1,575 |
| — |
| 37,048 |
|
Equity in net income (loss) of subsidiaries: | | | | | | |
CFTC | 48,820 |
| — |
| — |
| — |
| (48,820 | ) | — |
|
Guarantor Subsidiaries | — |
| 38,429 |
| — |
| — |
| (38,429 | ) | — |
|
Non-Guarantor Subsidiaries | — |
| 1,575 |
| — |
| — |
| (1,575 | ) | — |
|
SPV Subs | — |
| 8,816 |
| — |
| | (8,816 | ) | — |
|
Net income (loss) attributable to CURO | $ | 37,048 |
| $ | 87,249 |
| $ | 8,816 |
| $ | 1,575 |
| $ | (97,640 | ) | $ | 37,048 |
|
Condensed Consolidating Statements of $42.4 million.Cash Flows
|
| | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 |
(dollars in thousands) | CURO | Subsidiary Guarantors | Canada SPV | Subsidiary Non-Guarantors | Eliminations | CURO Consolidated |
Cash flows from operating activities: | | | | | | |
Net cash provided by continuing operating activities | $ | 6,517 |
| $ | 89,412 |
| $ | 48,035 |
| $ | 12,102 |
| $ | (4,197 | ) | $ | 151,869 |
|
Net cash used in discontinued operating activities | — |
| — |
| — |
| 390 |
| — |
| 390 |
|
Cash flows from investing activities: | | | | | |
|
|
Purchase of property, equipment and software | — |
| (3,237 | ) | — |
| (421 | ) | — |
| (3,658 | ) |
Originations of loans, net | — |
| (29,894 | ) | (22,280 | ) | (8,227 | ) | — |
| (60,401 | ) |
Acquisition of Ad Astra, net of acquiree's cash received | — |
| (14,418 | ) | — |
| — |
| — |
| (14,418 | ) |
Net cash used in continuing investing activities | — |
| (47,549 | ) | (22,280 | ) | (8,648 | ) | — |
| (78,477 | ) |
Cash flows from financing activities: | | | | | |
|
|
Proceeds from Non-Recourse Canada SPV facility | — |
| — |
| 23,560 |
| — |
| — |
| 23,560 |
|
Payments on Non-Recourse Canada SPV facility | — |
| — |
| (42,497 | ) | — |
| — |
| (42,497 | ) |
Proceeds from credit facilities | — |
| 60,000 |
| — |
| 9,938 |
| — |
| 69,938 |
|
Payments on credit facilities | — |
| (35,000 | ) | — |
| (9,938 | ) | — |
| (44,938 | ) |
Payments to net share settle RSUs | (609 | ) | — |
| — |
| — |
| — |
| (609 | ) |
Proceeds from exercise of stock options | — |
| 126 |
| — |
| — |
| — |
| 126 |
|
Debt issuance costs paid | — |
| (150 | ) | — |
| — |
| — |
| (150 | ) |
Repurchase of common stock | (5,908 | ) | — |
| — |
| — |
| — |
| (5,908 | ) |
Dividends paid to CURO Group Holdings Corp. | 2,247 |
| (2,247 | ) | — |
| — |
| — |
| — |
|
Dividends paid to stockholders | (2,247 | ) | — |
| — |
| — |
| — |
| (2,247 | ) |
Net cash (used in) provided by financing activities (1) | (6,517 | ) | 22,729 |
| (18,937 | ) | — |
| — |
| (2,725 | ) |
| | | | | |
|
|
Effect of exchange rate changes on cash and restricted cash | — |
| — |
| (1,928 | ) | (3,106 | ) | 4,197 |
| (837 | ) |
Net increase in cash and restricted cash | — |
| 64,592 |
| 4,890 |
| 738 |
| — |
| 70,220 |
|
Cash and restricted cash at beginning of period | — |
| 59,685 |
| 17,427 |
| 32,909 |
| — |
| 110,021 |
|
Cash at end of period | $ | — |
| $ | 124,277 |
| $ | 22,317 |
| $ | 33,647 |
| $ | — |
| $ | 180,241 |
|
|
| | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 |
(dollars in thousands) | CURO | Subsidiary Guarantors | Canada SPV | Subsidiary Non-Guarantors | Eliminations | CURO Consolidated |
Cash flows from operating activities: | | | | | | |
Net cash provided by continuing operating activities | $ | 67 |
| $ | 88,291 |
| $ | 53,969 |
| $ | (1,574 | ) | $ | 246 |
| $ | 140,999 |
|
Net cash used in discontinued operating activities | — |
| — |
| — |
| (504 | ) | — |
| (504 | ) |
Cash flows from investing activities: | | | | | | |
Purchase of property, equipment and software | — |
| (2,430 | ) | — |
| (689 | ) | — |
| (3,119 | ) |
Originations of loans, net | — |
| (38,226 | ) | (30,373 | ) | 3,652 |
| — |
| (64,947 | ) |
Cash paid for Katapult investment | — |
| (1,568 | ) | — |
| — |
| — |
| (1,568 | ) |
Net cash used in continuing investing activities | — |
| (42,224 | ) | (30,373 | ) | 2,963 |
| — |
| (69,634 | ) |
Net cash used in discontinued investing activities | — |
| — |
| — |
| (14,213 | ) | — |
| (14,213 | ) |
Cash flows from financing activities: | | | | | | |
Proceeds from Non-Recourse Canada SPV facility | — |
| — |
| 3,762 |
| — |
| — |
| 3,762 |
|
Payments on Non-Recourse Canada SPV facility | — |
| — |
| (24,831 | ) | — |
| — |
| (24,831 | ) |
Proceeds from credit facilities | — |
| 15,000 |
| — |
| 15,478 |
| — |
| 30,478 |
|
Payments on credit facilities | — |
| (35,000 | ) | — |
| (15,478 | ) | — |
| (50,478 | ) |
Payments to net share settle RSUs | (37 | ) | — |
| — |
| — |
| — |
| (37 | ) |
Proceeds from exercise of stock options | — |
| 40 |
| — |
| — |
| — |
| 40 |
|
Debt issuance costs paid | (30 | ) | — |
| (169 | ) | — |
| — |
| (199 | ) |
Net cash used in provided by financing activities (1) | (67 | ) | (19,960 | ) | (21,238 | ) | — |
| — |
| (41,265 | ) |
| | | | | | |
Effect of exchange rate changes on cash and restricted cash | — |
| — |
| 262 |
| 1,922 |
| (246 | ) | 1,938 |
|
Net increase (decrease) in cash and restricted cash | — |
| 26,107 |
| 2,620 |
| (11,406 | ) | — |
| 17,321 |
|
Cash and restricted cash at beginning of period | — |
| 52,397 |
| 12,840 |
| 34,620 |
| — |
| 99,857 |
|
Cash at end of period | $ | — |
| $ | 78,504 |
| $ | 15,460 |
| $ | 23,214 |
| $ | — |
| $ | 117,178 |
|
(1) Financing activities include continuing operations only and were not impacted by discontinued operations. |
On October 11, 2018, we extinguished the remaining term loan balance of $80.0 million. We made the final termination payment of $2.7 million on October 26, 2018, resulting in a loss on the extinguishment of debt of $9.7 million for the quarter ended December 31, 2018.
Non-Recourse Canada SPV Facility
On August 2, 2018, CURO Canada Receivables Limited Partnership, a newly created, bankruptcy-remote special purpose vehicle (the “Canada SPV Borrower”) and a wholly-owned subsidiary, entered into a four-year revolving credit facility with Waterfall Asset Management, LLC that provides for C$175.0 million of initial borrowing capacity and the ability to expand such capacity up to C$250.0 million (“Non-Recourse Canada SPV Facility”). The loans bear interest at an annual rate of 6.75% plus the three-month CDOR. As of September 30, 2019, outstanding borrowings under the Non-Recourse Canada SPV Facility were $102.5 million, net of deferred financing costs of $3.3 million.
Senior Revolver
On September 1, 2017, we closed on a $25.0 million Senior Secured Revolving Loan Facility (the "Senior Revolver"). In February 2018, the Senior Revolver capacity was increased to $29.0 million. In November 2018, the Senior Revolver capacity was increased to $50.0 million as permitted by the Indenture to the Senior Secured Notes. The Senior Revolver is now syndicated with participation by four banks. The negative covenants of the Senior Revolver generally conform to the related provisions in the Indenture for our 8.25% Senior Secured Notes. We believe this facility complements our other financing sources, while providing seasonal short-term liquidity. Under the Senior Revolver, there is $50.0 million maximum availability, including up to $5.0 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The Senior Revolver accrues interest at the one-month LIBOR (which may not be negative) plus 5% per annum and is repayable on demand. The terms of the Senior Revolver require that the outstanding balance be zero for at least 30 consecutive days in each calendar year. The Senior Revolver is guaranteed by all of our subsidiaries that guarantee our 8.25% Senior Secured Notes and is secured by a lien on substantially all of our assets and the guarantor subsidiaries that is senior to the lien securing our 8.25% Senior Secured Notes. The Senior Revolver had an outstanding balance of $25.0 million at September 30, 2019.
In connection with this facility we capitalized financing costs of $0.1 million, the balance of which we included in the Condensed Consolidated Balance Sheets as a component of “Other assets,” and are being amortized over the term of the facility and included as a component of interest expense.
Cash Money Revolving Credit Facility
Cash Money Cheque Cashing, Inc., one of our Canadian subsidiaries, maintains a C$10 million revolving credit facility with Royal Bank of Canada. The Cash Money Revolving Credit Facility provides short-term liquidity required to meet the working capital needs of our Canadian operations. Aggregate draws under the revolving credit facility are limited to the lesser of: (i) the borrowing base, which is defined as a percentage of cash, deposits in transit and accounts receivable, and (ii) C$10 million. As of September 30, 2019 and December 31, 2018, the borrowing capacity under our revolving credit facility was reduced by C$0.3 million in stand-by-letters of credit.
The Cash Money Revolving Credit Facility is collateralized by substantially all of Cash Money’s assets and contains various covenants that include, among other things, that the aggregate borrowings outstanding under the facility not exceed the borrowing base, restrictions on the encumbrance of assets and the creation of indebtedness. Borrowings under the Cash Money Revolving Credit Facility bear interest (per annum) at the prime rate of a Canadian chartered bank plus 1.95%.
The Cash Money Revolving Credit Facility was undrawn at September 30, 2019 and December 31, 2018.
Cash Flows
The following highlights our cash flow activity and the sources and uses of funding during the periods indicated (in thousands):
| | | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
Net cash provided by continuing operating activities | | $ | 464,293 |
| | $ | 357,079 |
| | $ | 151,869 |
| | $ | 140,999 |
|
Net cash used in continuing investing activities | | (391,188 | ) | | (421,423 | ) | | (78,477 | ) | | (69,634 | ) |
Net cash (used in) provided by continuing financing activities | | (58,488 | ) | | 90,449 |
| |
Net cash used in continuing financing activities | | | (2,725 | ) | | (41,265 | ) |
Continuing Operating Activities
Net cash provided by continuing operating activities for the ninethree months ended September 30, 2019March 31, 2020 was $464.3$151.9 million, primarily attributable to net income from continuing operations of $74.3 million, the effect of non-cash reconciling items of $364.3$137.7 million, which includes provision for loan losses of $338.3$113.5 million, andoffset by changes in our operating assets and liabilities which provided $25.6$21.9 million.
Net cash provided by continuing operating activities for the ninethree months ended September 30, 2018March 31, 2019 was $357.1$141.0 million, primarily attributable to net income of $28.7 million, provision for loan losses of $102.4 million and changes in our operating assets and liabilities of $12.1 million, partially offset by other non-cash expenses of $2.1 million. Contributing to current year net cash provided by continuing operating activitiesMajor components of non-cash reconciling items, such asexpenses include depreciation and amortization, provision for loan losses and loss on extinguishment of debt for a total of $398.1 million. Contributions from non-cash reconciling items were offset by changes in our operating assets and liabilities of $42.1 million.share-based compensation expense.
Continuing Investing Activities
Net cash used in continuing investing activities for the ninethree months ended September 30, 2019March 31, 2020 was $391.2$78.5 million, primarily reflecting the net origination of loans of $374.4 million. In addition, we used$60.4 million and the acquisition of Ad Astra for $14.4 million, net of cash to purchase $8.7received. Net origination of loans includes $30.1 million of propertycash inflows for California Unsecured and equipment, including software licenses and $8.2 million of additional investment in Zibby.Secured Installment loans from December 31, 2019 to March 31, 2020 due to regulatory changes, effective January 1, 2020.
Net cash used in continuing investing activities for the ninethree months ended September 30, 2018March 31, 2019 was $421.4$69.6 million, primarily reflecting the net origination of loans of $412.4$64.9 million. In addition, we used cash to purchase $8.0approximately $3.1 million of property and equipment, including software licenses, and to purchase $1.0 million of Zibby preferred shares.licenses.
Origination of loans will fluctuate from period-to-period, depending on the timing of loan issuances and collections. A seasonal decline in consumer loans receivable typically occurs during the first quarter of the year and is driven by income tax refunds in the U.S. Typically, customers will use the proceeds from income tax refunds to pay outstanding loan balances, resulting in an increase in our net cash balances and a decrease in our consumer loans receivable balances. Consumer loans receivable balances typically reflect growth during the remainder of the year.
Continuing Financing Activities
Net cash used in continuing financing activities for the ninethree months ended September 30, 2019March 31, 2020 was $58.5$2.7 million, primarily due to (i) $27.1$6.1 million of cash used to repurchase 2,000,000 shares ofnet proceeds on our debt facilities, offset by common stock at a pricerepurchases of $13.55 per share, owned by FFL$5.9 million and (ii) $25.1 millioncash dividends of cash used to repurchase 2,089,644 shares of our common stock under the share repurchase program which began during the second quarter of 2019.$2.2 million.
Net cash provided by continuing financing activities for the ninethree months ended September 30, 2018March 31, 2019 was $90.4$41.3 million. During the quarter, we extinguished $527.5made a $20.0 million payment on the Senior Revolver to reduce the outstanding balance to zero and made net repayments of our 12.00% Senior Secured Notes from$20.9 million on the issuance of our 8.25% Senior Secured Notes of $690.0 million. As part of the extinguishment, we paid $63.4 million of call premium. We also entered into a Non-Recourse Canada SPV facility during the quarter, which provided $89.9 million of proceeds and was offset by net payments on our U.S. SPV facility of $44.6 million. Net proceeds from the issuance of common stock and proceeds from the exercise of stock options were $12.0 million as of September 30, 2018.Facility.
Contractual Obligations
There have been no significant developments with respect to our contractual obligations since December 31, 2018,2019, as described in our 20182019 Form 10-K.
Critical Accounting Policies and Estimates
Goodwill. We exercise judgment in evaluating assets for impairment. Goodwill is tested for impairment annually, or when circumstances arise which could more likely than not reduce the fair value of a reporting unit below its carrying value. These tests require comparing carrying values to estimated fair values of the reporting unit under review.
The U.S. and Canada operations are our two reporting units, as defined by FASB’s ASC 280 - Segment Reporting, for which we assess goodwill for impairment. As of the most recent annual goodwill impairment testing date (October 1, 2019), both reporting units' estimated fair valued exceeded its carrying value. As described in our 2019 Form 10-K, an impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. Events or circumstances that could indicate an impairment include a significant change in the business climate, a change in strategic direction, legal factors, operating performance
indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit or economic outlook. These and other macroeconomic factors, in general, were considered when performing the annual test on October 1, 2019.
In the first quarter of 2020, we performed an interim assessment of goodwill on both reporting units to consider whether current events or circumstances, attributable to uncertainty caused by COVID-19, resulted in a more likely than not reduction in the fair value of the reporting units below their respective carrying values.
Canada Reporting Unit
As part of our quantitative testing process for goodwill of the Canada reporting unit, we estimated fair values using a discounted cash flow approach from the perspective of a market participant. Significant assumptions used in the discounted cash flow approach are revenue growth rates, gross margin, EBITDA margins, discount rate and long-term revenue growth rate. The cash flow forecasts of the reporting unit, which we updated to reflect the uncertainty caused by COVID-19, are based on management’s long-term view of our markets and are the forecasts that senior management and the Board of Directors use to evaluate the Company's overall and individual reporting unit operating performance. The discount rate utilized is management’s estimate of what the market’s weighted average cost of capital is for a company with a similar debt rating and stock volatility, as measured by beta. The terminal business value is determined by applying the long-term growth rate to the latest year for which a forecast exists. As part of our goodwill quantitative testing process, we evaluate whether there are reasonably likely changes to management’s estimates that would have a material impact on the results of the goodwill impairment testing.
As of March 31, 2020, no impairment of goodwill existed for the Canada reporting unit. Testing did indicate that the fair value of the Canada reporting unit exceeded its carrying value by less than 5%. This reduction in fair value of the Canada reporting unit, which was previously greater than 10% at the time of the October 1, 2019 annual impairment test, was primarily driven by significant uncertainty surrounding the effect that the COVID-19 pandemic will have on the reporting unit’s near-term cash flows, triggering a decrease in the reporting unit's forecasted near-term cash flows. The length of time and extent to which the pandemic will impact our customers remains unclear, and assumptions used in the discounted cash flow approach reflect management's estimates as of the date of this filing.
U.S. Reporting Unit
After performing a similar interim impairment test for the U.S. reporting unit as that for the Canada reporting unit utilizing a discounted cash flow method, which was adjusted for considerations related to COVID-19, we concluded that the fair value continues to be significantly in excess of the carrying value.
The following table summarizes the segment allocation of recorded goodwill on our unaudited Condensed Consolidated Balance Sheets as of March 31, 2020:
|
| | | | | | | | | | | |
(in thousands) | March 31, 2020 | Percent of Total | | December 31, 2019 | Percent of Total |
U.S. | $ | 105,922 |
| 79.7 | % | | $ | 91,131 |
| 75.6 | % |
Canada | 26,903 |
| 20.3 | % | | 29,478 |
| 24.4 | % |
Total Goodwill | $ | 132,825 |
| | | $ | 120,609 |
| |
There continues to be uncertainty surrounding the macroeconomic factors for the Canada reporting unit. Changes in the expected length of the current downturn, timing of recovery, or long-term revenue growth or profitability for this reporting unit could increase the likelihood of a future impairment. Additionally, changes in market participant assumptions such as an increased discount rate or further share price reductions could increase the likelihood of a future impairment.
Regulatory Environment and Compliance
There have been no significant developments with respect to our regulatory environment and compliance since December 31, 2018,2019, as described in our 20182019 Form 10-K except for the following:10-K.
California Assembly Bill 539
On September 13, 2019, the California legislature passed Assembly Bill 539 which imposes an interest rate cap on all consumer loans between $2,500 and $10,000 of 36%, plus the Federal Funds Rate. On October 10, 2019, Governor Newsom signed the bill into law and it is scheduled to become effective on January 1, 2020. Revenue from California Unsecured and Secured Installment loans amounted to 11.8% and 13.0% of total revenue from continuing operations for the trailing three and 12 months ended, respectively, September 30, 2019. As of September 30, 2019, California Unsecured and Secured Installment gross loans receivable were $86.4 million and $41.4 million, respectively. While we continue to optimize our installment loan portfolio in California as a result of this bill, we continue to evaluate the effect on our results of operations and financial condition and alternatives available to service customers in the California market. Refer to “Risk Factors” in Item 1A. of Part II of this Form 10-Q for additional information regarding the impact of this bill to our business.
California Consumer Privacy Act
In 2018, the California Consumer Privacy Act (“CCPA”) was passed into law, effective January 1, 2020. CCPA broadens consumer rights with respect to personal information, imposing expanded obligations to disclose the categories and uses of personal information a business collects, providing consumers a right to access that information, a right to opt out of the sale of personal information and the right to request that a business delete personal information about the consumer subject to certain exemptions. CCPA provides for civil penalties for violations, as well as a private right of action for data breaches, which may increase the costs of data breach litigation. CCPA has been subject to a handful of amendments, of which AB25 is most impactful to us. Although AB25 sunsets January 2021, it narrows the definition of who constitutes a consumer, thereby excluding employees from CCPA rights other than notice and a private right of action for data breach. The State Attorney General has proposed regulations to help interpret the CCPA; final adoption is expected in February 2020. A potential ballot initiative may have additional impact should it make it to the polls in November 2020. Despite amendments and regulations, the CCPA remains ambiguous in many regards, and we anticipate further amendments both for CCPA and specifically addressing employee data next year. Other states and possibly the federal government may adopt laws similar to the CCPA. While it is too early to know its full impact, these developments could ultimately result in the imposition of requirements on CURO and other consumer financial service providers that could increases costs or otherwise adversely affect our business.
British Columbia Business Practices and Consumer Amendment Act
Effective January 1, 2017, the British Columbia Ministry of Public Safety and Solicitor General (the "Ministry") reduced the total cost of borrowing from C$23 per C$100 lent to C$17 per C$100 lent. A further reduction to C$15 per C$100 lent came into effect on September 1, 2018. On February 26, 2019, the Minister of Public Safety and Solicitor General introduced in Parliament Bill 7 titled “Business Practices and Consumer Amendment Act." This bill received Royal Assent on May 16, 2019 and became law. There are no material changes to our current operations as a result of this legislation. The bill primarily allows the Ministry to (i) define a high cost credit product and (ii) require licensing and consumer protection oversight. It also authorizes the Ministry to prescribe regulations regarding high cost credit products including a cooling off period between loans, cost/optional services disclosure requirements, and prohibition of concurrent loan products. It is too early to predict the outcome of the regulations setting process and its impact on our operations.
CFPB Rulemaking Update
In February 2019, the CFPB issued two notices of proposed rulemaking proposing (i) to delay the August 19, 2019 compliance date for the so-called "Mandatory Underwriting Provisions" of the 2017 Final Payday, Vehicle Title, and Certain High-Cost Installment Loans (the "2017 Final Rule") Rule to November 19, 2020 and (ii) to rescind such Mandatory Underwriting Provisions (the “2019 Proposed Rule”). The CFPB issued a final rule on June 6, 2019 delaying the compliance date for the Mandatory Underwriting Provisions of the 2017 Final Rule to November 19, 2020. The Mandatory Underwriting Provisions which the 2019 Proposed Rule would rescind, which are still under consideration include: (i) a provision that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan, including our payday and vehicle title loans with a term of 45 days or less, without reasonably determining that consumers have the ability to repay those loans according to their terms; (ii) a provision that prescribes mandatory underwriting requirements for making this ability-to-repay determination; (iii) a provision that exempts certain loans from the mandatory underwriting requirements; and (iv) a provision that establishes related definitions, reporting, and recordkeeping requirements. The 2017 Final Rule is stayed, however, based on an order entered August 6, 2019 by the Western District of Texas, Austin Division (the "Court Order"). The parties in the litigation are required to file a Joint Status Report with the court no later than December 6, 2019.
The compliance date for the "Payment Provision" of the 2017 Final Rule was August 19, 2019, but is also currently stayed pursuant to the Court Order. Under the proposed "Payment Provisions":
If two consecutive attempts to collect money from a particular account of the borrower, made through any channel (e.g., paper check, ACH, prepaid card) are returned for insufficient funds, the lender cannot make any further attempts to collect from such account unless the borrower has provided a new and specific authorization for additional payment transfers. The 2017 Final Rule contains specific requirements and conditions for the authorization. While the CFPB has explained that these provisions are designed to limit bank penalty fees to which consumers may be subject, and while banks do not charge penalty fees on debit card authorization requests, the 2017 Final Rule nevertheless treats card authorization requests as payment attempts subject to these limitations.
A lender generally must give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumer’s checking, savings, or prepaid account. The notice must include information such as the date of the payment request, payment channel and payment amount (broken down by principal, interest, fees, and other charges), as well as additional information for “unusual attempts,” such as when the payment is for a different amount than the regular payment, initiated on a date other than the date of a regularly scheduled payment or initiated in a different channel that the immediately preceding payment attempt. A lender must also provide the borrower with a "consumer rights notice" in a prescribed form after two consecutive failed payment attempts.
The CFPB has indicated it has received a formal request to revisit the treatment of debit cards under the Payment Provisions and intends to examine the Payment Provisions further. If the CFPB determines that further action is warranted, it may commence a separate rulemaking initiative.
CFPB Supervision and Examination: The CFPB has supervisory powers over many providers of consumer financial products and services, including explicit authority to examine (and require registration) of payday lenders. The CFPB released its Supervision and Examination Manual, which includes a section on Short-Term, Small-Dollar Lending Procedures, and began field examinations of industry participants in 2012. The CFPB commenced its first supervisory examination of us in October 2014. The scope of the CFPB’s examination included a review of our Compliance Management System, our Short-Term Small Dollar lending procedures, and our compliance with Federal consumer financial protection laws. The 2014 examination had no material impact on our financial condition or results of operations, and we received the final CFPB Examination Report in September 2015.
The CFPB commenced its second examination of us in February 2017 and completed the related field work in June 2017. The scope of the 2017 examination included a review of our Compliance Management System, our substantive compliance with applicable federal laws, and matters requiring attention. The 2017 examination had no material impact on our financial condition or results of operations, and we received the final CFPB Examination Report in February 2018.
The CFPB commenced its third examination of us on October 7, 2019. This examination is a limited scope review to ensure continued compliance. While we do not expect that matters arising from this examination will have a material impact on us, we have made in recent years and are continuing to make, at least in part to meet CFPB expectations, certain enhancements to our compliance procedures and consumer disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about our market risks, see "Quantitative and Qualitative Disclosures about Market Risk" in our 20182019 Form 10-K for the year ended December 31, 2018.2019. There have been no material changes to the amounts presented therein.
LIBOR is used as a reference rate for certain of our financial instruments, such as our revolving credit facilities. LIBOR is set to be phased out at the end of 2021. We are currently reviewing how the LIBOR phase-out will affect the Company, but we do not expect the impact to be material.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including without limitation, controls and procedures designed to ensure that information required to be disclosed in reports we file under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on an evaluation of our disclosure controls and procedures as disclosed in Item 9A of our 2018 Form 10-K,the end of the period covered by this report conducted by our management, concluded that our internal control over financial reporting was not effective at December 31, 2018 becausewith the participation of the identification of a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement ofChief Executive Officer and Chief Financial Officer, the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
RemediationChief Executive Officer and changes in internal control over financial reporting
We are taking actions to improve our internal control over financial reporting, including implementing plans as identified in Item 9A of our 2018 Form 10-K, to address our material weakness. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management hasChief Financial Officer concluded through testing, that these controls are operating effectively. We expect that the remediationand procedures were effective as of this material weakness will be completed in 2019.
Except as noted above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the three months ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.March 31, 2020.
Limitation on the effectiveness of controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. A
control system also can be circumvented by collusion or improper management override. Because of such limitations, disclosure controls and internal control over financial reporting cannot prevent or detect all misstatements, whether unintentional errors or fraud. However, these inherent limitations are known features of the financial reporting process, therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Internal control over financial reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the three months ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item is included in Note 13, - "Contingent Liabilities" of the Notes to the unaudited Condensed Consolidated Financial Statements in this Form 10-Q and is incorporated herein by reference.
Item 1A. Risk Factors
There were no material changes to our risk factors as described in our 20182019 Form 10-K for the year ended December 31, 2018,2019 or in our Current Report on Form 8-K filed on April 8, 2020, except for the following:
Our industry is strictly regulated everywhereWe have covenants in our debt agreements which may restrict our flexibility to operate our business. If we operate, anddo not comply with these regulationscovenants, our failure could have a material adverse effect on our business and results of operations.
We are subject to substantial regulation everywhere we operate. In the U.S. and Canada, our business is subject to a variety of statutes and regulations enacted by government entities at the federal, state or provincial, and municipal levels. These regulations affect our business in many ways, and include regulations relating to:
the amount we may charge in interest rates and fees;
the terms of our loans (such as maximum and minimum durations), repayment requirements and limitations, number and frequency of loans, maximum loan amounts, renewals and extensions, required repayment plans and reporting and use of state-wide databases;
underwriting requirements;
collection and servicing activity, including initiation of payments from consumer accounts;
the establishment and operation of CSOs or CABs;
licensing, reporting and document retention;
unfair, deceptive and abusive acts and practices;
discrimination;
disclosures, notices, advertising and marketing;
loans to members of the military and their dependents;
requirements governing electronic payments, transactions, signatures and disclosures;
check cashing;
money transmission;
currency and suspicious activity recording and reporting;
privacy and use of personally identifiable information and consumer data, including credit reports;
anti-money laundering and counter-terrorist financing requirements, including currency and suspicious transaction recording and reporting;
posting of fees and charges; and
repossession practices in certain jurisdictions where we operate as a title lender, including requirements regarding notices and prompt remittance of excess proceeds for the sale of repossessed automobiles.
For a more detailed description of the regulations to which we are subject and the regulatory environment in the jurisdictions in which we operate see “Regulatory Environment and Compliance” in our 2018 Form 10-K and in this Form 10-Q.
These regulations, outside of our control, affect our business in many ways, including affecting the loans and other products we can offer, the prices we can charge, the other terms of our loans and other products, the customers to whom we are allowed to lend, how we obtain our customers, how we communicate with our customers, how we pursue repayment of our loans and many others. Consequently, these restrictions adversely affect our loan volume, revenues, delinquencies and other aspects of our business, including our results of operations.
For example, in June 2018, we discontinued the use of secondary payment cards for affected borrowers who do not explicitly reauthorize the use of secondary payment cards. For these borrowers, in the event we cannot obtain payment through the bank account or payment card listed on the borrower’s application and as authorized by the borrower, we must rely exclusively on other collection methods, such as delinquency notices and/or collection calls. The discontinuation for affected borrowers of our current use of secondary cards which have not been reauthorized by the borrower will increase collections costs and reduce collections effectiveness. Even in advance of the effective date of the 2017 Final CFPB Rule (and even if the 2017 Final CFPB Rule does not become effective), it is possible that we will make further changes to our payment practices in a manner that will increase costs and/or reduce revenues.
In addition, on September 13, 2019, the California legislature passed Assembly Bill 539 which imposes an interest rate cap on all consumer loans between $2,500 and $10,000 of 36% plus the Federal Funds Rate. On October 10, 2019, Governor Newsom
signed the bill into law and it is scheduled to become effective on January 1, 2020. Revenue from California Unsecured and Secured Installment loans amounted to 11.8% and 13.0% of total revenue from continuing operations for the trailing three and 12 months, respectively, for the period ended September 30, 2019. As of September 30, 2019, California Unsecured and Secured Installment gross loans receivable were $86.4 million and $41.4 million, respectively. We continue to evaluate the effect on our results of operations or financial condition.
Our debt agreements contain customary restrictive covenants, including limitations on consolidated indebtedness, liens, investments, subsidiary investments and financial condition as aasset dispositions, and require us to maintain certain leverage and interest coverage ratios. Failure to comply with these covenants could result in an event of this billdefault that, if not cured or waived, could result in reduced liquidity and alternatives available to service customers in the California market. If we are unsuccessful in managing the transition of our California business and operations from affected installment loans to existing and alternative products, Assembly Bill 539 could have a material adverse effect on our businessoperating results and financial condition. In addition, an event of default under one of our debt agreements may result in our then-outstanding debt to become immediately due and payable.
In addition, Our Non-Recourse Canada SPV Facility and Non-Recourse U.S. SPV Facility contain default, delinquency and net spread ratio limits and our Non-Recourse U.S. SPV Facility also contains a cash collection percentage limit on the receivables pledged to each facility. If these limits were exceeded, it would potentially impact our ability to draw under the terms of these agreements. Further, in certain instances, if ratios are exceeded, we may be required to redirect all excess cash to the credit providers. These limits are calculated based on the portfolio collateralizing the respective credit line.
Failure to comply with our debt covenants could have a material adverse effect on our liquidity, results of operations.
Further, during 2018, the California Consumer Privacy Act (“CCPA”) was passed into law, effective January 1, 2020. CCPA broadens consumer rights with respect to their personal information, imposing expanded obligations to disclose the categories and uses of personal information a business collects, providing consumers a rightoperation or financial condition if we are either unable to access capital at such time that information, a right to opt out of the sale of personal information and the right to request that a business delete personal information about the consumer subject to certain exemptions. CCPA provides for civil penalties for violations, as well as a private right of action for data breaches, which may increase the costs of data breach litigation. CCPA has been subject to a handful of amendments, of whichAB25 is the most impactful to us. Although AB25 sunsets January 2021, it narrows the definition of who constitutes a consumer, thereby excluding employees from CCPA rights other than notice and a private right of action for data breach. The State Attorney General has proposed regulations to help interpret the CCPA; final adoption is expected in February 2020. A potential ballot initiative may have additional impact should it make it to the polls in November 2020. Despite amendments and regulations, the CCPA remains ambiguous in many regards, and we anticipate further amendments both for CCPA and specifically addressing employee data next year. Other states and possibly the federal government may adopt laws similar to the CCPA. While it is too earlycritical to know its full impact, these developments could ultimately result in the imposition of requirements on CURO and other consumer financial service providers that could increases costsour business or otherwise adversely affectif we are required to reduce our business.outstanding indebtedness.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The 2017 Incentive Plan permits the netting of common stock upon vesting of restricted stock units to satisfy individual tax withholding requirements. See Note 6, "Share-Based Compensation" for additional information regarding the 2017 Incentive Plan. During the quarter ended September 30, 2019,March 31, 2020, we did not reacquire anyreacquired 75,968 shares of common stock related to such tax withholdings.
In April 2019, our Board See Note 18, "Share Repurchase Program" for additional information regarding share repurchases during the first quarter of Directors authorized a share repurchase program providing for the repurchase of up to $50.0 million of our common stock. The repurchase program, which began June 2019, will continue until completed or terminated. We expect the purchases to be made from time-to-time in the open market, in privately negotiated transactions, or both, at our discretion and subject to market conditions and other factors. Any repurchased shares will be available for use in connection with equity plans or other corporate purposes.
Separately, in August 2019, the Company entered into a Share Repurchase Agreement (the “Share Repurchase Agreement”) with FFL, a related party to the Company. Pursuant to the Share Repurchase Agreement, the Company repurchased 2,000,000 shares of its common stock, par value $0.001 per share, owned by FFL, in a private transaction at a purchase price equal to $13.55 per share of Common Stock. The purchase price was determined by using the Company's closing common stock price on August 29, 2019 of $13.97, less a discount of 3.0%. This transaction occurred outside of the share repurchase program authorized in April 2019.2020.
The following table provides information with respect to purchases we made of our common stock during the quarter ended September 30, 2019.March 31, 2020.
|
| | | | | | | | | | |
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Shares that may yet be Purchased under the Plans or Programs(1) (In millions)
|
July 2019 | 907,500 |
| $ | 10.68 |
| 907,500 |
| $ | 37.8 |
|
August 2019 | 611,694 |
| 13.33 |
| 611,694 |
| 29.6 |
|
September 2019 | 392,847 |
| 14.28 |
| 392,847 |
| 24.0 |
|
Total | 1,912,041 |
| $ | 12.27 |
| 1,912,041 |
| $ | 24.0 |
|
(1) As of the end of the period. |
|
| | | | | | | | | | |
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Shares that may yet be Purchased under the Plans or Programs(1) (In millions)
|
January 2020 | 408,059 |
| $ | 10.53 |
| 397,500 |
| $ | 0.6 |
|
February 2020 | 85,695 |
| 10.11 |
| 81,544 |
| 24.8 |
|
March 2020 | 122,976 |
| 6.87 |
| 61,718 |
| — |
|
Total | 616,730 |
| $ | 9.74 |
| 540,762 |
| $ | — |
|
(1) Includes shares withheld from employees as tax payments for shares issued under our stock-based compensation plans. See Note 6, "Share-Based Compensation" of the Notes to unaudited Consolidated Financial Statements for additional details on our stock-based compensation plans. |
(2) As of the end of the period. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
(a) Disclosure of Unreported 8-K Information
None.On March 25, 2020, the Company and two of its wholly owned subsidiaries (CURO Canada Receivables GP Inc. and CURO Canada Receivables Limited Partnership, by its General Partner, CURO Canada Receivables GP Inc.) entered into an Amendment Agreement to Credit Agreement and Guaranty (the “Amendment”), which amended the (i) Credit Agreement, dated as of August 2, 2018, among CURO Canada Receivables Limited Partnership, by its General partner, CURO Canada Receivables GP Inc., WF Marlie 2018-1, Ltd., as Lender, Waterfall Asset Management, LLC, as Administrative Agent and the other Lenders party thereto and the (ii) Guaranty, dated as of August 2, 2018, among CURO Group Holdings Corp., LendDirect Corp., Cash Money Cheque Cashing Inc., CURO Canada Receivables Limited Partnership, CURO Canada Receivables GP Inc., WF Marlie 2018-1, Ltd. and Waterfall Asset Management, LLC (the “Guaranty”). The Amendment aligns the measurement of the net worth covenant to the Company’s reporting of GAAP Stockholders’ Equity and establishes the minimum that the Company is required to maintain, which will be tested as of the end of each fiscal quarter beginning with the quarter ended March 31, 2020. The Amendment also includes immaterial administrative amendments to the Guaranty.
(b) Material Changes to Director Nominee Procedures
None.
Item 6. Exhibits
|
| | |
Exhibit no. | | Exhibit Description |
3.1 | | |
3.2 | | |
10.1 | | |
10.2 | | |
10.3 | | |
10.4 | | |
10.5 | | |
10.6 | | Share RepurchaseAmendment Agreement betweento Credit Agreement and Guaranty by and among CURO Canada Receivables Limited Partnership, by its general partner, CURO Canada Receivables GP Inc.; CURO Canada Receivables, Inc.; CURO Group Holdings Corp.; WF Marlie 2018-1, LTD; Waterfall Asset Management, LLC; LendDirect Corp.; and Friedman, Fleisher & Lowe Capital Partners II, L.P. and affiliated investment funds,Cash Money Cheque Cashing Inc., dated August 30, 2019 (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 3, 2019)as of March 25, 2020.* + |
31.1 | | |
31.2 | | |
32.1 | | |
101 | | The following unaudited financial information from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2019,March 31, 2020, filed with the SEC on NovemberMay 4, 2019,2020, formatted in Extensible Business Reporting Language (“XBRL”) includes: (i) Condensed Consolidated Balance Sheets at September 30, 2019March 31, 2020 and December 31, 2018,2019, (ii) Condensed Consolidated Statements of Operations for the quarter ended September 30,March 31, 2020 and 2019, and 2018, (iii) Condensed Consolidated Statements of Comprehensive Income for the quarter ended September 30,March 31, 2020 and 2019, and 2018, (iv) Condensed Consolidated Statements of Cash Flows for the quarter ended September 30,March 31, 2020 and 2019, and 2018, and (v) Notes to Condensed Consolidated Financial Statements* |
* Filed herewith.
+ Indicates management contract or compensatory plan, contract or arrangement.Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because they are not material and would likely cause competitive harm to the Company if publicly disclosed.
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: NovemberMay 4, 20192020 CURO Group Holdings Corp.
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| | | |
| By: | /s/ Roger Dean | |
| | Roger Dean | |
| | Executive Vice-PresidentVice President and Chief Financial Officer |