UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20222023
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.) |
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3615 North Ridge Road200 W Hubbard Street, Wichita8th Floor,Chicago, KSIL
| | 6720560654 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (316) 772-3801(312) 470-2000
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 ☒
As of October 28, 202227, 2023 there were 40,485,38141,300,542 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
FORM 10-Q
THIRD QUARTER ENDED SeptemberSEPTEMBER 30, 20222023
INDEX
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Item 1. | Financial Statements (unaudited) |
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| September 30, 2022 (unaudited) and December 31, 2021 | | | | | | |
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| Three and nine months ended September 30, 2022 (unaudited) and 2021 | |
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| Three and nine months ended September 30, 2022 (unaudited) and 2021 | |
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| Three and nine months ended September 30, 2022 (unaudited) and 2021 | |
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Item 3. | | |
Item 4. | | |
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Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | Exhibits, Financial Statement Schedules | |
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PART I. FINANCIAL INFORMATION
GLOSSARY
Terms and abbreviations used throughout this report are defined below.
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Term or abbreviation | | Definition |
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20212022 Form 10-K | | Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the SEC on March 7, 202210, 2023 |
1.0L 18.00% Senior Secured Term Loan | | $150.0 million first lien credit facility, executed in May 2023, which matures in August 2027 |
1.5L 7.50% Senior Secured Notes | | $682.3 million of the 7.50% Senior Secured Notes which participated in the May 2023 Exchange Agreement |
2.0L 7.50% Senior Secured Notes | | $317.7 million aggregate principal amount of the 7.50% Senior Secured Notes which did not participate in the May 2023 Exchange Agreement |
7.50% Senior Secured Notes | | 7.50% Senior Secured Notes, issued in July 2021 for $750.0 million, which mature in August 2028 |
8.25% Senior Secured Notes | | 8.25% Senior Secured Notes, issued in August 2018 for $690.0 million, which we extinguished during the third quarter of 2021 |
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ABL | | Asset-Backed Lending |
Adjusted EBITDA | | EBITDA plus or minus certain non-cash and other adjusting items; Refer to "Supplemental Non-GAAP Financial Information" for additional details |
ALLACL | | Allowance for loancredit losses |
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AOCI | | Accumulated Other Comprehensive Income (Loss)other comprehensive income (loss) |
ASC | | Accounting Standards Codification |
ASU | | Accounting Standards Update |
Average gross loans receivable | | Utilized to calculate product yield and NCO rates; calculated as average of beginning of quarter and end of quarter gross loans receivable |
BNPL | | Buy-Now-Pay-Later |
bps | | Basis points |
C$ | | Canadian dollar |
CAB | | Credit Access Business |
Canada SPV | | A four-year revolving credit facility with capacity up to C$400.0 million |
Canada SPV II | | A revolving credit facility with capacity up to C$110.0 million |
Curo Canada Revolving Credit FacilityCECL | | C$10.0 million revolving credit facility (formerly known as Cash Money Revolving Accounting Standards Update No. 2016-13, Financial Instruments—Credit Facility), maintained by CURO CanadaLosses (Topic 326): Measurement of Credit Losses on Financial Instruments |
CDOR | | Canadian Dollar Offered Rate |
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CFPB | | Consumer Financial Protection Bureau |
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CODM | | Chief Operating Decision Maker |
Condensed Consolidated Financial Statements | | The condensed consolidated financial statements presented in this Form 10-Q |
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CSO | | Credit services organization |
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CURO Canada | | CURO Canada Corp,Corp., a wholly-owned Canadian subsidiary of the Company formerly known as Cash Money Cheque Cashing Inc. |
DTA | | Deferred Tax Asset |
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EBITDA | | Earnings Before Interest, Taxes, Depreciation and Amortization |
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Exchange Act | | Securities Exchange Act of 1934, as amended |
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FASB | | Financial Accounting Standards Board |
FinServ | | FinServ Acquisition Corp., a publicly traded special purpose acquisition company (trading symbol FSRV) |
FinTech | | Financial Technology; the term used to describe any technology that delivers financial services through software, such as online banking, mobile payment apps or cryptocurrency |
First Heritage | | First Heritage Credit, LLC, a consumer lender that provides near-prime installment loans along with customary opt-in insurance and other financial products, based in Ridgeland, Mississippiwholly-owned U.S. subsidiary of the Company, which we acquired in July 2022 |
First Heritage SPV | | A revolving credit facility entered into concurrent with the acquisition of First Heritage, with capacity up to $225.0 million |
Flexiti | | Flexiti Financial Inc., a wholly-owned Canadian subsidiary of the Company, which we acquired in March 2021 and divested in August 2023 |
Flexiti Divestiture | | Flexiti was sold to Questrade Financial Group Inc. on March 10, 2021August 31, 2023 |
Flexiti Securitization | | A revolving credit facility with capacity up to C$526.5 million |
Flexiti SPV | | A revolving credit facility entered into concurrent with the acquisition of Flexiti, with capacity up to C$535.0 million |
Form 10-Q | | This reportQuarterly Report on Form 10-Q for the quarter ended September 30, 20222023 |
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Gross Combined Loans ReceivableHeights | | Gross loans receivable plus loans originated by third-party lendersSouthernCo, Inc., a Delaware corporation d/b/a Heights Finance, a wholly-owned U.S. subsidiary of the Company, which are Guaranteed by the Companywe acquired in December 2021 |
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Heights SPV | | A revolving credit facility with capacity up to $425.0 million |
Katapult | | Katapult Holdings, Inc., a lease-to-own platform for online, brick and mortar and omni-channel retailers |
Guaranteed by the Company | | Loans originated by third-party lenders through the CSO program which we guarantee but are not included in the unaudited Condensed Consolidated Financial Statements. All balances in connection with the CSO programs were disposed of on July 8, 2022 with the completion of the divestiture of the Legacy U.S. Direct Lending business.Business | | U.S. Direct Lending operating under the Speedy Cash, Rapid Cash and Avio Credit brands, sold to Community Choice Financial in July 2022 |
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NCO | | Net charge-off; which equals gross charge-offs less total recoveries |
NYSE | | New York Stock Exchange |
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POS | | Point-of-sale |
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Term or abbreviation | | Definition |
Heights FinanceQuestrade Financial Group Inc. | | SouthernCo,Questrade Financial Group Inc., a Delaware corporation d/b/a Heights Finance, a wholly-owned U.S. subsidiary of the Company,an online brokerage and wealth management company based in Canada, which we acquiredsold Flexiti to on December 27, 2021 |
Heights Finance SPV | | A non-recourse revolving credit facility, entered into concurrent with the acquisition of Heights Finance, with capacity up to $350.0 million. This facility was extinguished on July 15, 2022 when we entered into a new non-recourse revolving warehouse facility, see "Heights SPV." |
Heights SPV | | A revolving credit facility, entered into to replace the incumbent lender's facility and finance future loans originated by Heights Finance, with capacity up to $425.0 million |
Katapult | | Katapult Holdings, Inc. a lease-to-own platform for online, brick and mortar and omni-channel retailers. |
Legacy U.S. Direct Lending Business | | The Legacy US Direct Lending Business historically operated under the Speedy Cash, Rapid Cash, and Avio Credit brands. We sold the business to Community Choice Finance on July 8, 2022. |
LFL | | LFL Group, Canada's largest home furnishings retailer. |
LIBOR | | London Inter-Bank Offered Rate |
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NCO | | Net charge-off; total charge-offs less total recoveries |
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POS | | Point-of-sale |
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ROU | | Right of use |
RSU | | Restricted Stock Unit |
SEC | | Securities and Exchange Commission |
Senior Revolver | | Senior Secured Revolving Loan Facility with borrowing capacity of $40.0 million, |
Sequential | | The change which was paid off by proceeds from one quarter to the next quarter1.0L 18.0% Senior Secured Term Loan in May 2023 |
SOFR | | Secured Overnight Financing Rate |
SPAC | | Special Purpose Acquisition Company |
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SPE | | Special Purpose Entity |
SPV | | Special Purpose Vehicle |
SRC | | Smaller Reporting Company as defined by the SEC |
TDR | | Troubled Debt Restructuring. Debt restructuring for which a concession is granted to the borrower as a result of economic or legal reasons related to the borrower's financial difficulties |
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UDAAP | | Unfair, deceptive, or abusive acts and practicesRestructuring |
U.S. | | United States of America |
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U.S. GAAP | | Generally Accepted Accounting Principles in the United StatesU.S. |
U.S. SPV | | An asset-backed revolving credit facility with capacity up to $200.0 million if certain conditions are met. This facility was extinguished on July 7, 2022. |
VIE | | Variable Interest Entity; our wholly-owned, bankruptcy-remote special purpose subsidiaries |
ITEM 1. FINANCIAL STATEMENTS
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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| September 30, 2022 (unaudited) | | December 31, 2021 | | | |
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ASSETS | | | |
Cash and cash equivalents | $ | 45,683 | | | $ | 63,179 | | | | |
Restricted cash (includes restricted cash of consolidated VIEs of $89,849 and $57,155 as of September 30, 2022 and December 31, 2021, respectively) | 144,020 | | | 98,896 | | | | |
Gross loans receivable (includes loans of consolidated VIEs of $1,713,039 and $1,294,706 as of September 30, 2022 and December 31, 2021, respectively) | 1,894,427 | | | 1,548,318 | | | | |
Less: Allowance for loan losses (includes allowance for loan losses of consolidated VIEs of $101,320 and $66,618 as of September 30, 2022 and December 31, 2021, respectively) | (102,743) | | | (87,560) | | | | |
Loans receivable, net | 1,791,684 | | | 1,460,758 | | | | |
Income taxes receivable | 13,469 | | | 31,774 | | | | |
Prepaid expenses and other (includes prepaid expenses and other of consolidated VIEs of $8,206 and $— as of September 30, 2022 and December 31, 2021, respectively) | 65,167 | | | 42,038 | | | | |
Property and equipment, net | 37,402 | | | 54,635 | | | | |
Investment in Katapult | 25,848 | | | 27,900 | | | | |
Right of use asset - operating leases | 64,683 | | | 116,300 | | | | |
Deferred tax assets | 31,986 | | | 15,639 | | | | |
Goodwill | 424,292 | | | 429,792 | | | | |
Intangibles, net | 120,345 | | | 109,930 | | | | |
Other assets | 12,774 | | | 9,755 | | | | |
Total Assets | $ | 2,777,353 | | | $ | 2,460,596 | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Liabilities | | | | | | |
Accounts payable and accrued liabilities (includes accounts payable and accrued liabilities of consolidated VIEs of $10,642 and $9,886 as of September 30, 2022 and December 31, 2021, respectively) | $ | 66,723 | | | $ | 121,434 | | | | |
Deferred revenue | 25,111 | | | 21,649 | | | | |
Lease liability - operating leases | 66,370 | | | 122,431 | | | | |
Contingent consideration related to acquisition | 15,770 | | | 26,508 | | | | |
Income taxes payable | — | | | 680 | | | | |
Accrued interest (includes accrued interest of consolidated VIEs of $5,547 and $3,279 as of September 30, 2022 and December 31, 2021, respectively) | 18,048 | | | 34,974 | | | | |
Liability for losses on CSO lender-owned consumer loans | — | | | 6,908 | | | | |
Debt (includes debt and issuance costs of consolidated VIEs of $1,490,102 and $23,117 as of September 30, 2022 and $979,500 and $14,428 as of December 31, 2021, respectively) | 2,449,316 | | | 1,945,793 | | | | |
Other long-term liabilities | 11,563 | | | 13,845 | | | | |
Deferred tax liabilities | — | | | 6,044 | | | | |
Total Liabilities | 2,652,901 | | | 2,300,266 | | | | |
Commitments and contingencies (Note 11) | | | | | | |
Stockholders' Equity | | | | | | |
Preferred stock - $0.001 par value, 25,000,000 shares authorized; no shares were issued | — | | | — | | | | |
Common stock - $0.001 par value; 225,000,000 shares authorized; 50,183,4945 and 49,684,080 shares issued; and 40,485,381 and 40,810,444 shares outstanding at the respective period ends | 23 | | | 23 | | | | |
Treasury stock, at cost - 9,698,113 and 8,873,636 shares at the respective period ends | (136,832) | | | (124,302) | | | | |
Paid-in capital | 120,546 | | | 113,520 | | | | |
Retained earnings | 190,685 | | | 203,467 | | | | |
Accumulated other comprehensive loss | (49,970) | | | (32,378) | | | | |
Total Stockholders' Equity | 124,452 | | | 160,330 | | | | |
Total Liabilities and Stockholders' Equity | $ | 2,777,353 | | | $ | 2,460,596 | | | | |
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| September 30, 2023 (unaudited) | | December 31, 2022 | | | |
ASSETS | | | |
Cash and cash equivalents | $ | 82,550 | | | $ | 50,856 | | | | |
Restricted cash (includes restricted cash of consolidated VIEs of $24,613 and $20,177 as of September 30, 2023 and December 31, 2022, respectively) | 53,818 | | | 59,645 | | | | |
Gross loans receivable (includes loans of consolidated VIEs of $1,165,529 and $1,130,837 as of September 30, 2023 and December 31, 2022, respectively) | 1,254,401 | | | 1,254,395 | | | | |
Less: Allowance for credit losses (includes allowance for credit losses of consolidated VIEs of $185,669 and $67,609 as of September 30, 2023 and December 31, 2022, respectively) | (199,739) | | | (81,185) | | | | |
Loans receivable, net | 1,054,662 | | | 1,173,210 | | | | |
Income taxes receivable | 58,064 | | | 23,984 | | | | |
Prepaid expenses and other (includes prepaid expenses and other of consolidated VIEs of $16 and $5,069 as of September 30, 2023 and December 31, 2022, respectively) | 61,441 | | | 51,081 | | | | |
Property and equipment, net | 23,903 | | | 29,232 | | | | |
Investment in Katapult | 16,915 | | | 23,915 | | | | |
Right of use asset - operating leases | 51,413 | | | 58,177 | | | | |
Deferred tax assets (includes deferred tax assets of consolidated VIEs of $99 and $3,735 as of September 30, 2023 and December 31, 2022, respectively) | 14,194 | | | 18,138 | | | | |
Goodwill | 276,269 | | | 276,269 | | | | |
Intangibles, net | 74,336 | | | 70,913 | | | | |
Other assets | 9,387 | | | 8,370 | | | | |
Assets, discontinued operations | — | | | 945,403 | | | | |
Total Assets | $ | 1,776,952 | | | $ | 2,789,193 | | | | |
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | | | | | | |
Liabilities | | | | | | |
Accounts payable and accrued liabilities (includes accounts payable and accrued liabilities of consolidated VIEs of $3,006 and $6,704 as of September 30, 2023 and December 31, 2022, respectively) | $ | 62,992 | | | $ | 45,595 | | | | |
Deferred revenue (includes deferred revenue of consolidated VIEs of $14 and $31 as of September 30, 2023 and December 31, 2022, respectively) | 2,358 | | | 3,467 | | | | |
Lease liability - operating leases | 51,579 | | | 59,396 | | | | |
Income taxes payable | 2,537 | | | — | | | | |
Accrued interest (includes accrued interest of consolidated VIEs of $8,284 and $7,023 as of September 30, 2023 and December 31, 2022, respectively) | 20,953 | | | 38,460 | | | | |
Debt (includes debt and issuance costs of consolidated VIEs of $897,720 and $11,979 as of September 30, 2023 and $878,103 and $13,428 as of December 31, 2022, respectively) | 2,024,934 | | | 1,882,608 | | | | |
Other long-term liabilities | 9,620 | | | 11,736 | | | | |
Liabilities, discontinued operations | — | | | 802,065 | | | | |
Total Liabilities | 2,174,973 | | | 2,843,327 | | | | |
Commitments and contingencies (Note 7) | | | | | | |
Stockholders' (Deficit) Equity | | | | | | |
Preferred stock - $0.001 par value, 25,000,000 shares authorized; no shares were issued | — | | | — | | | | |
Common stock - $0.001 par value; 225,000,000 shares authorized; 50,998,655 and 50,216,165 shares issued; and 41,300,542 and 40,518,052 shares outstanding at the respective period ends | 23 | | | 23 | | | | |
Treasury stock, at cost - 9,698,113 shares at the respective period ends | (136,832) | | | (136,832) | | | | |
Paid-in capital | 127,877 | | | 124,483 | | | | |
(Accumulated deficit)/retained earnings | (332,464) | | | 4,268 | | | | |
Accumulated other comprehensive loss | (56,625) | | | (46,076) | | | | |
Total Stockholders' Deficit | (398,021) | | | (54,134) | | | | |
Total Liabilities and Stockholders' (Deficit) Equity | $ | 1,776,952 | | | $ | 2,789,193 | | | | |
See accompanying Notes to unaudited Condensed Consolidated Financial Statements.
ITEM 1. FINANCIAL STATEMENTS
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 | |
Revenue | Revenue | | | | | | | | Revenue | | | | | | | | |
Interest and fees revenue | Interest and fees revenue | $ | 180,515 | | | $ | 190,629 | | | $ | 723,802 | | | $ | 539,155 | | Interest and fees revenue | $ | 143,493 | | | $ | 155,940 | | | $ | 429,563 | | | $ | 659,725 | | |
Insurance premiums and commissions | 24,746 | | | 12,599 | | | 61,659 | | | 36,021 | | |
Other revenue | 8,859 | | | 6,052 | | | 23,259 | | | 18,348 | | |
Insurance and other income | | Insurance and other income | 24,370 | | | 30,469 | | | 74,684 | | | 77,822 | | |
Total revenue | Total revenue | 214,120 | | | 209,280 | | | 808,720 | | | 593,524 | | Total revenue | 167,863 | | | 186,409 | | | 504,247 | | | 737,547 | | |
Provision for losses | Provision for losses | 78,399 | | | 70,718 | | | 305,476 | | | 152,028 | | Provision for losses | 49,009 | | | 65,020 | | | 161,128 | | | 277,421 | | |
Net revenue | Net revenue | 135,721 | | | 138,562 | | | 503,244 | | | 441,496 | | Net revenue | 118,854 | | | 121,389 | | | 343,119 | | | 460,126 | | |
Operating Expenses | Operating Expenses | | Operating Expenses | | |
Salaries and benefits | Salaries and benefits | 53,413 | | | 62,110 | | | 215,569 | | | 175,347 | | Salaries and benefits | 52,148 | | | 49,179 | | | 161,911 | | | 196,121 | | |
Occupancy | Occupancy | 12,827 | | | 13,732 | | | 47,371 | | | 41,862 | | Occupancy | 10,454 | | | 12,419 | | | 32,683 | | | 46,442 | | |
Advertising | Advertising | 5,244 | | | 9,697 | | | 28,451 | | | 24,824 | | Advertising | 2,819 | | | 4,676 | | | 6,785 | | | 27,342 | | |
Direct operations | Direct operations | 11,729 | | | 14,883 | | | 52,296 | | | 40,552 | | Direct operations | 12,176 | | | 8,288 | | | 33,953 | | | 41,438 | | |
Depreciation and amortization | Depreciation and amortization | 9,499 | | | 7,285 | | | 27,985 | | | 19,685 | | Depreciation and amortization | 5,390 | | | 5,683 | | | 16,119 | | | 17,070 | | |
Other operating expense | Other operating expense | 23,646 | | | 14,851 | | | 58,809 | | | 45,020 | | Other operating expense | 11,207 | | | 22,595 | | | 37,179 | | | 56,354 | | |
Total operating expenses | Total operating expenses | 116,358 | | | 122,558 | | | 430,481 | | | 347,290 | | Total operating expenses | 94,194 | | | 102,840 | | | 288,630 | | | 384,767 | | |
Other expense (income) | Other expense (income) | | Other expense (income) | | |
Interest expense | Interest expense | 50,149 | | | 25,805 | | | 130,683 | | | 68,784 | | Interest expense | 55,798 | | | 38,155 | | | 150,303 | | | 103,840 | | |
Loss (income) from equity method investment | 2,309 | | | 1,582 | | | 2,053 | | | (676) | | |
Gain from equity method investment | — | | | — | | | — | | | (135,387) | | |
Loss on extinguishment of debt | 3,702 | | | 40,206 | | | 3,702 | | | 40,206 | | |
(Gain) loss on change in fair value of contingent consideration | (11,355) | | | 3,825 | | | (7,605) | | | 3,825 | | |
Loss from equity method investment | | Loss from equity method investment | 1,453 | | | 2,309 | | | 7,000 | | | 2,053 | | |
Extinguishment or modification of debt costs | | Extinguishment or modification of debt costs | — | | | 3,702 | | | 8,864 | | | 3,702 | | |
Gain on sale of business | Gain on sale of business | (68,443) | | | — | | | (68,443) | | | — | | Gain on sale of business | — | | | (68,443) | | | 2,027 | | | (68,443) | | |
Total other (income) expense | (23,638) | | | 71,418 | | | 60,390 | | | (23,248) | | |
Income (loss) before income taxes | 43,001 | | | (55,414) | | | 12,373 | | | 117,454 | | |
Provision (benefit) for income taxes | 17,348 | | | (13,375) | | | 11,464 | | | 29,241 | | |
Net income (loss) | 25,653 | | | (42,039) | | | 909 | | | 88,213 | | |
Miscellaneous expenses | | Miscellaneous expenses | — | | | — | | | 1,435 | | | — | | |
Total other expense (income) | | Total other expense (income) | 57,251 | | | (24,277) | | | 169,629 | | | 41,152 | | |
(Loss) income from continuing operations before income taxes | | (Loss) income from continuing operations before income taxes | (32,591) | | | 42,826 | | | (115,140) | | | 34,207 | | |
Provision for income taxes from continuing operations | | Provision for income taxes from continuing operations | 1,021 | | | 21,709 | | | 27,445 | | | 22,109 | | |
Net (loss) income from continuing operations | | Net (loss) income from continuing operations | (33,612) | | | 21,117 | | | (142,585) | | | 12,098 | | |
Net (loss) income from discontinued operations | | Net (loss) income from discontinued operations | (70,830) | | | 4,536 | | | (80,655) | | | (11,189) | | |
Net (loss) income | | Net (loss) income | $ | (104,442) | | | $ | 25,653 | | | $ | (223,240) | | | $ | 909 | | |
| Basic earnings (loss) per share | $ | 0.63 | | | $ | (1.02) | | | $ | 0.02 | | | $ | 2.13 | | |
Diluted earnings (loss) per share | $ | 0.63 | | | $ | (1.02) | | | $ | 0.02 | | | $ | 2.03 | | |
Basic (loss) earnings per share: | | Basic (loss) earnings per share: | | |
Continuing operations | | Continuing operations | $ | (0.81) | | | $ | 0.52 | | | $ | (3.48) | | | $ | 0.30 | | |
Discontinued operations | | Discontinued operations | (1.72) | | | 0.11 | | | (1.97) | | | (0.28) | | |
Basic (loss) earnings per share | | Basic (loss) earnings per share | $ | (2.53) | | | $ | 0.63 | | | $ | (5.45) | | | $ | 0.02 | | |
| Diluted (loss) earnings per share: | | Diluted (loss) earnings per share: | | |
Continuing operations | | Continuing operations | $ | (0.81) | | | $ | 0.52 | | | $ | (3.48) | | | $ | 0.30 | | |
Discontinued operations | | Discontinued operations | (1.72) | | | 0.11 | | | (1.97) | | | (0.28) | | |
Diluted (loss) earnings per share | | Diluted (loss) earnings per share | $ | (2.53) | | | $ | 0.63 | | | $ | (5.45) | | | $ | 0.02 | | |
| Weighted average common shares outstanding: | Weighted average common shares outstanding: | | Weighted average common shares outstanding: | | |
Basic | Basic | 40,479 | | | 41,220 | | | 40,203 | | | 41,459 | | Basic | 41,267 | | | 40,479 | | | 41,018 | | | 40,203 | | |
Diluted | Diluted | 40,835 | | | 41,220 | | | 40,754 | | | 43,422 | | Diluted | 41,267 | | | 40,835 | | | 41,018 | | | 40,754 | | |
See accompanying Notes to unaudited Condensed Consolidated Financial Statements.
ITEM 1. FINANCIAL STATEMENTS
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | $ | 25,653 | | | $ | (42,039) | | | $ | 909 | | | $ | 88,213 | |
Other comprehensive loss, net of tax: | | | | | | | |
Change in derivative instrument designated as cash flow hedge, net of tax | 4,567 | | | — | | | 4,567 | | | — | |
Foreign currency translation adjustment, net of tax | (18,272) | | | (10,611) | | | (22,159) | | | (2,042) | |
Other comprehensive loss, net of tax | (13,705) | | | (10,611) | | | (17,592) | | | (2,042) | |
Comprehensive income (loss) | $ | 11,948 | | | $ | (52,650) | | | $ | (16,683) | | | $ | 86,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 | | |
Net (loss) income | $ | (104,442) | | | $ | 25,653 | | | $ | (223,240) | | | $ | 909 | | | |
Other comprehensive income (loss) from continuing operations, net of tax: | | | | | | | | | |
Foreign currency translation adjustment, net of tax | (5,737) | | | (4,951) | | | 777 | | | (6,860) | | | |
Other comprehensive income (loss) from discontinued operations, net of tax: | | | | | | | | | |
Change in derivative instruments designated as cash flow hedges, net of tax | (11,419) | | | 4,567 | | | (5,333) | | | 4,567 | | | |
Foreign currency translation adjustment, net of tax | (7,866) | | | (13,321) | | | (5,993) | | | (15,299) | | | |
Other comprehensive income (loss), net of tax | (25,022) | | | (13,705) | | | (10,549) | | | (17,592) | | | |
Comprehensive (loss) income | $ | (129,464) | | | $ | 11,948 | | | $ | (233,789) | | | $ | (16,683) | | | |
See accompanying Notes to unaudited Condensed Consolidated Financial Statements.
ITEM 1. FINANCIAL STATEMENTS
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN (DEFICIT) EQUITY
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock, at cost | | Paid-in capital | | Retained Earnings (Deficit) | | AOCI | | Total Stockholders' Deficit |
| Shares Outstanding | | Par Value | | | | | |
Balances at December 31, 2022 | 40,518,052 | | | $ | 23 | | | $ | (136,832) | | | $ | 124,483 | | | $ | 4,268 | | | $ | (46,076) | | | $ | (54,134) | |
Cumulative effect of Adoption of ASU 2016-13, net of tax | — | | | — | | | — | | | — | | | (113,019) | | | — | | | (113,019) | |
Net loss | — | | | — | | | — | | | — | | | (59,471) | | | — | | | (59,471) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (2,720) | | | (2,720) | |
Dividends | — | | | — | | | — | | | — | | | (326) | | | — | | | (326) | |
Share-based compensation expense | — | | | — | | | — | | | 1,636 | | | — | | | — | | | 1,636 | |
Net settlement of share-based awards | 441,995 | | | — | | | — | | | (782) | | | — | | | — | | | (782) | |
Balances at March 31, 2023 | 40,960,047 | | | $ | 23 | | | $ | (136,832) | | | $ | 125,337 | | | $ | (168,548) | | | $ | (48,796) | | | $ | (228,816) | |
Net loss | — | | | — | | | — | | | — | | | (59,327) | | | — | | | (59,327) | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | 17,193 | | | 17,193 | |
Dividends | — | | | — | | | — | | | — | | | (25) | | | — | | | (25) | |
Share-based compensation expense | — | | | — | | | — | | | 2,618 | | | — | | | — | | | 2,618 | |
Net settlement of share-based awards | 181,976 | | | — | | | — | | | (16) | | | — | | | — | | | (16) | |
Balances at June 30, 2023 | 41,142,023 | | | $ | 23 | | | $ | (136,832) | | | $ | 127,939 | | | $ | (227,900) | | | $ | (31,603) | | | $ | (268,373) | |
Net loss | — | | | — | | | — | | | — | | | (104,442) | | | — | | | (104,442) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (25,022) | | | (25,022) | |
Dividends | — | | | — | | | — | | | — | | | (122) | | | — | | | (122) | |
Share-based compensation expense | — | | | — | | | — | | | 98 | | | — | | | — | | | 98 | |
Net settlement of share-based awards | 158,519 | | | — | | | — | | | (160) | | | — | | | — | | | (160) | |
Balances at September 30, 2023 | 41,300,542 | | | $ | 23 | | | $ | (136,832) | | | $ | 127,877 | | | $ | (332,464) | | | $ | (56,625) | | | $ | (398,021) | |
ITEM 1. FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock, at cost | | Paid-in capital | | Retained Earnings | | AOCI | | Total Stockholders' Equity |
| Shares Outstanding | | Par Value | | | | | |
Balance at December 31, 2021 | 40,810,444 | | | $ | 23 | | | $ | (124,302) | | | $ | 113,520 | | | $ | 203,467 | | | $ | (32,378) | | | $ | 160,330 | |
Net income | — | | | — | | | — | | | — | | | 1,336 | | | — | | | 1,336 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | 6,633 | | | 6,633 | |
Dividends | — | | | — | | | — | | | — | | | (4,791) | | | — | | | (4,791) | |
Share-based compensation expense | — | | | — | | | — | | | 4,093 | | | — | | | — | | | 4,093 | |
Proceeds from exercise of stock options | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Repurchase of common stock | (824,477) | | | — | | | (12,530) | | | — | | | — | | | — | | | (12,530) | |
Net settlement of share-based awards | 362,815 | | | — | | | — | | | (2,284) | | | — | | | — | | | (2,284) | |
Balance at March 31, 2022 | 40,348,782 | | | $ | 23 | | | $ | (136,832) | | | $ | 115,329 | | | $ | 200,012 | | | $ | (25,745) | | | $ | 152,787 | |
Net loss | — | | | — | | | — | | | — | | | (26,080) | | | — | | | (26,080) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (10,520) | | | (10,520) | |
Dividends | — | | | — | | | — | | | — | | | (4,434) | | | — | | | (4,434) | |
Share-based compensation expense | — | | | — | | | — | | | 4,415 | | | — | | | — | | | 4,415 | |
Common stock issued for RSUs vesting, net of shares withheld and withholding paid for employee taxes | 108,969 | | | — | | | — | | | (588) | | | — | | | — | | | (588) | |
Balance at June 30, 2022 | 40,457,751 | | | $ | 23 | | | $ | (136,832) | | | $ | 119,156 | | | $ | 169,498 | | | $ | (36,265) | | | $ | 115,580 | |
Net income | — | | | — | | | — | | | — | | | 25,653 | | | — | | | 25,653 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (13,705) | | | (13,705) | |
Dividends | — | | | — | | | — | | | — | | | (4,466) | | | — | | | (4,466) | |
Share-based compensation expense | — | | | — | | | — | | | 1,448 | | | — | | | — | | | 1,448 | |
Common stock issued for RSUs vesting, net of shares withheld and withholding paid for employee taxes | 27,630 | | | — | | | — | | | (58) | | | — | | | — | | | (58) | |
Balance at September 30, 2022 | 40,485,381 | | | $ | 23 | | | $ | (136,832) | | | $ | 120,546 | | | $ | 190,685 | | | $ | (49,970) | | | $ | 124,452 | |
See the 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, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2023 | | 2022 | |
Cash flows from operating activities | | | | |
Net income | $ | 909 | | | $ | 88,213 | | |
Cash flows from operating activities: | | Cash flows from operating activities: | | | | |
Net (loss) income from continuing operations | | Net (loss) income from continuing operations | $ | (142,585) | | | $ | 12,098 | | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | Depreciation and amortization | 27,985 | | | 19,685 | | Depreciation and amortization | 16,119 | | | 17,070 | | |
Provision for losses | Provision for losses | 305,476 | | | 152,028 | | Provision for losses | 161,128 | | | 277,421 | | |
Amortization of debt issuance costs and bond discount | Amortization of debt issuance costs and bond discount | 4,978 | | | 4,794 | | Amortization of debt issuance costs and bond discount | 13,076 | | | 2,943 | | |
Loss on extinguishment of debt | 3,702 | | | 40,206 | | |
Extinguishment or modification of debt costs | | Extinguishment or modification of debt costs | 8,864 | | | 3,702 | | |
Deferred income tax benefit | Deferred income tax benefit | (24,157) | | | (10,730) | | Deferred income tax benefit | 22,482 | | | (15,470) | | |
Gain on disposal of Legacy U.S. Direct Lending business | (68,443) | | | — | | |
Loss on disposal of property and equipment | 60 | | | 6,816 | | |
(Gain) loss on disposal of property and equipment | | (Gain) loss on disposal of property and equipment | (19) | | | 60 | | |
Gain on disposal of Legacy U.S. Direct Lending Business | | Gain on disposal of Legacy U.S. Direct Lending Business | — | | | (68,443) | | |
Loss from equity method investment | Loss from equity method investment | 2,053 | | | (676) | | Loss from equity method investment | 7,000 | | | 2,053 | | |
Gain from equity method investment | — | | | (135,387) | | |
Change in fair value of contingent consideration | (7,605) | | | 3,825 | | |
Share-based compensation | Share-based compensation | 9,956 | | | 10,148 | | Share-based compensation | 4,352 | | | 8,465 | | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | | |
Accrued interest on loans receivable | Accrued interest on loans receivable | 86,932 | | | 19,619 | | Accrued interest on loans receivable | (4,608) | | | 52,785 | | |
Prepaid expenses and other assets | Prepaid expenses and other assets | (4,251) | | | (2,989) | | Prepaid expenses and other assets | 8,281 | | | 8,029 | | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | (54,326) | | | 16,591 | | Accounts payable and accrued liabilities | 17,885 | | | (50,246) | | |
Deferred revenue | Deferred revenue | 10,730 | | | 10,084 | | Deferred revenue | (1,107) | | | 4,956 | | |
Income taxes payable | Income taxes payable | (679) | | | — | | Income taxes payable | 2,558 | | | (679) | | |
Income taxes receivable | Income taxes receivable | 17,636 | | | 8,270 | | Income taxes receivable | (34,052) | | | 17,544 | | |
Accrued interest | Accrued interest | (17,827) | | | (9,017) | | Accrued interest | (12,492) | | | (17,827) | | |
Other long-term liabilities | Other long-term liabilities | 2,602 | | | (770) | | Other long-term liabilities | (28,776) | | | (4,363) | | |
Net cash provided by continuing operating activities | Net cash provided by continuing operating activities | 295,731 | | | 220,710 | | Net cash provided by continuing operating activities | 38,106 | | | 250,098 | | |
Cash flows from investing activities | | | | |
Net cash (used in) provided by discontinued operating activities | | Net cash (used in) provided by discontinued operating activities | (18,525) | | | 45,633 | | |
Net cash provided by operating activities | | Net cash provided by operating activities | 19,581 | | | 295,731 | | |
Cash flows from investing activities: | | Cash flows from investing activities: | | | | |
Purchase of property, equipment and software | Purchase of property, equipment and software | (35,270) | | | (14,924) | | Purchase of property, equipment and software | (9,213) | | | (19,160) | | |
Loans receivable originated or acquired | Loans receivable originated or acquired | (1,827,067) | | | (985,603) | | Loans receivable originated or acquired | (675,321) | | | (1,109,119) | | |
Loans receivable repaid | Loans receivable repaid | 1,075,077 | | | 661,456 | | Loans receivable repaid | 568,752 | | | 631,430 | | |
Proceeds from Katapult | — | | | 146,878 | | |
Acquisition of Flexiti, net of acquiree's cash received | — | | | (91,203) | | |
Divestiture of Legacy U.S. Direct Lending business, net of cash provided | 288,980 | | | — | | |
Divestiture of Legacy U.S. Direct Lending Business, net of cash provided | | Divestiture of Legacy U.S. Direct Lending Business, net of cash provided | (2,027) | | | 288,980 | | |
Acquisition of First Heritage, net of acquiree's cash received | Acquisition of First Heritage, net of acquiree's cash received | (131,012) | | | — | | Acquisition of First Heritage, net of acquiree's cash received | — | | | (131,012) | | |
Net cash used in continuing investing activities | | Net cash used in continuing investing activities | (117,809) | | | (338,881) | | |
Net cash used in discontinued investing activities | | Net cash used in discontinued investing activities | (84,994) | | | (290,411) | | |
Net cash used in investing activities | Net cash used in investing activities | (629,292) | | | (283,396) | | Net cash used in investing activities | (202,803) | | | (629,292) | | |
Cash flows from financing activities | Cash flows from financing activities | | | | Cash flows from financing activities | | | | |
Proceeds from SPV and SPE facilities | 1,423,291 | | | 93,307 | | |
Payments on SPV and SPE facilities | (1,015,688) | | | (9,153) | | |
Proceeds from SPV facilities | | Proceeds from SPV facilities | 185,917 | | | 822,590 | | |
Payments on SPV facilities | | Payments on SPV facilities | (166,084) | | | (697,337) | | |
Debt issuance costs paid | Debt issuance costs paid | (9,801) | | | (15,957) | | Debt issuance costs paid | (27,436) | | | (9,801) | | |
Proceeds from credit facilities | Proceeds from credit facilities | 137,812 | | | 20,931 | | Proceeds from credit facilities | 155,000 | | | 137,812 | | |
Payments on credit facilities | Payments on credit facilities | (137,812) | | | (20,931) | | Payments on credit facilities | (40,000) | | | (137,812) | | |
Extinguishment of 8.25% Senior Secured Notes | — | | | (690,000) | | |
| Proceeds from issuance of 7.50% Senior Secured Notes | — | | | 750,000 | | |
Payments of call premiums from early debt extinguishments | — | | | (31,250) | | |
Proceeds from exercise of stock options | — | | | 266 | | |
Payments to net share settle equity awards | Payments to net share settle equity awards | (2,930) | | | (1,818) | | Payments to net share settle equity awards | (959) | | | (2,930) | | |
Repurchase of common stock | Repurchase of common stock | (13,531) | | | (17,191) | | Repurchase of common stock | — | | | (13,531) | | |
Dividends paid to stockholders | Dividends paid to stockholders | (13,691) | | | (11,497) | | Dividends paid to stockholders | (473) | | | (13,691) | | |
Net cash provided by continuing financing activities | | Net cash provided by continuing financing activities | 105,965 | | | 85,300 | | |
Net cash provided by discontinued financing activities | | Net cash provided by discontinued financing activities | 47,828 | | | 282,350 | | |
Net cash provided by financing activities | Net cash provided by financing activities | 367,650 | | | 66,707 | | Net cash provided by financing activities | 153,793 | | | 367,650 | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | Effect of exchange rate changes on cash, cash equivalents and restricted cash | (6,461) | | | (176) | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | 120 | | | (6,461) | | |
Net increase in cash, cash equivalents and restricted cash | 27,628 | | | 3,845 | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | (29,309) | | | 27,628 | | |
Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | 162,075 | | | 268,108 | | Cash, cash equivalents and restricted cash at beginning of period | 165,677 | | | 162,075 | | |
Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 189,703 | | | $ | 271,953 | | Cash, cash equivalents and restricted cash at end of period | $ | 136,368 | | | $ | 189,703 | | |
See the accompanying Notes to unaudited Condensed Consolidated Financial Statements.Statements
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands, unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited Condensed Consolidated Balance Sheets as of September 30, 20222023 and 2021 2022to the cash, cash equivalents and restricted cash used in the unaudited Condensed Consolidated Statement of Cash Flows (in thousands):
| | | | | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
Cash and cash equivalents | | $ | 45,683 | | | $ | 205,785 | |
Restricted cash (includes restricted cash of consolidated VIEs of $89,849 and $57,155 as of September 30, 2022 and December 31, 2021, respectively) | | 144,020 | | | 66,168 | |
Total cash, cash equivalents and restricted cash used in the Statement of Cash Flows | | $ | 189,703 | | | $ | 271,953 | |
| | | | | | | | | | | | | | | | |
| | September 30, |
| | 2023 | | 2022 | | |
Cash and cash equivalents | | $ | 82,550 | | | $ | 40,068 | | | |
Restricted cash (includes restricted cash of consolidated VIEs of $24,613 and $20,263 as of September 30, 2023 and September 30, 2022, respectively) | | 53,818 | | | 66,962 | | | |
Cash, discontinued operations ($5,615 cash and cash equivalents and $77,058 restricted cash as of September 30, 2022) | | — | | | 82,673 | | | |
Total cash, cash equivalents and restricted cash used in the Statement of Cash Flows | | $ | 136,368 | | | $ | 189,703 | | | |
See accompanying Notes to unaudited Condensed Consolidated Financial Statements.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Nature of Operations
The terms “CURO" and the “Company” refer to CURO Group Holdings Corp. and its direct and indirect subsidiaries as a combined entity, except where otherwise stated.
The Company is a tech-enabled,an omni-channel consumer finance company serving customers in the U.S. and Canada for over 25 years. Our roots in the consumer finance market run deep. We have worked diligently to provide customers a variety of convenient, easily accessible financial services. Our decades of alternative data power a hard-to-replicate underwriting and scoring engine, mitigating risk across the full spectrum of non-prime and near-prime consumers in the U.S and non-prime and prime consumers in Canada.credit products.
Basis of Presentation
The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with U.S. GAAP and the accounting policies described in its 20212022 Form 10-K. Interim results of operations are not necessarily indicative of results that might be expected for future interim periods or for the year ending December 31, 2022.2023.
While certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. Additionally, the Company qualifies as a Smaller Reporting Company (SRC) as defined by the SEC,an SRC, which allows registrantsit 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, theJune 30th. The Company met the definition of an SRC as of June 30, 2022. As such, we made the election2023 and reflected SRC status beginning with our first quarterly report following the determination, as of and for the quarter ended June 30, 2022. We will reevaluate ourevaluate its status as of June 30, 2023.2024.
The unaudited Condensed Consolidated Financial Statements and the accompanying notes reflect 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.
Revised Presentation
On August 31, 2023, the Company completed the divestiture of Flexiti to Questrade Financial Group Inc. Flexiti constituted the entirety of the Company’s Canada POS Lending operating segment, which resulted in treatment of the Canada POS Lending operating segment as discontinued operations for all periods presented. Throughout this report, current and prior period financial information is presented on a continuing operations basis, excluding the results and positions of the Canada POS Lending operating segment, unless otherwise noted. SeeNote 14, "DiscontinuedOperations" for additional information.
Beginning January 1, 2022,2023, the Company startedbegan reporting "Interest"Insurance and fees revenue," "Insurance premiums and commissions," and "Other revenue"other income" in place of the previously reported "Revenue""Insurance premiums and commissions" and "Other revenue" line itemitems in the unaudited Condensed Consolidated Statements of Operations. Prior period amounts have been reclassified to conform with current period presentation.
On July 8, 2022Beginning January 1, 2023, the Company completedrenamed the divestiture of its Legacy U.S. Direct Lending businesspreviously reported Allowance for loan losses to Community Choice Financial,Allowance for a sales price of $345.0 million. Refercredit losses on the unaudited Condensed Consolidated Balance Sheet. Prior period amounts have been reclassified to Note 14, "Acquisitions and Divestiture" for further discussion.conform with current period presentation.
Principles of Consolidation
The unaudited Condensed Consolidated Financial Statements reflect the accounts of CURO and its direct and indirect subsidiaries, including Heights Finance, which we acquired on December 27, 2021 and First Heritage, which we acquired on July 13, 2022. Refer to Note 14, "Acquisitions and Divestiture" for further disclosures related to these acquisitions.subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the unaudited Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions including those impacted 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. Some estimates may also affect the reported amounts of revenues and expenses during the periods presented. Significant estimates that the Company made in the accompanying unaudited Condensed Consolidated Financial Statements include ALL,ACL, certain assumptions related to equity investments, goodwill and intangibles, accruals related to self-insurance, CSO liability for losses, estimated tax liabilities and the accounting for the First Heritage, Heights Finance and Flexiti acquisitions. Actual results may differ from those estimates.
Allowance for Credit Losses
The FASB has changed the impairment model for estimating credit losses on financial assets. The previous incurred loss impairment model required the recognition of credit losses when it was probable that a loss had been incurred. The incurred loss
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Acquisitions
First Heritage Credit, LLC
On July 13, 2022, CURO closedmodel was replaced by the acquisitionCECL model, which requires entities to estimate the lifetime expected credit loss on financial instruments and to record an allowance to offset the amortized cost basis of First Heritage,the financial asset. The CECL model requires earlier recognition of credit losses as compared to the incurred loss approach. The Company adopted this standard effective January 1, 2023. The initial impact of adoption on continuing operations was a consumer lender that provides near-prime installment loans along with customary opt-in insurance and other financial products, based in Ridgeland, Mississippi, for a total purchase price$89.6 million increase to Accumulated deficit ($121.1 million increase to the ACL, net of $140.0$31.4 million in cash.
Heights Finance
On December 27, 2021, CURO closedtaxes). For the acquisition of Heights Finance,three months ended March 31, 2023, the Company recorded a consumer finance company that provides Installment loans and offers customary opt-in insurance and other financial products, based in Greenville, South Carolina for a total purchase price of $360.0 million ($335.0 million in cash plus $25.0 million in stock).
Flexiti
On March 10, 2021, CURO closed its acquisition of Flexiti, a POS and BNPL provider based in Toronto, Ontario, in a transaction accounted for as a business combination, for a total purchase price of up to $122.5 million ($86.5 million in cash and up to $32.8 million in contingent cash consideration subject to future operating metrics).
Refer tovaluation allowance against the U.S. DTAs. See Note 14,"Acquisitions and Divestiture"8 - Income Taxes for further information regardinginformation. As a result, the acquisition and Note 13, "Goodwill" forCompany decreased the tax impact to the Company's goodwill balanceAccumulated deficit by $13.0 million as a result of the acquisitions.valuation allowance for the three months ended March 31, 2023. As of adoption on January 1, 2023, the impact of CECL for continuing operations was recorded as a $102.7 million increase to Accumulated deficit ($121.2 million increase to the ACL, net of $18.5 million in taxes). The ACL on gross loans receivables reduces the outstanding gross loans receivables balance in the unaudited Condensed Consolidated Balance Sheets. After adoption, all changes in the ACL, net of charge-offs and recoveries, are recorded as “Provision for losses” in the unaudited Condensed Consolidated Statements of Operations.
DivestitureThe ACL is based on an analysis of historical loss, charge-off rates and recoveries. The Company also considers delinquency trends, impact of new loan products, changes to underwriting criteria or lending policies, changes in jurisdictional regulations or laws, recent credit trends and reasonable and supportable economic forecasts, which cover the life of the loan. The Company will also adjust for quantitative and qualitative factors that are not fully reflected in the historical data. If a loan is deemed to be uncollectible before it is fully reserved based on received information (e.g., receipt of customer bankruptcy notice or death), the Company charges off the loan at that time. The Company charges credit losses, including accrued interest, against the allowance when the account reaches 180 days contractually delinquent, subject to certain exceptions. Any recoveries on loans previously charged to the ACL are credited to the ACL when collected.
Legacy U.S. Direct Lending BusinessThe Company selected a static pool Probability of Default (“PD”) / Loss Given Default (“LGD”) / Exposure at Default ("EAD") model to estimate its base allowance for credit losses, in which the estimated loss is equal to the product of PD, LGD and EAD. Historical static pools of net loans receivables are tracked over the term of the pools to identify the probability of loss (PD) and the average size of losses, net of recoveries (LGD and EAD).
On July 8, 2022,As loans receivable are originated, provisions for credit losses are recorded in amounts sufficient to maintain an ACL at an adequate level to provide for estimated losses over the contractual term of the loan receivables. Subsequent changes to the contractual terms resulting from re-underwriting are not included in the loan receivable’s expected life. The Company uses its historical loss experience to forecast expected credit losses. Historical information about losses generally provides a basis for the estimate of expected credit losses. The Company also considers the need to adjust historical information to reflect the extent to which current conditions differ from the conditions that existed for the period over which historical information was evaluated. These adjustments to historical loss information may be qualitative or quantitative in nature.
Reasonable and supportable macroeconomic forecasts are required for the Company’s ACL model. The projected change in creditworthiness is modeled using Congressional Budget Office data such as unemployment rate and personal income. The Company adjusts the historical loss experience by relevant qualitative factors for these expectations.
Canada Loss Recognition
Effective January 1, 2023, the Company completedmodified the divestituretimeframe over which it charges-off loans within the loans in Canada and made related refinements to its loss provisioning methodology. Prior to January 1, 2023, the Company deemed the loans in Canada uncollectible and charged-off on day 91 past-due. As part of our policy alignment, the Company revised its Legacy U.S. Direct Lending businessestimates and now considers a loan in Canada uncollectible and charged-off when they have been contractually past-due for more than 180 consecutive days. Consequently, such past-due loans and related accrued interest now remain in loans receivable for 180 days before being charged-off against the ACL. All recoveries on charged-off loans are credited to Community Choice Financial, for total cashthe ACL when received. The Company evaluates the adequacy of $345.0the ACL compared to the related gross loans receivable balances that include accrued interest.
The aforementioned change was treated as a change in accounting estimate and applied prospectively effective January 1, 2023.
The change affects comparability to prior periods as follows:
•Gross loans receivable: balances as of September 30, 2023 include $21.7 million of which $35.0 million is payable over 12 months. The divestiture resulted in a gain of $68.4 millionloans that are between 91 and 180 days past-due with related accrued interest, while such balances for prior periods do not include any loans that are between 91 and 180 days past-due.
•Revenues: for the three and nine month periods ended September 30, 2023, revenues include accrued interest on the loans between 91 and 180 days past-due of $1.4 million and $3.9 million respectively, while revenues in prior periods do not include any loans that are between 91 and 180 days past-due.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
•Provision for Losses: effective January 1, 2023, past-due, unpaid balances plus related accrued interest on the loans charge off on day 181. Provision expense is affected by NCOs plus changes to the required ACL. Because NCOs now include unpaid principal and up to 180 days of related accrued interest, as compared to prior periods, NCO amounts and rates are higher and the required ACL as a percentage of gross loans receivable is higher. The Company recognized $63.9 million in charge offs related to the loans for the nine months ended September 30, 2022, which2023 and, absent the policy change, would have recognized $84.7 million for the nine months ended September 30, 2023 in gross charge offs on those loans. There was recorded in "Gain on sale of business"no impact on the unaudited Condensed Consolidated Statement of Operations.
Impacts of COVID-19Continued Listing Standard Notice from NYSE
For details regardingOn October 16, 2023, the effect COVID-19 hadCompany received a written notice (the “Market Cap Notice”) from the NYSE that the Company was not in compliance with the continued listing criteria set forth in Section 802.01B of the NYSE’s Listed Company Manual with respect to the minimum market capitalization and shareholders' equity requirements, as the average market capitalization of the Company over a consecutive 30 trading-day period was less than $50 million and, at the same time, the Company’s last reported stockholders’ equity was less than $50 million. As of October 16, 2023, the 30 trading-day average market capitalization was approximately $44.7 million, and its last reported stockholders’ deficit was $398.0 million ($268.4 million as of June 30, 2023). Within 45 days of receipt of the Market Cap Notice, the Company will respond to the NYSE with a business plan aimed to demonstrate the definitive actions the Company has taken, or is taking, to regain compliance with the continued listing standards within 18 months of the Market Cap Notice. Should the Listings Operations Committee of the NYSE review and approve the plan, the Company's common stock will continue to be listed and traded on the Company's operations in 2020 and 2021,NYSE during the 18-month cure period, subject to the Company's response to mitigatecompliance with the impactother continued listing criteria of the pandemicNYSE and the U.S.periodic monitoring of the business plan by the NYSE.
On October 27, 2023, the Company received written notice from the NYSE that the Company was not in compliance with the continued listing criteria set forth in 802.01C of the NYSE's Listed Company Manual with respect to stock price requirements (the "Stock Price Notice"). The Company has a period of six months following the receipt of the Stock Price Notice to regain compliance. As a result, the Company has until April 27, 2024 to regain compliance. If the Company determines that in order to cure the price condition it is necessary to take an action that requires shareholder approval, it must obtain shareholder approval by no later than its 2024 annual meeting and Canadian federalmust implement the action promptly thereafter.
The Market Cap Notice and local responses toStock Price Notice do not affect the pandemic, refer toCompany’s reporting obligations with the 2021 Form 10-K.Securities and Exchange Commission, and they do not conflict with or cause an event of default under any of the Company’s material debt or other agreements.
Recently Issued Accounting Pronouncements Not YetRecently Adopted
ASU 2023-03
In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. This ASU amends various paragraphs in the accounting codification pursuant to the issuance of Commission Staff Bulletin number 120. As the ASU does not provide any new guidance, there is no transition or effective date associated with its adoption. Accordingly, the Company adopted ASU 2023-03 immediately upon its issuance. The adoption of ASU 2023-03 did not have any impact on the Company’s consolidated financial statement presentation or related disclosures.
ASU 2016-13 and subsequent amendmentsSubsequent Amendments
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, ASU 2019-05 in May 2019, ASU 2019-10 and -11 in November 2019, ASU 2020-02 in February 2020 and ASU 2022-02 in March 2022. The amended standard 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. 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 2019-10 amended the mandatory effective date for ASU 2016-13. As a result ASU 2016-13 and related amendments are effective for fiscal years beginning after December 15, 2022 for entities that qualified as a smaller reporting company as of June 30, 2019, such as the Company. ASU 2016-13 and its amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. The Company deferred the adoption of ASU 2016-13 untilCECL on January 1, 2023, through a modified-retrospective approach, the Company recorded an increase to the continuing operations ACL of $121.1 million and a corresponding one-time, cumulative reduction to continuing operations retained earnings of $102.7 million (net of $18.5 million in taxes) in the unaudited Condensed Consolidated Balance Sheet as permitted under of January 1, 2023. The Company’s continuing operations ACL increased from 6.5% to 16.1% as a percentage of the amortized cost basis on January 1, 2023.
In March 2022, the FASB issued ASU 2019-10.2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which removes the accounting guidance for troubled debt restructurings and requires entities to evaluate whether a modification provided to a customer results in a new loan or continuation of an existing loan. The Companyamendments enhance existing disclosures and require new disclosures for receivables when there has performed parallel testing through the third quarter of 2022. We continue to refine our model to estimate the expected credit losses, as well as, finalize our processes and internal controlsbeen a modification in order to comply with the adoption of ASU 2016-13. The Company believes the implementation will have a material effect on the Company's consolidated financial statements.contractual cash flows due
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
to a customer experiencing financial difficulties. Additionally, the amendments require disclosure of gross charge-off information by year of origination in the vintage disclosures. The Company adopted this guidance as of January 1, 2023 using the modified retrospective method. Adoption of this standard did not have a material impact on our unaudited Condensed Consolidated Financial Statements.
ASU 2020-04 and subsequent amendments
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform - FacilitationAs result of the Effectsadoption of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions2016-13, several of our significant accounting policies have changed to U.S. GAAP guidance on contract modifications and hedge accounting to easereflect the financial reporting burdensrequirements of the upcoming market transition from LIBOR and other interbank offered rates to alternative reference rates, suchnew standard. See above for these updated significant accounting policies as SOFR. Entities can elect to not 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 also can 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 FASB has recently extended the adoption date to December 31, 2024. The FASB also issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope inof January 2021. It clarifies that certain optional expedients and exceptions in Topic 848 apply to derivatives that are affected by the discounting transition. The amendments in this ASU affect the guidance in ASU 2020-04 and are effective in the same timeframe as ASU 2020-04. As of September 30, 2022, the Company has transitioned all debt facilities from LIBOR to SOFR.1, 2023.
ASU 2021-08
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with ASC 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, and earlyThe adoption is permitted. While the Company is continuing to assess the timing of adoption and the potential impacts of ASU 2021-08 it doesat January 1, 2023 did not expect ASU 2021-08 will have a material effect on its financial statements.the Company's unaudited Condensed Consolidated Financial Statements.
NOTE 2 -– LOANS RECEIVABLE AND REVENUE
Effective with the sale of the Legacy U.S. Direct Lending Business on July 8, 2022, the Company no longer guarantees loans originated by third-party lenders through CSO programs.
The following table summarizes revenue by product (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 | | |
Revolving LOC | | $ | 51,039 | | | $ | 52,461 | | | $ | 149,614 | | | $ | 200,565 | | | |
Installment | | 92,454 | | | 103,479 | | | 279,949 | | | 459,160 | | | |
Total interest and fees revenue | | 143,493 | | | 155,940 | | | 429,563 | | | 659,725 | | | |
Insurance and other income | | 24,370 | | | 30,469 | | | 74,684 | | | 77,822 | | | |
Total revenue | | $ | 167,863 | | | $ | 186,409 | | | $ | 504,247 | | | $ | 737,547 | | | |
The following tables summarize loans receivable by product and the related delinquent loans receivable (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 | |
| | Revolving LOC | | Installment | | Total | |
Current loans receivable | | $ | 408,817 | | | $ | 651,326 | | | $ | 1,060,143 | | |
1-30 days past-due | | 20,025 | | | 67,141 | | | 87,166 | | |
Delinquent: | | | | | | | |
31-60 days past-due | | 10,572 | | | 20,272 | | | 30,844 | | |
61-90 days past-due | | 8,705 | | | 12,314 | | | 21,019 | | |
91 + days past-due | | 20,922 | | | 34,307 | | | 55,229 | | |
Total delinquent loans receivable | | 40,199 | | | 66,893 | | | 107,092 | | |
Total loans receivable | | 469,041 | | | 785,360 | | | 1,254,401 | | |
Less: allowance for credit losses | | (119,183) | | | (80,556) | | | (199,739) | | |
Loans receivable, net | | $ | 349,858 | | | $ | 704,804 | | | $ | 1,054,662 | | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Revolving LOC | | | | | Installment | | Total |
Current loans receivable | | $ | 409,615 | | | | | | $ | 649,262 | | | $ | 1,058,877 | |
1-30 days past-due | | 22,991 | | | | | | 76,709 | | | 99,700 | |
Delinquent: | | | | | | | | | |
31-60 days past-due | | 9,403 | | | | | | 21,480 | | | 30,883 | |
61-90 days past-due | | 7,878 | | | | | | 14,143 | | | 22,021 | |
91 + days past-due | | 1,190 | | | | | | 41,724 | | | 42,914 | |
Delinquent loans receivable | | 18,471 | | | | | | 77,347 | | | 95,818 | |
Total loans receivable | | 451,077 | | | | | | 803,318 | | | 1,254,395 | |
Less: allowance for credit losses | | (37,972) | | | | | | (43,213) | | | (81,185) | |
Loans receivable, net | | $ | 413,105 | | | | | | $ | 760,105 | | | $ | 1,173,210 | |
|
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 |
| Revolving LOC | Installment | Other | Total |
Allowance for credit losses: | | | | |
Balance, beginning of period | $ | 125,650 | | $ | 84,643 | | $ | — | | $ | 210,293 | |
Charge-offs | (26,080) | | (45,801) | | (1,669) | | (73,550) | |
Recoveries | 4,057 | | 12,459 | | 155 | | 16,671 | |
Net charge-offs | (22,023) | | (33,342) | | (1,514) | | (56,879) | |
Provision for losses | 19,031 | | 28,464 | | 1,514 | | 49,009 | |
Effect of foreign currency translation | (3,475) | | 791 | | — | | (2,684) | |
Balance, end of period | $ | 119,183 | | $ | 80,556 | | $ | — | | $ | 199,739 | |
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 |
| Revolving LOC | Installment | Other | Total |
Allowance for credit losses: | | | | |
Balance, beginning of period, prior to adoption of ASU 2016-13 | $ | 37,972 | | $ | 43,213 | | $ | — | | $ | 81,185 | |
Impact of adoption of ASU 2016-13 | 69,655 | | 51,566 | | — | | 121,221 | |
Balance, January 1, 2023 | 107,627 | | 94,779 | | — | | 202,406 | |
Charge-offs | (60,131) | | (142,721) | | (5,313) | | (208,165) | |
Recoveries | 10,095 | | 32,830 | | 619 | | 43,544 | |
Net charge-offs | (50,036) | | (109,891) | | (4,694) | | (164,621) | |
Provision for losses | 61,659 | | 94,775 | | 4,694 | | 161,128 | |
Effect of foreign currency translation | (67) | | 893 | | — | | 826 | |
Balance, end of period | $ | 119,183 | | $ | 80,556 | | $ | — | | $ | 199,739 | |
The following table presents an analysis of the activity in the ACL and the liability for losses on CSO lender-owned consumer loans (in thousands) for the three and nine months ended September 30, 2022, prior to the adoption of ASU 2016-13, as defined by the accounting guidance in effect at that time:
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Revolving LOC | Installment | Other | Total |
Allowance for credit losses: | | | | |
Balance, beginning of period | $ | 46,648 | | $ | 45,057 | | $ | — | | $ | 91,705 | |
Charge-offs | (27,974) | | (45,544) | | (3,319) | | (76,837) | |
Recoveries | 3,181 | | 15,741 | | 217 | | 19,139 | |
Net charge-offs | (24,793) | | (29,803) | | (3,102) | | (57,698) | |
Provision for losses | 28,408 | | 33,510 | | 3,102 | | 65,020 | |
Divestiture (1) | (13,555) | | (13,691) | | — | | (27,246) | |
Effect of foreign currency translation | (2,084) | | (162) | | — | | (2,246) | |
Balance, end of period | $ | 34,624 | | $ | 34,911 | | $ | — | | $ | 69,535 | |
| | | | |
Liability for losses on CSO lender-owned consumer loans (2): | | | | |
Balance, beginning of period | $ | — | | $ | 8,083 | | $ | — | | $ | 8,083 | |
Divestiture (1) | — | | (8,083) | | — | | (8,083) | |
Balance, end of period | $ | — | | $ | — | | $ | — | | $ | — | |
(1) Write off of the ACL or liability for losses on CSO lender-owned consumer loans related to loan balance sold or guarantees transferred from the Company on July 8, 2022 upon the completion of the divestiture of the Legacy U.S. Direct Lending Business. |
(2) All balances in connection with the CSO programs were disposed of on July 8, 2022 upon the divestiture of the Legacy U.S. Direct Lending Business. |
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Revolving LOC | Installment | Other | Total |
Allowance for credit losses: | | | | |
Balance, beginning of period | $ | 45,951 | | $ | 19,420 | | $ | — | | $ | 65,371 | |
Charge-offs | (102,549) | | (172,466) | | (9,630) | | (284,645) | |
Recoveries | 15,702 | | 74,477 | | 1,250 | | 91,429 | |
Net charge-offs | (86,847) | | (97,989) | | (8,380) | | (193,216) | |
Provision for losses | 91,614 | | 127,368 | | 8,380 | | 227,362 | |
Divestiture (1) | (13,555) | | (13,691) | | — | | (27,246) | |
Effect of foreign currency translation | (2,539) | | (197) | | — | | (2,736) | |
Balance, end of period | $ | 34,624 | | $ | 34,911 | | $ | — | | $ | 69,535 | |
| | | | |
Liability for losses on CSO lender-owned consumer loans (2): | | | | |
Balance, beginning of period | $ | — | | $ | 6,908 | | $ | — | | $ | 6,908 | |
Divestiture (1) | — | | (6,908) | | — | | (6,908) | |
Balance, end of period | $ | — | | $ | — | | $ | — | | $ | — | |
(1) Write off of the ACL or liability for losses on CSO lender-owned consumer loans related to loan balance sold or guarantees transferred from the Company on July 8, 2022 upon the completion of the divestiture of the Legacy U.S. Direct Lending Business. |
(2) All balances in connection with the CSO programs were disposed of on July 8, 2022 upon the divestiture of the Legacy U.S. Direct Lending Business. |
Credit Quality Indicators for Revolving LOC and Installment Loans
The credit quality of the Company's gross loans receivable is dependent on the Company's ability to enforce sound underwriting standards, maintain diligent servicing of the portfolio and respond to changing economic conditions. The Company uses loan type and loan delinquency as key data points in determining the ACL. Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become more than 30 days past due. This indicator is important to understand the overall credit performance of the Company's customers and their ability to repay.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The tables below presents key credit quality indicators, by origination year for installment loans, as of and for the three and nine months ended September 30, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross loans receivables by origination year, as of September 30, 2023 |
| | | Delinquent | |
| Current | 1-30 days past-due | 31-60 days past-due | 61-90 days past-due | 91+ days past due | Total Delinquent | Total Loans Receivable |
Revolving LOC | $ | 408,817 | | $ | 20,025 | | $ | 10,572 | | $ | 8,705 | | $ | 20,922 | | $ | 40,199 | | $ | 469,041 | |
Installment loans | | | | | | | |
2023 | $ | 446,354 | | $ | 36,658 | | $ | 10,031 | | $ | 6,144 | | $ | 13,392 | | $ | 29,567 | | $ | 512,579 | |
2022 | 163,528 | | 23,028 | | 7,717 | | 4,921 | | 16,831 | | 29,469 | | 216,025 | |
2021 | 37,511 | | 6,694 | | 2,288 | | 1,090 | | 3,738 | | 7,116 | | 51,321 | |
2020 | 3,145 | | 650 | | 216 | | 139 | | 298 | | 653 | | 4,448 | |
2019 | 376 | | 73 | | 8 | | 15 | | 34 | | 57 | | 506 | |
Prior | 412 | | 38 | | 12 | | 5 | | 14 | | 31 | | 481 | |
Total installment loans | $ | 651,326 | | $ | 67,141 | | $ | 20,272 | | $ | 12,314 | | $ | 34,307 | | $ | 66,893 | | $ | 785,360 | |
Total loans receivables | $ | 1,060,143 | | $ | 87,166 | | $ | 30,844 | | $ | 21,019 | | $ | 55,229 | | $ | 107,092 | | $ | 1,254,401 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Activity by origination year |
| Three Months Ended September 30, 2023 | | Nine Months Ended September 30, 2023 |
| Gross charge-offs | Gross recoveries | Net charge-offs | | Gross charge-offs | Gross recoveries | Net charge-offs |
Revolving LOC | $ | (26,080) | | $ | 4,057 | | $ | (22,023) | | | $ | (60,131) | | $ | 10,095 | | $ | (50,036) | |
Installment loans | | | | | | | |
2023 | $ | (15,406) | | $ | 6,342 | | $ | (9,064) | | | $ | (32,514) | | $ | 15,411 | | $ | (17,103) | |
2022 | (25,520) | | 1,602 | | (23,918) | | | (89,145) | | 6,151 | | (82,994) | |
2021 | (4,206) | | 1,558 | | (2,648) | | | (18,526) | | 3,768 | | (14,758) | |
2020 | (330) | | 634 | | 304 | | | (1,510) | | 1,686 | | 176 | |
2019 | (38) | | 547 | | 509 | | | (154) | | 1,566 | | 1,412 | |
Prior | (301) | | 1,776 | | 1,475 | | | (872) | | 4,248 | | 3,376 | |
Total installment loans | $ | (45,801) | | $ | 12,459 | | $ | (33,342) | | | $ | (142,721) | | $ | 32,830 | | $ | (109,891) | |
Total loans receivables | $ | (71,881) | | $ | 16,516 | | $ | (55,365) | | | $ | (202,852) | | $ | 42,925 | | $ | (159,927) | |
| | | | | | | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Delinquent and Non-accrual Loans
The accrual of interest revenue on loans receivable is generally suspended when it has been 90 days past due for Direct Lending, or due to statutory requirements. If a loan is charged off, the accrued interest is charged against the allowance. The Company inherently considers non-accrual loans in its estimate of the ACL.
The following table provides information on our delinquent and non-accrual loans (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| 31-60 days past-due | 61-90 days past-due | 91 + days past-due | Total delinquent | 91 or more days delinquent and accruing | Total non-accruing (1) |
Revolving LOC | $ | 10,572 | | $ | 8,705 | | $ | 20,922 | | $ | 40,199 | | $ | 4,398 | | $ | 18,001 | |
Installment | 20,272 | | 12,314 | | 34,307 | | 66,893 | | 1,406 | | 35,766 | |
Total delinquent loans | $ | 30,844 | | $ | 21,019 | | $ | 55,229 | | $ | 107,092 | | $ | 5,804 | | $ | 53,767 | |
Percentage of total loan receivables | 2.5 | % | 1.7 | % | 4.4 | % | 8.5 | % | 0.5 | % | 4.3 | % |
(1) The gross interest income that was recognized related to non-accruing loans was $1.0 million and $4.7 million for the three and nine months ended September 30, 2023. |
As of December 31, 2022, Revolving LOC and Installment loans classified as non-accrual were $4.5 million and $54.6 million, respectively.
Loan Modifications to Customers Experiencing Financial Difficulty
The Company adopted ASU 2022-02 as of January 1, 2023 on a modified retrospective basis through a cumulative adjustment to retained earnings. The new guidance is applicable for all loans modified to customers experiencing financial difficulties as of the beginning of 2023. Following the adoption of this guidance, we evaluate all loan receivables modifications according to the accounting guidance to determine whether such loan modification should be accounted for as a new loan or a continuation of the existing loan. The Company offers loan modifications to customers experiencing financial difficulty through forgiveness of unpaid principal and accrued interest balances.
The following table provides information on the financial effect of the loan modifications to customers experiencing financial difficulty in the period during the period presented (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 | | Nine Months Ended September 30, 2023 |
| Amount | % of Loan Receivables | | Amount | % of Loan Receivables |
Revolving LOC modifications | | | | | |
Principal / accrued interest forgiven | $ | 1,844 | | 0.1 | % | | $ | 3,151 | | 0.3 | % |
Installment modifications | | | | | |
Principal / accrued interest forgiven | 41 | | — | % | | 87 | | — | % |
Total principal/ accrued interest modifications | $ | 1,885 | | 0.2 | % | | $ | 3,238 | | 0.3 | % |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Performance of Loans Modified to Customers Experiencing Financial Difficulty
The following table provides information on the performance of loans modified to customers experiencing financial difficulty which have been modified subsequent to January 1, 2023 and remain outstanding at September 30, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis, as of September 30, 2023 |
| | | Delinquent |
| Current | 1-30 days past-due | 31-60 days past-due | 61-90 days past-due | 91+ days past-due | Total delinquent |
Revolving LOC | $ | 12,550 | | $ | 1,667 | | $ | 1,222 | | $ | 1,006 | | $ | 3,685 | | $ | 5,913 | |
Installment | 26 | | 4 | | 10 | | 12 | | 34 | | 56 | |
Total delinquent modified loans | $ | 12,576 | | $ | 1,671 | | $ | 1,232 | | $ | 1,018 | | $ | 3,719 | | $ | 5,969 | |
Percentage of total loan receivables | 1.0 | % | 0.1 | % | 0.1 | % | 0.1 | % | 0.3 | % | 0.5 | % |
Payment Defaults
The following table presents the type, number and amount of loans to customers experiencing financial difficulty that modified their loans between January 1, 2023 and September 30, 2023, and experienced a payment default as evidenced by a charged-off loan during the period presented (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 | | Nine Months Ended September 30, 2023 |
| Number of Accounts defaulted (charged-off) | Value of accounts defaulted (charged-off) | | Number of Accounts defaulted (charged-off) | Value of accounts defaulted (charged-off) |
Revolving LOC | 611 | | $ | 2,128 | | | 2,484 | | $ | 2,142 | |
Installment | 57 | | 98 | | | 233 | | 345 | |
Total defaults | 668 | | $ | 2,226 | | | 2,717 | | $ | 2,487 | |
Troubled Debt Restructurings (Prior to 2023)
Prior to the adoption of ASU 2022-02, the Company considered a modified loan in which a concession had been granted to the customer to be a TDR based generally on the size of the concession compared to the underlying loan balance and credit quality of the customer. Due to differences between the legacy TDR requirements and current loan modification disclosure requirements, information presented in the disclosures below is not directly comparable to the disclosures under the current guidance.
The table below presents TDRs that are related to the Company's Customer Care Program implemented in response to COVID-19, included in both gross loans receivable and the impairment included in the ACL (in thousands) as of September 30, 2022:
| | | | | | | | |
| | As of September 30, 2022 |
Current TDR gross receivables | | $ | 9,564 | |
Delinquent TDR gross receivables | | 2,920 | |
Total TDR gross receivables | | 12,484 | |
Less: Impairment included in the allowance for credit losses | | (2,645) | |
Less: Additional allowance | | (759) | |
Outstanding TDR receivables, net of impairment | | $ | 9,080 | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The tables below present loans modified and classified as TDRs during the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | | | | | 2022 | | 2022 | |
Pre-modification TDR loans receivable | | | | | | $ | 2,020 | | | $ | 7,600 | | |
Post-modification TDR loans receivable | | | | | | 1,945 | | | 7,324 | | |
Total concessions included in gross charge-offs | | | | | | $ | 75 | | | $ | 276 | | |
There were $1.3 million and $4.0 million of loans classified as TDRs that were charged off and included as a reduction in the ACL during the three and nine months ended September 30, 2022.
The table below presents the Company's average outstanding TDR loans receivable, interest income recognized on TDR loans and number of TDR loans for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | | | | | 2022 | | 2022 | |
Average outstanding TDR loans receivable | | | | | | $ | 12,424 | | | $ | 11,391 | | |
Interest income recognized | | | | | | $ | 1,448 | | | $ | 3,855 | | |
Number of TDR loans | | | | | | 828 | | | 2,949 | | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – VARIABLE INTEREST ENTITIES
As of September 30, 2022,2023, the Company had fivefour credit facilities, whereby certain loans receivable were sold to VIEs to collateralize debt incurred under each facility. SeeRefer to Note 5,6, "Debt" for additional details on each facility.
The Company has determined that it is the primary beneficiary of the VIEs and is required to consolidate them. The Company includes the assets and liabilities related to the VIEs in the unaudited Condensed Consolidated Financial Statements. The assets of a VIE can be used only to settle liabilities of that VIE. Creditors (or beneficial interest holders) of the VIEs do not have recourse to the Company's general credit.
The carrying amounts of consolidated VIEs' assets and liabilities were as follows (in thousands):
| | | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 |
Assets | Assets | | | | | Assets | | | | |
Restricted cash | Restricted cash | | $ | 89,849 | | | $ | 57,155 | | Restricted cash | | $ | 24,613 | | | $ | 20,177 | |
Loans receivable, net | Loans receivable, net | | 1,611,719 | | | 1,228,088 | | Loans receivable, net | | 979,860 | | | 1,063,228 | |
Prepaid expenses and other | Prepaid expenses and other | | 8,206 | | | — | | Prepaid expenses and other | | 16 | | | 5,069 | |
Deferred tax assets | Deferred tax assets | | 97 | | | — | | Deferred tax assets | | 99 | | | 3,735 | |
Total Assets | Total Assets | | $ | 1,709,871 | | | $ | 1,285,243 | | Total Assets | | $ | 1,004,588 | | | $ | 1,092,209 | |
Liabilities | Liabilities | | Liabilities | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | | $ | 10,642 | | | $ | 9,886 | | Accounts payable and accrued liabilities | | $ | 3,006 | | | $ | 6,704 | |
Deferred revenue | Deferred revenue | | 22 | | | 106 | | Deferred revenue | | 14 | | | 31 | |
Deferred tax liability | | — | | | 269 | | |
Accrued interest | Accrued interest | | 5,547 | | | 3,279 | | Accrued interest | | 8,284 | | | 7,023 | |
Income taxes payable | | (234) | | | — | | |
Debt, net | | 1,466,985 | | | 965,072 | | |
Income Taxes Payable | | Income Taxes Payable | | — | | | 7,850 | |
Debt | | Debt | | 885,741 | | | 864,675 | |
Total Liabilities | Total Liabilities | | $ | 1,482,962 | | | $ | 978,612 | | Total Liabilities | | $ | 897,045 | | | $ | 886,283 | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 34 – LOANS RECEIVABLE AND REVENUEGOODWILL
As a result of the sale of the Legacy U.S. Direct Lending business on July 8, 2022, the Company no longer guarantees loans originated by third-party lenders through CSO programs. The Company will continue to present these loans in the tables that follow based on historical practice and for comparability purposes.Goodwill
The following table summarizes revenuechange in the carrying amount of goodwill by productreporting unit for the nine months ended September 30, 2023 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revolving LOC | | $ | 77,036 | | | $ | 78,262 | | | $ | 264,642 | | | $ | 209,033 | |
| | | | | | | | |
Unsecured Installment | | 72,422 | | | 72,056 | | | 320,051 | | | 213,233 | |
Secured Installment | | 17,724 | | | 13,743 | | | 71,721 | | | 41,591 | |
Single-Pay | | 13,333 | | | 26,568 | | | 67,388 | | | 75,298 | |
Total Installment | | 103,479 | | | 112,367 | | | 459,160 | | | 330,122 | |
| | | | | | | | |
Insurance revenue | | 24,746 | | | 12,599 | | | 61,659 | | | 36,021 | |
Other | | 8,859 | | | 6,052 | | | 23,259 | | | 18,348 | |
Total revenue(1) | | $ | 214,120 | | | $ | 209,280 | | | $ | 808,720 | | | $ | 593,524 | |
(1) Includes revenue from CSO programs of $3.9 million and $43.4 million for the three months ended September 30, 2022 and 2021, respectively, and $101.2 million and $119.7 million for the nine months ended September 30, 2022 and 2021, respectively. |
| | | | | |
| Total |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Goodwill at December 31, 2022 | $ | 276,269 | |
Foreign currency translation | — | |
| |
Goodwill at September 30, 2023 | $ | 276,269 | |
| |
The following tables summarize loans receivable by productCompany tests goodwill at least annually for potential impairment, as of October 1, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The potential indicators include, among various factors, declining sales, earnings or cash flows or the related delinquent loans receivable (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 |
| | Revolving LOC | | Unsecured Installment | Secured Installment | Single-Pay(1) | Total Installment | | Total |
Current loans receivable | | $ | 1,045,839 | | | $ | 478,547 | | $ | 117,934 | | $ | 19,849 | | $ | 616,330 | | | $ | 1,662,169 | |
1-30 days past-due | | 36,844 | | | 58,207 | | 12,534 | | — | | 70,741 | | | 107,585 | |
Delinquent loans receivable | | 46,703 | | | 68,165 | | 9,805 | | — | | 77,970 | | | 124,673 | |
Total loans receivable | | 1,129,386 | | | 604,919 | | 140,273 | | 19,849 | | 765,041 | | | 1,894,427 | |
Less: allowance for losses | | (67,832) | | | (27,565) | | (4,900) | | (2,445) | | (34,911) | | | (102,743) | |
Loans receivable, net | | $ | 1,061,554 | | | $ | 577,354 | | $ | 135,373 | | $ | 17,404 | | $ | 730,130 | | | $ | 1,791,684 | |
(1) Of the $19.8 million of Single-Pay receivables, $12.2 million relate to mandated extended payment options for certain Canada Single-Pay loans. |
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 2022 Form 10-K for additional information on the Company's policy for assessing goodwill for possible impairment.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 |
| | Revolving LOC | | Unsecured Installment | Secured Installment | Total Installment - Company Owned | | Total |
Delinquent loans receivable | | | | | | | | |
31-60 days past-due | | $ | 24,925 | | | $ | 19,266 | | $ | 3,086 | | $ | 22,352 | | | $ | 47,277 | |
61-90 days past-due | | 12,360 | | | 14,150 | | 1,836 | | 15,986 | | | 28,346 | |
91 + days past-due | | 9,418 | | | 34,749 | | 4,883 | | 39,632 | | | 49,050 | |
Total delinquent loans receivable | | $ | 46,703 | | | $ | 68,165 | | $ | 9,805 | | $ | 77,970 | | | $ | 124,673 | |
During the fourth quarter of 2022, the Company performed a quantitative assessment for each of its reporting units. Management utilized the income and the guideline public company approaches, in equal weightings, in determining a fair value for each of the U.S. Direct Lending and Canada Direct Lending reporting units for purposes of testing goodwill. The income approach estimates fair value using the present value of future cash flows, whereas the guideline public company approach estimates fair value using the fair value of publicly traded businesses in a similar line of business. As a result, the Company recognized a non-cash pre-tax impairment charge of $107.8 million on the U.S. Direct Lending reporting unit to write down the carrying values of goodwill. Management concluded that the estimated fair value of the Canada Direct Lending reporting unit was greater than its carrying value, as of the annual assessment date; as such, no impairment charge was required.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Revolving LOC | | Unsecured Installment | Secured Installment | Single-Pay(1) | Total Installment - Company Owned | | Total |
Current loans receivable | | $ | 843,379 | | | $ | 359,512 | | $ | 110,232 | | $ | 42,463 | | $ | 512,207 | | | $ | 1,355,586 | |
1-30 days past-due | | 35,657 | | | 45,160 | | 13,213 | | — | | 58,373 | | | 94,030 | |
Delinquent loans receivable | | 35,077 | | | 53,014 | | 10,611 | | — | | 63,625 | | | 98,702 | |
Total loans receivable | | 914,113 | | | 457,686 | | 134,056 | | 42,463 | | 634,205 | | | 1,548,318 | |
Less: allowance for losses | | (68,140) | | | (13,387) | | (3,327) | | (2,706) | | (19,420) | | | (87,560) | |
Loans receivable, net | | $ | 845,973 | | | $ | 444,299 | | $ | 130,729 | | $ | 39,757 | | $ | 614,785 | | | $ | 1,460,758 | |
(1) Of the $42.5 million of Single-Pay receivables, $11.3 million relate to mandated extended payment options for certain Canada Single-Pay loans. |
In the three months ended March 31, 2023, the Company combined the Legacy U.S. Direct Lending and Canada Direct Lending reporting units into a single Direct Lending reporting unit. Refer to Note 12, "Segment and Geographic Data" for further information. In the third quarter of 2023, the Company performed an interim review of triggering events for the Direct Lending reporting unit, which would indicate whether a quantitative or qualitative assessment of goodwill impairment was necessary. As a result of the interim triggering event review, the Company concluded an additional assessment was not necessary.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Revolving LOC | | Unsecured Installment | Secured Installment | Total Installment - Company Owned | | Total |
Delinquent loans receivable | | | | | | | | |
31-60 days past-due | | $ | 15,452 | | | $ | 16,646 | | $ | 4,539 | | $ | 21,185 | | | $ | 36,637 | |
61-90 days past-due | | 13,397 | | | 13,933 | | 3,213 | | 17,146 | | | 30,543 | |
91 + days past-due | | 6,228 | | | 22,435 | | 2,859 | | 25,294 | | | 31,522 | |
Total delinquent loans receivable | | $ | 35,077 | | | $ | 53,014 | | $ | 10,611 | | $ | 63,625 | | | $ | 98,702 | |
The following tables summarize loans Guaranteed by the Company under CSO programs and the related delinquent receivables (in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Unsecured Installment | Secured Installment | Total Installment - Guaranteed by the Company |
Current loans receivable Guaranteed by the Company | | $ | 37,303 | | $ | 799 | | $ | 38,102 | |
1-30 days past-due | | 6,633 | | 162 | | 6,795 | |
Delinquent loans receivable Guaranteed by the Company | | 1,378 | | 42 | | 1,420 | |
Total loans receivable Guaranteed by the Company | | 45,314 | | 1,003 | | 46,317 | |
Less: Liability for losses on CSO lender-owned consumer loans | | (6,869) | | (39) | | (6,908) | |
Loans receivable Guaranteed by the Company, net | | $ | 38,445 | | $ | 964 | | $ | 39,409 | |
| | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Unsecured Installment | Secured Installment | Total Installment - Guaranteed by the Company |
Delinquent loans receivable | | | | |
31-60 days past-due | | $ | 1,003 | | $ | 28 | | $ | 1,031 | |
61-90 days past-due | | 277 | | 8 | | 285 | |
91 + days past-due | | 98 | | 6 | | 104 | |
Total delinquent loans receivable | | $ | 1,378 | | $ | 42 | | $ | 1,420 | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables summarize activity in the ALL and the liability for losses on CSO lender-owned consumer loans in total (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Revolving LOC | | Unsecured Installment | Secured Installment | Single-Pay | Total Installment | | Other | Total |
Allowance for loan losses: | | | | | | | | | |
Balance, beginning of period | $ | 75,128 | | | $ | 32,991 | | $ | 8,827 | | $ | 3,239 | | $ | 45,057 | | | $ | — | | $ | 120,185 | |
Charge-offs | (36,298) | | | (33,838) | | (474) | | (11,232) | | (45,544) | | | (3,319) | | (85,161) | |
Recoveries | 5,391 | | | 8,674 | | 77 | | 6,990 | | 15,741 | | | 217 | | 21,349 | |
Net charge-offs | (30,907) | | | (25,164) | | (397) | | (4,242) | | (29,803) | | | (3,102) | | (63,812) | |
Provision for losses | 41,787 | | | 29,129 | | — | | 4,381 | | 33,510 | | | 3,102 | | 78,399 | |
Divestiture (2) | (13,555) | | | (9,906) | | (3,002) | | (783) | | (13,691) | | | — | | (27,246) | |
Effect of foreign currency translation | (4,621) | | | (13) | | — | | (149) | | (162) | | | — | | (4,783) | |
Balance, end of period | $67,832 | | $27,037 | $5,428 | $2,446 | $34,911 | | $0 | $102,743 |
| | | | | | | | | |
Liability for losses on CSO lender-owned consumer loans: (1) | | | | | | | | | |
Balance, beginning of period | $ | — | | | $ | 8,040 | | $ | 43 | | $ | — | | $ | 8,083 | | | $ | — | | $ | 8,083 | |
Divestiture (2) | — | | | (8,040) | | (43) | | — | | (8,083) | | | — | | (8,083) | |
Balance, end of period | $ | — | | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | |
(1) All balances in connection with the CSO programs were disposed of on July 8, 2022 upon the divestiture of the Legacy U.S. Direct Lending business. |
(2) Write off of the allowance for loan losses or liability for losses on CSO lender-owned consumer loans related to loan balance sold or guarantees transferred from the company on July 8, 2022 upon the completion of the divestiture of the Legacy U.S. Direct Lending business. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| Revolving LOC | | Unsecured Installment | Secured Installment | Single-Pay | Total Installment | | Other | Total |
Allowance for loan losses: | | | | | | | | | |
Balance, beginning of period | $ | 44,847 | | | $ | 16,701 | | $ | 3,880 | | $ | 2,432 | | $ | 23,013 | | | $ | — | | $ | 67,860 | |
Charge-offs | (27,974) | | | (18,400) | | (4,252) | | (24,640) | | (47,292) | | | (869) | | (76,135) | |
Recoveries | 8,564 | | | 4,811 | | 1,996 | | 18,493 | | 25,300 | | | 401 | | 34,265 | |
Net charge-offs | (19,410) | | | (13,589) | | (2,256) | | (6,147) | | (21,992) | | | (468) | | (41,870) | |
Provision for losses | 27,800 | | | 11,223 | | 1,858 | | 6,223 | | 19,304 | | | 468 | | 47,572 | |
Effect of foreign currency translation | (975) | | | (5) | | — | | (39) | | (44) | | | — | | (1,019) | |
Balance, end of period | $ | 52,262 | | | $ | 14,330 | | $ | 3,482 | | $ | 2,469 | | $ | 20,281 | | | $ | — | | $ | 72,543 | |
Liability for losses on CSO lender-owned consumer loans: | | | | | | | | | |
Balance, beginning of period | — | | | 5,234 | | 31 | | — | | $ | 5,265 | | | — | | $ | 5,265 | |
Increase in liability | — | | | 1,739 | | 3 | | — | | 1,742 | | | — | | 1,742 | |
Balance, end of period | $ | — | | | $ | 6,973 | | $ | 34 | | $ | — | | $ | 7,007 | | | $ | — | | $ | 7,007 | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Revolving LOC | | Unsecured Installment | Secured Installment | Single-Pay | Total Installment | | Other | Total |
Allowance for loan losses: | | | | | | | | | |
Balance, beginning of period | $ | 68,140 | | | $ | 13,387 | | $ | 3,327 | | $ | 2,706 | | $ | 19,420 | | | $ | — | | $ | 87,560 | |
Charge-offs | (121,391) | | | (94,166) | | (17,452) | | (60,848) | | (172,466) | | | (9,630) | | (303,487) | |
Recoveries | 22,167 | | | 23,337 | | 6,154 | | 44,986 | | 74,477 | | | 1,250 | | 97,894 | |
Net charge-offs | (99,224) | | | (70,829) | | (11,298) | | (15,862) | | (97,989) | | | (8,380) | | (205,593) | |
Provision for losses | 119,669 | | | 94,400 | | 16,401 | | 16,567 | | 127,368 | | | 8,380 | | 255,417 | |
Divestiture (2) | (13,555) | | | (9,906) | | (3,002) | | (783) | | (13,691) | | | — | | (27,246) | |
Effect of foreign currency translation | (7,198) | | | (15) | | — | | (182) | | (197) | | | — | | (7,395) | |
Balance, end of period | $ | 67,832 | | | $ | 27,037 | | $ | 5,428 | | $ | 2,446 | | $ | 34,911 | | | $ | — | | $ | 102,743 | |
| | | | | | | | | |
Liability for losses on CSO lender-owned consumer loans: (1) | | | | | | | | | |
Balance, beginning of period | $ | — | | | $ | 6,869 | | $ | 39 | | $ | — | | $ | 6,908 | | | $ | — | | $ | 6,908 | |
Divestiture (2) | — | | | (6,869) | | (39) | | — | | (6,908) | | | — | | (6,908) | |
Balance, end of period | $ | — | | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | |
(1) All balances in connection with the CSO programs were disposed of on July 8, 2022 upon the divestiture of the Legacy U.S. Direct Lending business. |
(2) Write off of the allowance for loan losses or liability for losses on CSO lender-owned consumer loans related to loan balance sold or guarantees transferred from the company on July 8, 2022 upon the completion of the divestiture of the Legacy U.S. Direct Lending business. |
Heights Acquisition
The Company completed the acquisition of Heights on December 27, 2021. Provisional goodwill was estimated at $253.9 million, based on the preliminary valuation. The Company recorded $11.8 million of net adjustments during fiscal year 2022, resulting in a goodwill balance of $265.7 million as of December 31, 2022, excluding the impairment charge on the Legacy U.S. Direct Lending reporting unit, now included in the Direct Lending reporting unit, recorded in the fourth quarter of 2022. See
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Revolving LOC | | Unsecured Installment | Secured Installment | Single-Pay | Total Installment | | Other | Total |
Allowance for loan losses: | | | | | | | | | |
Balance, beginning of period | $ | 51,958 | | | $ | 24,073 | | $ | 7,047 | | $ | 3,084 | | $ | 34,204 | | | $ | — | | $ | 86,162 | |
Charge-offs | (81,175) | | | (58,337) | | (14,979) | | (68,680) | | (141,996) | | | (2,525) | | (225,696) | |
Recoveries | 23,351 | | | 16,811 | | 6,756 | | 57,321 | | 80,888 | | | 1,331 | | 105,570 | |
Net charge-offs | (57,824) | | | (41,526) | | (8,223) | | (11,359) | | (61,108) | | | (1,194) | | (120,126) | |
Provision for losses | 58,274 | | | 31,782 | | 4,658 | | 10,743 | | 47,183 | | | 1,194 | | 106,651 | |
Effect of foreign currency translation | (146) | | | 1 | | — | | 1 | | 2 | | | — | | (144) | |
Balance, end of period | $ | 52,262 | | | $ | 14,330 | | $ | 3,482 | | $ | 2,469 | | $ | 20,281 | | | $ | — | | $ | 72,543 | |
| | | | | | | | | |
Liability for losses on CSO lender-owned consumer loans: | | | | | | | | | |
Balance, beginning of period | $ | — | | | $ | 7,160 | | $ | 68 | | $ | — | | $ | 7,228 | | | $ | — | | $ | 7,228 | |
Decrease in liability | — | | | (187) | | (34) | | — | | (221) | | | — | | (221) | |
Balance, end of period | $ | — | | | $ | 6,973 | | $ | 34 | | $ | — | | $ | 7,007 | | $ | — | | $ | — | | $ | 7,007 | |
Note 13,"Acquisitions and Divestitures" for more information related to the business combination.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of September��30, 2022, Revolving LOC and Installment loans classified as nonaccrual were $4.8 million and $39.4 million, respectively. As of December 31, 2021, Revolving LOC and Installment loans classified as nonaccrual were $5.9 million and $41.4 million, respectively. The Company inherently considers nonaccrual loans in its estimate of the ALL as delinquencies are a primary input into the Company's roll-rate-based model.Legacy U.S. Direct Lending Business Divestiture
TDR Loans Receivable
On July 8, 2022, the Company completed the divestiture of its Legacy U.S. Direct Lending Business to Community Choice Financial, for total sale proceeds of $349.2 million, net of working capital adjustments, comprised of $314.2 million of cash received at close and $35.0 million in cash payable in monthly installment payments over the subsequent 12 months. The table below presents TDRs that are relateddivestiture resulted in a gain of $68.4 million during the year ended 2022 which was recorded in "Gain on sale of business" in the unaudited Condensed Consolidated Statements of Operations. The Company reduced the gain by $2.0 million for the nine months ended September 30, 2023, based on expected uncollectible amounts. There was no change to the Customer Care Program implemented in response to COVID-19, included in both gross loans receivable and the impairment included in the ALL (in thousands):
| | | | | | | | | | | |
| | As of September 30, 2022 | As of December 31, 2021 |
Current TDR gross receivables | | $ | 9,564 | | $ | 11,580 | |
Delinquent TDR gross receivables | | 2,920 | | 5,066 | |
Total TDR gross receivables | | 12,484 | | 16,646 | |
Less: Impairment included in the allowance for loan losses | | (2,645) | | (3,632) | |
Less: Additional allowance | | (759) | | (2,212) | |
Outstanding TDR receivables, net of impairment | | $ | 9,080 | | $ | 10,802 | |
The tables below present loans modified and classified as TDRs during the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Pre-modification TDR loans receivable | | $ | 2,020 | | | $ | 3,586 | | | $ | 7,600 | | | $ | 11,953 | |
Post-modification TDR loans receivable | | 1,945 | | | 3,182 | | | 7,324 | | | 10,654 | |
Total concessions included in gross charge-offs | | $ | 75 | | | $ | 404 | | | $ | 276 | | | $ | 1,299 | |
There were $1.3 million and $2.9 million of loans classified as TDRs that were charged off and included as a reduction in the ALLgain during the three months ended September 30, 2022 and 2021, respectively, and $4.0 million and $11.0 million during the nine months ended September 30, 2022 and 2021, respectively. The Company had commitments to lend additional funds of $1.4 million to customers with available and unfunded Revolving LOC loans classified as TDRs as of September 30, 2022.
The table below presents the Company's average outstanding TDR loans receivable, interest income recognized on TDR loans and number of TDR loans for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Average outstanding TDR loans receivable | | $ | 12,424 | | | $ | 16,190 | | | $ | 11,391 | | | $ | 17,911 | |
Interest income recognized | | 1,448 | | | 4,155 | | | 3,855 | | | 14,277 | |
Number of TDR loans | | 828 | | | 2,624 | | | 2,949 | | | 8,872 | |
| | |
| | | | | | |
NOTE 4 – CREDIT SERVICES ORGANIZATION
2023. As a resultpart of the sale, $91.1 million of the Legacy U.S. Direct Lending business on July 8, 2022, the Company no longer guarantees loans originated by third-party lenders through CSO programs. The Company will continue to present these loans in the paragraphs that follow based on historical practice and for comparability purposes. Refer to Note 14, "Acquisitions and Divestiture" for additional information.
The CSO fee receivables were $5.2 million at December 31, 2021, 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 customer loans that are charged-off. The terms of these loans range up to six months. See Note 1, "Summary of Significant Accounting Policies and Nature of Operations" of the 2021 Form 10-K for further details of the Company's accounting policy.
As of December 31, 2021, the incremental maximum amount payable under all such guaranteesgoodwill was $38.4 million. This liability is not included in the Company's unaudited Condensed Consolidated Balance Sheets. If the Company is required to pay any portion of the total amount of the loans it has guaranteed, it will attempt to recover the entire amount or a portion from the applicable customers. The Company holds no collateral in respect of the guarantees. The Company estimates a liability for losses associated
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
with the guaranty provided to the CSO lenders, which was $6.9 million at December 31, 2021. This liability is reflected in "Liability for losses on CSO lender-owned consumer loans" in the unaudited Condensed Consolidated Balance Sheets.
The Company placed $5.5 million in collateral accounts for the benefit of lenders at December 31, 2021, 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 lender.
Deferred revenue associated with the CSO program was immaterial as of December 31, 2021, and there were no costs to obtain, or costs to fulfill, capitalized under the program.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 – DEBT
The Company's debt instruments and balances outstanding as of September 30, 2022 and December 31, 2021, including maturity date, effective interest rate and borrowing capacity, were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Effective interest rate | | | Outstanding as of |
| Maturity Date | Borrowing Capacity | | September 30, 2022 | | December 31, 2021 |
Corporate Debt: | | | | | | | |
7.50% Senior Secured Notes | August 1, 2028 | 7.50 | % | | | $ | 1,000,000 | | | $ | 1,000,000 | |
| | | | | | | |
Total corporate debt | | | | | 1,000,000 | | | 1,000,000 | |
Funding Debt: | | | | | | | |
Heights SPV | July 15, 2024 | 1-Mo SOFR + 4.25% | $425.0 million | | $ | 396,610 | | | $ | — | |
First Heritage SPV | July 13, 2024 | 1-Mo SOFR + 4.25% | $225.0 million | | 183,203 | | | — | |
Flexiti SPV (1) (5) | September 29, 2025 | Weighted average interest rate (4) 8.07% | C$535.0 million | | 269,333 | | | 176,625 | |
Flexiti Securitization (1) | December 9, 2025 | 1-Mo CDOR + 3.59% | C$526.5 million | | 382,937 | | | 242,886 | |
Canada SPV (1) | August 2, 2026 | 3-Mo CDOR + 6.00% | C$400.0 million | | 258,019 | | | 160,533 | |
Heights Finance SPV (3) | N/A (3) | 1-Mo LIBOR + 5.25% | $350.0 million | | — | | | 350,000 | |
U.S. SPV (2) | N/A (2) | 1-Mo LIBOR + 6.25% | $200.0 million | | — | | | 49,456 | |
Curo Canada Revolving Credit Facility (1) | On-demand | Canada Prime Rate + 1.95% | C$10.0 million | | — | | | — | |
Senior Revolver | August 31, 2023 | 1-Mo SOFR + 5.00% | $40.0 million | | — | | | — | |
Total funding debt | | | | | $ | 1,490,102 | | | $ | 979,500 | |
Less: debt issuance costs | | | | | (40,786) | | | (33,707) | |
Total Debt | | | | | $ | 2,449,316 | | | $ | 1,945,793 | |
| | | | | | | |
(1) Capacity amounts are denominated in Canadian dollars, whereas outstanding balances as of September 30, 2022 and December 31, 2021 are denominated in U.S. dollars. |
(2) The U.S. SPV was extinguished on July 8, 2022 upon the divestiture of the Legacy U.S. Direct lending business. |
(3) The Heights Finance SPV was extinguished on July 15, 2022 and replaced as of July 15, 2022 with Heights SPV. |
(4) The weighted average interest rate does not include the impact of the amortization of deferred loan origination costs or debt discounts.
|
(5) Includes $35.5 million of debt that matured on September 30, 2022, however, due to a Canadian statutory holiday, it is not deemed to be extinguished until the next business day, in October 2022. |
Corporate Debt
7.50% Senior Secured Notes
In July 2021, the Company issued $750.0 million of 7.50% Senior Secured Notes which mature on August 1, 2028. Interest on the notes is payable semiannually, in arrears, on February 1 and August 1. In December 2021, the Company issued an additional $250.0 million of 7.50% Senior Secured Notes to fund the acquisition of Heights Finance. Refer to Note 14,13,"Acquisitions and Divestiture" for additional details. In connection withmore information related to the 7.50% Senior Secured Notes, financing costs of $19.3 million were capitalized, net of amortization, and included in the unaudited Condensed Consolidated Balance Sheets as a component of "Debt." These costs are amortized over the term of the 7.50% Senior Secured Notes as a component of interest expense.divestiture.
8.25% Senior Secured Notes
In August 2018, the Company issued $690.0 million of 8.25% Senior Secured Notes maturing on September 1, 2025. In connection with the 8.25% Senior Secured Notes, the Company capitalized financing costs of $13.9 million, which were being amortized as a component of interest expense over its term.
During the third quarter of 2021, the 8.25% Senior Secured Notes were extinguished using proceeds from the 7.50% Senior Secured Notes described above. The early extinguishment of the 8.25% Senior Secured Notes resulted in a loss of $40.2 million.
Funding Debt
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
First Heritage Acquisition
As of September 30, 2022, the Company had five credit facilities whereby certain loans receivable were sold to wholly-owned VIEs to collateralize debt incurred under each facility. These facilities are the (i) Heights SPV, (ii) First Heritage SPV, (iii) Canada SPV, (iv) Flexiti SPV and (v) Flexiti Securitization. For further information on these facilities, refer to Note 2, "Variable Interest Entities".
Heights SPV
On July 15, 2022, we entered into a new $425.0 million non-recourse revolving warehouse facility to replace the incumbent lender's facility and finance future loans originated by Heights Finance. The effective interest rate was 1-month SOFR plus 4.25%. The Company also pays a 0.50% per annum commitment fee on the unused portion of the commitments. The warehouse revolving period matures on July 15, 2024.
First Heritage SPV
On July 13, 2022, concurrently with the closing of the First Heritage acquisition, we entered into a new $225.0 million non-recourse revolving warehouse facility to replace First Heritage's incumbent lender's facility and to finance future loans originated by First Heritage. The effective interest rate was 1-month SOFR plus 4.25%. The Company also pays a 0.50% per annum commitment fee on the unused portion of the commitments. The warehouse revolving period matures on July 13, 2024.
Flexiti SPV
In March 2021, concurrently withcompleted the acquisition of Flexiti, Flexiti Financing SPE Corp.,First Heritage, a wholly-owned Canadian subsidiary of the Company, refinancedconsumer lender that provides near-prime installment loans along with customary opt-in insurance and increase its Flexiti SPV to C$500.0 million, with a maturity on March 10, 2024. As of September 30, 2022, the weighted average interest rate was 8.07%. The borrower also pays a 0.50% per annum commitment fee on the unused portion of the commitments. On September 29, 2022, Flexiti refinanced and increased its Flexiti SPV in order to both increase the borrowing capacity from C$500.0 million to C$535.0 million and extended its maturity to September 29, 2025. All other material terms of the revolving warehouse credit facility remain unchanged.
Flexiti Securitization
In December 2021, Flexiti Securitization Limited Partnership, a wholly-owned Canadian subsidiary of the Company, entered into the Flexiti Securitization. The facility providesfinancial products, for C$500.0 million, with a maturity of December 9, 2025. As of September 30, 2022, the effective interest was one-month CDOR plus 3.59%. The borrower also pays a 0.45% per annum commitment fee on the unused portion of the commitments.
Interest Rate Swap on Flexiti Securitization
On July 7, 2022, Flexiti entered into an interest rate swap with National Bank of Canada to protect against the interest risk on the C$526.5 million, variable rate, borrowing facility. The interest rate swap is a derivative instrument, designated as a cash flow hedge and as such any change in the fair value of the derivative is recorded as a component of other comprehensive income. As of September 30, 2022, a $4.6 million interest rate swap is included in other assets and a $4.6 million gain as a result of the change in fair value is recognized in other comprehensive income on our Condensed Consolidated Balance Sheet.
Canada SPV
In August 2018, CURO Canada Receivables Limited Partnership, a wholly-owned subsidiary of the Company, entered into the Canada SPV. During the fourth quarter of 2021 and first quarter of 2022, the Company amended the existing credit facility in order to, among other things, (i) increase the borrowing capacity from C$175.0 million to C$400.0 million, (ii) reduce borrowing costs, and (iii) extend the initial maturity date by three years, to August 2026. As of September 30, 2022, the effective interest rate was three-month CDOR plus 6.00%. The borrower also pays a 0.50% per annum commitment fee on the unused portion of the commitments. The Canada SPV matures on August 2, 2026.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Heights Finance SPV
In December 2021, the Company acquired Heights Finance, including the Heights Finance SPV. Heights Finance entered into the Heights Finance SPV in December 2019 with a total revolving commitmentpurchase price of $350.0 million. The interest rate$140.0 million in cash. Provisional goodwill was recorded at $75.4 million, excluding the impairment charge on the facility is one-month LIBOR plus 5.25%. The Heights Finance SPV was scheduled to mature on December 31, 2024.
The Heights Finance SPV was extinguished on July 15, 2022, using proceeds from the new $425.0 million non-recourse revolving warehouse facility, "Heights SPV," as described above. The early extinguishment of the Heights Finance SPV resulted in a loss of $0.6 million.
U.S. SPV
In April 2020, CURO Receivables Finance II, LLC, a wholly-owned subsidiary of the Company, entered into the U.S. SPV, which provided for $200.0 million of borrowing capacity with an effective interest rate on the Company's borrowings of one-month LIBOR plus 6.25%. The borrower pays the lenders a monthly commitment fee at an annual rate of 0.50% on the unused portion of the commitments. The U.S. SPV was set to mature on April 8, 2024.
The U.S. SPV was extinguished on July 8, 2022 upon the completion of the divestiture of our Legacy U.S. Direct Lending business to Community Choice Financial. The early extinguishment ofreporting unit, now included in the U.S. SPVDirect Lending reporting unit, recorded in the fourth quarter 2022. No adjustments were recorded during the measurement period which resulted in a lossfinal goodwill balance of $3.1$75.4 million.
Senior Revolver
The Company maintains the Senior Revolver that provides $40.0 million of borrowing capacity, including up to $4.0 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The current term expires August 31, 2023. The Senior Revolver accrues interest at one-month SOFR plus 5.00%.
The Senior Revolver is guaranteed by all subsidiaries that guarantee the 7.50% Senior Secured Notes, and is secured by a lien on substantially all assets of CURO and the guarantor subsidiaries that is seniormore information related to the lien securing the 7.50% Senior Secured Notes.
business combination.
CURO Canada Revolving Credit Facility
CURO Canada maintains the Curo Canada Revolving Credit Facility, formerly known as the Cash Money Revolving Credit Facility, a C$10.0 million revolving credit facility, which provides short-term liquidity for the Company's Canadian direct lending operations. As of September 30, 2022, the borrowing capacity under the Curo Canada Revolving Credit Facility was C$9.9 million, net of C$0.1 million in outstanding stand-by letters of credit.
The Curo Canada Revolving Credit Facility is collateralized by substantially all of CURO Canada’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 Curo Canada Revolving Credit Facility bear interest per annum at the prime rate of a Canadian chartered bank plus 1.95%.
NOTE 6 – INCOME TAXES
The Company's effective income tax rate was 92.6% and 24.9% for the nine months ended September 30, 2022 and 2021, respectively.
The effective income tax rate for the nine months ended September 30, 2022, was higher compared to the blended federal and state/provincial statutory rate of approximately 26.0%, primarily as a result of lost tax benefits related to the divestiture of the Legacy U.S. Direct Lending business of $8.4 million, share-based compensation of $0.9 million, officers’ compensation of $1.0 million, and non-deductible transaction costs of $0.2 million, partially offset by tax benefits related to change in fair value of contingent consideration of $2.1 million.
The effective income tax rate for the nine months ended September 30, 2021 was lower compared to the blended federal and state/provincial statutory rates of approximately 26.0%, primarily as a result of proportionally more net income in lower rate jurisdictions, driven by the gain on the Katapult transaction of $146.9 million in the second quarter of 2021 and the loss on extinguishment of debt of $40.2 million in the third quarter of 2021. Additionally, the effective tax rate also includes the release of a valuation allowance due to the Company's share of Katapult's income, tax benefits related to share-based compensation, expense related to the non-deductible transaction costs and the change in fair value of contingent consideration, additional Texas accrual for 2020 due to the settlement of 2013 to 2019 Texas tax returns, and a tax benefit for the recognition of Research and Development tax credit.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 accumulated earnings in Canada of $244.8 million were distributed to the U.S. legal entities, the Company would be subject to Canadian withholding taxes of an estimated $12.2 million. The determination of the U.S. state income taxes upon a potential foreign earnings distribution is impractical. In the event the earnings are distributed to the U.S. legal entities, the Company will adjust the income tax provision for the applicable period and determine the amount of foreign tax credit that would be available.
NOTE 75 – 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 inputs, meaning those that reflect the Company's own judgment about the assumptions market participants would use in pricing the asset or liability based on the best information available for the specific 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.
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 as a result of limited market data. The Company develops these inputs based on the best information available, including its own data.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Estimated Fair Value | |
| Carrying Value September 30, 2023 | Level 1 | Level 2 | Level 3 | Total | |
Financial assets: | | | | | | |
Cash Surrender Value of Life Insurance | $ | 5,693 | | $ | 5,693 | | $ | — | | $ | — | | $ | 5,693 | | |
Financial liabilities: | | | | | | |
Non-qualified deferred compensation plan | $ | 4,212 | | $ | 4,212 | | $ | — | | $ | — | | $ | 4,212 | | |
| | | | | | |
The table below presents the assets and liabilities that were carried at fair value on the unaudited Condensed Consolidated Balance Sheets at December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Estimated Fair Value | |
| Carrying Value September 30, 2022 | Level 1 | Level 2 | Level 3 | Total | |
Financial assets: | | | | | | |
Cash Surrender Value of Life Insurance | $ | 7,378 | | $ | 7,378 | | $ | — | | $ | — | | $ | 7,378 | | |
Interest rate swap on Flexiti Securitization | 4,567 | | — | | 4,567 | | — | | 4,567 | | |
Financial liabilities: | | | | | | |
Non-qualified deferred compensation plan | $ | 4,972 | | $ | 4,972 | | $ | — | | $ | — | | $ | 4,972 | | |
Contingent consideration related to acquisition | 15,770 | | — | | — | | 15,770 | | 15,770 | | |
Interest Rate Swap on Flexiti Securitization
On July 7, 2022, Flexiti entered into an interest rate swap with National Bank of Canada to protect against the interest risk on its variable rate borrowing facility. For additional information on the interest rate swap on the Flexiti Securitization, refer to Note 5, "Debt."
Contingent consideration related to acquisition
In connection with the acquisition of Flexiti during the first quarter of 2021, the Company recorded a liability for contingent consideration based on the achievement of revenue less NCOs and loan origination targets over the two years following closing of the acquisition that could result in additional cash consideration up to $32.8 million to Flexiti's former stockholders. The fair value of the liability is estimated using the option-based income approach using a Monte Carlo simulation model discounted back to the reporting date. The significant unobservable inputs (Level 3) used to estimate the fair value included the expected future tax benefits associated with the acquisition, the probability that the risk adjusted-revenue and origination targets will be achieved and discount rates. The contingent consideration measured at fair value using unobservable inputs decreased from the initial measurement of $20.6 million as of March 31, 2021 to $15.8 million as of September 30, 2022. The first and only payment to date of $1.0 million was made in July 2022. For additional information on Flexiti and the related contingent consideration, refer to Note 14, "Acquisitions and Divestiture." | | | | | | | | | | | | | | | | | |
| | Estimated Fair Value |
| Carrying Value December 31, 2022 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | | | | |
Cash Surrender Value of Life Insurance | $ | 7,591 | | $ | 7,591 | | $ | — | | $ | — | | $ | 7,591 | |
Financial liabilities: | | | | | |
Non-qualified deferred compensation plan | $ | 5,149 | | $ | 5,149 | | $ | — | | $ | — | | $ | 5,149 | |
Cash Surrender Value of Life Insurance and Non-qualified deferred compensation plan
The cash surrender value of life insurance is included in “Other assets”Other assets in the Company’s unaudited Condensed Consolidated Balance Sheets. The non-qualified deferred compensation plan offsetting liability is included in “AccountsAccounts payable and accrued liabilities”liabilities in the Company’s Consolidated Balance Sheets.
The table below presents the assets and liabilities that were carried at fair value on the unaudited Condensed Consolidated Balance Sheets at December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| | Estimated Fair Value |
| Carrying Value December 31, 2021 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | | | | |
Cash Surrender Value of Life Insurance | $ | 8,242 | | $ | 8,242 | | $ | — | | $ | — | | $ | 8,242 | |
Financial liabilities: | | | | | |
Non-qualified deferred compensation plan | $ | 5,109 | | $ | 5,109 | | $ | — | | $ | — | | $ | 5,109 | |
Contingent consideration related to acquisition | 26,508 | | — | | — | | 26,508 | | 26,508 | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Sheets.
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, 20222023 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Estimated Fair Value |
| | Carrying Value September 30, 2022 | Level 1 | Level 2 | Level 3 | Total |
| Financial assets: | | | | | |
| Cash and cash equivalents | $ | 45,683 | | $ | 45,683 | | $ | — | | $ | — | | $ | 45,683 | |
| Restricted cash | 144,020 | | 144,020 | | — | | — | | 144,020 | |
| Loans receivable, net | 1,791,684 | | — | | — | | 1,791,684 | | 1,791,684 | |
| Financial liabilities: | | | | | |
| 7.50% Senior Secured Notes | $ | 982,331 | | $ | — | | $ | 489,700 | | $ | — | | $ | 489,700 | |
| Heights SPV | 388,013 | | — | | — | | 388,013 | | 388,013 | |
| First Heritage SPV | 178,403 | | — | | — | | 183,203 | | 183,203 | |
| Flexiti SPV | 264,333 | | — | | — | | 269,333 | | 269,333 | |
| Flexiti Securitization | 380,036 | | — | | — | | 382,937 | | 382,937 | |
| Canada SPV | 256,200 | | — | | — | | 258,019 | | 258,019 | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | |
| | Estimated Fair Value |
| Carrying Value September 30, 2023 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | | | | |
Cash and cash equivalents | $ | 82,550 | | $ | 82,550 | | $ | — | | $ | — | | $ | 82,550 | |
Restricted cash | 53,818 | | 53,818 | | — | | — | | 53,818 | |
Loans receivable, net | 1,054,662 | | — | | — | | 1,054,662 | | 1,054,662 | |
Investment in Katapult | 16,915 | | 8,827 | | — | | — | | 8,827 | |
Financial liabilities: | | | | | |
1.0L 18.00% Senior Secured Term Loan | $ | 154,401 | | $ | — | | $ | — | | $ | 172,506 | | $ | 172,506 | |
1.5L 7.50% Senior Secured Notes | 671,922 | | — | | 272,920 | | — | | 272,920 | |
2.0L 7.50% Senior Secured Notes | 312,870 | | — | | 74,660 | | — | | 74,660 | |
Heights SPV | 419,521 | | — | | — | | 425,000 | | 425,000 | |
First Heritage SPV | 150,104 | | — | | — | | 152,765 | | 152,765 | |
Canada SPV | 243,066 | | — | | — | | 244,946 | | 244,946 | |
Canada SPV II | 73,050 | | — | | — | | 75,009 | | 75,009 | |
| | | | | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 20212022 (in thousands):
| | | Estimated Fair Value | | Estimated Fair Value |
| | Carrying Value December 31, 2021 | Level 1 | Level 2 | Level 3 | Total | | Carrying Value December 31, 2022 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | Financial assets: | | Financial assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 63,179 | | $ | 63,179 | | $ | — | | $ | — | | $ | 63,179 | | Cash and cash equivalents | $ | 50,856 | | $ | 50,856 | | $ | — | | $ | — | | $ | 50,856 | |
Restricted cash | Restricted cash | 98,896 | | 98,896 | | — | | — | | 98,896 | | Restricted cash | 59,645 | | 59,645 | | — | | — | | 59,645 | |
Loans receivable, net | Loans receivable, net | 1,460,758 | | — | | — | | 1,460,758 | | 1,460,758 | | Loans receivable, net | 1,173,210 | | — | | — | | 1,173,210 | | 1,173,210 | |
Investment in Katapult | | Investment in Katapult | 23,915 | | 20,624 | | — | | — | | 20,624 | |
Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
Liability for losses on CSO lender-owned consumer loans (1) | $ | 6,908 | | $ | — | | $ | — | | $ | 6,908 | | $ | 6,908 | | |
7.50% Senior Secured Notes | 7.50% Senior Secured Notes | 980,721 | | — | | 1,005,700 | | — | | 1,005,700 | | 7.50% Senior Secured Notes | $ | 982,934 | | $ | — | | $ | 466,500 | | $ | — | | $ | 466,500 | |
U.S. SPV (1) | 45,392 | | — | | — | | 49,456 | | 49,456 | | |
Heights SPV | | Heights SPV | 393,181 | | — | | — | | 393,181 | | 393,181 | |
First Heritage SPV | | First Heritage SPV | 178,622 | | — | | — | | 182,751 | | 182,751 | |
Canada SPV | Canada SPV | 157,813 | | — | | — | | 160,533 | | 160,533 | | Canada SPV | 292,872 | | — | | — | | 294,594 | | 294,594 | |
Flexiti SPV | 172,739 | | — | | — | | 176,625 | | 176,625 | | |
Flexiti Securitization | 239,128 | | — | | — | | 242,886 | | 242,886 | | |
Heights Finance SPV | 350,000 | | — | | — | | 350,000 | | 350,000 | | |
(1) Liabilities were disposed of the when we completed the divestiture of the Legacy U.S. Direct Lending business on July 8, 2022. | |
Senior Revolver | | Senior Revolver | 35,000 | | — | | — | | 35,000 | | 35,000 | |
Loans Receivable, Net
Loans receivable are carried on the unaudited Condensed Consolidated Balance Sheets net of the ALL.ACL. 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.macroeconomic conditions, including unemployment rate and customer income. The net carrying value of loans receivable approximates their fair value. Refer to Note 3,2, "Loans Receivable and Revenue" for additional information.
1.0L 18.00% Senior Secured Term Loans, 1.5L 7.50% Senior Secured Notes, 2.0L 7.50% Senior Secured Notes, Heights SPV, First Heritage SPV, Canada SPV, Canada SPV IIand Senior Revolver
The fair value disclosures for the 1.5L 7.50% Senior Secured Notes and 2.0L 7.50% Senior Secured Notes as of September 30, 2023 and the 7.50% Senior Secured Notes as of December 31, 2022 were based on observable market trading data. The fair values of the 1.0L 18.00% Senior Secured Term Loans, Heights SPV, First Heritage SPV, Canada SPV, Canada SPV II and Senior Revolver were based on the cash needed for their respective final settlements. Refer to Note 6, "Debt" for additional information.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CSO Program
As a result of the sale of the Legacy U.S. Direct Lending business on July 8, 2022, the Company no longer guarantees loans originated by third-party lenders through CSO programs. The Company will continue to present these loans in the tables that follow based on historical practice and for comparability purposes. Refer to Note 14, "Acquisitions and Divestiture" for additional information.
In connection with CSO programs, the Company guaranteed 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 was required to purchase from the lender charged-off loans that it had guaranteed. Refer to Note 3, "Loans Receivable and Revenue" and Note 4, Credit Services Organization" for additional information. All balances in connection with the CSO programs were disposed of with the completion of the divestiture of the Legacy U.S. Direct Lending business on July 8, 2022.
7.50% Senior Secured Notes, Heights SPV, First Heritage SPV, Flexiti SPV, Flexiti Securitization, Canada SPV, Curo Canada Revolving Credit Facility and Senior Revolver (U.S. SPV and Heights FinanceSPV extinguished during the third quarter of 2022)
The fair value disclosure for the 7.50% Senior Secured Notes as of September 30, 2022 and December 31, 2021 was based on observable market trading data. The fair values of the Heights SPV, First Heritage SPV, Flexiti SPV, Flexiti Securitization, Canada SPV, Curo Canada Revolving Credit Facility and Senior Revolver were based on the cash needed for their respective final settlements.
InvestmentFirst Heritage Acquisition
On July 13, 2022, the Company completed the acquisition of First Heritage, a consumer lender that provides near-prime installment loans along with customary opt-in insurance and other financial products, for a total purchase price of $140.0 million in Katapultcash. Provisional goodwill was recorded at $75.4 million, excluding the impairment charge on the Legacy U.S. Direct Lending reporting unit, now included in the Direct Lending reporting unit, recorded in the fourth quarter 2022. No adjustments were recorded during the measurement period which resulted in a final goodwill balance of $75.4 million. See Note 13, "Acquisitions and Divestiture" for more information related to the business combination.
NOTE 5 – 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 inputs, meaning those that reflect the Company's judgment about the assumptions market participants would use in pricing the asset or liability based on the best information available for the specific 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.
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 judgments about the assumptions market participants would use in pricing the asset or liability as a result of limited market data. The Company develops these inputs based on the best information available, including its own data.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Financial Assets and Liabilities Carried at Fair Value
The table below presents the Company's investment in Katapultassets and liabilities that were carried at fair value on the unaudited Condensed Consolidated Balance Sheets at September 30, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Equity Method Investment | | Measurement Alternative (1) | | Total Investment in Katapult |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Balance at December 31, 2020 | | $ | 7,762 | | | $ | 19,609 | | | $ | 27,371 | |
Equity method income - Q1 2021 | | 546 | | | — | | | 546 | |
Balance at March 31, 2021 | | 8,308 | | | 19,609 | | | 27,917 | |
Equity method income - Q2 2021 | | 1,712 | | | — | | | 1,712 | |
Conversion of investment(2) | | 6,481 | | | (19,609) | | | (13,128) | |
Balance at June 30, 2021 | | 16,501 | | | — | | | 16,501 | |
Equity method loss - Q3 2021 | | (1,582) | | | — | | | (1,582) | |
Balance at September 30, 2021 | | 14,919 | | | — | | | 14,919 | |
Equity method income - Q4 2021 | | 2,982 | | | — | | | 2,982 | |
Purchases of common stock | | 9,999 | | | — | | | 9,999 | |
Balance at December 31, 2021 | | 27,900 | | | — | | | 27,900 | |
Equity method income - Q1 2022 | | 1,584 | | | — | | | 1,584 | |
Balance at March 31, 2022 | | 29,484 | | | — | | | 29,484 | |
Equity method loss - Q2 2022 | | (1,327) | | | | | (1,327) | |
| | | | | | |
Balance at June 30, 2022 | | 28,157 | | | — | | | 28,157 | |
Equity method loss - Q3 2022 | | (2,309) | | | | | (2,309) | |
Balance at September 30, 2022 | | $ | 25,848 | | | $ | — | | | $ | 25,848 | |
| | | | | | |
Classification as of December 31, 2021 | | Level 3, not carried at fair value | | N/A | | |
Classification as of September 30, 2022 | | Level 3, not carried at fair value | | N/A | | |
(1) The Company elected to measure this equity security without a readily determinable fair value equal to its cost minus impairment. If the Company identifies an observable price change in orderly transactions for same or similar investment in Katapult, it will measure the equity security at fair value as of the date that the observable transaction occurred. |
(2) On June 9, 2021, Katapult completed its merger with FinServ. Immediately prior to the merger, the Company first converted all of its preferred stock and exercised all common stock warrants, and then exchanged all shares of Katapult common stock for $146.9 million in cash and 18.9 million shares of common stock in the resulting public company, Katapult (NASDAQ: KPLT). The Company's entire investment in Katapult is now accounted for under the equity method of accounting. The Company recorded a related net gain of $135.4 million on its equity method investment in Katapult, based on the pro rata cost basis of the investment and the discharge of the guarantee provided during the second quarter of 2021. |
| | | | | | | | | | | | | | | | | | |
| | Estimated Fair Value | |
| Carrying Value September 30, 2023 | Level 1 | Level 2 | Level 3 | Total | |
Financial assets: | | | | | | |
Cash Surrender Value of Life Insurance | $ | 5,693 | | $ | 5,693 | | $ | — | | $ | — | | $ | 5,693 | | |
Financial liabilities: | | | | | | |
Non-qualified deferred compensation plan | $ | 4,212 | | $ | 4,212 | | $ | — | | $ | — | | $ | 4,212 | | |
| | | | | | |
The table below presents the assets and liabilities that were carried at fair value on the unaudited Condensed Consolidated Balance Sheets at December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | Estimated Fair Value |
| Carrying Value December 31, 2022 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | | | | |
Cash Surrender Value of Life Insurance | $ | 7,591 | | $ | 7,591 | | $ | — | | $ | — | | $ | 7,591 | |
Financial liabilities: | | | | | |
Non-qualified deferred compensation plan | $ | 5,149 | | $ | 5,149 | | $ | — | | $ | — | | $ | 5,149 | |
Cash Surrender Value of Life Insurance and Non-qualified deferred compensation plan
The cash surrender value of life insurance is included in Other assets in the Company’s unaudited Condensed Consolidated Balance Sheets. The non-qualified deferred compensation plan offsetting liability is included in Accounts payable and accrued liabilities in the Company’s unaudited Condensed Consolidated Balance Sheets.
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, 2023 (in thousands):
| | | | | | | | | | | | | | | | | |
| | Estimated Fair Value |
| Carrying Value September 30, 2023 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | | | | |
Cash and cash equivalents | $ | 82,550 | | $ | 82,550 | | $ | — | | $ | — | | $ | 82,550 | |
Restricted cash | 53,818 | | 53,818 | | — | | — | | 53,818 | |
Loans receivable, net | 1,054,662 | | — | | — | | 1,054,662 | | 1,054,662 | |
Investment in Katapult | 16,915 | | 8,827 | | — | | — | | 8,827 | |
Financial liabilities: | | | | | |
1.0L 18.00% Senior Secured Term Loan | $ | 154,401 | | $ | — | | $ | — | | $ | 172,506 | | $ | 172,506 | |
1.5L 7.50% Senior Secured Notes | 671,922 | | — | | 272,920 | | — | | 272,920 | |
2.0L 7.50% Senior Secured Notes | 312,870 | | — | | 74,660 | | — | | 74,660 | |
Heights SPV | 419,521 | | — | | — | | 425,000 | | 425,000 | |
First Heritage SPV | 150,104 | | — | | — | | 152,765 | | 152,765 | |
Canada SPV | 243,066 | | — | | — | | 244,946 | | 244,946 | |
Canada SPV II | 73,050 | | — | | — | | 75,009 | | 75,009 | |
| | | | | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company began investing in Katapult in 2017table below presents the assets and increased its investment through multiple private placement acquisitions. During the first quarter of 2021, the Company changed the two-month reporting lag to a one-quarter reporting lag, as discussed in Note 1, "Summary of Significant Accounting Policies and Nature of Operations." The Company recorded a loss of $2.3 million for the three months ended September 30, 2022 based on its share of Katapult’s earnings.
During the fourth quarter of 2021, the Company purchased an additional 2.6 million shares of common stock of Katapult for an aggregate purchase price of $10.0 million.
On June 9, 2021, Katapult completed its merger with FinServ. As a result, the Company received $146.9 million in cash and 18.9 million shares of common stock of the resulting public company, Katapult (NASDAQ: KPLT). The Company recorded a related net gain of $135.4 million on its equity method investment in Katapult during the second quarter of 2021. Additionally, as part of the merger, CURO received 3.0 million earn-out warrants and holds two of the eight board of director seats for Katapult.
Both the equity method investment and the previously recognized investment measuredliabilities that were not carried at cost minus impairment are presented within "Investment in Katapult"fair value on the unaudited Condensed Consolidated Balance Sheets.Sheets at December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | Estimated Fair Value |
| Carrying Value December 31, 2022 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | | | | |
Cash and cash equivalents | $ | 50,856 | | $ | 50,856 | | $ | — | | $ | — | | $ | 50,856 | |
Restricted cash | 59,645 | | 59,645 | | — | | — | | 59,645 | |
Loans receivable, net | 1,173,210 | | — | | — | | 1,173,210 | | 1,173,210 | |
Investment in Katapult | 23,915 | | 20,624 | | — | | — | | 20,624 | |
Financial liabilities: | | | | | |
7.50% Senior Secured Notes | $ | 982,934 | | $ | — | | $ | 466,500 | | $ | — | | $ | 466,500 | |
Heights SPV | 393,181 | | — | | — | | 393,181 | | 393,181 | |
First Heritage SPV | 178,622 | | — | | — | | 182,751 | | 182,751 | |
Canada SPV | 292,872 | | — | | — | | 294,594 | | 294,594 | |
Senior Revolver | 35,000 | | — | | — | | 35,000 | | 35,000 | |
Loans Receivable, Net
Loans receivable are carried on the unaudited Condensed Consolidated Balance Sheets net of the ACL. The Company owns 19.4%unobservable inputs used to calculate the carrying values include quantitative factors, such as current default trends. Also considered in evaluating the accuracy of Katapult on a fully diluted basis assuming full pay-outthe models are changes to the loan portfolio mix, the impact of earn-out sharesnew 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 macroeconomic conditions, including unemployment rate and customer income. The net carrying value of loans receivable approximates their fair value. Refer to Note 2, "Loans Receivable and Revenue" for additional information.
1.0L 18.00% Senior Secured Term Loans, 1.5L 7.50% Senior Secured Notes, 2.0L 7.50% Senior Secured Notes, Heights SPV, First Heritage SPV, Canada SPV, Canada SPV IIand Senior Revolver
The fair value disclosures for the 1.5L 7.50% Senior Secured Notes and 2.0L 7.50% Senior Secured Notes as of September 30, 2023 and the 7.50% Senior Secured Notes as of December 31, 2022 were based on observable market trading data. The fair values of the 1.0L 18.00% Senior Secured Term Loans, Heights SPV, First Heritage SPV, Canada SPV, Canada SPV II and 18.1% excluding pay-out of earn-out shares.Senior Revolver were based on the cash needed for their respective final settlements. Refer to Note 6, "Debt" for additional information.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 – STOCKHOLDERS' EQUITY
The following table summarizes the changes in stockholders' equity for the nine months ended September 30, 2022 and 2021 (in thousands, except Common Stock data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock, at cost | | Paid-in capital | | Retained Earnings | | AOCI (1) | | Total Stockholders' Equity |
| Shares Outstanding | | Par Value | | | | | |
Balance at December 31, 2021 | 40,810,444 | | | $ | 23 | | | $ | (124,302) | | | $ | 113,520 | | | $ | 203,467 | | | $ | (32,378) | | | $ | 160,330 | |
Net income | — | | | — | | | — | | | — | | | 1,336 | | | — | | | 1,336 | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 6,633 | | | 6,633 | |
Dividends | — | | | — | | | — | | | — | | | (4,791) | | | — | | | (4,791) | |
Share-based compensation expense | — | | | — | | | — | | | 4,093 | | | — | | | — | | | 4,093 | |
Repurchase of common stock | (824,477) | | | — | | | (12,530) | | | — | | | — | | | — | | | (12,530) | |
Net settlement of share-based awards | 362,815 | | | — | | | — | | | (2,284) | | | — | | | — | | | (2,284) | |
Balance at March 31, 2022 | 40,348,782 | | | $ | 23 | | | $ | (136,832) | | | $ | 115,329 | | | $ | 200,012 | | | $ | (25,745) | | | $ | 152,787 | |
Net loss | — | | | — | | | — | | | — | | | (26,080) | | | — | | | (26,080) | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (10,520) | | | (10,520) | |
Dividends | — | | | — | | | — | | | — | | | (4,434) | | | — | | | (4,434) | |
Share based compensation expense | — | | | — | | | — | | | 4,415 | | | — | | | — | | | 4,415 | |
Common stock issued for RSUs vesting, net of shares withheld and withholding paid for employee taxes | 108,969 | | | — | | | — | | | (588) | | | — | | | — | | | (588) | |
Balance at June 30, 2022 | 40,457,751 | | | $ | 23 | | | $ | (136,832) | | | $ | 119,156 | | | $ | 169,498 | | | $ | (36,265) | | | $ | 115,580 | |
Net income | — | | | — | | | — | | | — | | | 25,653 | | | — | | | 25,653 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (13,705) | | | (13,705) | |
Dividends | — | | | — | | | — | | | — | | | (4,466) | | | — | | | (4,466) | |
Share based compensation expense | — | | | — | | | — | | | 1,448 | | | — | | | — | | | 1,448 | |
Common stock issued for RSUs vesting, net of shares withheld and withholding paid for employee taxes | 27,630 | | | — | | | — | | | (58) | | | — | | | — | | | (58) | |
Balance at September 30 2022 | 40,485,381 | | | $ | 23 | | | $ | (136,832) | | | $ | 120,546 | | | $ | 190,685 | | | $ | (49,970) | | | $ | 124,452 | |
(1) Accumulated other comprehensive income (loss) |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock, at cost | | Paid-in capital | | Retained Earnings | | AOCI (1) | | Total Stockholders' Equity |
| Shares Outstanding | | Par Value | | | | | |
Balance at December 31, 2020 | 41,370,504 | | | $ | 9 | | | $ | (77,852) | | | $ | 79,812 | | | $ | 160,068 | | | $ | (30,132) | | | $ | 131,905 | |
Net income | — | | | — | | | — | | | — | | | 25,735 | | | — | | | 25,735 | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 3,855 | | | 3,855 | |
Dividends | — | | | — | | | — | | | — | | | (2,368) | | | — | | | (2,368) | |
Share-based compensation expense | — | | | — | | | — | | | 2,683 | | | — | | | — | | | 2,683 | |
Proceeds from exercise of stock options | 15,852 | | | — | | | — | | | 48 | | | — | | | — | | | 48 | |
Common stock issued for RSUs vesting, net of shares withheld and withholding paid for employee taxes | 237,423 | | | — | | | — | | | (1,668) | | | — | | | — | | | (1,668) | |
| | | | | | | | | | | | | |
Balance at March 31, 2021 | 41,623,779 | | | $ | 9 | | | $ | (77,852) | | | $ | 80,875 | | | $ | 183,435 | | | $ | (26,277) | | | $ | 160,190 | |
Net income | — | | | — | | | — | | | — | | | 104,517 | | | — | | | 104,517 | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 4,714 | | | 4,714 | |
Dividends | — | | | — | | | — | | | — | | | (4,582) | | | — | | | (4,582) | |
Share-based compensation expense | — | | | — | | | — | | | 3,467 | | | — | | | — | | | 3,467 | |
Proceeds from exercise of stock options | 43,920 | | | — | | | — | | | 191 | | | — | | | — | | | 191 | |
Repurchase of common stock | (104,487) | | | — | | | (1,752) | | | — | | | — | | | — | | | (1,752) | |
Common stock issued for RSUs vesting, net of shares withheld and withholding paid for employee taxes | 116,329 | | | — | | | — | | | (43) | | | — | | | — | | | (43) | |
Balances at June 30, 2021 | 41,679,541 | | | $ | 9 | | | $ | (79,604) | | | $ | 84,490 | | | $ | 283,370 | | | $ | (21,563) | | | $ | 266,702 | |
Net loss | — | | | — | | | — | | | — | | | (42,039) | | | — | | | (42,039) | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (10,611) | | | (10,611) | |
Dividends | — | | | — | | | — | | | — | | | (4,547) | | | — | | | (4,547) | |
Share based compensation expense | — | | | — | | | — | | | 3,998 | | | — | | | — | | | 3,998 | |
Proceeds from exercise of stock options | 7,200 | | | — | | | — | | | 27 | | | — | | | — | | | 27 | |
Repurchase of common stock | (964,566) | | | — | | | (15,940) | | | — | | | — | | | — | | | (15,940) | |
Common stock issued for RSUs vesting, net of shares withheld and withholding paid for employee taxes | 14,936 | | | | | | | $ | (107) | | | | | | | (107) | |
Balance at September 30, 2021 | 40,737,111 | | | $ | 9 | | | $ | (95,544) | | | $ | 88,408 | | | $ | 236,784 | | | $ | (32,174) | | | $ | 197,483 | |
(1) Accumulated other comprehensive income (loss) |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Dividends
The table below summarizes the Company's quarterly dividends for 2022.
| | | | | | | | | | | | | | | | | |
| | | | | Dividends Paid |
| Date of declaration | Stockholders of record | Date paid | Dividend per share | (in thousands) |
Q1 2022 | February 4, 2022 | February 18, 2022 | March 1, 2022 | $ | 0.11 | | $ | 4,517 | |
Q2 2022 | April 28, 2022 | May 10, 2022 | May 23, 2022 | $ | 0.11 | | $ | 4,440 | |
Q3 2022 | August 3, 2022 | August 15, 2022 | August 26, 2022 | $ | 0.11 | | $ | 4,453 | |
| | | | | |
The table below summarizes the Company's quarterly dividends for 2021.
| | | | | | | | | | | | | | | | | |
| | | | | Dividends Paid |
| Date of declaration | Stockholders of record | Date paid | Dividend per share | (in thousands) |
Q1 2021 | January 29, 2021 | February 16, 2021 | March 2, 2021 | $ | 0.055 | | $ | 2,284 | |
Q2 2021 | May 3, 2021 | May 14, 2021 | May 27, 2021 | $ | 0.11 | | $ | 4,580 | |
Q3 2021 | July 28, 2021 | August 9, 2021 | August 19, 2021 | $ | 0.11 | | $ | 4,556 | |
| | | | | |
| | | | | |
| | | | | |
In October 2022, the Company's Board of Directors suspended the quarterly dividend.
NOTE 9 – 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, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | $ | 25,653 | | | $ | (42,039) | | | $ | 909 | | | $ | 88,213 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted average common shares - basic | 40,479 | | | 41,220 | | | 40,203 | | | 41,459 | |
Dilutive effect of stock options and restricted stock units | 356 | | | — | | | 551 | | | 1,963 | |
Weighted average common shares - diluted | 40,835 | | | 41,220 | | | 40,754 | | | 43,422 | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic earnings per share | $ | 0.63 | | | $ | (1.02) | | | $ | 0.02 | | | $ | 2.13 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted earnings per share | $ | 0.63 | | | $ | (1.02) | | | $ | 0.02 | | | $ | 2.03 | |
| | | | | | | |
| | | | | | | |
|
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; therefore, these shares are not included in calculating diluted earnings per share. For the three and nine months ended September 30, 2022, there were 3.5 million and 2.4 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 and nine months ended September 30, 2021, there were 0.1 million and 0.1 million, respectively, of potential shares of common stock excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.
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. The control number concept requires that the same number of potentially dilutive securities applied in computing diluted earnings per share is 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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 – SEGMENT REPORTING
Segment information is prepared on the same basis that the Company's CODM reviews financial information for operational decision making purposes, including revenues, net revenue, gross margin, segment operating income and other items.
U.S.As of September 30, 2022, the Company operated over 500 U.S. retail locations in 13 states. The Company provides secured and unsecured installment loan products to near-prime and non-prime consumers as well as credit insurance and other ancillary financial products to its customers in the U.S.
Canada Direct Lending. As of September 30, 2022, the Company operated a total of 211 stores across eight Canadian provinces and had an online presence in eight provinces and one territory. The Company provides Revolving LOC and Installment loans, which include Single-Pay loans, optional credit protection insurance products to Revolving LOC and Installment loan customers, 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.
Canada POS Lending. As of September 30, 2022, the Company served Canadian customers through POS financing available at over 8,000 retail locations and over 3,500 merchant partners across 10 provinces and two territories. The Company provides Revolving LOC loans and a number of other ancillary financial products to its customers in Canada. Results of operations for the nine months ended September 30, 2021 from Canada POS Lending represent results from the date of Flexiti's acquisition, March 10, 2021, through September 30, 2021.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table illustrates summarized financial information concerning reportable segments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues by segment: (1) | | | | | | | | |
U.S. | | $ | 107,430 | | | $ | 131,674 | | | $ | 511,540 | | | $ | 386,960 | |
Canada Direct Lending | | 78,979 | | | 66,190 | | | 226,007 | | | 186,510 | |
Canada POS Lending | | 27,711 | | | 11,416 | | | 71,173 | | | 20,054 | |
Consolidated revenue | | $ | 214,120 | | | $ | 209,280 | | | $ | 808,720 | | | $ | 593,524 | |
Net revenues by segment: | | | | | | | | |
U.S. | | $ | 75,357 | | | $ | 83,244 | | | $ | 315,079 | | | $ | 278,852 | |
Canada Direct Lending | | 46,032 | | | 52,187 | | | 145,047 | | | 154,717 | |
Canada POS Lending | | 14,332 | | | 3,131 | | | 43,118 | | | 7,927 | |
Consolidated net revenue | | $ | 135,721 | | | $ | 138,562 | | | $ | 503,244 | | | $ | 441,496 | |
Segment operating (loss) income: | | | | | | | | |
U.S. | | $ | 30,757 | | | $ | (62,099) | | | $ | (11,347) | | | $ | 75,909 | |
Canada Direct Lending | | 12,069 | | | 23,744 | | | 45,554 | | | 71,334 | |
Canada POS Lending | | 175 | | | (17,059) | | | (21,834) | | | (29,789) | |
Consolidated operating (loss) income | | $ | 43,001 | | | $ | (55,414) | | | $ | 12,373 | | | $ | 117,454 | |
Expenditures for long-lived assets by segment: | | | | | | | | |
U.S. | | $ | 6,545 | | | $ | 4,402 | | | $ | 14,066 | | | $ | 9,226 | |
Canada Direct Lending | | 630 | | | 481 | | | 5,094 | | | 991 | |
Canada POS Lending | | 5,846 | | | 2,603 | | | 16,110 | | | 5,134 | |
Consolidated expenditures for long-lived assets | | $ | 13,021 | | | $ | 7,486 | | | $ | 35,270 | | | $ | 15,351 | |
| | | | |
The following table provides the proportion of gross loans receivable by segment (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
U.S. | | $ | 739,100 | | | $ | 661,945 | |
Canada Direct Lending | | 465,057 | | | 427,197 | |
Canada POS Lending | | 690,270 | | | 459,176 | |
Total gross loans receivable | | $ | 1,894,427 | | | $ | 1,548,318 | |
The following table represents 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, 2022 | | December 31, 2021 |
U.S. | | $ | 14,618 | | | $ | 32,753 | |
Canada Direct Lending | | 20,097 | | | 21,072 | |
Canada POS Lending | | 2,687 | | | 810 | |
Total net long-lived assets | | $ | 37,402 | | | $ | 54,635 | |
The Company's CODM does not review assets by segment for purposes of allocating resources or decision-making purposes; therefore, total assets by segment are not disclosed.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Securities Litigation and Enforcement
In 2018, a putative securities fraud class action lawsuit was filed against the Company and certain of its officers and directors and other related parties 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 (the "Yellowdog Action"). The suit alleged the Company made misleading statements and omitted material information regarding the Company's efforts to transition the Canadian inventory of products from Installment loans to Revolving LOC loans.
In December 2020, the Court granted final approval of the $9.0 million settlement and dismissed the case with prejudice. The Company's directors' and officers' insurance policy required the Company to pay the first $2.5 million in fees and settlement and the insurance carriers paid the remaining amounts. For the nine months ended September 30, 2022, there was no further expense related to this litigation.
In June and July 2020, three shareholder derivative lawsuits were filed in the United States District Court for the District of Delaware ("Court") against the Company, certain of its directors and officers, and in two of the three lawsuits, a large stockholder. Plaintiffs generally alleged the same underlying facts of the Yellowdog Action. In July 2021, the derivative lawsuits were voluntarily dismissed and Plaintiffs refiled two cases in the United States District Court for the District of Kansas. In April 2022, the Company reached an agreement in principle with the plaintiffs to settle these actions. On October 27, 2022, the Court granted final approval of the settlement and dismissed the case with prejudice. The terms of the settlement provided for the implementation of certain corporate governance reforms and a payment of $345,000 in attorneys’ fees and expenses to plaintiffs’ counsel, which was paid by the Company's insurers, and included no admission of liability or wrongdoing by the Company.
Other Legal Matters. The Company is a defendant in certain other litigation matters encountered from time-to-time in the ordinary course of business, some of which may be covered to an extent by insurance. While it is difficult to predict the outcome of any particular proceeding, the Company does not believe the result of any of these matters will have a material adverse effect on the Company's business, results of operations or financial condition.
NOTE 12 – LEASES
Leases entered into by the Company are primarily for retail stores in certain U.S. states and Canadian provinces.
Leases classified as finance leases were immaterial to the Company as of September 30, 2022. Operating leases expire at various times through 2033. Operating leases are included in "Right of use asset - operating leases" and "Lease liability - operating leases" in the unaudited Condensed Consolidated Balance Sheets. Operating lease costs are included in "Occupancy" in the unaudited Condensed Consolidated Statement of Operations. The majority of leases have an original term up to five years plus renewal options for additional similar terms.
The following table summarizes the operating lease costs and other information for the three and nine months ended September 30, 2022 and September 30,2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | 2021 | | 2022 | 2021 |
Operating lease costs: | | | | | |
Third-Party | $ | 7,098 | | $ | 8,043 | | | $ | 26,151 | | 24,604 | |
Related-Party | 332 | | 551 | | | 1,986 | | 1,649 | |
Total operating lease costs | $ | 7,430 | | $ | 8,594 | | | $ | 28,137 | | 26,253 | |
| | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | | | $ | 29,713 | | $ | 26,556 | |
ROU assets obtained | | | | $ | (26,772) | | $ | 9,893 | |
Weighted average remaining lease term - Operating leases | | | | 4.4 years | 5.3 years |
Weighted average discount rate - Operating leases | | | | 7.7 | % | 9.1 | % |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the aggregate operating lease payments that the Company was contractually obligated to make under operating leases as of September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Third-Party | | Related-Party | | Total |
Remainder of 2022 | | $ | 6,845 | | | $ | 253 | | | $ | 7,098 | |
2023 | | 23,533 | | | 615 | | | 24,148 | |
2024 | | 16,527 | | | 632 | | | 17,159 | |
2025 | | 11,178 | | | 649 | | | 11,827 | |
2026 | | 6,161 | | | 666 | | | 6,827 | |
2027 | | 3,921 | | | 684 | | | 4,605 | |
Thereafter | | 12,423 | | | 1,021 | | | 13,444 | |
Total | | 80,588 | | | 4,520 | | | 85,108 | |
Less: Imputed interest | | (17,453) | | | (1,286) | | | (18,739) | |
Operating lease liabilities | | $ | 63,135 | | | $ | 3,234 | | | $ | 66,369 | |
There were no material leases entered into subsequent to the balance sheet date.
NOTE 13 – GOODWILL
The change in the carrying amount of goodwill by operating segment for the nine months ended September 30, 2022 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | Canada Direct Lending | | Canada POS Lending | | Total |
Goodwill at December 31, 2021 | $ | 359,779 | | | $ | 30,105 | | | $ | 39,908 | | | $ | 429,792 | |
Foreign currency translation | — | | | (2,199) | | | (2,914) | | | (5,113) | |
Measurement period adjustment | 15,379 | | | — | | | — | | | 15,379 | |
Divestiture (Note 14) | (91,131) | | | — | | | — | | | (91,131) | |
Acquisition (Note 14) | 75,365 | | | — | | | — | | | 75,365 | |
Goodwill at September 30, 2022 | $ | 359,392 | | | $ | 27,906 | | | $ | 36,994 | | | $ | 424,292 | |
The Company tests goodwill at least annually for potential impairment, as of 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 2021 Form 10-K for additional information on the Company's policy for assessing goodwill for impairment.
In the third quarter of 2022, the Company performed an interim review of triggering events for each reporting unit, which would indicate whether a quantitative or qualitative assessment of goodwill impairment was necessary. As a result of the interim triggering event review, the Company concluded an additional assessment was not necessary and did not record an impairment loss during the three months ended September 30, 2022.
Flexiti Acquisition
The Company completed the acquisition of Flexiti on March 10, 2021, resulting in $39.9 million of goodwill as of December 31, 2021, based on the excess of the purchase price of the business combination over the fair value of the acquired net assets. Goodwill of $39.9 million was net of $4.5 million of adjustments upon the conclusion of the measurement period, and $0.5 million of foreign currency translation impact as of December 31, 2021. See Note 14,"Acquisitions and Divestiture" for more information related to the business combination.
Heights Finance Acquisition
The Company completed the acquisition of Heights Finance on December 27, 2021. Provisional goodwill was estimated at $253.9 million, based on the preliminary valuation. The Company recorded a $15.4 million of adjustments during the second quarter of 2022, resulting in a provisional goodwill balance of $269.2 million, as of June 30, 2022. See Note 14,"Acquisitions and Divestiture" for more information related to the business combination.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Legacy U.S. Direct Lending Business Divestiture
On July 8, 2022 the Company completed the divestiture of its Legacy U.S. Direct Lending business to Community Choice Financial, for total sale proceeds of $349.2 million, net of working capital adjustments, comprised of $314.2 million of cash received at close and $35 million in cash payable in monthly installment payments over the subsequent 12 months. The divestiture resulted in a gain of $68.4 million in the three and nine months ended September 30, 2022, which was recorded in "Gain on sale of business" on the unaudited Condensed Consolidated Statement of Operations. As part of the sale, $91.1 million of goodwill was written off. See Note 14,"Acquisitions and Divestiture" for more information related to the divestiture.
First Heritage Acquisition
On July 13, 2022, the Company completed the acquisition of First Heritage, a consumer lender that provides near-prime installment loans along with customary opt-in insurance and other financial products, for a total purchase price of $140.0 million in cash. Provisional goodwill was recorded at $75.4 million, excluding the impairment charge on the Legacy U.S. Direct Lending reporting unit, now included in the Direct Lending reporting unit, recorded in the fourth quarter 2022. No adjustments were recorded during the measurement period which resulted in a final goodwill balance of $75.4 million. See Note 13, "Acquisitions and Divestiture" for more information related to the business combination.
NOTE 5 – 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 inputs, meaning those that reflect the Company's judgment about the assumptions market participants would use in pricing the asset or liability based on the best information available for the specific 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.
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 judgments about the assumptions market participants would use in pricing the asset or liability as a result of limited market data. The Company develops these inputs based on the best information available, including its own data.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Estimated Fair Value | |
| Carrying Value September 30, 2023 | Level 1 | Level 2 | Level 3 | Total | |
Financial assets: | | | | | | |
Cash Surrender Value of Life Insurance | $ | 5,693 | | $ | 5,693 | | $ | — | | $ | — | | $ | 5,693 | | |
Financial liabilities: | | | | | | |
Non-qualified deferred compensation plan | $ | 4,212 | | $ | 4,212 | | $ | — | | $ | — | | $ | 4,212 | | |
| | | | | | |
The table below presents the assets and liabilities that were carried at fair value on the unaudited Condensed Consolidated Balance Sheets at December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | Estimated Fair Value |
| Carrying Value December 31, 2022 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | | | | |
Cash Surrender Value of Life Insurance | $ | 7,591 | | $ | 7,591 | | $ | — | | $ | — | | $ | 7,591 | |
Financial liabilities: | | | | | |
Non-qualified deferred compensation plan | $ | 5,149 | | $ | 5,149 | | $ | — | | $ | — | | $ | 5,149 | |
Cash Surrender Value of Life Insurance and Non-qualified deferred compensation plan
The cash surrender value of life insurance is included in Other assets in the Company’s unaudited Condensed Consolidated Balance Sheets. The non-qualified deferred compensation plan offsetting liability is included in Accounts payable and accrued liabilities in the Company’s unaudited Condensed Consolidated Balance Sheets.
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, 2023 (in thousands):
| | | | | | | | | | | | | | | | | |
| | Estimated Fair Value |
| Carrying Value September 30, 2023 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | | | | |
Cash and cash equivalents | $ | 82,550 | | $ | 82,550 | | $ | — | | $ | — | | $ | 82,550 | |
Restricted cash | 53,818 | | 53,818 | | — | | — | | 53,818 | |
Loans receivable, net | 1,054,662 | | — | | — | | 1,054,662 | | 1,054,662 | |
Investment in Katapult | 16,915 | | 8,827 | | — | | — | | 8,827 | |
Financial liabilities: | | | | | |
1.0L 18.00% Senior Secured Term Loan | $ | 154,401 | | $ | — | | $ | — | | $ | 172,506 | | $ | 172,506 | |
1.5L 7.50% Senior Secured Notes | 671,922 | | — | | 272,920 | | — | | 272,920 | |
2.0L 7.50% Senior Secured Notes | 312,870 | | — | | 74,660 | | — | | 74,660 | |
Heights SPV | 419,521 | | — | | — | | 425,000 | | 425,000 | |
First Heritage SPV | 150,104 | | — | | — | | 152,765 | | 152,765 | |
Canada SPV | 243,066 | | — | | — | | 244,946 | | 244,946 | |
Canada SPV II | 73,050 | | — | | — | | 75,009 | | 75,009 | |
| | | | | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | Estimated Fair Value |
| Carrying Value December 31, 2022 | Level 1 | Level 2 | Level 3 | Total |
Financial assets: | | | | | |
Cash and cash equivalents | $ | 50,856 | | $ | 50,856 | | $ | — | | $ | — | | $ | 50,856 | |
Restricted cash | 59,645 | | 59,645 | | — | | — | | 59,645 | |
Loans receivable, net | 1,173,210 | | — | | — | | 1,173,210 | | 1,173,210 | |
Investment in Katapult | 23,915 | | 20,624 | | — | | — | | 20,624 | |
Financial liabilities: | | | | | |
7.50% Senior Secured Notes | $ | 982,934 | | $ | — | | $ | 466,500 | | $ | — | | $ | 466,500 | |
Heights SPV | 393,181 | | — | | — | | 393,181 | | 393,181 | |
First Heritage SPV | 178,622 | | — | | — | | 182,751 | | 182,751 | |
Canada SPV | 292,872 | | — | | — | | 294,594 | | 294,594 | |
Senior Revolver | 35,000 | | — | | — | | 35,000 | | 35,000 | |
Loans Receivable, Net
Loans receivable are carried on the unaudited Condensed Consolidated Balance Sheets net of the ACL. 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 macroeconomic conditions, including unemployment rate and customer income. The net carrying value of loans receivable approximates their fair value. Refer to Note 2, "Loans Receivable and Revenue" for additional information.
1.0L 18.00% Senior Secured Term Loans, 1.5L 7.50% Senior Secured Notes, 2.0L 7.50% Senior Secured Notes, Heights SPV, First Heritage SPV, Canada SPV, Canada SPV IIand Senior Revolver
The fair value disclosures for the 1.5L 7.50% Senior Secured Notes and 2.0L 7.50% Senior Secured Notes as of September 30, 2023 and the 7.50% Senior Secured Notes as of December 31, 2022 were based on observable market trading data. The fair values of the 1.0L 18.00% Senior Secured Term Loans, Heights SPV, First Heritage SPV, Canada SPV, Canada SPV II and Senior Revolver were based on the cash needed for their respective final settlements. Refer to Note 6, "Debt" for additional information.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Investment in Katapult
The table below presents the Company's investment in Katapult (in thousands):
| | | | | | | | | | | | |
| | | | | Investment in Katapult | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Balance at December 31, 2021 | | | | | $ | 27,900 | | |
Equity method income - Q1 2022 | | | | | 1,584 | | |
Balance at March 31, 2022 | | | | | 29,484 | | |
Equity method loss - Q2 2022 | | | | | (1,328) | | |
Balance at June 30, 2022 | | | | | 28,156 | | |
Equity method loss - Q3 2022 | | | | | (2,309) | | |
Balance at September 30, 2022 | | | | | 25,847 | | |
Equity method loss - Q4 2022 | | | | | (1,932) | | |
Balance at December 31, 2022 | | | | | 23,915 | | |
Equity method loss - Q1 2023 | | | | | (3,413) | | |
Balance at March 31, 2023 | | | | | 20,502 | | |
Equity method loss - Q2 2023 | | | | | (2,134) | | |
Balance at June 30, 2023 | | | | | 18,368 | | |
Equity method loss - Q3 2023 | | | | | (1,453) | | |
Balance at September 30, 2023 | | | | | $ | 16,915 | | |
| |
| |
The Company has an equity method investment in Katapult and records its share of earnings and losses on a one-quarter reporting lag. The Company recorded a loss of $1.5 million and $7.0 million for the three and nine ended September 30, 2023 respectively, based on its share of Katapult’s earnings. The equity method investment is presented within "Investment in Katapult" on the unaudited Condensed Consolidated Balance Sheets.
The Company owns 22.7% of Katapult's outstanding common and in-substance common stock as of September 30, 2023.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – DEBT
The Company's debt instruments and balances outstanding as of September 30, 2023 and December 31, 2022, including maturity date, effective interest rate and borrowing capacity, subject to borrowing base limitations, were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Effective interest rate | | | Outstanding as of |
| Maturity Date | Borrowing Capacity | | September 30, 2023 | | December 31, 2022 |
Corporate Debt: | | | | | | | |
1.0L 18.00% Senior Secured Term Loan | August 2, 2027 | 18.00 | % | | | $ | 172,506 | | | $ | — | |
1.5L 7.50% Senior Secured Notes | August 1, 2028 | 7.50 | % | | | 682,298 | | | — | |
2.0L 7.50% Senior Secured Notes | August 1, 2028 | 7.50 | % | | | 317,702 | | | — | |
7.5% Senior Secured Notes | August 1, 2028 | 7.50 | % | | | — | | | 1,000,000 | |
Total corporate debt | | | | | 1,172,506 | | | 1,000,000 | |
Funding Debt: | | | | | | | |
Heights SPV | July 15, 2025 | 1-Mo SOFR + 5.42% | $425.0 million | | $ | 425,000 | | | $ | 400,758 | |
First Heritage SPV | July 13, 2025 | 1-Mo SOFR + 4.25% | $225.0 million | | 152,765 | | | 182,751 | |
Canada SPV (1) | August 2, 2026 | 3-Mo CDOR + 6.00% | C$400.0 million | | 244,946 | | | 294,594 | |
Canada SPV II (1) | November 12, 2025 | 3-Mo CDOR + 8.00% | C$110.0 million | | 75,009 | | | — | |
Senior Revolver (2) | | | | | — | | | 35,000 | |
Total funding debt | | | | | $ | 897,720 | | | $ | 913,103 | |
Less: debt issuance costs | | | | | (45,292) | | | (30,495) | |
Total Debt | | | | | $ | 2,024,934 | | | $ | 1,882,608 | |
(1) Capacity amounts are denominated in Canadian dollars, whereas outstanding balances as of September 30, 2023 and December 31, 2022 are denominated in U.S. dollars. The exchange rate applied at September 30, 2023 was 0.7365 and the exchange rate at December 31, 2022 was 0.7365. |
(2) On May 15, 2023, the Company utilized the proceeds from the $150.0 million 1.0L 18.00% Senior Secured Term Loan to pay off the Senior Revolver. |
Corporate Debt
1.0 Lien 18.00% Senior Secured Term Loan
On May 15, 2023, the Company entered into a new $150.0 million first lien term loan, which matures on August 2, 2027. Interest is payable quarterly, in arrears, on March 31, June 30, September 30 and December 31. The principal loan balance and any unpaid accrued interest are due to the lender on the maturity date. The 1.0L 18.00% Senior Secured Term Loan are senior secured obligations of the Company and rank senior in right of payment to all of its existing and any future unsecured senior debt. The 1.0L 18.00% Senior Secured Term Loan accrues interest at a rate of 18.0% per annum. The Company may elect to pay up to 12.00% per annum in kind during the first year following the closing and up to 9.00% per annum in kind thereafter. The Company elected to pay 12.00% interest per annum in kind for the three months ended September 30, 2023. The 1.0L 18.00% Senior Secured Term Loan contains financial and other covenant requirements, including, but not limited to, financial covenants that require the Company to maintain certain liquidity levels. In connection with the 1.0L 18.00% Senior Secured Term Loan, the Company has a remaining balance of $18.1 million of capitalized financing costs, net of amortization, included in the unaudited Condensed Consolidated Balance Sheets as a component of Debt, as of September 30, 2023. These costs are amortized over the term of the 1.0L 18.00% Senior Secured Term Loan as a component of Interest expense.
7.50% Senior Secured Notes, 1.5L 7.50% Senior Secured Notes and 2.0L 7.50% Senior Secured Notes
In July 2021, the Company issued $750.0 million of 7.50% Senior Secured Notes which mature on August 1, 2028. Interest on the notes is payable semiannually, in arrears, on February 1 and August 1. In December 2021, the Company issued an additional $250.0 million of 7.50% Senior Secured Notes, also maturing on August 1, 2028, to fund the acquisition of Heights. Refer to Note 13, "Acquisitions and Divestitures" for additional details. On May 15, 2023, the Company closed on an exchange agreement with approximately 68.2% of the 7.50% Senior Secured Notes holders, who agreed to exchange approximately $682.3 million aggregate principal amount of the 7.50% Senior Secured Notes for approximately $682.3 million of 1.5L 7.50% Senior Secured Notes due August 1, 2028. The 1.5L 7.50% Senior Secured Notes retain all the same terms and conditions of the 7.50% Senior Secured Notes except that they rank senior in lien priority to the remaining $317.7 million 2.0L 7.50% Senior Secured Notes.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Except for the 2.0L 7.50% Senior Secured Notes, the 1.5L 7.50% Senior Secured Notes rank junior in right of payment to all existing and future secured debt of senior lien priority, including the 1.0L 18.00% Senior Secured Term Loan, and are senior in right of payment to all other existing and any future senior debt. No incremental Deferred Financing Costs were incurred in relation to the exchange of the 1.5L 7.50% Senior Secured Notes.
The 2.0L 7.50% Senior Secured Notes have a maturity of August 1, 2028. Interest on the notes is payable semiannually, in arrears, on February 1 and August 1. The principal amount of the 2.0L 7.50% Senior Secured Notes is $317.7 million. The 2.0L 7.50% Senior Secured Notes rank junior in right of payment to all existing and any future secured debt of senior lien priority, including the 1.0L 18.00% Senior Secured Term Loan and 1.5L 7.50% Senior Secured Notes, and are senior in right of payment to all other existing and any future senior debt. The 2.0L 7.50% Senior Secured Notes retain all other terms and conditions of the 7.50% Senior Secured Notes.
In connection with the 7.50% Senior Secured Notes, the Company has a remaining balance of $15.2 million of capitalized financing costs included in the unaudited Condensed Consolidated Balance Sheets as a component of Debt, as of September 30, 2023. These costs are amortized over the term of the 7.50% Senior Secured Notes as a component of Interest expense.
Funding Debt
As of September 30, 2023, the Company had four credit facilities whereby loans receivable were sold to VIEs to collateralize debt incurred under each facility. The following debt arrangements are issued by the Company’s wholly owned, bankruptcy-remote SPVs, which are considered VIEs under U.S. GAAP and are consolidated into the financial statements of their respective primary beneficiary: (i) Heights SPV, (ii) First Heritage SPV, (iii) Canada SPV and (iv) Canada SPV II. For further information on these facilities, refer to Note 3, "Variable Interest Entities."
Assets transferred to each SPV are legally isolated from the Company and its affiliates, as well as the claims of the Company’s and its affiliates’ creditors. Further, the assets of each SPV are owned by such SPV and are not available to satisfy the debts or other obligations of the Company or any of its affiliates.
These debts are supported by the expected cash flows from the underlying collateralized finance receivables. Advances on the funding debt are determined based on the contractually agreed upon advance rates. Under the terms of each SPV credit facility, the effective advance rates vary from stated advanced rates based on certain eligibility requirements. Collections on these finance receivables are remitted to restricted cash collection accounts, which totaled $24.6 million and $20.2 million as of September 30, 2023 and December 31, 2022, respectively. The increase in restricted cash is based on the contractual requirements of the SPVs related to the total value and performance of the underlying collateralized finance receivables.
Heights SPV
On July 15, 2022, the Company entered into a $425.0 million non-recourse revolving warehouse facility to replace the incumbent lender's facility and finance future loans originated by Heights. The effective interest rate is stated as 1-month SOFR plus a fixed contractual rate determined based on the relative amount of Class A and Class B pledged receivables. The rate was 1-month SOFR plus 5.42% at September 30, 2023. The Company also pays a 0.50% per annum commitment fee on the unused portion of the commitments. The warehouse revolving period matures on July 15, 2024.
First Heritage SPV
On July 13, 2022, concurrently with the closing of the First Heritage acquisition, the Company entered into a $225.0 million non-recourse revolving warehouse facility to replace the incumbent lender's facility and finance future loans originated by First Heritage. The effective interest rate is 1-month SOFR plus 4.25%. The Company also pays a 0.50% per annum commitment fee on the unused portion of the commitments. The warehouse revolving period matures on July 13, 2024.
Canada SPV
In August 2018, as amended in the fourth quarter of 2021 and first quarter of 2022, CURO Canada Receivables Limited Partnership, a wholly-owned subsidiary of the Company, entered into the Canada SPV. The effective interest rate was 3-month CDOR plus 6.00%. The borrower also pays a 0.50% per annum commitment fee on the unused portion of the commitments. The warehouse revolving period matures on July 2, 2024.
Canada SPV II
On May 15, 2023, the Company closed on a C$110.0 million non-recourse revolving warehouse facility to finance loans in Canada. The facility includes a C$40.0 million accordion that is triggered upon the Company's request at the lenders' discretion. The effective interest is three-month CDOR plus 8.00%. The Company also pays a 0.50% per annum commitment fee on the unused portion of the commitments. The warehouse revolving period matures on November 12, 2025.
Senior Revolver
The Company maintained the Senior Revolver that provided $40.0 million of borrowing capacity, including up to $4.0 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The most recent term expired August 31, 2023. The Senior Revolver accrued interest at one-month SOFR plus 5.00%.
On May 15, 2023, the Company fully paid off the outstanding borrowings of $40.3 million of principal and accrued interest under the Senior Revolver, using proceeds from the 1.0L 18.0% Senior Secured Term Loan described above. The early extinguishment of the Senior Revolver resulted in a loss of $0.1 million.
Curo Canada Revolving Credit Facility
Curo Canada maintained the Curo Canada Revolving Credit Facility, which provided short-term liquidity for the Company's Canadian direct lending operations.
On December 21, 2022, the borrowing capacity under the Curo Canada Revolving Credit Facility was reduced from C$10.0 million to C$5.0 million, and the facility was cancelled on January 6, 2023.
On May 15, 2023, the Company executed the Third Supplemental Indenture, which amends the underlying indenture to, among other things, eliminate or amend substantially all of the restrictive covenants contained in the indenture other than those related to the payment of principal and interest. The Company incurred fees of $1.7 million, net of amortization, related to the debt covenant amendments for the foregoing SPV facilities. These fees were capitalized, and included in the unaudited Condensed Consolidated Balance Sheets as a component of Debt. These costs are amortized over the term of the SPV facilities as a component of Interest expense.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Prior to the Company acquiring Heights, Heights received four Civil Investigative Demands (each, a “CID”) from the Consumer Financial Protection Bureau (“CFPB”). In May and June 2022, Heights participated in the CFPB’s Notice and Opportunity to Respond and Advise (“NORA”) process, and submitted a NORA response addressing the potential violations raised by the CFPB during the NORA process. Following this process, on August 22, 2023 the CFPB filed a civil complaint in the U.S. District Court for the District of South Carolina against Heights and seven of its state-licensed subsidiaries alleging violations of the Consumer Financial Protection Act. The CFPB is seeking injunctive relief, redress for allegedly affected consumers and civil monetary penalties. On October 9, 2023, Heights and the other defendants filed a Motion to Stay pending the U.S. Supreme Court decision in CFPB v. Cmty. Fin. Servs. Ass'n of Am., Ltd., No. 22-448 (U.S. argued Oct. 3, 2023) (“CFSA”), regarding the constitutionality of the CFPB’s funding mechanism. On October 23, 2023, the CFPB filed its opposition to the Motion to Stay. Heights and the other defendants filed an answer to the complaint on October 24, 2023, and filed a reply in support of the Motion to Stay on October 30, 2023.
On the terms and subject to the conditions set forth in the definitive agreement to acquire Heights, the former owners of Heights agreed to indemnify the Company for certain losses arising after the consummation of the transaction, including relating to the CFPB’s enforcement action. The indemnification obligations of the former owners of Heights are limited to an indemnity holdback of $10 million cash plus $20 million of CURO stock valued as of the date of close, which was escrowed at the closing of the transaction, and will be the Company’s sole recourse against the former owners of Heights with respect to all of the indemnifiable claims under the definitive transaction agreement. The value of the stock portion of the escrow as of September 30, 2023 is $1.2 million.
The Company believes that the CFPB’s claims are without merit and will vigorously defend the lawsuit. Nevertheless, at this time, the Company cannot predict or determine the timing or outcome of this matter or the effect that any adverse determinations the lawsuit may have on its business, financial condition or results of operations. There can be no assurance that the escrowed amount will be sufficient to address all covered losses. However, the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements or changes to the Company’s business practices or operations could materially and adversely affect the Company’s business, financial condition, results of operations or reputation.
Other Legal Matters. The Company is involved in litigation matters related to amounts due in connection with the sale of the Legacy U.S. Direct Lending Business. The Company is a defendant in certain other litigation matters encountered from time-to-time in the ordinary course of business, some of which may be covered to an extent by insurance. While it is difficult to predict the outcome of any particular proceeding, the Company does not believe that any of these matters will have a material adverse effect on the Company's business, results of operations or financial condition.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES
The Company's effective income tax rate from continuing operations was (23.8)% and 64.6% for the nine months ended September 30, 2023 and 2022, respectively.
The effective income tax rate from continuing operations for the nine months ended September 30, 2023 was lower than the blended federal and state/provincial statutory rate of approximately 26.0%, primarily as a result of recording a valuation allowance against U.S. DTAs of $52.5 million, partially offset by releasing Canada Direct Lending DTAs of $(0.7) million, and lost tax benefits related to share-based compensation of $2.0 million.
The effective income tax rate from continuing operations for the nine months ended September 30, 2022, was higher than the blended federal and state/provincial statutory rate of approximately 26.0%, primarily as a result of lost tax benefits related to the divestiture of the Legacy U.S. Direct Lending Business of $8.4 million, share-based compensation of $0.9 million, officers’ compensation of $1.0 million and non-deductible transaction costs of $0.2 million.
For the nine months ended September 30, 2023, we continued to evaluate evidence to estimate whether sufficient future sources of income will be generated to permit the use of the existing DTAs in the U.S. from continuing operations. During the first quarter of 2023, we determined that negative evidence outweighs the positive evidence of our ability to realize the U.S. DTAs. On this basis, we recorded a valuation allowance of $65.4 million against the U.S. DTAs from continuing operations, including $52.5 million recorded as Provision for income taxes and $13.0 million in Accumulated deficit related to the adoption of CECL.
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 accumulated earnings in Canada of $232.4 million were distributed to the U.S. legal entities, the Company would be subject to Canadian withholding taxes of an estimated $11.6 million. The determination of the U.S. state income taxes upon a potential foreign earnings distribution is impractical. In the event the earnings are distributed to the U.S. legal entities, the Company will adjust the income tax provision for the applicable period and determine the amount of foreign tax credit that would be available.
NOTE 9 – 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, |
| 2023 | | 2022 | | 2023 | | 2022 | | |
Net (loss) income from continuing operations | $ | (33,612) | | | $ | 21,117 | | | $ | (142,585) | | | $ | 12,098 | | | |
Net (loss) income from discontinued operations | (70,830) | | | 4,536 | | | (80,655) | | | (11,189) | | | |
Net (loss) income | $ | (104,442) | | | $ | 25,653 | | | $ | (223,240) | | | $ | 909 | | | |
| | | | | | | | | |
Weighted average common shares - basic | 41,267 | | | 40,479 | | | 41,018 | | | 40,203 | | | |
Dilutive effect of stock options and restricted stock units | — | | | 356 | | | — | | | 551 | | | |
Weighted average common shares - diluted | 41,267 | | | 40,835 | | | 41,018 | | | 40,754 | | | |
| | | | | | | | | |
Basic (loss) earnings per share: | | | | | | | | | |
Continuing operations | $ | (0.81) | | | $ | 0.52 | | | $ | (3.48) | | | $ | 0.30 | | | |
Discontinued operations | (1.72) | | | 0.11 | | | (1.97) | | | (0.28) | | | |
Basic (loss) earnings per share | $ | (2.53) | | | $ | 0.63 | | | $ | (5.45) | | | $ | 0.02 | | | |
| | | | | | | | | |
Diluted (loss) earnings per share: | | | | | | | | | |
Continuing operations | $ | (0.81) | | | $ | 0.52 | | | $ | (3.48) | | | $ | 0.30 | | | |
Discontinued operations | (1.72) | | | 0.11 | | | (1.97) | | | (0.28) | | | |
Diluted (loss) earnings per share | $ | (2.53) | | | $ | 0.63 | | | $ | (5.45) | | | $ | 0.02 | | | |
| | |
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; therefore, these shares are not included in calculating diluted earnings per share. For the three and nine months ended September 30, 2023, there were 4.4 million and 4.4 million, respectively, and for the three and nine
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
months ended September 30, 2022, there were 3.5 million and 2.4 million, respectively, of potential shares of common stock excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.
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. The control number concept requires that the same number of potentially dilutive securities applied in computing diluted earnings per share is applied to all other categories of income or loss, regardless of their anti-dilutive effect on such categories.
NOTE 10 – LEASES
Leases entered into by the Company are primarily for retail stores in certain U.S. states and Canadian provinces.
Leases classified as finance leases were immaterial to the Company as of September 30, 2023. Operating leases expire at various times through 2033. Operating leases are included in "Right of use asset - operating leases" and "Lease liability - operating leases" in the unaudited Condensed Consolidated Balance Sheets. Operating lease costs are included in "Occupancy" in the unaudited Condensed Consolidated Statements of Operations. The majority of leases have an original term up to five years plus renewal options under similar terms.
The Company recorded $0.8 million and $8.3 million of expense during the three and nine months ended September 30, 2023 for lease abandonment costs related to restructuring actions. For further information, refer to Note 15, "Restructuring."
The following table summarizes the operating lease costs and other information for the three and nine months ended September 30, 2023 and2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | 2022 | | 2023 | 2022 |
Operating lease costs: | | | | | |
Third-Party | $ | 5,832 | | $ | 6,983 | | | $ | 17,937 | | $ | 25,791 | |
Related-Party | 157 | | 332 | | | 470 | | 1,986 | |
Total operating lease costs | $ | 5,989 | | $ | 7,315 | | | $ | 18,407 | | $ | 27,777 | |
| | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | | | $ | 18,705 | | $ | 29,421 | |
ROU assets obtained | | | | $ | 9,174 | | $ | (29,965) | |
Weighted average remaining lease term - Operating leases | | | | 4.0 years | 4.6 years |
Weighted average discount rate - Operating leases | | | | 8.5 | % | 8.1 | % |
The following table summarizes the aggregate operating lease payments that the Company was contractually obligated to make under operating leases as of September 30, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Third-Party | | Related-Party | | Total |
Remainder of 2023 | | $ | 5,623 | | | $ | 156 | | | $ | 5,779 | |
2024 | | 19,088 | | | 632 | | | 19,720 | |
2025 | | 13,568 | | | 649 | | | 14,217 | |
2026 | | 7,547 | | | 667 | | | 8,214 | |
2027 | | 4,542 | | | 685 | | | 5,227 | |
2028 | | 2,611 | | | 667 | | | 3,278 | |
Thereafter | | 4,527 | | | 326 | | | 4,853 | |
Total | | 57,506 | | | 3,782 | | | 61,288 | |
Less: Imputed interest | | (8,763) | | | (946) | | | (9,709) | |
Operating lease liabilities | | $ | 48,743 | | | $ | 2,836 | | | $ | 51,579 | |
There were no material leases entered into subsequent to the balance sheet date.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – DIVIDENDS
Dividend Program
In October 2022, the Company's Board of Directors suspended its previously authorized quarterly dividend of $0.11 per share ($0.44 per share annualized). There were no dividends paid in the nine months ended September 30, 2023, except those related to previously declared dividends on RSUs vested during the nine months ended September 30, 2023 related to the unvested period.
NOTE 12 – SEGMENT AND GEOGRAPHIC DATA
During the quarter ended September 30, 2023, we completed the sale of Flexiti, which comprised our entire Canada POS Lending operating segment. See Note14, "Discontinued Operations"for more information. The Company determined the Flexiti operations met the criteria for discontinued operations in the third quarter of 2023. As a result, the Flexiti operations are presented in the accompanying unaudited Condensed Consolidated Balance Sheet, unaudited Condensed Consolidated Statements of Operations and Cash Flows as discontinued operations for all applicable periods presented. Consequently, we now report our results in a single reportable segment, Direct Lending, which reflects how the Company's CODM allocates resources and evaluates our financial results. The U.S. and Canada have similar economic and operating characteristics, including the nature of products and services offered, operating procedures and risks, customer bases and shared corporate resources, which led the CODM to conclude that these separate segments combine to form one operating segment. Because we have a single reportable segment, all required financial segment information can be found directly in the unaudited Consolidated Financial Statements. As of September 30, 2023, the Company operated over 490 U.S. retail locations in 13 states. As of September 30, 2023, the Company operated nearly 150 stores across eight Canadian provinces and had an online presence in eight provinces and one territory.
Geographic Data
The following table presents total revenues by geographic region:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
U.S. | | $ | 87,906 | | | $ | 107,430 | | | $ | 269,731 | | | $ | 511,540 | |
Canada | | 79,957 | | | 78,979 | | | 234,516 | | | 226,007 | |
Total revenue | | $ | 167,863 | | | $ | 186,409 | | | $ | 504,247 | | | $ | 737,547 | |
The following table presents the proportion of gross loans receivable by geographic region:
| | | | | | | | | | | | | | |
| | September 30, 2023 | | December 31, 2022 |
U.S. | | $ | 751,869 | | | $ | 773,380 | |
Canada | | 502,532 | | | 481,015 | |
Total gross loans receivable | | $ | 1,254,401 | | | $ | 1,254,395 | |
The following table presents the Company's net long-lived assets, comprised of property and equipment, by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2023 | | December 31, 2022 |
U.S. | | $ | 10,330 | | | $ | 13,993 | |
Canada | | 13,573 | | | 15,239 | |
Total net long-lived assets | | $ | 23,903 | | | $ | 29,232 | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
First Heritage
On July 13, 2022, the Company closed the acquisition of First Heritage, a consumer lender that provides near-prime installment loans along with customary opt-in insurance and other financial products,
based in Ridgeland, Mississippi, for a total purchase price of $140.0 million in cash. Provisional goodwill was recorded at $75.4 million.See Note 14,"Acquisitions and Divestiture" for more information related to the business combination.
NOTE 14 – ACQUISITIONS AND DIVESTITURE
ACQUISITIONS
First Heritage
On July 13, 2022, we completed the acquisition of First Heritage, a consumer lender that provides near-prime installment loans along with customary opt-in insurance and other financial products, based in Ridgeland, Mississippi, pursuant to the merger agreement dated May 18, 2022 (“Merger Agreement”). Pursuant to the Merger Agreement, Sugarcane Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Merger Sub”), merged with and into First Heritage (the “Merger”), with First Heritage surviving the Merger as a wholly-owned subsidiary of the Company for a purchase price of $140.0 million in cash, subject to certain customary working capital and other adjustments in accordance with the terms of the Merger Agreement.adjustments. The Company began consolidating the financial results of First Heritage in the unaudited Condensed Consolidated Financial Statements on July 13, 2022 within the U.S.Direct Lending operating segment.
This transaction has beenwas 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 acquired assets and liabilities assumed are provisional based on the preliminary fair value estimates as of the acquisition date. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Form 10-Q and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of September 30, 2022,2023, the primary areas that remain preliminary relate toCompany completed the valuationdetermination of certain loans receivables, intangiblethe fair values of the acquired identifiable assets and certain tax-related balances.
liabilities.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table presents the preliminary purchase price allocation recorded in the Company’s unaudited Condensed Consolidated Balance Sheet as of the date of acquisition (in thousands):
| | | | | | | |
| | | Amounts acquired on July 13, 2022 (as adjusted) |
Assets | | | |
Cash and cash equivalents | | | $ | 31,396 | |
Restricted cash | | | 1,933 | |
Gross loans receivable(1) | | | 218,011 | |
Prepaid expenses and other | | | 1,2841,285 | |
Property and equipment | | | 345 | |
Right-of-use assets | | | 4,241 | |
Intangibles, net | | | 10,670 | |
Total assets | | | $ | 267,880 | |
| | | |
Liabilities | | | |
Accounts payable and accrued liabilities | | | $ | 4,2714,270 | |
Lease liabilities | | | 4,241 | |
Debt | | | 170,392 | |
Total liabilities | | $ | 178,904 | |
| | | |
Net assets acquired | | $ | 88,976 | |
Total consideration paid | | | 164,341 | |
Goodwill | | | $ | 75,365 | |
(1) The gross contractual loans receivables as of July 13, 2022 were $236.1 million, of which the Company estimates $18.1 million will not be collected. |
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (dollars in thousands):
| | | | | | | | | | | |
| Fair Value | Useful Life | | | |
Trade name | $ | 3,790 | | 10.0 years | | | |
Customer relationships | 6,880 | | 3.5 years | | | |
Total identified intangible assets | $ | 10,670 | | | | | |
Goodwill of $75.4 million represents the excess of the consideration paid over the fair value of the net tangible and intangible assets acquired. The goodwill was primarily attributable to expected synergies created with the Company’s future product offerings and the value of the combined workforce. Goodwill from this transaction is deductible for income tax purposes.
The Company incurred costs related to this acquisition of $10.1 million that were recorded in "Other operating expense" in the U.S. segment in the accompanying Consolidated Statement of Operations for the three months ended September 30, 2022.
Heights Finance
On December 27, 2021, the Company acquired 100% of the outstanding stock of Heights Finance for $360.0 million, consisting of $335.0 million in cash and $25.0 million of ourthe Company's common stock. Heights Finance is a consumer finance company that provides secured and unsecured Installment loans to near-prime and non-prime consumers, and offers customary opt-in insurance and other financial products across 390 branches in 11 U.S. states.
The Company began consolidating the financial results of Heights Finance in the unaudited Condensed Consolidated Financial Statements on December 27, 2021 within the U.S.Direct Lending operating segment. For additional information, see Note 15, "Acquisitions" of the 2021 Form 10-K.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
We are inAs of December 31, 2021, the processCompany completed the determination of reviewing the valuationfair values of the acquired identifiable assets and liabilities, including goodwill, and expect to finalize the purchase price allocation prior to December 31, 2022.liabilities. During the nine monthsyear ended September 30,December 31, 2022, the Company recorded a measurement period adjustmentadjustments that increased goodwill by $15.4$11.8 million. The measurement period adjustment related to the fair value of the loan portfolio and would have resulted in $7.7 million of incremental interest and fee revenue during the three months ended March 31, 2022 and no impact on the year ended December 31, 2022. The Company recorded a measurement period adjustment in the fourth quarter of 2022 that decreased goodwill by $3.5 million related to the final true-up of deferred tax balances after the pre-acquisition income tax returns were filed in October 2022. The Company made these measurement period adjustments to reflect facts and circumstancesthe correct deferred tax balances that existed as of the acquisition date and did not result from events subsequent to such date. Additionally, in the acquisition date.fourth quarter of 2022, a measurement period adjustment was recorded related to tax filings for pre-acquisition activity which resulted in $4.2 million of income tax receivables and an increase to accounts payable for the same amount. As of September 30,December 31, 2022, the primary areas that remain preliminary relate toCompany completed the valuationdetermination of intangiblethe fair values of the acquired identifiable assets and certain tax-related balances.liabilities.
The following table presents the preliminary purchase price allocation recorded in the Company’s unaudited Condensed Consolidated Balance Sheet as of the date of acquisition of Heights Finance (in thousands):
| | | Amounts acquired on December 27, 2021 | Measurement period adjustments | Amounts acquired on December 27, 2021 (as adjusted) | | Amounts acquired on December 27, 2021 | Measurement period adjustments | Amounts acquired on December 27, 2021 (as adjusted) | |
Assets | Assets | | Assets | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 13,564 | | $ | — | | $ | 13,564 | | Cash and cash equivalents | $ | 13,564 | | $ | — | | $ | 13,564 | | |
Restricted cash | Restricted cash | 33,630 | | — | | 33,630 | | Restricted cash | 33,630 | | — | | 33,630 | | |
Gross loans receivable(1) | Gross loans receivable(1) | 471,630 | | (15,379) | | 456,251 | | Gross loans receivable(1) | 471,630 | | (15,379) | | 456,251 | | |
Income tax receivable | Income tax receivable | 3,526 | | — | | 3,526 | | Income tax receivable | 3,526 | | 4,209 | | 7,735 | | |
Prepaid expenses and other | Prepaid expenses and other | 7,410 | | — | | 7,410 | | Prepaid expenses and other | 7,410 | | — | | 7,410 | | |
Property and equipment | Property and equipment | 4,748 | | — | | 4,748 | | Property and equipment | 4,748 | | — | | 4,748 | | |
Right-of-use assets | Right-of-use assets | 16,111 | | — | | 16,111 | | Right-of-use assets | 16,111 | | — | | 16,111 | | |
Intangibles, net | Intangibles, net | 11,900 | | — | | 11,900 | | Intangibles, net | 11,900 | | — | | 11,900 | | |
Deferred tax asset | | Deferred tax asset | — | | 2,477 | | 2,477 | | |
Other assets | Other assets | 98 | | — | | 98 | | Other assets | 98 | | — | | 98 | | |
Total assets | Total assets | $ | 562,617 | | $ | (15,379) | | $ | 547,238 | | Total assets | $ | 562,617 | | $ | (8,693) | | $ | 553,924 | | |
| Liabilities | Liabilities | | Liabilities | | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | $ | 19,186 | | $ | — | | $ | 19,186 | | Accounts payable and accrued liabilities | $ | 19,186 | | $ | 4,209 | | $ | 23,395 | | |
Lease liabilities | Lease liabilities | 16,315 | | — | | 16,315 | | Lease liabilities | 16,315 | | — | | 16,315 | | |
Deferred tax liability | Deferred tax liability | 1,077 | | — | | 1,077 | | Deferred tax liability | 1,077 | | (1,077) | | — | | |
Accrued interest on debt | Accrued interest on debt | 1,781 | | — | | 1,781 | | Accrued interest on debt | 1,781 | | — | | 1,781 | | |
Debt | Debt | 350,000 | | — | | 350,000 | | Debt | 350,000 | | — | | 350,000 | | |
Total liabilities | Total liabilities | $ | 388,359 | | $ | — | | $ | 388,359 | | Total liabilities | $ | 388,359 | | $ | 3,132 | | $ | 391,491 | | |
| Net assets acquired | Net assets acquired | $ | 174,258 | | $ | (15,379) | | $ | 158,879 | | Net assets acquired | $ | 174,258 | | $ | (11,825) | | $ | 162,433 | | |
Total consideration paid | Total consideration paid | 428,115 | | | 428,115 | | Total consideration paid | 428,115 | | | 428,115 | | |
Goodwill | Goodwill | $ | 253,857 | | | $ | 269,236 | | Goodwill | $ | 253,857 | | | $ | 265,682 | | |
(1) The gross contractual loans receivables as of December 27, 2021 were $485.4 million, of which the Company estimates $29.2 million will not be collected. | |
(1) The gross contractual loans receivables as of December 27, 2021 were $485.4 million, of which the Company estimates $29.1 million will not be collected. | | (1) The gross contractual loans receivables as of December 27, 2021 were $485.4 million, of which the Company estimates $29.1 million will not be collected. | |
DIVESTITURES
Flexiti
On August 31, 2023, the Company completed the previously announced sale of Flexiti to Questrade for total base consideration of $40.6 million, subject to an adjustment based on Flexiti’s tangible book value, unrestricted cash at closing and certain other adjustments. In total, the Company received net proceeds of $63.7 million.Refer to Note 14, "Discontinued Operations" for further discussion.
On March 10, 2021, the Company acquired 100% of the outstanding stock of Flexiti. The fair value of total consideration paid was $86.5 million in cash, $6.3 million in debt costs and $20.6 million in contingent cash consideration subject to future operating metrics, including revenue less NCOs and loan originations. Flexiti provides POS financing solutions to retailers across Canada.
The Company began consolidating the financial results of Flexiti in the unaudited Condensed Consolidated Financial Statements on March 10, 2021. For additional information, see Note 15, "Acquisitions" of the 2021 Form 10-K.
DIVESTITURE
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Legacy U.S. Direct Lending Business
On July 8, 2022, the Company completed the divestiture of its Legacy U.S. Direct Lending businessBusiness to Community Choice Financial, for total sale proceeds of $349.2 million, net of working capital adjustments, comprised of $314.2 million of cash received at close and $35$35.0 million in cash payable in monthly installment payments over the subsequent 12 months.
The divestiture resulted in a gain of $68.4 million infor the three and nine monthsyear ended September 30,December 31, 2022, which was recorded in "Gain on sale of business" on the unaudited Condensed Consolidated StatementStatements of Operations. ThePer ASC 205: Presentation of Financial Statements, the sale of the business is not considered a strategic shift that will have a major effect onclassified as discontinued operations in the Company’s operations or financial results, and thus it is not reported as discontinued operations.
results.
The Company reduced the gain by $2.0 million in the nine months ended September 30, 2023 based on expected uncollectible amounts. There was no change to this calculation in the three months ended September 30, 2023.
The following table presents the
preliminary purchase price allocationamounts attributable to each category recorded in the Company’s
unaudited Condensed Consolidated Balance Sheet as of the date of divestiture of the Legacy U.S. Direct Lending
businessBusiness, as adjusted (in thousands):
| | | | | | | | | | | |
| | | July 8, 2022 |
| Assets | | |
| Cash, cash equivalents and restricted cash | | $ | 21,292 | |
| Loans receivable | | 162,147 | |
| Right of use asset | | 39,326 | |
| Goodwill | | 91,131 | |
| Other assets (1)
| | 30,690 | |
| Total assets | | $ | 344,586 | |
| | | |
| Liabilities | | |
| Accounts payable and accrued liabilities | | $ | 8,947 | |
| Right of use liability | | 43,433 | |
| Liability for losses on CSO lender-owned consumer loans | | 5,628 | |
| Other long term liabilities (2)
| | 5,815 | |
| Total liabilities | | 63,823 | |
| | | |
| Net assets sold | | 280,763 | |
| Total proceeds | | 349,207 | |
| Total pretax gain on sale of business | | $ | 68,444 | |
| (1) Includes income tax receivable, property and equipment, intangibles, deferred tax assets, and other assets. |
| (2) Includes deferred revenue, income taxes payable, deferred tax liability, and other long-term liabilities |
| | | | | | | | | | | |
| Amounts divested of on July 8, 2022 | Subsequent adjustments | Amounts divested of on July 8, 2022 (as adjusted) |
Assets | | | |
Cash, cash equivalents and restricted cash | $ | 21,292 | | $ | — | | $ | 21,292 | |
Loans receivable | 162,147 | | — | | 162,147 | |
Right of use asset | 39,326 | | — | | 39,326 | |
Goodwill | 91,131 | | — | | 91,131 | |
Other assets (1) | 30,690 | | (2,027) | | 28,663 | |
Total assets | $ | 344,586 | | $ | (2,027) | | $ | 342,559 | |
| | | |
Liabilities | | | |
Accounts payable and accrued liabilities | $ | (8,947) | | $ | — | | $ | (8,947) | |
Right of use liability | (43,433) | | — | | (43,433) | |
Liability for losses on CSO lender-owned consumer loans | (5,628) | | — | | (5,628) | |
Other long term liabilities (2) | (5,815) | | — | | (5,815) | |
Total liabilities | $ | (63,823) | | $ | — | | $ | (63,823) | |
| | | |
Net assets sold | $ | 280,763 | | | $ | 280,763 | |
Total proceeds | 349,207 | | (2,027) | | 347,180 | |
Total pretax gain on sale of business | $ | 68,444 | | | $ | 66,417 | |
(1) Includes income tax receivable, property and equipment, intangibles, deferred tax assets and other assets. |
(2) Includes deferred revenue, income taxes payable, deferred tax liability and other long-term liabilities |
The Legacy U.S. Direct Lending Business had pre-tax net income of $60.7$3.6 million and $3.6$60.7 million for the nine monthsthree and threenine months ended September 30, 2022, respectively. The Legacy U.S. Direct Lending Business had pre-tax net income of $118.1 million and $27.7 million for the nine months and three months ended September 30, 2021, respectively. Pre-tax net income is comprised of net revenue and expenses directly related to the Legacy U.S. Direct Lending Business, which does not include certain costs recorded in the Legacy U.S. Direct Lending operating segment that are not classified as disposed of, such as interest expense on the 7.50% Senior Secured Notes and certain corporate expenses.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – DISCONTINUED OPERATIONS
Flexiti
On August 31, 2023, the Company completed the divestiture of Flexiti to Questrade Financial Group Inc. The Company received total sales proceeds of $63.7 million, including $28.6 million in cash, after $12.3 million of transaction costs paid out of proceeds, on the closing date and $22.9 million in escrow receivables. The total sales proceeds are net of adjustments to the gross purchase price for Flexiti's tangible book value and unrestricted cash as of the closing date. The Company paid total transaction costs of $13.0 million related to the sale of Flexiti. Flexiti constituted the entirety of the Company’s Canada POS Lending operating segment. The divestiture resulted in a loss of $93.2 million in the three and nine months ended September 30, 2023, which was recorded in Net (loss) income from discontinued operations on the unaudited Condensed Consolidated Statements of Operations. As part of the transaction, the Company also entered into a Transition Service Agreement to support Questrade in the transition by continuing to provide call center and select finance support services to Flexiti, for a period of six months following the closing date. As consideration for these services, Questrade will reimburse the Company for the salaries and benefits expenses incurred on behalf of the services rendered based upon an agreed upon blended rate and for applicable call center licenses. Income from the transition service agreement is recorded as a reduction to the corresponding expense within the unaudited Consolidated Statements of Operations.
After consideration of the relevant facts related to the Flexiti divestiture, the Company concluded the proposed disposal activities represented a strategic shift that has a major effect on the Company’s operations and financial results as Flexiti (i) provides Buy-Now-Pay-Later / Point of Sale services through its merchant partner network, (ii) engaged in merchant partnerships as a source of customer acquisition and revenue, (iii) primarily engaged with prime customers and (iv) offered interest free or deferred periods on certain of its loans, unlike the Company's remaining Direct Lending operations. As such, Flexiti qualified for presentation as discontinued operations. Accordingly, the financial results of Flexiti are presented in the accompanying unaudited Condensed Consolidated Financial Statements for all periods presented as discontinued operations. Refer to Note 1, "Summary of Significant Accounting Policies and Nature of Operations" for further information.
Assets and liabilities related to the divested operations have been reclassified in the unaudited Condensed Consolidated Balance Sheet as of December 31, 2022, which are detailed in the table below:
| | | | | |
| December 31, 2022 |
Assets | |
Cash, cash equivalents, and restricted cash | $ | 55,176 | |
Loans receivable, net | 792,596 | |
Prepaid expenses and other | 1,976 | |
Property and equipment, net | 2,725 | |
Right-of-use assets | 3,020 | |
Deferred tax assets | 31,755 | |
Intangibles | 52,764 | |
Other assets (1) | 5,391 | |
Assets, discontinued operations | $ | 945,403 | |
| |
Liabilities | |
Accounts payable and accrued liabilities | $ | 28,233 | |
Deferred revenue | 28,792 | |
Right-of-use liability | 3,451 | |
Contingent consideration related to acquisition | 16,884 | |
Debt | 724,705 | |
Liabilities, discontinued operations | $ | 802,065 | |
(1) Includes income tax receivable and other assets. |
The operating results of Flexiti have been reclassified as discontinued operations in the unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2023, respectively, as detailed in the table below:
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands, unaudited) | 2023 | 2022 | | | | 2023 | 2022 | | |
Revenue | | | | | | | | | |
Interest and fees revenue | $ | 26,253 | | $ | 24,575 | | | | | $ | 98,606 | | $ | 64,077 | | | |
Insurance and other income | 3,451 | | 3,136 | | | | | 13,430 | | 7,096 | | | |
Total revenue | 29,704 | | 27,711 | | | | | 112,036 | | 71,173 | | | |
Provision for losses | 11,449 | | 13,379 | | | | | 41,860 | | 28,055 | | | |
Net revenue | 18,255 | | 14,332 | | | | | 70,176 | | 43,118 | | | |
Operating expenses | | | | | | | | | |
Salaries and benefits | 3,436 | | 4,234 | | | | | 19,824 | | 19,448 | | | |
Occupancy | 247 | | 408 | | | | | 957 | | 929 | | | |
Advertising | 79 | | 568 | | | | | 419 | | 1,109 | | | |
Direct operations | 2,357 | | 3,441 | | | | | 9,138 | | 10,858 | | | |
Depreciation and amortization | 2,574 | | 3,816 | | | | | 10,007 | | 10,915 | | | |
Other operating expense | 16,354 | | 1,051 | | | | | 16,610 | | 2,455 | | | |
Total operating expenses | 25,047 | | 13,518 | | | | | 56,955 | | 45,714 | | | |
Other expense | | | | | | | | | |
Loss on sale | 93,245 | | — | | | | | 93,245 | | — | | | |
Interest expense | 11,128 | | 11,994 | | | | | 41,667 | | 26,843 | | | |
(Gain) loss on change in fair value of contingent consideration | — | | (11,355) | | | | | 2,728 | | (7,605) | | | |
Total other expense | 104,373 | | 639 | | | | | 137,640 | | 19,238 | | | |
(Loss) income from discontinued operations | (111,165) | | 175 | | | | | (124,419) | | (21,834) | | | |
Benefit for income taxes | (40,335) | | (4,361) | | | | | (43,764) | | (10,645) | | | |
Net (loss) income from discontinued operations | $ | (70,830) | | $ | 4,536 | | | | | $ | (80,655) | | $ | (11,189) | | | |
The Company's effective income tax rate from discontinued operations was 35.2% and 48.8% for the nine months ended September 30, 2023 and 2022, respectively. The effective income tax rate from discontinued operations for the nine months ended September 30, 2023 of 35.2% was higher than the blended federal and provincial statutory rate of approximately 26%, primarily as a result of recording a current tax benefit realized from the loss on the divestiture. The effective income tax rate from discontinued operations for the nine months ended September 30, 2022 of 48.8% was higher than the blended federal and provincial statutory rate of approximately 26%, primarily as a result of $2.1 million change in value of contingent consideration.
NOTE 15 – RESTRUCTURING
On October 5, 2022, the Company's Board of Directors approved restructuring actions to reduce operating expenses through store closures and headcount reductions in both the U.S. and Canada, and the elimination of duplicative corporate office functions in the U.S. Both the workforce reduction and store closures were aimed at reducing duplicative corporate functions and stores with overlapping customer populations as a result of the acquisitions of Heights in December of 2021 and First Heritage in July of 2022. For the year ended December 31, 2022, the Company incurred $16.0 million of expense related to our restructuring actions, of which $7.9 million related to employee termination benefits resulting from the workforce reduction of approximately 150 employees, and $8.2 million related to lease abandonment costs resulting from the closure of 89 stores in the U.S. and Canada.
For the three and nine months ended September 30, 2023, the Company incurred an additional $4.0 million and $14.0 million, respectively, of expense related to our restructuring actions, of which $3.0 million and $5.5 million related to employee termination benefits, and $0.8 million and $8.3 million, respectively, related to lease abandonment costs resulting from the closure of stores in the U.S. and Canada.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the total restructuring costs incurred during the three and nine months ended September 30, 2023, (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2023 | | Nine months ended September 30, 2023 |
| Employee Termination Benefits | Lease Exit Costs | Other Related Costs | Total Restructuring Costs | | Employee Termination Benefits | Lease Exit Costs | Other Related Costs | Total Restructuring Costs |
Salaries and Benefits | $ | 3,045 | | $ | — | | $ | — | | $ | 3,045 | | | $ | 4,562 | | $ | — | | $ | — | | $ | 4,562 | |
Other Operating Expense | — | | 800 | | 189 | | 989 | | | 958 | | 8,281 | | 189 | | 9,428 | |
Total | $ | 3,045 | | $ | 800 | | $ | 189 | | $ | 4,034 | | | $ | 5,520 | | $ | 8,281 | | $ | 189 | | $ | 13,990 | |
The following table shows the total amount incurred and liability, which is recorded in accounts payables and other accrued liabilities in the unaudited Condensed Consolidated Balance Sheets, for restructuring-related costs as of September 30, 2023 and for the three and nine months ended September 30, 2023, (in thousands):
| | | | | |
| |
| |
| |
Accrued restructuring costs as of December 31, 2022 | $ | 4,746 | |
Restructuring costs incurred during the three months ended March 31, 2023 | 9,956 | |
Amount paid during the three months ended March 31, 2023 | (4,641) | |
Accrued restructuring costs as of March 31, 2023 | $ | 10,061 | |
Restructuring costs incurred during the three months ended June 30, 2023 | — | |
Amount paid during the three months ended June 30, 2023 | (2,904) | |
Accrued restructuring costs as of June 30, 2023 | $ | 7,157 | |
Restructuring costs incurred during the three months ended September 30, 2023 | 4,034 | |
Amount paid during the three months ended September 30, 2023 | (3,234) | |
Accrued restructuring costs as of September 30, 2023 | $ | 7,957 | |
NOTE 16 – SHARE REPURCHASE PROGRAM
In February 2022, the Company's Board of Directors authorized a new share repurchase program for the repurchase of up to $25.0 million of CUROits common stock. In March 2023, the Board of Directors terminated the program. There were no repurchases under this program as of September 30, 2022. Repurchases are at the Company's discretion and can continue until completed or terminated. The Company expects any repurchases to be made from time-to-time in the open market and/or in privately negotiated transactions at the Company's 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.program.
In May 2021, the Company's Board of Directors authorized a share repurchase program for up to $50.0 million of its common stock. The program commenced in June 2021 and was completed in February 2022. The Company repurchased 824,477 shares of common stock under the plan at an average price of $15.20 for a total cost of $12.5 million during the nine months ended September 30, 2022.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The table below summarizes share repurchase activity in the $50.0 million repurchase program during the three and nine months ended September 30, 2022 (in thousands, except for per share amounts and number of share amounts):
| | | | | | | | |
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 |
Total number of shares repurchased | — | | 824,777 | |
Average price paid per share | $ | — | | $ | 15.20 | |
Total value of shares repurchased | $ | — | | $ | 12,530 | |
| | |
| | |
| | |
| | |
We repurchased 104,487 shares of our common stock at an average price of $16.77 for a total cost of $1.8 million during the three and nine months ended September 30, 2021.
NOTE 1617 – SUBSEQUENT EVENTS
Cost SavingsOn October 16, 2023, the Company received a written notice (the “Market Cap Notice”) from the NYSE that the Company was not in compliance with the continued listing criteria set forth in Section 802.01B of the NYSE’s Listed Company Manual with respect to the minimum market capitalization and Efficiency Enhancementsshareholders' equity requirements, because the average market capitalization of the Company over a consecutive 30 trading-day period was less than $50 million and, at the same time, the Company’s last reported stockholders’ equity was less than $50 million. As of October 16, 2023, the 30 trading-day average market capitalization was approximately $44.7 million, and the Company's last reported stockholders’ deficit was $398.0 million ($268.4 million as of June 30, 2023). Within 45 days of receipt of the Market Cap Notice, the Company will respond to the NYSE with a business plan aimed to demonstrate the definitive actions the Company has taken, or will take, to regain compliance with the continued listing standards within 18 months of the Market Cap Notice. Should the Listings Operations Committee of the NYSE review and approve the plan, the Company's common stock will continue to be listed and traded on the NYSE during the 18-month cure period, subject to the Company's compliance with the other continued listing criteria of the NYSE and the periodic monitoring of the business plan by the NYSE.
As partOn October 27, 2023, the Company received written notice from the NYSE that the Company was not in compliance with the continued listing criteria set forth in 802.01C of the continuing evaluationNYSE's Listed Company Manual with respect to stock price requirements (the "Stock Price Notice"). The Company has a period of six months following the receipt of the Company cost structure,Stock Price Notice to regain compliance. As a result, the Company madehas until April 27, 2024 to regain compliance. If the decisionCompany determines that in order to cure the price condition it is necessary to take an action that requires shareholder approval, it must obtain shareholder approval no later than its 2024 annual meeting and must implement the action promptly thereafter.
The Market Cap Notice and Stock Price Notice do not affect the Company’s reporting obligations with the Securities and Exchange Commission, and they do not conflict with or cause an event of default under any of the Company’s material debt or other agreements.
At October 202230, 2023, the Company had $22.9 million in escrow receivables, of which $19.9 million related to enact certain cost savings strategies, which include (i) store closures in both CanadaFlexiti's tangible book value and unrestricted cash, as of the US, (ii) consolidationclosing date. On October 30, 2023, the Company received the final Flexiti tangible book value and unrestricted cash amounts from Questrade needed to finalize the purchase price. No adjustments to the proceeds or loss on sale of certain back-office functions as well as reductions to our corporate office footprint, and (iii) ending the First Phase credit card.Flexiti calculation were required.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking StatementsFORWARD LOOKING STATEMENTS
The following discussion of financial condition, results of operations, liquidity and capital resources, our regulatory environment 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 OperationsForm 10-Q contains forward-looking statements. These forward-looking statements include projections, estimates and assumptions about various matters, including future financial and operational performance, and may be identified by words such as "guidance," "estimate," "anticipate," "believe," "forecast," "step," "plan," "predict," "focused," "project," "is likely," "is possible," "expect," "anticipate," "intend," "should," "will," 'may," "confident," "trend" and variations of such words and similar expressions. The matters discussed in these forward-looking statements are based on management's beliefs, assumptions, current expectations and estimates and projections, and 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 the sections titled “Risk Factors” in our 20212022 Form 10-K and "Risk Factors" in Item 1A of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 and this Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements.our business.
Company Overview
We are a tech-enabled,an omni-channel consumer finance company serving a full spectrum of non-prime and prime consumers in portions of the U.S. and Canada.
History
CURO was founded in 1997over 25 years ago to meet the growing needs of consumers looking for alternativeadditional ways to access to credit. With 25 years of experience, weWe continuously update our products and technology platform to offer a variety of convenient and accessible financial and loan services across all ofservices. We design our markets. The terms “CURO," "we,” “our,” “us”customer experience to allow consumers to apply for, update and manage their loans in the “Company” referchannels they prefer—in branch, via mobile device or over the phone. Our high customer satisfaction scores speak to CURO Group Holdings Corp.our ability to anticipate and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated.
exceed customers’ needs.
In the U.S., we operate under several principal brands, including "Heights Finance," "Southern Finance" "Covington Credit," "Heights Finance," "Quick Credit", "Southern Finance"Credit," and "First Heritage." Until July 2022 we also operated under brands that included "Speedy Cash", "Rapid Cash" and "AvioHeritage Credit". We also offer demand deposit accounts in the U.S. under the Revolve Finance brand, and credit card programs under the First Phase brand, which we launched in the fourth quarter of 2021. As of September 30, 2022, our store network consisted of over 500 U.S. retail locations across 13 states.
direct lending brands. In Canada, we operate under “Cash Money” and “LendDirect” direct lending brands and the "Flexiti" point-of-sale brand.brands. As of September 30, 2022,2023, we operated our direct lendingover 490 store locations across 13 U.S. states and online servicesnearly 150 stores in eight Canadian provinces and one Canadian territory. Our point-of-sale operations are available at nearly 8,000 retail locations and over 3,500 merchant partners across 10had an online presence in eight provinces and two territories.
In July 2022, we soldone territory. Until the sale of our Legacy U.S. Direct Lending Business whichin July 2022, we also operated under thebrands that included "Speedy Cash",Cash," "Rapid Cash" and "Avio Credit" brands. AlsoCredit." We also offered demand deposit accounts in July 2022 we purchased athe U.S. based near-prime installment lender, First Heritage, which operatesunder the "Revolve Finance" brand and credit card programs under the "First Heritage Credit"Phase" brand, furthering our strategic shift to broaden our position inuntil the near-prime consumer lending market infourth quarter of 2022. In Canada, we also operated under the U.S. Refer to Note 14, "Acquisitions and Divestiture" for additional details regardingbrand "Flexiti" until the divestituresale of our Legacy U.S. Direct Lending business and the acquisition of First Heritage.Flexiti on August 31, 2023.
On December 27, 2021, we acquired Heights Finance, a consumer finance company that provides Installment loans and offers customary opt-in insurance and other financial products in the U.S. The acquisition of Heights Finance accelerated our strategic transition in the U.S. toward longer term, higher balance and lower credit risk products, and provided us with access to what we believe to be a larger addressable market while mitigating regulatory risk.Recent Business Developments
Discontinued Operations
On March 10, 2021,August 31, 2023, we acquiredcompleted the divestiture of Flexiti an emerging growth Canadian POS/BNPL provider,to Questrade for total sale proceeds of $63.7 million, inclusive of the Flexiti tangible book value and unrestricted cash adjustments. The divestiture resulted in a loss of $93.4 million in the three and nine months ended September 30, 2023, which provided us instant capability and scale opportunitywas recorded in Canada's credit card and POS financing markets.Net (loss) income from discontinued operations on the unaudited Condensed Consolidated Statements of Operations. Refer to "Item 1—Business—Company Overview" of our 2021 Form 10-K and Note 14,14, "AcquisitionsDiscontinued Operations" for further discussion. Additionally, as discussed in “Note 1, Summary of SignificantAccounting Policies and Divestiture"Nature of Operations," we determined the Flexiti Divestiture met the criteria for additional details regardingdiscontinued operations beginning in the Heights Finance andthird quarter of 2023. As a result, Flexiti acquisitions. Both acquisitions were accountedis presented in the accompanying unaudited Condensed Consolidated Financial Statements as discontinued operations for under the purchase method and thus their results of operations are included in our financial statements commencing as of their respective acquisition dates.all periods presented.
In 2017,Flexiti comprised the entirety of our former Canada POS Lending operating segment. As a result, we made our first investment in Katapult, an e-commerce focused FinTech company offering an innovative lease financing solution to consumers and enabling essential transactions at the merchant POS. In June 2021, Katapult merged with FinServ, resultingnow report results in a new publicly traded company (NASDAQ: KPLT). Refer to "Item 1—Business—Company Overview" of our 2021 Form 10-K for additional information about the merger and its benefits to us. In the fourth quarter of 2021, we acquired an additional 2.6 million shares of common stock of Katapult for an aggregate purchase price of $10.0 million. Our fully diluted ownership of Katapult as of September 30, 2022 was 19.4%, assuming full pay-out of earn-out shares, and 18.1% excluding pay-out of earn-out shares.single reportable segment.
Notice of Non-Compliance with NYSE Continued Listing Standards
Consolidated Results of Operations
Comparison of Consolidated Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021
On October 16, 2023, the Company received a written notice (the “Market Cap Notice”) from the NYSE that the Company was not in compliance with the continued listing criteria set forth in Section 802.01B of the NYSE’s Listed Company Manual with respect to the minimum market capitalization and shareholders' equity requirements, as the average market capitalization of the Company over a consecutive 30 trading-day period was less than $50 million and, at the same time, the Company’s last reported stockholders’ equity was less than $50 million. As of October 16, 2023, the 30 trading-day average market capitalization was approximately $44.7 million, and its last reported stockholders’ deficit was $398.0 million ($268.4 million as of June 30, 2023). Within 45 days of receipt of the Market Cap Notice, the Company will respond to the NYSE with a business plan aimed to demonstrate the definitive actions the Company has taken, or is taking, to regain compliance with the continued listing standards within 18 months of the Market Cap Notice. Should the Listings Operations Committee of the NYSE review and approve the plan, the Company's common stock will continue to be listed and traded on the NYSE during the 18-month cure period, subject to the Company's compliance with the other continued listing criteria of the NYSE and the periodic monitoring of the business plan by the NYSE.
On October 27, 2023, the Company received written notice from the NYSE that the Company was not in compliance with the continued listing criteria set forth in 802.01C of the NYSE's Listed Company Manual with respect to stock price requirements (the "Stock Price Notice"). The Company has a period of six months following the receipt of the Stock Price Notice to regain compliance. As a result, the Company has until April 27, 2024 to regain compliance. If the Company determines that in order to cure the price condition it is necessary to take an action that requires shareholder approval, it must obtain shareholder approval by no later than its 2024 annual meeting and must implement the action promptly thereafter.
The Market Cap Notice and Stock Price Notice do not affect the Company’s reporting obligations with the Securities and Exchange Commission, and they do not conflict with or cause an event of default under any of the Company’s material debt or other agreements.
Finalization of the Flexiti Purchase Price
At October 30, 2023, the Company had $22.9 million in escrow receivables, of which $19.9 million related to Flexiti's tangible book value and unrestricted cash, as of the closing date. On October 30, 2023, the Company received the final Flexiti tangible book value and unrestricted cash amounts from Questrade needed to finalize the purchase price. No adjustments to the proceeds or loss on sale of Flexiti calculation were required.
Regulatory Developments
RESULTS OF OPERATIONS
Consolidated Revenue by Product
On August 31, 2023, we completed the divestiture of Flexiti to Questrade. Flexiti comprised the entirety of our Canada POS Lending operating segment. This transaction resulted in treatment of the Canada POS Lending operating segment as discontinued operations for all periods presented in the unaudited Condensed Consolidated Financial Statements. Unless otherwise indicated, the discussion on our results of operations provided below relates to our continuing operations and we have recast prior-period amounts for purposes of historical comparisons. See Note 14, "Discontinued Operations" for further information. Beginning January 1, 2022,2023, we report "Intereststarted reporting "Insurance and fees revenue,"other income" in place of the previously reported "Insurance premiums and commissions" and "Other revenue" line items in place of our previously reported "Revenue" on ourthe unaudited Condensed Consolidated Statements of Operations. Prior period presentationsamounts have been revisedreclassified to conform to thewith current period presentation.
Beginning January 1, 2023, we renamed the previously reported Allowance for loan losses to Allowance for credit losses on the unaudited Condensed Consolidated Statements of Operations. Prior period amounts have been reclassified to conform with current period presentation.
The table below presents our consolidated results of operations. A further discussionAs a result of the results of our operating segments is provided under "Segment Analysis" below.
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(in thousands, unaudited) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | 2021 | Change $ | Change % | | 2022 | 2021 | Change $ | Change % |
Revenue | | | | | | | | | | |
Interest and fees revenue | | $ | 180,515 | | $ | 190,629 | | $ | (10,114) | | (5.3) | % | | $ | 723,802 | | $ | 539,155 | | $ | 184,647 | | 34.2 | % |
Insurance premiums and commissions | | 24,746 | | 12,599 | | 12,147 | | 96.4 | % | | 61,659 | | 36,021 | | 25,638 | | 71.2 | % |
Other revenue | | 8,859 | | 6,052 | | 2,807 | | 46.4 | % | | 23,259 | | 18,348 | | 4,911 | | 26.8 | % |
Total revenue | | 214,120 | | 209,280 | | 4,840 | | 2.3 | % | | 808,720 | | 593,524 | | $ 215,196 | | 36.3 | % |
Provision for losses | | 78,399 | | 70,718 | | 7,681 | | 10.9 | % | | 305,476 | | 152,028 | | 153,448 | | 100.9 | % |
Net revenue | | 135,721 | | 138,562 | | (2,841) | | (2.1) | % | | 503,244 | | 441,496 | | 61,748 | | 14.0 | % |
Operating Expenses | | | | | | | | | | |
Salaries and benefits | | 53,413 | | 62,110 | | (8,697) | | (14.0) | % | | 215,569 | | 175,347 | | 40,222 | | 22.9 | % |
Occupancy | | 12,827 | | 13,732 | | (905) | | (6.6) | % | | 47,371 | | 41,862 | | 5,509 | | 13.2 | % |
Advertising | | 5,244 | | 9,697 | | (4,453) | | (45.9) | % | | 28,451 | | 24,824 | | 3,627 | | 14.6 | % |
Direct operations | | 11,729 | | 14,883 | | (3,154) | | (21.2) | % | | 52,296 | | 40,552 | | 11,744 | | 29.0 | % |
Depreciation and amortization | | 9,499 | | 7,285 | | 2,214 | | 30.4 | % | | 27,985 | | 19,685 | | 8,300 | | 42.2 | % |
Other operating expense | | 23,646 | | 14,851 | | 8,795 | | 59.2 | % | | 58,809 | | 45,020 | | 13,789 | | 30.6 | % |
Total operating expenses | | 116,358 | | 122,558 | | (6,200) | | (5.1) | % | | 430,481 | | 347,290 | | 83,191 | | 24.0 | % |
Other expense (income) | | | | | | | | | | |
Interest expense | | 50,149 | | 25,805 | | 24,344 | | 94.3 | % | | 130,683 | | 68,784 | | 61,899 | | 90.0 | % |
Loss (income) from equity method investment | | 2,309 | | 1,582 | | 727 | | 46.0 | | | 2,053 | | (676) | | 2,729 | | # |
Gain from equity method investment | | — | | — | | — | | # | | — | | (135,387) | | 135,387 | | # |
Loss on extinguishment of debt | | 3,702 | | 40,206 | | (36,504) | | (90.8) | % | | 3,702 | | 40,206 | | (36,504) | | (90.8) | % |
(Gain) loss on change in fair value of contingent consideration | | (11,355) | | 3,825 | | (15,180) | | # | | (7,605) | | 3,825 | | (11,430) | | # |
Gain on sale of business | | (68,443) | | — | | (68,443) | | # | | (68,443) | | — | | (68,443) | | # |
Total other (income) expense | | (23,638) | | 71,418 | | (95,056) | | # | | 60,390 | | (23,248) | | 83,638 | | # |
Income (loss) before income taxes | | 43,001 | | (55,414) | | 98,415 | | # | | 12,373 | | 117,454 | | (105,081) | | (89.5) | % |
Provision (benefit) for income taxes | | 17,348 | | (13,375) | | 30,723 | | # | | 11,464 | | 29,241 | | (17,777) | | (60.8) | % |
Net income (loss) | | 25,653 | | (42,039) | | 67,692 | | # | | 909 | | 88,213 | | (87,304) | | (99.0) | % |
| | |
# - Variance greater than 100% or not meaningful. |
For the three months ended September 30, 2022 and 2021
The improvement in Net income of $67.7 million for the three months ended September 30, 2022 was primarily driven by (i) the $68.4 million Gain on sale of business recorded in the third quarter 2022 resulting from the completion of the divestiture of our Legacy U.S. Direct Lending businessBusiness in July 2022, (ii)we no longer guarantee loans originated by third-party lenders through CSO programs. As such, our results of operations discussed below only include the $11.4 million adjustment toresults from the change inCSO program for the fair value of contingent consideration recorded in connection with our acquisition of Flexiti,three months and (iii) in the third quarter of 2021 a $40.2 million loss on the extinguishment and refinancing of our former senior notes ("8.25% Senior Secured Notes"), partially offset in the third quarter of 2022 by a $24.3 million increase in interest expense. The increase in interest expense in the third quarter of 2022 compared to the same period in 2021 was primarily driven by (i) an increase in benchmark rates on variable rate debt, (ii) Senior Notes issued to fund in part our Heights Finance acquisition, and (iii) increased non-recourse asset-backed lending ("ABL") borrowing to support organic loan growth and acquired portfolios.
For the Nine Months Ended September 30, 2022 and 2021
The decline in Net income of $87.3 million for the nine months ended September 30, 2022 compared2022. Refer to the prior-year period was primarily driven by (i) year-over-year comparisonsNote 13, "Acquisitions and Divestitures" for the provision for loan losses, which were favorably impacted by COVID-19 stimulus impacts during 2021, (ii) gains related to our investment in Katapult Holdings, Inc., and (iii) higher interest expense in 2022, partially offset by (i) the $68.4 million Gain on sale of business recorded in the third quarter of 2022 resulting from the completion of the divestiture of our Legacy U.S. Lending Direct business in July 2022, (ii) the $11.4 million adjustment to the change in the fair value of contingent consideration recorded in connection with our acquisition of Flexiti,additional information. and (iii) in the third quarter of 2021, a $40.2 million loss on the extinguishment and refinancing of our former senior notes ("8.25% Senior Secured Notes"). During the second quarter of 2021, Katapult became a public company via a SPAC merger, generating a pretax gain to us of $135.4 million.Government stimulus in March 2021 and pandemic-related consumer behavior reduced demand, increased payment rates and lowered loss rates in 2021, resulting in a provision for loan losses that was $16.7 million less than NCOs for the first nine months of 2021. Credit normalization and strong sequential loan growth in the first nine months of 2022 resulted in a provision for loan losses that exceeded NCOs by $50.1 million, a $66.8 million year-over-year change, (including the impact of purchase accounting for the Heights Finance portfolio acquired in December 2021 and First Heritage portfolio acquired in July 2022). The increase of $61.9 million in interest expense in 2022 was primarily driven by (i) an increase in benchmark rates on variable rate debt, (ii) Senior Notes issued to fund in part our Heights acquisition, and (iii) increased non-recourse ABL borrowing to support organic loan growth and acquired portfolios.
Revenue
For the three months ended September 30, 2022 and 2021
During the three months ended September 30, 2022, total revenue increased $4.8 million, or 2.3% to $214.1 million, compared to the prior-year period, primarily driven by:
•Revenue growth in Canada POS Lending and Canada Direct Lending of 142.7% and 19.3%, respectively,
•Revenue increase related to the Heights Finance and First Heritage acquisitions, partially offset by an 18.4% decline in U.S. revenue primarily as a result of the July 2022 divestiture of our Legacy U.S. Direct Lending business.
For the Nine Months Ended September 30, 2022 and 2021
During the nine months ended September 30, 2022, total revenue increased $215.2 million, or 36.3%, to $808.7 million, compared to the prior-year period, primarily driven by our acquisitions of Heights Finance and First Heritage, growth in Canada Direct Lending and the addition of two full quarters of revenue for the acquisition of Flexiti. The main components were:
•U.S. revenue increase of $124.6 million, or 32.2%, primarily as a result of our Heights Finance and First Heritage acquisitions, offset by a decrease in total revenues due to the July 2022 divestiture of the Legacy U.S. Direct lending business,
•Canada POS Lending revenue increase of $51.1 million, or 255%, compared to the nine months ended September 30, 2021 , which only included Flexiti's results after its acquisition on March 10, 2021; and
•Canada Direct Lending revenue increase of $39.5 million, or 21.2%.
The following table summarizes revenue by product for the period indicated:
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| | Three Months Ended |
| | September 30, 2022 | | September 30, 2021 |
(in thousands, unaudited) | | U.S. | Canada Direct Lending | Canada POS Lending | Total | % of Total | | U.S. | Canada Direct Lending | Canada POS Lending | Total | % of Total |
Revolving LOC | | $ | 2,210 | | $ | 50,251 | | $ | 24,575 | | $ | 77,036 | | 36.0 | % | | $ | 27,377 | | $ | 40,239 | | $ | 10,646 | | $ | 78,262 | | 37.4 | % |
Installment | | 90,834 | | 12,645 | | — | | 103,479 | | 48.3 | % | | 101,036 | | 11,331 | | — | | 112,367 | | 53.7 | % |
Total interest and fees | | 93,044 | | 62,896 | | 24,575 | | 180,515 | | 84.3 | % | | 128,413 | | 51,570 | | 10,646 | | 190,629 | | 91.1 | % |
Insurance premiums and commissions | | 9,986 | | 14,045 | | 715 | | 24,746 | | 11.6 | % | | — | | 12,506 | | 93 | | 12,599 | | 6.0 | % |
Other revenue | | 4,400 | | 2,038 | | 2,421 | | 8,859 | | 4.1 | % | | 3,261 | | 2,114 | | 677 | | 6,052 | | 2.9 | % |
Total revenue | | $ | 107,430 | | $ | 78,979 | | $ | 27,711 | | $ | 214,120 | | 100.0 | % | | $ | 131,674 | | $ | 66,190 | | $ | 11,416 | | $ | 209,280 | | 100.0 | % |
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| | | For the Three Months Ended |
| | | September 30, 2023 | | | | September 30, 2022 | | | |
(in thousands) | | | Total | % of Total | | | | Total | % of Total | | Change $ | Change % |
Revolving LOC | | | $ | 51,039 | | 30.4 | % | | | | $ | 52,461 | | 28.1 | % | | (1,422) | | (2.7) | % |
Installment | | | 92,454 | | 55.1 | % | | | | 103,479 | | 55.5 | % | | (11,025) | | (10.7) | % |
Total interest and fees revenue | | | 143,493 | | 85.5 | % | | | | 155,940 | | 83.7 | % | | (12,447) | | (8.0) | % |
Insurance and other income | | | 24,370 | | 14.5 | % | | | | 30,469 | | 16.3 | % | | (6,099) | | (20.0) | % |
Total revenue | | | $ | 167,863 | | 100.0 | % | | | | $ | 186,409 | | 100.0 | % | | (18,546) | | (9.9) | % |
During the three months ended September 30, 2023, total revenue decreased $18.5 million, or 9.9%, to $167.9 million, compared to the prior-year period, primarily related to a product mix shift and the sale of the Legacy U.S. Direct Lending Business in July 2022, which caused a shift to longer term, higher credit quality and lower yielding loans.
Product Revenue for the Three Months Ended September 30, 2022 and 20212023
•Revolving LOC
◦Revolving LOC revenue for the three months ended September 30, 2022 decreased $1.22023 remained relatively flat at $51.0 million, a decrease of $1.4 million, or 1.6%, compared to the prior-year period, driven by increases in revenue of $10.0 million and $13.9 million in the Canada Direct Lending and Canada POS businesses, respectively, offset by a decrease in U.S. revenue of $25.2 million, or 91.9%, due to the sale of the Legacy U.S. Direct Lending business in July of 2022.2.7%.
•Installment
◦Installment revenue for the three months ended September 30, 20222023 decreased $8.9$11.0 million, or 7.9%10.7%, compared to the prior-year period. The decrease was driven by the $10.2 million decrease in U.S. Installment revenue in the third quarter of 2022period, primarily due to the July 2022 divestituresale of the Legacy U.S. Direct lending business, partially offset by the acquisitions of Heights Finance and First Heritage,Lending Business in July 2022 and a $1.3 million increaseproduct mix shift to higher credit quality lower yielding loans in Canada Direct Lending Installment revenue.the U.S.
•Insurance premiums and commissionsother income
◦Insurance premiums and commissionsother income for the three months ended September 30, 2022 increased $12.12023 decreased $6.1 million, or 96.4%20.0%, compared to the prior-year period, driven by U.S. growth of $10.0 million, primarily duerelated to our acquisitions of Heights Finance and First Heritage, and Canada Direct Lending growth of $1.5 million, or 12.3%, year over year, froma product mix shift in the sale of insurance productscurrent period compared to Revolving LOC and Installment loan customers in Canada.the prior period leading to lower other product income.
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| | | | | For the Nine Months Ended |
| | | | | September 30, 2023 | | | | | | September 30, 2022 | | | |
(in thousands) | | | | | Total | % of Total | | | | | | Total | % of Total | | Change $ | Change % |
Revolving LOC | | | | | $ | 149,614 | | 29.7 | % | | | | | | $ | 200,565 | | 27.2 | % | | (50,951) | | (25.4) | % |
Installment | | | | | 279,949 | | 55.5 | % | | | | | | 459,160 | | 62.3 | % | | (179,211) | | (39.0) | % |
Total interest and fees revenue | | | | | 429,563 | | 85.2 | % | | | | | | 659,725 | | 89.4 | % | | (230,162) | | (34.9) | % |
Insurance and other income | | | | | 74,684 | | 14.8 | % | | | | | | 77,822 | | 10.6 | % | | (3,138) | | (4.0) | % |
Total revenue | | | | | $ | 504,247 | | 100.0 | % | | | | | | $ | 737,547 | | 100.0 | % | | (233,300) | | (31.6) | % |
•Other revenue
◦Other revenue forDuring the threenine months ended September 30, 2022 increased $2.82023, total revenue decreased $233.3 million, or 46.4%31.6%, versusto $504.2 million, compared to the prior-year period, primarily due to a $1.7 million increasethe sale of the Legacy U.S. Direct Lending Business in otherJuly 2022, partially offset by the acquisition of First Heritage in July 2022 and revenue for Canada POS Lending as ancillary fees rosegrowth in line with overall loan growthCanada. These transactions furthered our shift to longer term, higher credit quality and $1.1 million in the U.S. from new product offerings associated with our acquisitions of Heights Finance and First Heritage.
lower yielding loans.
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| | Nine Months Ended |
| | September 30, 2022 | | September 30, 2021 |
(in thousands, unaudited) | | U.S. | Canada Direct Lending | Canada POS Lending | Total | % of Total | | U.S. | Canada Direct Lending | Canada POS Lending | Total | % of Total |
Revolving LOC | | $ | 57,269 | | $ | 143,296 | | $ | 64,077 | | $ | 264,642 | | 32.7 | % | | $ | 78,391 | | $ | 112,057 | | $ | 18,585 | | $ | 209,033 | | 35.2 | % |
Installment | | 423,537 | | 35,623 | | — | | 459,160 | | 56.8 | % | | 297,803 | | 32,319 | | — | | 330,122 | | 55.6 | % |
Total interest and fees | | 480,806 | | 178,919 | | 64,077 | | 723,802 | | 89.5 | % | | 376,194 | | 144,376 | | 18,585 | | 539,155 | | 90.8 | % |
Insurance premiums and commissions | | 19,310 | | 40,988 | | 1,361 | | 61,659 | | 7.6 | % | | — | | 35,753 | | 268 | | 36,021 | | 6.1 | % |
Other revenue | | 11,424 | | 6,100 | | 5,735 | | 23,259 | | 2.9 | % | | 10,766 | | 6,381 | | 1,201 | | 18,348 | | 3.1 | % |
Total revenue | | $ | 511,540 | | $ | 226,007 | | $ | 71,173 | | $ | 808,720 | | 100.0 | % | | $ | 386,960 | | $ | 186,510 | | $ | 20,054 | | $ | 593,524 | | 100.0 | % |
Product Revenue for the Nine Months Ended September 30, 2022 and 2021
•Revolving LOC
◦Revolving LOC revenue for the nine months ended September 30, 2022 increased $55.62023 decreased $51.0 million, or 26.6%25.4%, compared to the prior-year period, driven by growth in Canada Direct Lending revenue of $31.2 million, or 27.9%, and Canada POS lending of $45.5 million, partially offset byprimarily due to the effectsimpact of the sale of the Legacy U.S. Direct Lending businessBusiness in July 2022, partially offset by growth in Canada of 2022.$6.3 million, or 4.4%.
•Installment
◦Installment revenue for the nine months ended September 30, 2022 increased $129.02023 decreased $179.2 million, or 39.1%39.0%, compared to the prior-year period, primarily due to an increasethe sale of $125.7 millionthe Legacy U.S. Direct Lending Business in U.S. installmentJuly 2022, partially offset by revenue driven by ourfollowing the acquisition of Heights Finance and First Heritage.Heritage in July 2022.
•Insurance premiums and commissionsother income
◦Insurance premiums and commissionsother income for the nine months ended September 30, 2022 increased $25.62023 decreased $3.1 million, or 71.2%4.0%,
compared to the prior-year period, primarily due to an increase of $19.3 million in U.S. insurance premiums and commission revenue driven by our acquisition of Heights Finance and First Heritage. Canada Direct Lending grew $5.2 million, or 14.6%, year over year, due to growth in the sale of insurance products to Revolving LOC and Installment loan customersthe Legacy U.S. Direct Lending Business in Canada.July 2022, partially offset by revenue following the acquisition of First Heritage in July 2022.
Consolidated Results of Operations
The table below presents our consolidated results of operations.
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(in thousands, unaudited) | | Three Months Ended September 30, | Nine Months Ended September 30, |
| 2023 | 2022 | Change $ | Change % | 2023 | 2022 | | Change $ | Change % |
Revenue | | | | | | | | | | |
Interest and fees revenue | | $ | 143,493 | | $ | 155,940 | | $ | (12,447) | | (8.0) | % | $ | 429,563 | | $ | 659,725 | | | $ | (230,162) | | (34.9) | % |
Insurance and other income | | 24,370 | | 30,469 | | (6,099) | | (20.0) | % | 74,684 | | 77,822 | | | (3,138) | | (4.0) | % |
Total revenue | | 167,863 | | 186,409 | | (18,546) | | (9.9) | % | 504,247 | | 737,547 | | | ($ 233,300) | | (31.6) | % |
Provision for losses | | 49,009 | | 65,020 | | (16,011) | | (24.6) | % | 161,128 | | 277,421 | | | (116,293) | | (41.9) | % |
Net revenue | | 118,854 | | 121,389 | | (2,535) | | (2.1) | % | 343,119 | | 460,126 | | | (117,007) | | (25.4) | % |
Operating Expenses | | | | | | | | | | |
Salaries and benefits | | 52,148 | | 49,179 | | 2,969 | | 6.0 | % | 161,911 | | 196,121 | | | (34,210) | | (17.4) | % |
Occupancy | | 10,454 | | 12,419 | | (1,965) | | (15.8) | % | 32,683 | | 46,442 | | | (13,759) | | (29.6) | % |
Advertising | | 2,819 | | 4,676 | | (1,857) | | (39.7) | % | 6,785 | | 27,342 | | | (20,557) | | (75.2) | % |
Direct operations | | 12,176 | | 8,288 | | 3,888 | | 46.9 | % | 33,953 | | 41,438 | | | (7,485) | | (18.1) | % |
Depreciation and amortization | | 5,390 | | 5,683 | | (293) | | (5.2) | % | 16,119 | | 17,070 | | | (951) | | (5.6) | % |
Other operating expense | | 11,207 | | 22,595 | | (11,388) | | (50.4) | % | 37,179 | | 56,354 | | | (19,175) | | (34.0) | % |
Total operating expenses | | 94,194 | | 102,840 | | (8,646) | | (8.4) | % | 288,630 | | 384,767 | | | (96,137) | | (25.0) | % |
Other expense (income) | | | | | | | | | | |
Interest expense | | 55,798 | | 38,155 | | 17,643 | | 46.2 | % | 150,303 | | 103,840 | | | 46,463 | | 44.7 | % |
Loss from equity method investment | | 1,453 | | 2,309 | | (856) | | (37.1) | % | 7,000 | | 2,053 | | | 4,947 | | # |
Extinguishment or modification of debt costs | | — | | 3,702 | | (3,702) | | # | 8,864 | | 3,702 | | | 5,162 | | # |
Gain on sale of business | | — | | (68,443) | | 68,443 | | # | 2,027 | | (68,443) | | | 70,470 | | # |
Miscellaneous expenses | | — | | — | | — | | # | 1,435 | | — | | | 1,435 | | # |
Total other expense (income) | | 57,251 | | (24,277) | | 81,528 | | # | 169,629 | | 41,152 | | | 128,477 | | # |
Income (loss) before income taxes | | (32,591) | | 42,826 | | (75,417) | | # | (115,140) | | 34,207 | | | (149,347) | | # |
Provision for income taxes from continuing operations | | 1,021 | | 21,709 | | (20,688) | | (95.3) | % | 27,445 | | 22,109 | | | 5,336 | | 24.1 | % |
Net (loss) income from continuing operations | | $ | (33,612) | | $ | 21,117 | | $ | (54,729) | | # | $ | (142,585) | | $ | 12,098 | | | $ | (154,683) | | # |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
#- Change greater than 100% or not meaningful |
46
Other revenue for the nine months ended September 30, 2022 increased $4.9 million, or 26.8%, versus the prior-year period, due to a $4.5 million increase in other revenue for Canada POS Lending as ancillary fees rose in line with overall loan growth.
Consolidated Portfolio Performance
| | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except percentages, unaudited) | | Q3 2023 | Q2 2023 | Q1 2023 | Q4 2022 | Q3 2022 | | | | | |
Gross loans receivable | | | | | | | | | | | |
Revolving LOC | | $ | 469,041 | $ | 472,902 | $ | 461,443 | $ | 451,077 | $ | 439,117 | | | | | |
Installment loans | | 785,360 | 754,713 | 748,133 | 803,318 | 765,041 | | | | | |
Total gross loans receivable | | $ | 1,254,401 | $ | 1,227,615 | $ | 1,209,576 | $ | 1,254,395 | $ | 1,204,158 | | | | | |
| | | | | | | | | | | |
Lending Revenue | | | | | | | | | | | |
Revolving LOC | | $ | 51,039 | $ | 49,483 | $ | 49,092 | $ | 49,915 | $ | 52,461 | | | | | |
Installment loans | | 92,454 | 92,283 | 95,212 | 100,435 | 103,478 | | | | | |
Total lending revenue | | $ | 143,493 | $ | 141,766 | $ | 144,304 | $ | 150,350 | $ | 155,939 | | | | | |
| | | | | | | | | | | |
Lending Provision | | | | | | | | | | | |
Revolving LOC | | $ | 19,031 | $ | 27,089 | $ | 15,539 | $ | 29,620 | $ | 28,408 | | | | | |
Installment loans | | 28,464 | 35,171 | 31,139 | 46,442 | 33,511 | | | | | |
Total lending provision | | $ | 47,495 | $ | 62,260 | $ | 46,678 | $ | 76,062 | $ | 61,919 | | | | | |
| | | | | | | | | | | |
NCOs | | | | | | | | | | | |
Revolving LOC | | $ | 22,023 | $ | 21,780 | $ | 6,234 | $ | 26,715 | $ | 24,793 | | | | | |
Installment loans | | 33,342 | 35,483 | 41,078 | 38,168 | 29,783 | | | | | |
Total NCOs | | $ | 55,365 | $ | 57,263 | $ | 47,312 | $ | 64,883 | $ | 54,576 | | | | | |
| | | | | | | | | | | |
NCO rate (annualized) (1) | | | | | | | | | | | |
Revolving LOC | | 18.6 | % | 18.7% | 5.5% | 23.8% | 20.9 | % | | | | | |
Installment loans | | 17.2 | % | 18.9% | 21.5% | 19.3% | 16.7 | % | | | | | |
Total NCO rate | | 17.7 | % | 18.8% | 15.6% | 20.9% | 18.4 | % | | | | | |
| | | | | | | | | | | |
ACL rate (2) (3) | | | | | | | | | | | |
Revolving LOC | | 25.4 | % | 26.6 | % | 25.6 | % | 8.4 | % | 7.9 | % | | | | | |
Installment loans | | 10.3 | % | 11.2 | % | 11.3 | % | 5.4 | % | 4.6 | % | | | | | |
Total ACL rate | | 15.9 | % | 17.1 | % | 16.8 | % | 6.5 | % | 5.8 | % | | | | | |
| | | | | | | | | | | |
31+ days past-due rate (2) | | | | | | | | | | | |
Revolving LOC | | 8.6 | % | 8.5 | % | 8.4 | % | 4.1 | % | 5.1 | % | | | | | |
Installment loans | | 8.5 | % | 8.1 | % | 8.2 | % | 9.6 | % | 10.2 | % | | | | | |
Total past-due rate | | 8.5 | % | 8.3 | % | 8.3 | % | 7.6 | % | 8.3 | % | | | | | |
| | | | | | | | | | | |
(1) We calculate NCO rate as total quarterly NCOs divided by Average gross loans receivable, then we annualize the rate. The amount and timing of recoveries are impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications and the periodic sale of charged off loans. | | | | | |
(2) We calculate (i) ACL rate and (ii) 31+ days past-due rate as the respective totals divided by gross loans receivable at each quarter end. | | | | | |
(3) We adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" on January 1, 2023, which requires us to estimate the lifetime expected credit loss on financial instruments. Our previous model required the recognition of credit losses when it was probable that a loss had been incurred. | | | | | |
Comparison of Consolidated Results of Operations for the Three Months Ended September 30, 20222023 and 20212022
Revenue
Provision for Losses
◦Sequential loan growth, driven by strong consumer demand, across all loan portfolios compareda lower allowance for credit losses rate due to a decrease in net charge off rates and overall credit improvement during the same period in the prior year;
◦Continued orderly credit normalization associated with loan growth as customers return to pre-COVID-19 payment behaviors, in contrast to the prior year, when customers received government stimulus payments;
◦Provision for losses for our Heights Finance and First Heritage acquisitions offset by the divestiture of the Legacy U.S Direct Lending business in July 2022; and
◦Higher NCO and past-due rates, as COVID-19 impacts lessened compared to the comparable period in the prior year. Refer to the "Segment Analysis" sections below for additional details.
quarter.
Provision for Losses for the Nine Months Ended September 30, 2022 and 2021
•Provision for losses increased by $153.4 million, or 100.9%, for the nine months ended September 30, 2022 compared to the prior-year period, primarily driven by:
◦Year-over-year loan growth, driven by strong consumer demand, across all loan portfolios compared to the same period in the prior year;
◦Continued orderly credit normalization associated with loan growth as customers return to pre-COVID-19 payment behaviors as compared to the prior year, when customers received government stimulus payments;
◦Full three quarters of provision for losses for our Heights Finance acquisition of $81.1 million;
◦Full three quarters of provision for loan losses for Canada POS Lending of $28.1 million, an increase of $15.9 million compared to the prior-year period; and
◦Higher NCO and past-due rates, as COVID-19 impacts lessened compared to the same period in the prior year. Refer to the "Segment Analysis" sections below for additional details.
Operating Expenses
The following table summarizes operating expenses for the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, unaudited) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | 2021 | Change $ | Change % | | 2022 | 2021 | Change $ | Change % |
Operating Expenses | | | | | | | | | | |
Salaries and benefits | | $ | 53,413 | | $ | 62,110 | | $ | (8,697) | | (14.0) | % | | $ | 215,569 | | $ | 175,347 | | $ | 40,222 | | 22.9 | % |
Occupancy | | 12,827 | | 13,732 | | (905) | | (6.6) | % | | 47,371 | | 41,862 | | 5,509 | | 13.2 | % |
Advertising | | 5,244 | | 9,697 | | (4,453) | | (45.9) | % | | 28,451 | | 24,824 | | 3,627 | | 14.6 | % |
Direct operations | | 11,729 | | 14,883 | | (3,154) | | (21.2) | % | | 52,296 | | 40,552 | | 11,744 | | 29.0 | % |
Depreciation and amortization | | 9,499 | | 7,285 | | 2,214 | | 30.4 | % | | 27,985 | | 19,685 | | 8,300 | | 42.2 | % |
Other operating expense | | 23,646 | | 14,851 | | 8,795 | | 59.2 | % | | 58,809 | | 45,020 | | 13,789 | | 30.6 | % |
Total operating expenses | | $ | 116,358 | | $ | 122,558 | | $ | (6,200) | | (5.1) | % | | $ | 430,481 | | $ | 347,290 | | $ | 83,191 | | 24.0 | % |
Operating expenses for the three months ended September 30, 20222023 decreased $6.2$8.6 million, or 5.1%8.4%, compared to the prior-year period, primarily driven by:
•Salaries and benefits.Salaries and benefits were $53.4expense was $52.1 million for the three months ended September 30, 2022, a decrease2023, an increase of $8.7$3.0 million, or 14.0%6.0%, compared to the prior-year period. The decreaseincrease is primarily related to the July 2022 divestiture of our Legacy U.S Direct Lending business offset by the acquisitions of First Heritage and Heights Finance, in July 2022 and December 2021, respectively.
•Advertising costs decreased $4.5 million, or 45.9%, year over year, almost entirelylargely due to $3.0 million of restructuring costs incurred during the July 2022 divestiture of our Legacy U.S Direct Lending business.three months ended September 30, 2023, as further described in
•
Direct operations were $11.7Occupancy.Occupancy expense was $10.5 million for the three months ended September 30, 2022,2023, a decrease of $3.2$2.0 million, or 21.2%15.8%, compared to the prior-year period. The decrease was largely due to the closure of Canada stores and reduction of corporate office space resulting from restructuring initiatives begun in the fourth quarter of 2022, partially offset by additional store costs as a result of the acquisition of First Heritage and its 106 stores in July 2022.
Advertising. Advertising expense was $2.8 million for the three months ended September 30, 2023, a decrease of $1.9 million, or 39.7%, compared to the prior-year period primarily due to the July 2022 divestituresale of our Legacy U.SU.S. Direct Lending Business in July 2022 which required high spend to attract business offsetand the current approach to marketing our brands.
Direct operations.Direct operations expense was $12.2 million for the three months ended September 30, 2023, an increase of $3.9 million, or 46.9%, compared to the prior-year period. The increase is primarily driven by an increase in technology costs necessary to run the effectbusiness, including our migration of acquisitions of First Heritageall U.S. Direct Lending loans to one consolidated loan management system which was completed in the quarter ended September 30, 2023.
Depreciation and Heights Finance.
•amortization. Depreciation and amortization expense for the three months ended September 30, 2022 increased $2.22023 was $5.4 million, a decrease of $0.3 million, or 30.4%5.2%, compared to the prior-year period, primarily due to a decrease in Canada stores related to restructuring initiatives begun in the amortizationfourth quarter of First Heritage- and Heights Finance-related assets.
2022.
•Other operating expenses.Other operating expenses were $23.6$11.2 million for the three months ended September 30, 2023, a decrease of $11.4 million, or 50.4%, compared to the prior-year period, primarily driven by a decrease in professional fees associated with the First Heritage acquisition and the divestiture of the Legacy U.S. Direct Lending Business incurred in the same period last year.
Other Expense (Income)
Other expenses for the three months ended September 30, 2023 were $57.3 million, compared to Other income of $24.3 million for the three months ended September 30, 2022, an increase of $8.8 million, or 59.2%, compared to the prior-year period, primarily driven by transaction-related professional services costs related to the sale of our Legacy U.S. Direct Lending business and the acquisition of First Heritage during the quarter. Refer to the "Segment Analysis" sections below for additional details.
Operating expenses for the nine months ended September 30, 2022 increased $83.2 million, or 24.0%, primarily driven by:
•Salaries and benefits were $215.6 million for the nine months ended September 30, 2022, an increase of $40.2 million, or 22.9%, compared to the prior-year period. The increase is largely due to the acquisitions of Heights Finance and First Heritage, and three full quarters of Canada POS Lending business salaries and benefits partially offset by the July 2022 divestiture of our Legacy U.S Direct Lending business.
•Occupancy costs were $47.4 million for the nine months ended September 30, 2022, an increase of $5.5 million, or 13.2%, compared to the prior-year period. The increase is almost entirely due to our acquisitions of First Heritage and Heights Finance.
•Advertising costs increased $3.6 million, or 14.6%, primarily driven by the acquisitions of First Heritage and Heights Finance.
•Direct operations were $52.3 million for the nine months ended September 30, 2022, an increase of $11.7 million, or 29.0%, compared to the prior-year period. The increase is due to our acquisition of Heights Finance as well as nine months of Canada POS Lending direct operations of $3.3 million.
•Amortization expense for the nine months ended September 30, 2022 increased $8.3 million, or 42.2%, compared to the prior-year period, primarily due full three quarters of Canada POS Lending expense associated with the amortization of capitalized software development costs and an increase of amortization expense of $5.3 million from our acquisitions of Heights Finance and First Heritage.
•Other operating expenses were $58.8 million for the nine months ended September 30, 2022, an increase of $13.8 million, or 30.6%, compared to the prior-year period, primarily driven by costs incurred for the sale of the Legacy U.S. Direct Lending business and the acquisitions of Heights Finance and First Heritage. Refer to the "Segment Analysis" sections below for additional details.
Other Expense (Income)
The following table summarizes other expenses (income) for the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, unaudited) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | 2021 | Change $ | Change % | | 2022 | 2021 | Change $ | Change % |
Other expense (income) | | | | | | | | | | |
Interest expense | | $ | 50,149 | | $ | 25,805 | | $ | 24,344 | | 94.3 | % | | 130,683 | | 68,784 | | 61,899 | | 90.0 | % |
Loss (income) from equity method investment | | 2,309 | | 1,582 | | 727 | | 46.0 | | | 2,053 | | (676) | | 2,729 | | # |
Gain from equity method investment | | — | | — | | — | | # | | — | | (135,387) | | 135,387 | | # |
(Gain) loss on change in fair value of contingent consideration | | (11,355) | | 3,825 | | (15,180) | | # | | (7,605) | | 3,825 | | (11,430) | | # |
Loss on extinguishment of debt | | 3,702 | | 40,206 | | (36,504) | | (90.8) | % | | 3,702 | | 40,206 | | (36,504) | | (90.8) | % |
Gain on sale of business | | (68,443) | | — | | (68,443) | | # | | (68,443) | | — | | (68,443) | | # |
Total other (income) expense | | $ | (23,638) | | $ | 71,418 | | $ | (95,056) | | # | | 60,390 | | (23,248) | | 83,638 | | # |
| | |
# - Variance greater than 100% or not meaningful. |
Other expenses for the three months ended September 30, 2022 decreased $95.1$81.5 million compared to the prior-year period, primarily driven by:
•Interest expense.Gain on sale of our Legacy U.S. Direct Lending business of $68.4 million in July 2022.
•Loss on extinguishment of debt of $40.2 million in for the three months ended September 30, 2021 due to the early redemption of the 8.25% Senior Secured Notes.
•Interest expense for the three months ended September 30, 20222023 increased $24.3$17.6 million, or 94.3%46.2%, compared to the prior-year period, primarily related todriven by (i) an increase in benchmark ratesthe new $150 million 1.0L 18.00% Senior Secured Term Loan and Canada SPV II entered into on variable rate debt,May 15, 2023, (ii) Senior Notes issued to fund in part our Heights Finance acquisition, and (iii) increased non-recourse ABL borrowing to support organic loan growth and acquired portfolios.
Other expenses for the nine months ended September 30, 2022 increased $83.6 million compared to the prior-year period, primarily driven by:
•During the second quarter of 2021 Katapult became a public company via a SPAC merger, generating a pretax gain of $135.4 million
•Interest expense for the nine months ended September 30, 2022, increased $61.9 million, or 90.0%, primarily driven by (i)loans and (iii) an increase in benchmark rates on variable rate debt, (ii) Senior Notes issued to fund in part our Heights Finance acquisition, and (iii) increased non-recourse ABL borrowing to support organic loan growth and acquired portfolios.variable-rate debt.
•Equity method investment. These increasesOur share of Katapult's losses were offset by$1.5 million and $2.3 million of loss for the three months ended September 30, 2023 and 2022, respectively.
Extinguishment or modification of debt costs. We incurred $3.7 million of expenses related to the extinguishment or modification of debt during the three months ended September 30, 2022.
Gain on sale of business. We recorded a the gain of $68.4 million on the sale of our Legacy U.S. Direct Lending business of $68.4 million that occurredBusiness in July 2022 and the loss on extinguishment of debt of $40.2 million in for the three months ended September 30, 2021 due to the early redemption of the 8.25% Senior Secured Notes.2022.
Provision for Income Taxes
Three Months Ended September 30, 2022 and 2021
The effective income tax rate for the three months ended September 30, 20222023 from continuing operations was 40.3%(3.1)%. The effective income tax rate for the three months ended September 30, 2022, was higher compared to the blended federal and state/provincial statutory rate of approximately 26%, primarily as a result of lost tax benefits related to the divestiture of the Legacy U.S. Direct Lending business and officers’ compensation, partially offset by tax benefits related to change in fair value of contingent consideration. The effective
income tax rate of adjusted tax expense included in Adjusted Net Income for the three months ended September 30, 2022 was 34.7%.
The effective income tax rate for the three months ended September 30, 2021 was 24.1%. The effective income tax rate2023 from continuing operations was lower than the blended federal and state/provincial statutory rate of approximately 26%26.0%, primarily as a result of proportionally more loss in lower-tax rate jurisdictions, driven by the loss on extinguishmentrecording a valuation allowance against U.S. DTAs of debt. In addition, we recorded an income tax benefit from the recognition of research and development tax credit. This benefit was$9.0 million, partially offset by a nondeductible expense itemreleasing valuation allowance of Canada Direct Lending DTAs of $(0.7) million, and lost tax benefits related to the change in fair valueshare-based compensation of contingent consideration.$0.4 million.
Comparison of Consolidated Results of Operations for the Nine Months Ended September 30, 2023 and 2022
Revenue
Provision for Losses
We adopted CECL on January 1, 2023, as further described in Note 1, "Summary of Significant Accounting Policies and Nature of Operations". Provision for losses decreased by $116.3 million, or 41.9%, for the nine months ended September 30, 2023 compared to the prior-year period, primarily driven by our Legacy U.S. Direct Lending Business divestiture of $107.8 million, which is a higher loss rate product, partially offset by the impact of adopting CECL and growth in our business.
Operating Expenses
Operating expenses for the nine months ended September 30, 2023 decreased $96.1 million, or 25.0%, compared to the prior-year period, primarily driven by:
Salaries and benefits.Salaries and benefits expense was $161.9 million for the nine months ended September 30, 2023, a decrease of $34.2 million, or 17.4%, compared to the prior-year period. The decrease was largely due to the July 2022 divestiture of our Legacy U.S. Direct Lending Business and lower headcount as a result of restructuring initiatives implemented in the fourth quarter of 2022, partially offset by the increase of store employees of the acquired First Heritage business.
Occupancy.Occupancy expense was $32.7 million for the nine months ended September 30, 2023, a decrease of $13.8 million, or 29.6%, compared to the prior-year period. The decrease was largely due to the 160 stores that were part of the July 2022 divestiture of our Legacy U.S. Direct Lending Business, partially offset by the acquisition of First Heritage and its 106 stores.
Advertising. Advertising expense was $6.8 million for the nine months ended September 30, 2023, a decrease of $20.6 million, or 75.2%, compared to the prior-year period primarily due to the sale of our Legacy U.S. Direct Lending Business in July 2022 and 2021the current approach to marketing our brands.
Direct operations.Direct operations expense was $34.0 million for the nine months ended September 30, 2023, a decrease of $7.5 million, or 18.1%, compared to the prior-year period. The decrease is primarily driven by the divestiture of the Legacy U.S. Direct Lending Business, partially offset by the lower cost First Heritage business acquired in July 2022.
Depreciation and amortization.Depreciation and amortization expense for the nine months ended September 30, 2023 was $16.1 million, a decrease of $1.0 million, or 5.6%, compared to the prior-year period. The decrease is primarily driven by the July 2022 divestiture of our Legacy U.S. Direct Lending Business and store closures as a result of the restructuring initiatives implemented in the fourth quarter of 2022, partially offset by increased amortization expense of intangibles assets related to the acquisition of First Heritage.
Other operating expenses.Other operating expenses were $37.2 million for the nine months ended September 30, 2023, a decrease of $19.2 million, or 34.0%, compared to the prior-year period, primarily driven by a decrease in professional fees associated with the First Heritage acquisition and the divestiture of the Legacy U.S. Direct Lending Business incurred in the same period last year.
Other Expense (Income)
Other expenses for the nine months ended September 30, 2023 were $169.6 million, an increase of $128.5 million, or 312.2%, compared to the prior-year period, primarily driven by:
Interest expense. Interest expense for the nine months ended September 30, 2023, increased $46.5 million, or 44.7%, compared to the prior-year period, primarily driven by the new 1.0L 18.00% Senior Secured Term Loan entered into on May 15, 2023, increased non-recourse ABL borrowing to support organic loan growth and an increase in benchmark rates on variable-rate debt.
Equity method investment. Our share of Katapult's losses was $7.0 million of loss for the nine months ended September 30, 2023 and $2.1 million of income for the nine months ended September 30, 2022.
Extinguishment or modification of debt costs. We incurred $8.9 million of expenses during the nine months ended September 30, 2023 of which approximately $8.8 million of the expenses were related to costs incurred to third parties as part of the new 1.0L 18.00% Senior Secured Term Loan and uptiering 1.5L 7.50% Senior Secured Notes with the remaining $0.1 million related to the extinguishment of the Senior Revolver.
Gain on sale of business. During the nine months ended September 30, 2023, we recorded a $2.0 million reduction to the gain on the July 2022 sale of our Legacy U.S. Direct Lending Business, based on expected uncollectible amounts. We recorded a gain of $68.4 million on the sale of our Legacy U.S. Direct Lending Business in the corresponding prior year period.
Miscellaneous expenses. We incurred $1.4 million of miscellaneous expenses during the nine months ended September 30, 2023 related to the termination of contracts utilized by the Legacy U.S. Direct Lending Business.
Provision for Income Taxes
The effective income tax rate for the nine months ended September 30, 20222023 from continuing operations was 92.6%(23.8)%. The effective income tax rate for the nine months ended September 30, 2022,2023 was higher compared tolower than the blended federal and state/provincial statutory rate of approximately 26%26.0%, primarily as a result of lost tax benefits related to the divestiturerecording a valuation allowance against U.S. DTAs of the Legacy U.S. Direct Lending business, share-based compensation, officers’ compensation, and non-deductible transaction costs,$52.5 million, partially offset by tax benefits related to change in fair value of contingent consideration. The effective income tax rate of adjusted tax expense included in Adjusted Net Income for the nine months ended September 30, 2022 was 28.1%.
The effective income tax rate of 24.9% for the nine months ended September 30, 2021 was lower compared to the blended federal and state/provincial statutory rates of approximately 26%, primarily as a result of proportionally more net income in lower rate jurisdictions, driven by the gain on the Katapult transaction in the second quarter of 2021 and the loss on extinguishment of debt in the third quarter of 2021. Additionally, the effective tax rate also includes the release of areleasing valuation allowance due to the Company's share of Katapult's income,Canada Direct Lending DTAs of $(0.7) million, and lost tax benefits related to share-based compensation tax expense related to the non-deductible transaction costs and the change in fair value of contingent consideration, tax expense of additional Texas accrual for 2020 due to the settlement of 2013 to 2019 Texas tax returns, and a tax benefit for the recognition of Research and Development tax credit.$2.0 million.
Loan Volume and Portfolio Performance Analysis
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 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 by providing a guarantee to the unaffiliated lender. As a result of the sale of the Legacy U.S. Direct Lending business on July 8, 2022, the Company no longer guarantees loans originated by third-party lenders through CSO programs. The Company will continue to present these loans in the tables that follow based on historical practice and for comparability purposes. Refer to Note 14, "Acquisitions and Divestiture" for additional information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of | | | | | | | | | |
(in thousands, unaudited) | | | September 30, 2022 | | June 30, 2022 | | March 31, 2022 | | December 31, 2021 | | September 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving LOC | | | $ | — | | | $ | 58,471 | | | $ | 49,077 | | | $ | 52,532 | | | $ | 51,196 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Installment - Company Owned | | | 739,100 | | | 627,651 | | | 589,652 | | | 609,413 | | | 137,987 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Canada Direct Lending | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving LOC | | | 439,117 | | | 442,738 | | | 424,485 | | | 402,405 | | | 366,509 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Installment | | | 25,940 | | | 24,817 | | | 23,578 | | | 24,792 | | | 24,315 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Canada POS Lending | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving LOC | | | 690,270 | | | 627,163 | | | 541,776 | | | 459,176 | | | 302,349 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Company Owned gross loans receivable | | | $ | 1,894,427 | | | $ | 1,780,840 | | | $ | 1,628,568 | | | $ | 1,548,318 | | | $ | 882,356 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross loans receivable Guaranteed by the Company | | | — | | | 51,323 | | | 44,420 | | | 46,317 | | | 43,422 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross combined loans receivable (1) | | | $ | 1,894,427 | | | $ | 1,832,163 | | | $ | 1,672,988 | | | $ | 1,594,635 | | | $ | 925,778 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(1) See a description of non-GAAP Financial Measures in "Supplemental Non-GAAP Financial Information." |
Gross loans receivable increased $1,012.1 million , or 114.7%, to $1,894.4 million as of September 30, 2022, from $882.4 million as of September 30, 2021. The increase was driven by:
•U.S. Direct Lending increased by $549.9 million primarily driven by loan growth and our Heights Finance and First Heritage acquisitions, partially offset by the sale of the Legacy U.S. Direct Lending business;
•Canada POS Lending growth of $387.9 million, or 128.3%; and
•Canada Direct Lending growth of $74.2 million, or 19.0%.
Sequentially, gross loans receivable increased $113.6 million , or 6.4% , driven by the acquisition of First Heritage, Canada POS Lending growth of $63.1 million, or 10.1%, and Canada Direct Lending Revolving LOC growth of $3.6 million, or 0.8%. The increase was offset by the sale of the Legacy U.S. Direct Lending business. Excluding the loans sold with the divestiture of the Legacy U.S. Direct Lending business, gross loan receivables grew $301.6 million sequentially.
Segment Analysis
The following is a summary of portfolio performance and results of operations for the segment and period indicated (all periods unaudited except for Q4 2021). We report financial results for three reportable segments: U.S., Canada Direct Lending and Canada POS Lending.
U.S. Portfolio Performance | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except percentages) | | Q3 2022 | Q2 2022(6) | | Q1 2022 | Q4 2021(1) | Q3 2021 | | | | | |
Gross combined loans receivable (2) | | | | | | | | | | | | |
Revolving LOC | | $ | — | $ | 58,471 | | $ | 49,077 | $ | 52,532 | $ | 51,196 | | | | | |
Installment loans - Company Owned | | 739,100 | 627,651 | | 589,652 | 137,782 | 137,987 | | | | | |
Total U.S. Company Owned gross loans receivable | | 739,100 | 686,122 | | 638,729 | 190,314 | 189,183 | | | | | |
Installment loans - Guaranteed by the Company (3) | | — | 51,323 | | 44,420 | 46,317 | 43,422 | | | | | |
Total U.S. gross combined loans receivable (2) | | $ | 739,100 | $ | 737,445 | | $ | 683,149 | $ | 236,631 | $ | 232,605 | | | | | |
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Lending Revenue: | | | | | | | | | | | | |
Revolving LOC | | $ | 2,210 | $ | 28,145 | | $ | 26,913 | $ | 27,911 | $ | 27,377 | | | | | |
Installment loans - Company Owned | | 86,936 | 121,595 | | 113,833 | 56,820 | 57,659 | | | | | |
Installment loans - Guaranteed by the Company (3) | | 3,898 | 48,283 | | 48,991 | 47,348 | 43,377 | | | | | |
Total U.S. lending revenue | | $ | 93,044 | $ | 198,023 | | $ | 189,737 | $ | 132,079 | $ | 128,413 | | | | | |
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Lending Provision: | | | | | | | | | | | | |
Revolving LOC | | $ | — | $ | 11,831 | | $ | 9,577 | $ | 11,592 | $ | 8,140 | | | | | |
Installment loans - Company Owned | | 29,045 | 54,868 | | 32,962 | 18,618 | 16,792 | | | | | |
Installment loans - Guaranteed by the Company (3) | | — | 28,313 | | 21,749 | 25,967 | 23,146 | | | | | |
Total U.S. lending provision | | $ | 29,045 | $ | 95,012 | | $ | 64,288 | $ | 56,177 | $ | 48,078 | | | | | |
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NCOs (7) | | | | | | | | | | | | |
Revolving LOC | | $ | 1,140 | $ | 10,248 | | $ | 10,055 | $ | 11,481 | $ | 8,329 | | | | | |
Installment loans - Company Owned | | 25,722 | 40,757 | | 36,247 | 19,664 | 19,548 | | | | | |
Installment loans - Guaranteed by the Company (3) | | 1,589 | 27,395 | | 21,492 | 26,065 | 21,404 | | | | | |
Total U.S. NCOs | | $ | 28,451 | $ | 78,400 | | $ | 67,794 | $ | 57,210 | $ | 49,281 | | | | | |
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NCO rate (4) (7) | | | | | | | | | | | | |
Revolving LOC | | 3.9% | 19.1% | | 19.8% | 22.1% | 16.9% | | | | | |
Installment loans - Company Owned | | 3.8% | 6.7% | | 6.0% | 14.3% | 14.1% | | | | | |
Total U.S. Company Owned NCO rate | | 3.8% | 7.7% | | 7.1% | 16.4% | 14.8% | | | | | |
Installment loans - Guaranteed by the Company (3) | | 6.2% | 57.2% | | 47.4% | 58.1% | 53.2% | | | | | |
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(in thousands, except percentages) | | Q3 2022 | Q2 2022(6) | | Q1 2022 | Q4 2021(1) | Q3 2021 | | | | | |
Total U.S. NCO rate | | 3.9% | 11.0% | | 14.7% | 24.4% | 21.6% | | | | | |
ALL and CSO Liability for Losses rate (5) | | | | | | | | | | | | |
Revolving LOC | | — | % | 25.1 | % | | 26.7% | 25.9% | 26.3% | | | | | |
Installment loans - Company Owned | | 4.4 | % | 6.8 | % | | 4.2% | 12.7% | 13.4% | | | | | |
Total U.S. Company Owned ALL rate | | 4.4 | % | 8.4 | % | | 5.9% | 16.3% | 16.9% | | | | | |
Installment loans - Guaranteed by the Company (3) | | — | % | 15.7 | % | | 16.1% | 14.9% | 16.1% | | | | | |
Total ALL and CSO Liability for Losses rate | | 4.4 | % | 8.9 | % | | 6.6% | 16.0% | 16.8% | | | | | |
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31+ days past-due rate (5) | | | | | | | | | | | | |
Revolving LOC | | — | % | 17.4 | % | | 19.1% | 19.2% | 18.3% | | | | | |
Installment loans - Company Owned | | 10.5 | % | 10.0 | % | | 9.6% | 9.4% | 11.9% | | | | | |
Total U.S. Company Owned past-due rate(8) | | 10.5 | % | 10.7 | % | | 10.4% | 10.1% | 13.6% | | | | | |
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Installment loans - Guaranteed by the Company (3) | | — | % | 2.6 | % | | 4.5% | 3.1% | 3.8% | | | | | |
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(1) On December 27, 2021, we acquired Heights Finance, which accounted for approximately $472 million of U.S. Installment loans as of December 31, 2021. As the period between December 27, 2021 and December 31, 2021 did not result in material loan performance, we have excluded Heights Finance from the table for the fourth quarter of 2021. |
(2) Non-GAAP measure. For a description of each non-GAAP metric, see "Non-GAAP Financial Measures." |
(3) Includes loans originated by third-party lenders through CSO programs. Installment gross loans receivable Guaranteed by the Company are not included in the Consolidated Financial Statements. All balances in connection with the CSO programs were disposed of on July 8, 2022 upon the completion of the divestiture of the Legacy U.S. Direct Lending business. |
(4) We calculate NCO rate as total NCOs divided by Average gross loans receivable. The amount and timing of recoveries are impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications and the periodic sale of charged off loans. |
(5) We calculate (i) Allowance for loan losses (ALL) and CSO Liability for losses rate and (ii) past-due rate as the respective totals divided by gross loans receivable at each respective quarter end. |
(6) Includes loan balances and activity classified as Held for Sale. |
(7) For the first, second and third quarters of 2022, NCOs presented above include $5.0 million, $10.3 million and $0.5 million, respectively, of NCO's related to the purchase accounting fair value discount, which are excluded from provision. |
(8) The total past-due rate for U.S. Lending including loans 1-30 days past-due were 20.0%, 21.2%, 17.7%, 18.3% and 22.3% for the three months ended September 30, 2022, June 30, 2022, March 31, 2022, December 31, 2021 and September 30, 2021, respectively. |
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U.S. Loan Net Revenue
U.S. lending revenues decreased by $35.4 million, or 27.5%, to $93.0 million, for the three months ended September 30, 2022, compared to the prior-year period, as a result of the divestiture of the Legacy U.S. Direct lending business in July 2022, partially offset by the acquisitions of Heights Finance in December 2021 and First Heritage in July 2022.
The provision for losses decreased $19.0 million, or 39.6%, year over year, primarily driven by the divestiture of the Legacy U.S. Direct lending business in July 2022, offset by normalized provisioning on loan growth as customer behavior returned to pre-COVID-19 levels and a full quarter's provision for Heights Finance.
U.S. Revolving LOC loan performance
U.S. Revolving LOC loan balances were divested with the completion of the divestiture of the Legacy U.S. Direct lending business in July 2022.
U.S. Installment loan performance - Company Owned
U.S. Installment loan balances as of September 30, 2022 increased $601.1 million, or 435.6%, and revenue increased $29.3 million, or 50.8%, compared to the prior-year period, primarily as a result of our acquisition of Heights Finance and First Heritage. NCO rates decreased 1,034 bps year over year and decreased 294 bps sequentially primarily as a result of Heights Finance and First Heritage. Past-due rates decreased 136 bps year over year and 47 bps sequentially due to the strategic mix shift from divested U.S. Legacy high-cost, short-term lending to longer duration lower risk consumer finance acquisitions of Heights Finance and First Heritage.
U.S. Installment loan performance - Guaranteed by the Company
U.S. Installment loans Guaranteed by the Company decreased $43.4 million, or 100.0%, year over year. With the sale of the Legacy U.S. Direct Lending business in July of 2022, the company no longer guarantees loans originated by third party lenders through CSO programs.
Following is a summary of results of operations for the U.S. segment for the periods indicated.
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands, unaudited) | 2022 | 2021 | Change $ | Change % | | 2022 | 2021 | Change $ | Change % |
Revenue | | | | | | | | | |
Interest and fees revenue | $ | 93,044 | | $ | 128,413 | | $ | (35,369) | | (27.5) | % | | $ | 480,806 | | $ | 376,194 | | $ | 104,612 | | 27.8 | % |
Insurance premiums and commissions | 9,986 | | — | | 9,986 | | # | | 19,310 | | — | | 19,310 | | # |
Other revenue | 4,400 | | 3,261 | | 1,139 | | 34.9 | % | | 11,424 | | 10,766 | | 658 | | 6.1 | % |
Total revenue | 107,430 | | 131,674 | | (24,244) | | (18.4) | % | | 511,540 | | 386,960 | | $ 124,580 | | 32.2 | % |
Provision for losses | 32,073 | | 48,430 | | (16,357) | | (33.8) | % | | 196,461 | | 108,108 | | 88,353 | | 81.7 | % |
Net revenue | 75,357 | | 83,244 | | (7,887) | | (9.5) | % | | 315,079 | | 278,852 | | 36,227 | | 13.0 | % |
Operating Expenses | | | | | | | | | |
Salaries and benefits | 35,216 | | 44,444 | | (9,228) | | (20.8) | % | | 154,096 | | 127,867 | | 26,229 | | 20.5 | % |
Occupancy | 6,948 | | 8,101 | | (1,153) | | (14.2) | % | | 29,344 | | 24,834 | | 4,510 | | 18.2 | % |
Advertising | 3,816 | | 8,297 | | (4,481) | | (54.0) | % | | 24,245 | | 21,527 | | 2,718 | | 12.6 | % |
Direct operations | 5,534 | | 8,718 | | (3,184) | | (36.5) | % | | 32,788 | | 26,112 | | 6,676 | | 25.6 | % |
Depreciation and amortization | 4,549 | | 3,020 | | 1,529 | | 50.6 | % | | 13,710 | | 9,154 | | 4,556 | | 49.8 | % |
Other operating expenses | 20,004 | | 11,494 | | 8,510 | | 74.0 | % | | 48,458 | | 36,129 | | 12,329 | | 34.1 | % |
Total operating expenses | 76,067 | | 84,074 | | (8,007) | | (9.5) | % | | 302,641 | | 245,623 | | 57,018 | | 23.2 | % |
Other expense (income) | | | | | | | | | |
Interest expense | 30,965 | | 19,481 | | 11,484 | | 58.9 | % | | 86,473 | | 53,177 | | 33,296 | | 62.6 | % |
Loss (income) from equity method investment | 2,309 | | 1,582 | | 727 | | 46.0 | | | 2,053 | | (676) | | 2,729 | | # |
Gain from equity method investment | — | | — | | — | | # | | — | | (135,387) | | 135,387 | | # |
Loss on extinguishment of debt | 3,702 | | 40,206 | | (36,504) | | (90.8) | | | 3,702 | | 40,206 | | (36,504) | | (90.8) | % |
Gain on disposal of business | (68,443) | | — | | (68,443) | | # | | (68,443) | | — | | (68,443) | | # |
Total other expense (income) | (31,467) | | 61,269 | | (92,736) | | # | | 23,785 | | (42,680) | | 66,465 | | # |
Segment operating (loss) income | 30,757 | | (62,099) | | 92,856 | | # | | (11,347) | | 75,909 | | (87,256) | | # |
Interest Expense | 30,965 | | 19,481 | | 11,484 | | 58.9 | % | | 86,473 | | 53,177 | | 33,296 | | 62.6 | % |
Amortization and Depreciation | 4,549 | | 3,020 | | 1,529 | | 50.6 | % | | 13,710 | | 9,154 | | 4,556 | | 49.8 | % |
EBITDA (1) | 66,271 | | (39,598) | | 105,869 | | # | | 88,836 | | 138,240 | | (49,404) | | (35.7) | % |
Restructuring costs | 739 | | 5,651 | | (4,912) | | | | 2,954 | | 11,414 | | (8,460) | | |
Legal and other costs | 46 | | 370 | | (324) | | | | 1,076 | | 370 | | 706 | | |
Loss (income) from equity method investment | 2,309 | | 1,582 | | 727 | | | | 2,053 | | (676) | | 2,729 | | |
Gain from equity method investment | — | | — | | — | | | | — | | (135,387) | | 135,387 | | |
Transaction costs | 10,063 | | 141 | | 9,922 | | | | 10,063 | | 6,482 | | 3,581 | | |
Acquisition-related adjustments | (2,883) | | — | | (2,883) | | | | 491 | | — | | 491 | | |
Loss on extinguishment of debt | 3,702 | | 40,206 | | (36,504) | | | | 3,702 | | 40,206 | | (36,504) | | |
Share-based compensation | 1,306 | | 3,998 | | (2,692) | | | | 8,068 | | 10,148 | | (2,080) | | |
Gain on sale of business | (68,443) | | — | | (68,443) | | | | (68,443) | | — | | (68,443) | | |
Other adjustments | — | | (195) | | 195 | | | | (640) | | (600) | | (40) | | |
Adjusted EBITDA (1) | $ | 13,110 | | $ | 12,155 | | $ | 955 | | 7.9 | % | | $ 48,160 | | $ 70,197 | | ($ 22,037) | | (31.4) | % |
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(1) These are non-GAAP metrics. For a description of each non-GAAP addback, see the applicable reconciliations contained under "Consolidated Results of Operations." For a description of each non-GAAP metric, see "Non-GAAP Financial Measures." |
# - Variance greater than 100% or not meaningful. |
U.S. Segment Results - For the Three Months Ended September 30, 2022 and 2021
For a discussion of revenue, provision for losses and related gross loans receivables for the three months ended September 30, 2022 and 2021, see "U.S. Portfolio Performance," above.
Operating expenses for the three months ended September 30, 2022 were $76.1 million, a decrease of $8.0 million, or 9.5%, compared to $84.1 million for the three months ended September 30, 2021, primarily driven by the divestiture of the Legacy U.S. Direct lending business in July 2022, partially offset by the acquisitions of Heights Finance and First Heritage.
U.S. interest expense for the three months ended September 30, 2022 increased $11.5 million, or 58.9% compared to the prior-year period, primarily driven by (i) an increase in benchmark rates on variable rate debt, (ii) Senior Notes issued to fund in part our Heights Finance acquisition, (iii) in July 2022, concurrently with the closing of the First Heritage acquisition, we entered into a new $225 million non-recourse revolving warehouse facility to finance future loans originated by First Heritage, and (iv) in July 2022, we entered into a new $425 million non-recourse revolving warehouse facility to replace our incumbent lender and finance future loans originated by Heights Finance.
We recognize our share of Katapult’s income or loss on a one-quarter lag. We recorded a loss of $2.3 million for the three months ended September 30, 2022. We own 19.4% of Katapult on a fully diluted basis assuming full pay-out of earn-out shares as of September 30, 2022, and 18.1% excluding pay-out of earn-out shares.
U.S. Segment Results - For the Nine Months Ended September 30, 2022 and 2021
Operating expenses for the nine months ended September 30, 2022 were $302.6 million, an increase of $57.0 million, or 23.2%, compared to $245.6 million for the nine months ended September 30, 2021, primarily driven by the operating expenses associated with Heights Finance and First Heritage, partially offset by the divestiture of the Legacy U.S. Direct lending business in July 2022.
U.S. interest expense for the nine months ended September 30, 2022 increased $33.3 million, or 62.6% compared to the prior-year period, primarily driven by (i) an increase in benchmark rates on variable rate debt, (ii) Senior Notes issued to fund in part our Heights acquisition, (iii) in July 2022, concurrently with the closing of the First Heritage acquisition, we entered into a new $225 million non-recourse revolving warehouse facility to finance future loans originated by First Heritage, and (iv) in July 2022, we entered into a new $425 million non-recourse revolving warehouse facility to replace our incumbent lender and finance future loans originated by Heights Finance.
We recorded a loss of $2.1 million for the nine months ended September 30, 2022 for our share of Katapult's loss. We own 19.4% of Katapult on a fully diluted basis assuming full pay-out of earn-out shares as of September 30, 2022, and 18.1% excluding pay-out of earn-out shares.
Canada Direct Lending Portfolio Performance | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except percentages) | | Q3 2022 | Q2 2022 | Q1 2022 | | Q4 2021 | Q3 2021 | | | | | |
Gross loans receivable | | | | | | | | | | | | |
Revolving LOC | | $ | 439,117 | $ | 442,738 | $ | 424,485 | | $ | 402,405 | $ | 366,509 | | | | | |
Installment loans | | 25,941 | 24,817 | 23,578 | | 24,792 | 24,315 | | | | | |
Total gross loans receivable | | $ | 465,058 | $ | 467,555 | $ | 448,063 | | $ | 427,197 | $ | 390,824 | | | | | |
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Lending Revenue: | | | | | | | | | | | | |
Revolving LOC | | $ | 50,251 | $ | 47,591 | $ | 45,455 | | $ | 43,943 | $ | 40,239 | | | | | |
Installment loans | | 12,645 | 11,868 | 11,109 | | 11,416 | 11,331 | | | | | |
Total lending revenue | | $ | 62,896 | $ | 59,459 | $ | 56,564 | | $ | 55,359 | $ | 51,570 | | | | | |
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Lending Provision: | | | | | | | | | | | | |
Revolving LOC | | $ | 28,408 | $ | 22,641 | $ | 19,156 | | $ | 20,080 | $ | 11,375 | | | | | |
Installment loans | | 4,466 | 3,303 | 2,723 | | 2,945 | 2,512 | | | | | |
Total lending provision | | $ | 32,874 | $ | 25,944 | $ | 21,879 | | $ | 23,025 | $ | 13,887 | | | | | |
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NCOs | | | | | | | | | | | | |
Canada Direct Lending Revolving LOC | | $ | 23,652 | $ | 20,160 | $ | 21,590 | | $ | 15,112 | $ | 9,887 | | | | | |
Canada Direct Lending Installment loans | | 4,061 | 2,904 | 2,647 | | 2,758 | 2,444 | | | | | |
Total Canada Direct Lending NCOs | | $ | 27,713 | $ | 23,064 | $ | 24,237 | | $ | 17,870 | $ | 12,331 | | | | | |
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NCO rate (1) | | | | | | | | | | | | |
Revolving LOC | | 5.4 | % | 4.6% | 5.2% | | 3.9% | 2.8% | | | | | |
Installment loans | | 16.0 | % | 12.0% | 10.9% | | 11.2% | 10.2% | | | | | |
Total NCO rate | | 5.9 | % | 5.0% | 5.5% | | 4.4% | 3.3% | | | | | |
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ALL rate (2) | | | | | | | | | | | | |
Revolving LOC | | 7.9 | % | 7.2 | % | 7.2 | % | | 8.0 | % | 7.5 | % | | | | | |
Installment loans | | 10.3 | % | 9.7 | % | 8.8 | % | | 8.0 | % | 7.4 | % | | | | | |
Total ALL rate | | 8.0 | % | 7.4 | % | 7.3 | % | | 8.0 | % | 7.5 | % | | | | | |
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31+ days past-due rate (2) | | | | | | | | | | | | |
Revolving LOC | | 5.1 | % | 4.2 | % | 4.3 | % | | 3.2 | % | 2.5 | % | | | | | |
Installment loans | | 1.0 | % | 0.8 | % | 1.0 | % | | 0.9 | % | 0.7 | % | | | | | |
Total past-due rate (3) | | 4.8 | % | 4.0 | % | 4.1 | % | | 3.1 | % | 2.4 | % | | | | | |
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(1) We calculate NCO rate as total NCOs divided by Average gross loans receivable. The amount and timing of recoveries are impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications and the periodic sale of charged off loans. |
(2) We calculate ALL rate and past-due rate as the respective totals divided by gross loans receivable at each respective quarter end. |
(3) The total past-due rate for Canada Direct Lending including loans 1-30 days past-due were 9.5%, 8.3%, 7.7%, 6.7% and 5.1% for the three months ended September 30, 2022, June 30, 2022, March 31, 2022, December 31, 2021 and September 30, 2021, respectively. |
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Canada Direct Loan Net Revenue
Canada Direct Lending revenue increased year over year by $11.3 million, or 22.0%, (increased $15.7 million, or 23.7%, on a constant currency basis), for the three months ended September 30, 2022, due to the growth of Revolving LOC loans in Canada.
The provision for losses increased $19.0 million, or 136.7%, (and increased $20.2 million, or 144.3%, on a constant currency basis), to $32.9 million for the three months ended September 30, 2022, compared to $14.0 million in the prior-year period. The provision for losses increased $6.9 million, or 26.7%, (and increased $8.2 million, or 31.5% on a constant currency basis), sequentially. The increase in provision for losses was primarily driven by (i) normalized provisioning on strong year-over-year loan growth as customer behavior returns to pre-COVID-19 levels, (ii) orderly credit normalization to higher NCO and past-due rates as
COVID-19 impacts lessened compared to the same period in the prior year, and (iii) continued shift in online originations which have inherently more credit risk versus in-store originations.
Canada Direct Lending Revolving LOC loan performance
Canada Direct Lending Revolving LOC gross loans receivable increased $72.6 million , or 19.0%, ($107.5 million, or 29.3%, on a constant currency basis) year over year and decreased $3.6 million, or 0.5%, but increased $31.2 million, or 7.1%, on a constant currency basis sequentially. Revolving LOC revenue increased $10.0 million, or 24.9%, year over year and $2.7 million, or 5.6%, sequentially, ($17.4 million, or 46.5%, respectively, on a constant currency basis). The quarterly NCO rate increased year over year from 2.8% to 5.4% as of September 30, 2022 and declined sequentially from 4.6% to 5.4% as of September 30, 2022 as COVID-19 impacts lessened compared to the comparable period in the prior year. Past-due rates rose 256 bps year over year and 82 bps sequentially.
Canada Direct Lending Installment loan performance
Canada Direct Lending Installment revenue increased $1.3 million, or 11.6%, ($2.5 million, or 21.8%, on a constant currency basis) year over year. Installment gross loans receivable increased $1.6 million, or 6.7% ($3.7 million, or 15.2%, on a constant currency basis) year over year. The NCO rate increased year over year from 10.2% to 16.0% and sequentially from 12.0% to 16.0% as of September 30, 2022 as COVID-19 impacts lessened compared to the same period in the prior year.
Canada Direct Lending Results of Operations
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands, unaudited) | 2022 | 2021 | Change $ | Change % | | 2022 | 2021 | Change $ | Change % |
Revenue | | | | | | | | | |
Interest and Fees Revenue | $ | 62,896 | | $ | 51,570 | | $ | 11,326 | | 22.0 | % | | $ | 178,919 | | $ | 144,376 | | $ | 34,543 | | 23.9 | % |
Insurance Premiums and Commissions | 14,045 | | 12,506 | | 1,539 | | 12.3 | % | | 40,988 | | 35,753 | | 5,235 | | 14.6 | % |
Other Revenue | 2,038 | | 2,114 | | (76) | | (3.6) | % | | 6,100 | | 6,381 | | (281) | | (4.4) | % |
Total Revenue | 78,979 | | 66,190 | | 12,789 | | 19.3 | % | | 226,007 | | 186,510 | | $ 39,497 | | 21.2 | % |
Provision for Losses | 32,947 | | 14,003 | | 18,944 | | # | | 80,960 | | 31,793 | | 49,167 | | # |
Net Revenue | 46,032 | | 52,187 | | (6,155) | | (11.8) | % | | 145,047 | | 154,717 | | (9,670) | | (6.3) | % |
Operating expenses | | | | | | | | | |
Salaries and Benefits | 13,962 | | 13,571 | | 391 | | 2.9 | % | | 42,025 | | 39,081 | | 2,944 | | 7.5 | % |
Occupancy | 5,471 | | 5,403 | | 68 | | 1.3 | % | | 17,098 | | 16,750 | | 348 | | 2.1 | % |
Advertising Expense | 861 | | 1,139 | | (278) | | (24.4) | % | | 3,097 | | 2,821 | | 276 | | 9.8 | % |
Direct Operations | 2,753 | | 2,418 | | 335 | | 13.9 | % | | 8,650 | | 6,869 | | 1,781 | | 25.9 | % |
Amortization and Depreciation | 1,134 | | 1,124 | | 10 | | 0.9 | % | | 3,360 | | 3,394 | | (34) | | (1.0) | % |
Other operating expenses | 2,592 | | 2,348 | | 244 | | 10.4 | % | | 7,896 | | 7,175 | | 721 | | 10.0 | % |
Total operating expenses | 26,773 | | 26,003 | | 770 | | 3.0 | % | | 82,126 | | 76,090 | | 6,036 | | 7.9 | % |
Other expense (income) | | | | | | | | | |
Interest Expense | 7,190 | | 2,440 | | 4,750 | | # | | 17,367 | | 7,293 | | 10,074 | | # |
Other Expense/Income | 7,190 | | 2,440 | | 4,750 | | # | | 17,367 | | 7,293 | | 10,074 | | # |
Segment Operating Income | 12,069 | | 23,744 | | (11,675) | | (49.2) | % | | 45,554 | | 71,334 | | (25,780) | | (36.1) | % |
Interest Expense | 7,190 | | 2,440 | | 4,750 | | # | | 17,367 | | 7,293 | | 10,074 | | # |
Amortization and Depreciation | 1,134 | | 1,124 | | 10 | | 0.9 | % | | 3,360 | | 3,394 | | (34) | | (1.0) | % |
EBITDA (1) | 20,393 | | 27,308 | | (6,915) | | (25.3) | % | | 66,281 | | 82,021 | | (15,740) | | (19.2) | % |
Legal and other costs | — | | — | | — | | # | | 7 | | — | | 7 | | # |
Share-based compensation | 152 | | — | | 152 | | # | | 396 | | — | | 396 | | # |
Other Adjustments | — | | 94 | | (94) | | # | | 16 | | 242 | | (226) | | (93.4) | % |
Adjusted EBITDA (1) | $ | 20,545 | | $ | 27,402 | | $ | (6,857) | | (25.0) | % | | $ 66,700 | | $ 82,263 | | ($ 15,563) | | (18.9) | % |
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(1) These are non-GAAP metrics. For a description of each non-GAAP addback, see the applicable reconciliations contained under "Consolidated Results of Operations." For a description of each non-GAAP metric, see "Non-GAAP Financial Measures." |
# - Variance greater than 100% or not meaningful. |
Canada Direct Lending Segment Results - For the Three Months Ended September 30, 2022 and 2021
For a discussion of revenue, provision for losses and related gross loans receivables for the three months ended September 30, 2022 and 2021, see "Canada Direct Lending Portfolio Performance" above.
Canada Direct Lending operating expenses were $26.8 million for the three months ended September 30, 2022, an increase of $0.8 million, or 3.0%, ($1.8 million, or 6.7%, on a constant currency basis), compared to the prior-year period, primarily due to higher variable costs, primarily collection and financial service fees, on higher volume.
Interest expense for the three months ended September 30, 2022 was $7.2 million, compared to $2.4 million for the three months ended September 30, 2021, due to higher utilization of the Canada SPV facility and an increase in benchmark rates on variable rate debt.
Canada Direct Lending Segment Results - For the Nine Months Ended September 30, 2022 and 2021
Canada Direct Lending operating expenses were $82.1 million for the six months ended September 30, 2022, an increase of $6.0 million, or 7.9%, ($1.8 million, or 6.7%, on a constant currency basis), compared to the prior-year period, primarily due to higher variable costs, largely collection and financial service fees, on higher volume.
Interest expense for the nine months ended September 30, 2022 was $17.4 million, compared to $7.3 million for the nine months ended September 30, 2021, due to higher utilization of the Canada SPV facility and an increase in benchmark rates on variable rate debt.
Canada POS Lending Portfolio Performance
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(in thousands, except percentages) | | Q3 2022 | Q2 2022 | Q1 2022 | | Q4 2021 | Q3 2021 | | | | | |
Revolving LOC | | | | | | | | | | | | |
Total gross loans receivable | | $ | 690,270 | $ | 627,163 | $ | 541,776 | | $ | 459,176 | $ | 302,349 | | | | | |
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Total lending revenue | | $ | 24,575 | $ | 20,846 | $ | 18,655 | | $ | 13,704 | $ | 10,646 | | | | | |
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Total lending provision | | $ | 13,379 | $ | 5,963 | $ | 8,714 | | $ | 12,511 | $ | 8,285 | | | | | |
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Canada POS Lending NCOs (1) | | $ | 6,114 | $ | 3,537 | $ | 2,727 | | $ | 1,731 | $ | 1,827 | | | | | |
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NCO rate (1)(2) | | 0.9 | % | 0.6 | % | 0.5 | % | | 0.5 | % | 0.7 | % | | | | | |
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ALL rate (3) | | 4.8 | % | 4.5 | % | 5.1 | % | | 4.8 | % | 3.8 | % | | | | | |
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31+ days past-due rate (3)(4) | | 3.6 | % | 2.8 | % | 2.2 | % | | 1.9 | % | 2.1 | % | | | | | |
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(1) For the third and fourth quarters of 2021, NCOs presented above include $0.6 million and $0.8 million, respectively, of NCO's related to the fair value discount, which are excluded from provision. |
(2) We calculate NCO rate as total NCOs divided by Average gross loans receivable. |
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(3) We calculate ALL rate and past-due rate as the respective totals divided by gross loans receivable at each respective quarter end. |
(4) The total past-due rate for Canada POS Lending including loans 1-30 days past-due were 5.8%, 5.3%, 4.2%, 4.1% and 4.8% for the three months ended September 30, 2022, June 30, 2022, March 31, 2022, December 31, 2021 and September 30, 2021, respectively. | | |
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Canada POS Lending Revolving LOC loan performance
Canada POS Lending revenue increased year over year by $13.9 million, driven by loan growth of $387.9 million, or 128.3%. The increase in gross loans receivable was driven by growth associated with both existing and new merchant partners. Revolving LOC gross loans receivable generally charge-off at 180 days past due. The quarterly NCO rate increased year over year from 0.7% to 0.9% as of September 30, 2022 and increased sequentially from 0.6% to 0.9%. These increases were primarily driven by the maturity of the portfolio and an increased product mix shift in increased lending to lower credit quality consumers. Past-due rates rose 141 bps year over year and 75 bps sequentially.
Originations for the three months ended September 30, 2022 were C$351.3 million, an increase of C$151.5 million, or 75.8%, from the prior-year period of C$199.8 million. Originations for the nine months ended September 30, 2022 were C$920.6 million, an increase of C$531.7 million, or 136.7%, from the prior-year period of C$388.9 million. Sequentially, Canada POS Revolving LOC gross loans receivable increased $63.1 million, or 10.1%, due to continued strong loan growth.
Canada POS Lending Results of Operations
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands, unaudited) | 2022 | 2021 (1) | Change $ | Change % | | 2022 | 2021 | Change $ | Change % |
Revenue | | | | | | | | | |
Interest and fees revenue | $ | 24,575 | | $ | 10,647 | | 13,928 | | # | | $ | 64,077 | | $ | 18,586 | | 45,491 | | # |
Insurance premiums and commissions | 715 | | 93 | | 622 | | # | | 1,361 | | 268 | | 1,093 | | # |
Other revenue | 2,421 | | 676 | | 1,745 | | # | | 5,735 | | 1,200 | | 4,535 | | # |
Total revenue | 27,711 | | 11,416 | | 16,295 | | # | | 71,173 | | 20,054 | | 51,119 | | # |
Provision for losses | 13,379 | | 8,285 | | 5,094 | | 61.5 | % | | 28,055 | | 12,127 | | 15,928 | | # |
Net revenue | 14,332 | | 3,131 | | 11,201 | | # | | 43,118 | | 7,927 | | 35,191 | | # |
Operating expenses | | | | | | | | | |
Salaries and benefits | 4,234 | | 4,095 | | 139 | | 3.4 | % | | 19,447 | | 8,398 | | 11,049 | | # |
Occupancy | 408 | | 227 | | 181 | | 79.7 | % | | 929 | | 278 | | 651 | | # |
Advertising | 568 | | 261 | | 307 | | # | | 1,110 | | 476 | | 634 | | # |
Direct operations | 3,441 | | 3,746 | | (305) | | (8.1) | % | | 10,857 | | 7,570 | | 3,287 | | 43.4 | % |
Depreciation and amortization | 3,816 | | 3,141 | | 675 | | 21.5 | % | | 10,915 | | 7,137 | | 3,778 | | 52.9 | % |
Other operating expense | 1,051 | | 1,011 | | 40 | | 4.0 | % | | 2,456 | | 1,718 | | 738 | | 43.0 | % |
Total operating expenses | 13,518 | | 12,481 | | 1,037 | | 8.3 | % | | 45,714 | | 25,577 | | 20,137 | | 78.7 | % |
Other expense | (11,355) | | 3,825 | | (15,180) | | | | (7,605) | | 3,825 | | (11,430) | | |
Interest expense | 11,994 | | 3,884 | | 8,110 | | # | | 26,843 | | 8,314 | | 18,529 | | # |
Total other expense | 639 | | 7,709 | | (7,070) | | (91.7) | % | | 19,238 | | 12,139 | | 7,099 | | 58.5 | % |
Segment operating income (loss) | 175 | | (17,059) | | 17,234 | | # | | (21,834) | | (29,789) | | 7,955 | | (26.7) | % |
Interest expense | 11,994 | | 3,884 | | 8,110 | | # | | 26,843 | | 8,314 | | 18,529 | | # |
Depreciation and amortization | 3,816 | | 3,141 | | 675 | | 21.5 | % | | 10,915 | | 7,137 | | 3,778 | | 52.9 | % |
EBITDA (2) | 15,985 | | (10,034) | | 26,019 | | # | | 15,924 | | (14,338) | | 30,262 | | # |
Acquisition-related adjustments | — | | 4,292 | | (4,292) | | | | 218 | | 9,787 | | (9,569) | | |
Change in fair value of contingent consideration | (11,355) | | 3,825 | | (15,180) | | | | (7,605) | | 3,825 | | (11,430) | | |
Share-based compensation | (10) | | — | | (10) | | | | 1,494 | | — | | 1,494 | | |
Other adjustments | — | | (17) | | 17 | | | | 43 | | (34) | | 77 | | |
Adjusted EBITDA (2) | $ | 4,620 | | $ | (1,934) | | $ 6,554 | | # | | $ 10,074 | | ($ 760) | | $ 10,834 | | # |
# - Variance greater than 100% or not meaningful. | | | | | | | |
(1) The totals reported for the nine months ended September 30, 2021 include results from the date of the Flexiti acquisition, March 10, 2021, through September 30, 2021. |
(2) These are non-GAAP metrics. For a description of each non-GAAP addback, see the applicable reconciliations contained under "Consolidated Results of Operations." For a description of each non-GAAP metric, see "Non-GAAP Financial Measures." |
Canada POS Lending Segment Results - For the Three Months Ended September 30, 2022 and 2021
For a discussion of revenue, provision for losses and related gross loans receivable, see the "Canada POS Lending Portfolio Performance," above for the three months ended September 30, 2022.
Canada POS Lending operating expenses were $13.5 million for the three months ended September 30, 2022, an increase of $1.0 million, or 8%, ( $1.5 million, or 12.0%, on a constant currency basis), compared to the prior-year period, primarily due to cost increases to support higher loan volume year over year.
Interest expense for the three months ended September 30, 2022 was $12.0 million compared to $3.8 million for the three months ended September 30, 2021, due to an increase in benchmark rates on variable rate debt and increased non-recourse ABL borrowing to support organic loan growth.
Canada POS Lending Segment Results - For the Nine Months Ended September 30, 2022 and 2021
A comparison of the year-over-year results for the nine months ended September 30, 2022 compared to September 30, 2021 are not meaningful as we acquired Flexiti on March 10, 2021.
Supplemental Non-GAAP Financial Information
Non-GAAP Financial Measures
In addition to the financial information prepared in conformity with U.S. GAAP, we provide certain “non-GAAP financial measures,” including:
•Adjusted Net Income ("ANI") and Adjusted Earnings Per Share, or the Adjusted Earnings Measures (net income plus or minus certain legal and other costs, income or loss from equity method investment, goodwill and intangible asset impairments, transaction-related costs, restructuring costs, loss on extinguishment of debt, adjustments related to acquisition accounting, share-based compensation, intangible asset amortization, gain on sale of business, changes in fair value of contingent consideration, certain tax adjustments and cumulative tax effect of applicable adjustments, on a total and per share basis);
•EBITDA (earnings before interest, income taxes, depreciation and amortization);
•Adjusted EBITDA (EBITDA 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 the Consolidated Financial Statements). As a result of the sale of the Legacy U.S. Direct Lending business, we no longer guarantee loans originated by third-party lenders through CSO programs.
We believe that the 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 reflect an additional way of viewing aspects of the business that, when viewed with the Company's U.S. GAAP results, provide a more complete understanding of factors and trends affecting the 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. GAAP. In addition, we believe that the adjustments shown above 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. GAAP, we provide Gross Combined Loans Receivable consisting of owned loans receivable plus loans originated by third-party lenders through the CSO programs, which we guarantee but do not include in the Condensed Consolidated Financial Statements. Management believes this analysis provides investors with important information needed to evaluate overall lending performance. All balances in connection with the CSO programs were disposed of on July 8, 2022 with the completion of the divestiture of the Legacy U.S. Direct Lending business.
We provide non-GAAP financial information for informational purposes and to enhance understanding of the U.S. GAAP 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, segment operating income, or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities or any other liquidity measure derived in accordance with U.S. 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. 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. 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 the Company records a loss under U.S. GAAP, shares outstanding utilized to calculate Diluted Earnings per Share are equivalent to basic shares outstanding. Shares outstanding utilized to calculate Adjusted Earnings per Share reflect the number of diluted shares the Company would have reported if reporting net income under U.S. GAAP.
As noted above, Gross Combined Loans Receivable includes loans originated by third-party lenders through CSO programs which are not included in the consolidated financial statements but from which we earn revenue and for which we provide a guarantee to the lender. All balances in connection with the CSO programs were disposed of on July 8, 2022 with the completion of the divestiture of the Legacy U.S. Direct Lending business. Management believes this analysis provides investors with important information needed to evaluate overall lending performance.
We believe Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA are used by investors to analyze operating performance and to 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 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)
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | 2021 | Change $ | Change % | | 2022 | 2021 | Change $ | Change % |
Net income (loss) | | $ | 25,653 | | $ | (42,039) | | $ | 67,692 | | # | | $ 909 | | $ 88,213 | | ($ 87,304) | | (99.0) | % |
Adjustments: | | | | | | | | | | |
Restructuring costs (1) | | 739 | | 5,651 | | | | | 2,954 | | 11,414 | | | |
Legal and other costs (2) | | 46 | | 370 | | | | | 1,083 | | 370 | | | |
Loss (income) from equity method investment (3) | | 2,309 | | 1,582 | | | | | 2,053 | | (676) | | | |
Gain from equity method investment (11) | | — | | — | | | | | — | | (135,387) | | | |
Transaction costs (4) | | 10,063 | | 141 | | | | | 10,063 | | 6,482 | | | |
Acquisition-related adjustments (5) | | (2,883) | | 4,292 | | | | | 709 | | 9,787 | | | |
Change in fair value of contingent consideration (6) | | (11,355) | | 3,825 | | | | | (7,605) | | 3,825 | | | |
Loss on extinguishment of debt (12) | | 3,702 | | 42,262 | | | | | 3,702 | | 42,262 | | | |
Share-based compensation (7) | | 1,448 | | 3,998 | | | | | 9,958 | | 10,148 | | | |
Intangible asset amortization (8) | | 3,151 | | 1,774 | | | | | 9,652 | | 4,471 | | | |
Gain on sale of business (13) | | (68,443) | | — | | | | | (68,443) | | — | | | |
Cumulative tax effect of adjustments (9) | | 23,677 | | (15,411) | | | | | 18,061 | | 13,058 | | | |
Adjusted net (loss) income | | $ | (11,893) | | $ | 6,445 | | $ | (18,338) | | # | | $ | (16,904) | | $ 53,967 | | $ | (70,871) | | # |
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Net income (loss) | | $ 25,653 | | ($ 42,039) | | | | | $ 909 | | $ 88,213 | | | |
Diluted weighted average shares outstanding | | 40,835 | | 41,220 | | | | | 40,754 | | 43,422 | | | |
Adjusted diluted average shares outstanding | | 40,835 | | 43,285 | | | | | 40,754 | | 43,422 | | | |
Diluted earnings (loss) per share | | $ | 0.63 | | $ | (1.02) | | $ | 1.65 | | # | | $ | 0.02 | | $ | 2.03 | | $ | (2.01) | | # |
Per share impact of adjustments to net (loss) income | | (0.92) | | 1.17 | | | | | (0.43) | | (0.79) | | | |
Adjusted diluted (loss) earnings per share | | $ | (0.29) | | $ | 0.15 | | $ | (0.44) | | (293.3) | % | | ($ 0.41) | | $ 1.24 | | $ | (1.65) | | (133.1) | % |
Note: Footnotes follow Reconciliation of Net income table on the next page |
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Reconciliation of Net Income to EBITDA and Adjusted EBITDA, non-GAAP measures (in thousands, except per share data, unaudited)
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | 2021 | Change $ | Change % | | 2022 | 2021 | Change $ | Change % |
Net income (loss) | | $ | 25,653 | | $ | (42,039) | | $ | 67,692 | | # | | $ 909 | | $ 88,213 | | $ | (87,304) | | (99.0) | % |
Provision (benefit) for income taxes | | 17,348 | | (13,375) | | 30,723 | | # | | 11,464 | | 29,241 | | (17,777) | | (60.8) | % |
Interest expense | | 50,149 | | 25,805 | | 24,344 | | 94.3 | % | | 130,683 | | 68,784 | | 61,899 | | 90.0 | % |
Depreciation and amortization | | 9,499 | | 7,285 | | 2,214 | | 30.4 | % | | 27,985 | | 19,685 | | 8,300 | | 42.2 | % |
EBITDA | | 102,649 | | (22,324) | | 124,973 | | # | | 171,041 | | 205,923 | | (34,882) | | (16.9) | % |
Restructuring costs (1) | | 739 | | 5,651 | | | | | 2,954 | | 11,414 | | | |
Legal and other costs (2) | | 46 | | 370 | | | | | 1,083 | | 370 | | | |
Loss (income) from equity method investment (3) | | 2,309 | | 1,582 | | | | | 2,053 | | (676) | | | |
Gain from equity method investment (11) | | — | | — | | | | | — | | (135,387) | | | |
Transaction costs (4) | | 10,063 | | 141 | | | | | 10,063 | | 6,482 | | | |
Acquisition-related adjustments (5) | | (2,883) | | 4,292 | | | | | 709 | | 9,787 | | | |
Change in fair value of contingent consideration (6) | | (11,355) | | 3,825 | | | | | (7,605) | | 3,825 | | | |
Loss on extinguishment of debt (12) | | 3,702 | | 40,206 | | | | | 3,702 | | 40,206 | | | |
Gain on sale of business (13) | | (68,443) | | — | | | | | (68,443) | | — | | | |
Share-based compensation (7) | | 1,448 | | 3,998 | | | | | 9,958 | | 10,148 | | | |
Other adjustments (10) | | — | | (118) | | | | | (581) | | (392) | | | |
Adjusted EBITDA | | $ | 38,275 | | $ | 37,623 | | $ | 652 | | 1.7 | % | | $ 124,934 | | $ 151,700 | | $ | (26,766) | | (17.6) | % |
Adjusted EBITDA Margin | | 17.9 | % | 18.0 | % | | | | 15.4 | % | 25.6 | % | | |
# - Change greater than 100% or not meaningful |
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(1) | Restructuring costs for the three and nine months ended September 30, 2022 and the three and nine months ended September 30, 2021, respectively, resulted from U.S. store closures and related costs and certain severance payments to eliminate duplicate roles. |
(2) | Legal and other costs for the three and nine months ended September 30, 2022 and the three and nine months ended September 30, 2021, respectively, primarily related to settlement costs related to certain legal matters. |
(3) | The amount reported is our share of Katapult's U.S. GAAP net income or loss, recognized on a one quarter lag. |
(4) | Transaction costs for the three and nine months ended September 30, 2022 relate to, the sale of the Legacy U.S. Direct Lending business, and the acquisition of First Heritage, both of which closed in July 2022.
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(5) | During the three months and nine months ended September 30, 2022, acquisition-related adjustments related to the acquired Heights Finance and First Heritage loan portfolios.
During the three months and nine months ended September 30, 2021, acquisition-related adjustments related to the acquired Flexiti loan portfolio. |
(6) | In connection with our acquisition of Flexiti, we recorded a $11.4 million and $7.61 million adjustment related to the fair value of the contingent consideration for the three and nine months ended September 30, 2022, respectively. We recorded a $3.8 million and $3.8 million adjustment related to the fair value of the contingent consideration for the three and nine months ended September 30, 2021, respectively. |
(7) | The estimated fair value of share-based awards was recognized as non-cash compensation expense on a straight-line basis over the vesting period. |
(8) | Intangible asset amortization in determining ANI for the three and nine months ended September 30, 2022 primarily included amortization of identifiable intangible assets established in connection with the acquisitions of Flexiti, Heights Finance and First Heritage. |
(9) | Cumulative tax effect of adjustments included in Reconciliation of Net income to Adjusted Net Income table is calculated using the estimated incremental tax rate by country. |
(10) | During the three and nine months ended 2021 and during the nine months ended 2022, other adjustments primarily reflect the intercompany foreign-currency exchange impact. |
(11) | Gain on investment in Katapult of $135.4 million recorded during the three and nine months ended September 30, 2021 as a result of its reverse merger with FinServ. |
(12) | On July 30, 2021, we entered into new 7.50% Senior Secured Notes due 2028, which were used on August 12, 2021 to extinguish the 8.25% Senior Secured Notes due 2025. During the three and nine months ended September 30, 2021, $40.2 million from the loss on the extinguishment of debt was due to the early redemption of the 8.25% Senior Secured Notes due 2025. An additional $2.1 million of interest was incurred for the three and nine months ended September 30, 2021, which represents interest on the 8.25% Senior Secured Notes due 2025 for the period between July 30, 2021 and August 12, 2021. This is the period during which the 8.25% Senior Secured Notes and 7.50% Senior Secured Notes were outstanding.
During the three and nine months ended September 30, 2022, $3.1 million of the loss on extinguishment of debt was due to the early extinguishment of the U.S. SPV on July 8, 2022 upon the completion of the divestiture of our Legacy U.S.Direct Lending business to Community Choice Financial, and $0.6 million was due to the extinguishment of the Heights Finance SPV on July 15, 2022. |
(13) | On July 8, 2022, the Company completed the divestiture of its Legacy U.S. Direct Lending business to Community Choice Financial, resulting in a gain of $68.4 million recorded to "Gain on sale of business" in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2022. |
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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 (loss) income include the effect of changes in currency exchange rates. We translate all balance sheet accountsthe unaudited Condensed Consolidated Balance Sheet into U.S. dollars at the currency exchange rate in effect at the end of each period. We translate the statementunaudited Condensed Consolidated Statements of operationsOperations at the average rates of exchange for the period. We record currency translation adjustments as a component of Accumulated Other Comprehensive Incomeother comprehensive loss in Stockholders’ (Deficit) Equity.
Constant Currency Analysis
We have operations in the U.S. and Canada. InFor the three months ended September 30, 2023 and 2022, 47.6% and 2021, 49.8% and 37.1%42.4%, respectively, of our revenues were originated in Canadian Dollars. For the nine months ended September 30, 2023 and 2022, 46.5% and 2021, 36.7% and 34.8%30.6%, respectively, of our revenues were originated in Canadian Dollars. As a result, changes in our reported results include the impacts of changes in foreign currency exchange rates forof the Canadian Dollar.
Income Statement of Operations - Exchange Rate for the three and nine month periods ended September 30, 2023 and 2022
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | 2021 | | $ Change | % Change | | 2022 | 2021 | | $ Change | % Change |
Average Exchange Rates for the Canadian Dollar | 0.7661 | | 0.7941 | | | (0.0280) | | (3.5) | % | | 0.7831 | | $ | 0.7993 | | | ($0.0162) | | (2.0) | % |
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| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2023 | 2022 | | $ Change | % Change | | 2023 | 2022 | | $ Change | % Change | | | | | |
Average Exchange Rates for the Canadian Dollar | 0.7453 | | 0.7661 | | | (0.0208) | | (2.7) | % | | 0.7427 | | 0.7831 | | | (0.0404) | | (5.2) | % | | | | | |
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Balance Sheet - Exchange Rate as of September 30, 20222023 and December 31, 20212022
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| September 30, | December 31, | | Change |
| 2022 | 2021 | | $ | % |
Exchange Rate for the Canadian Dollar | 0.7273 | | 0.7846 | | | (0.0573) | | (7.3) | % |
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| September 30, | December 31, | | Change |
| 2023 | 2022 | | $ | % |
Exchange Rate for the Canadian Dollar | 0.7365 | | 0.7365 | | | 0.0000 | | 0.0 | % |
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The following constant currency analysis removes the impact of the fluctuation in foreign exchange rates and utilizes constant currency results in our analysis of the Canada Direct Lending segment performance.Canadian operations. 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.
We calculated the revenues and gross margin below for our Canadareportable segments during the three and nine months ended September 30, 20222023 using the actual average exchange rate during the three and nine months ended September 30, 20212022 (in thousands, unaudited)thousands).
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | 2021 | | $ Change | % Change | | 2022 | 2021 | | $ Change | % Change |
Canada Direct Lending – constant currency basis: | | | | | | | | | |
Revenues | | $ | 81,861 | | 66,190 | | | $ | 15,671 | | 23.7 | % | | $ | 231,862 | | 186,510 | | | $ | 45,352 | | 24.3 | % |
Net revenue | | 47,653 | | 52,187 | | | (4,534) | | (8.7) | % | | 148,612 | | 154,717 | | | (6,105) | | (3.9) | % |
Segment operating income | | 12,448 | | 23,744 | | | (11,296) | | (47.6) | % | | 46,549 | | 71,334 | | | (24,785) | | (34.7) | % |
Canada POS Lending – constant currency basis(1): | | | | | | | | | |
Revenues | | $ | 28,743 | | 11,416 | | | $ | 17,327 | | 151.8 | % | | $ | 73,133 | | 20,054 | | | $ | 53,079 | | 264.7 | % |
Net revenue | | 14,825 | | 3,131 | | | 11,694 | | 373.5 | % | | 44,227 | | 7,927 | | | 36,300 | | 457.9 | % |
Segment operating income (loss) | | 405 | | (17,059) | | | 17,464 | | (102.4) | % | | (21,967) | | (29,789) | | | 7,822 | | (26.3) | % |
(1) The totals reported for the nine months ended September 30, 2021 include results from the date of acquisition, March 10, 2021, through September 30, 2021. |
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | 2022 | | $ Change | % Change | | 2023 | 2022 | | $ Change | % Change |
Constant currency basis: | | | | | | | | | | |
Revenues | | $ | 171,544 | | $ | 186,409 | | | $ | (14,865) | | (8.0) | % | | $ | 515,910 | | $ | 737,547 | | | $ | (221,637) | | (30.1) | % |
Net revenue | | 121,459 | | 121,389 | | | 70 | | 0.1 | % | | 350,988 | | 460,126 | | | (109,138) | | (23.7) | % |
Loss before income taxes | | (31,380) | | 42,826 | | | (74,206) | | (173.3) | % | | (112,165) | | 34,207 | | | (146,372) | | (427.9) | % |
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We calculated gross loans receivable for our Canadareportable segments below as of September 30, 20222023 using the actual exchange rate as of December 31, 20212022 (in thousands, unaudited)thousands).
| | | September 30, | | December 31, | | Change | | September 30, | | December 31, | | Change |
| | 2022 | | 2021 | | $ | % | | 2023 | | 2022 | | $ | % |
Canada Direct Lending – constant currency basis: | | | |
Gross loans receivable | | $ | 501,969 | | | $ | 427,197 | | | $ | 74,772 | | 17.5 | % | |
Canada POS Lending – constant currency basis: | | |
Constant currency basis: | | Constant currency basis: | | |
Gross loans receivable | Gross loans receivable | | $ | 745,056 | | | $ | 459,176 | | | $ | 285,880 | | 62.3 | % | Gross loans receivable | | $ | 1,254,401 | | | $ | 1,254,395 | | | $ | 6 | | — | % |
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LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity to fund the loans we make to our customers are (i) cash provided by operationsand (ii) our revolving credit facilities and our non-recourse funding facilities, as further described in Note 5, "Debt"6, "Debt" of the Notes to the unaudited Condensed Consolidated Financial Statements. Historically, we also used funds from third-party lenders under our CSO programs. As a result of the sale of the Legacy U.S. Direct Lending business on July 8, 2022, we no longer guarantee loans originated by third-party lenders through CSO programs.
As of September 30, 2022, we were in compliance with all financial ratios, covenants and other requirements in our debt agreements. We anticipate that our primary useuses of cash will be to fund growth in our working capital, finance capital expenditures to further our growthbusiness strategy in both the U.S. and Canada and meet our debt service obligations. We may also use cash for potential strategic investments in and acquisitions of other companies that help us extend our reach and product portfolio. Additionally, we may use cash to fund a return on capital for our stockholders through share repurchase programs, or in the form of dividends. Our Board of Directors authorized a $25.0 million share repurchase program in February 2022, under which no shares have been repurchased to date. Refer to Note 15,16, "Share Repurchase Program" of the Notes to the unaudited Condensed Consolidated Financial Statements for further details of our share repurchases. The Board of Directors suspended the program.quarterly dividend payment in October 2022.
Our level of cash flow provided by operating activities typically experiences seasonal fluctuations 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 to the extent we experience any short-term or long-term funding shortfalls, such as tightening our credit approval practices, (as we did during the COVID-19 pandemic), which has the effect of reducing cash outflow requirements while increasingmaintaining cash inflows through loan repayments.
Our credit agreements contain performance and financial covenants (both at the parent and SPV level), including restrictions on indebtedness, liens, restricted payments and dividends, investments, asset sales and similar covenants, and contain customary events of default.
We may also sell or securitize our assets, draw on our available revolving credit facilities or lines of credit, enter into additional refinancing agreements or reduce our capital spending to generate additional liquidity. The impacts to cash as described in "—Cash"Cash Flows" below and other factors resulted in our available unrestricted cash on hand of $45.7$82.6 million as of September 30, 2022.2023. We believe our cash on hand, and available borrowings and cash provided by other sources should provide us with sufficient liquidity for at least the next 12 months.
Our recent acquisitionsAs of First HeritageSeptember 30, 2023, we were in compliance with all financial ratios, covenants and Heights Finance have increasedother requirements in our product offerings to include customers in the near-prime and prime space. The acquisition of First Heritage and Heights Finance accelerates our strategic transition in the U.S. toward longer term, higher balance and lower rate credit products and provides us with access to a larger addressable market while mitigating regulatory risk. These initiatives to expand our product offerings and grow the U.S. and Canada businesses could materially impact our future cash flows. For further information regarding the acquisitions, refer to Note 1, "Summary of Significant Accounting Policies and Nature of Operations,"Note 13, "Goodwill," and Note 14,"Acquisitions and Divestiture" of the Notes to the unaudited Condensed Consolidated Financial Statements.
We have no additional material commitmentsdebt agreements or demands that are likely to affect our liquidity.had received any necessary waivers.
Debt Capitalization Summary
(in thousands, except capacity, net of deferred financing costs)
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| | Capacity | Interest Rate | Maturity | Balance as of September 30, 2022 (in USD) | | |
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7.50% Senior Secured Notes (due 2028) (2) | | $1.0 billion | 7.50% | August 1, 2028 | $ | 982,331 | | | |
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Heights SPV | | $425.0 million | 1-Mo SOFR + 4.25% | July 15, 2024 | 388,013 | | | |
First Heritage SPV | | $225.0 million | 1-Mo SOFR + 4.25% | July 13, 2024 | 178,403 | | | |
Canada SPV(1) | | C$400.0 million | 3-Mo CDOR + 6.00% | August 2, 2026 | 256,200 | | | |
Flexiti SPV(1) | | C$535.0 million | Weighted average interest rate (3) 8.07% | September 29, 2025 | 264,333 | | | |
Flexiti Securitization(1) | | C$526.5 million | 1-Mo CDOR + 3.59% | December 9, 2025 | 380,036 | | | |
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(1) Capacity amounts are denominated in Canadian dollars, while outstanding balances as of September 30, 2022 are denominated in U.S. dollars. | | |
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(2) On July 30, 2021, we closed our $750 million aggregate principal amount of new 7.50% Senior Secured Notes, which was used to redeem our $690.0 million 8.25% Senior Secured Notes due 2025. On December 27, 2021, we issued an additional $250.0 million of our 7.50% Senior Secured Notes for a total capacity of $1.0 billion. | | |
(3) The weighted average interest rate does not include the impact of the amortization of deferred loan origination costs or debt discounts.
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| | Capacity | Interest Rate | Maturity | Balance as of September 30, 2023 (in USD) | | |
Corporate Debt: | | | | | | | |
1.0L 18.00% Senior Secured Term Loan | | | 18.00% | August 2, 2027 | $ | 154,401 | | | |
1.5L 7.50% Senior Secured Notes (due 2028) | | | 7.50% | August 1, 2028 | 671,922 | | | |
2.0L 7.50% Senior Secured Notes (due 2028) | | | 7.50% | August 1, 2028 | 312,870 | | | |
Funding Debt: | | | | | | | |
Heights SPV | | $425.0 million | 1-Mo SOFR + 5.42% | July 15, 2025 | 419,521 | | | |
First Heritage SPV | | $225.0 million | 1-Mo SOFR + 4.25% | July 13, 2025 | 150,104 | | | |
Canada SPV(1) | | C$400.0 million | 3-Mo CDOR + 6.00% | August 2, 2026 | 243,066 | | | |
Canada SPV II(1) | | C$110.0 million | 3-Mo CDOR + 8.00% | November 12, 2025 | 73,050 | | | |
(1) Capacity amounts are denominated in Canadian dollars, while outstanding balances as of September 30, 2023 are denominated in U.S. dollars. | | |
Refer to Note 5,6, "Debt," for details on each of our credit facilities and resources.
Cash Flows
The following highlights our cash flow activity and the sources and uses of funding during the periods indicated (in thousands):
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| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Net cash provided by continuing operating activities | | $ | 295,731 | | | $ | 220,710 | |
Net cash used in investing activities | | (629,292) | | | (283,396) | |
Net cash provided by financing activities | | 367,650 | | | 66,707 | |
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| | Nine Months Ended September 30, |
| | 2023 | | 2022 | | |
Net cash provided by continuing operating activities | | $ | 38,106 | | | $ | 250,098 | | | |
Net cash used in continuing investing activities | | (117,809) | | | (338,881) | | | |
Net cash provided by continuing financing activities | | 105,965 | | | 85,300 | | | |
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Nine Months Ended September 30, 2023 and 2022
Continuing Operating Activities
Net cash provided by continuing operating activities for the nine months ended September 30, 20222023 was $295.7$38.1 million, which is primarily attributable to net income of $0.9 million, the effect of non-cash reconciling items of $254.0$233.0 million, which primarily included $161.1 million of provision for credit losses, $22.5 million of deferred income taxes and $16.1 million of depreciation and amortization, offset by a net loss from continuing operations of $142.6 million and changes in our operating assets and liabilities of $40.8$52.3 million. Our non-cash reconciling items of $254.0 million primarily included $305.5 million of provision for losses and $28.0 million of depreciation and amortization, offset by the gain on the disposal of our Legacy U.S. Direct Lending business of $68.4 million . Our changes in operating assets and liabilities of $40.8$52.3 million were primarily related to $54.3$34.1 million of lower accounts payable and accrued liabilities as a result of timing on the settlement of certain accruals and (ii) $17.8 million of lower accrued interest, partially offset by $86.9higher income taxes receivable $4.6 million of lower accrued interest on our gross loans receivable and $17.6$12.5 million of lower accrued interest, offset by $17.9 million of higher income taxes receivable.accounts payable and accrued liabilities.
Continuing Investing Activities
Net cash used in continuing investing activities for the nine months ended September 30, 20222023 was $629.3$117.8 million, primarily due to net origination of loans for continuing investing activities of $752.0 million. In$106.6 million, in addition we usedto cash to purchase $35.3$9.2 million of property, equipment and software an increaseand a $2.0 million reduction to the gain on sale from the prior year due to the acquisitionsdivestiture of Flexiti, Heights Finance and First Heritage.Legacy U.S. Direct Lending Business in July 2022 based on expected uncollectible amounts.
Continuing Financing Activities
Net cash provided by continuing financing activities for the nine months ended September 30, 20222023 was $367.7$106.0 million primarily due to $407.6$115.0 million in net proceeds from credit facilities due to the 1.0L 18.00% Senior Secured Term Loan offset by the payoff of the Senior Revolver in May of 2023, and $19.8 million of net proceeds from our non-recourse debt facilities, partially offset by (i) $13.5$27.4 million of share repurchases in the first quarter of 2022 and (ii) $13.7 million of cash dividends.debt issuance costs paid.
Critical Accounting Policies and Estimates
There have been no material changes to the information onWe describe our critical accounting estimates describedused in the preparation of our consolidated financial statements in Part II - Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates, in our 20212022 Form 10-K, which information is incorporated by reference herein.10-K. We consider the following policies to be our most critical accounting policies because they involve critical accounting estimates and a significant degree of management judgment:
•ACL,
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.business combinations and considerations and
•goodwill.
Our reporting units consist of the U.S., Canada Direct Lending and Canada POS Lending segments, 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, 2021), the U.S., Canada Direct Lending, and Canada POS Lending reporting units' estimated fair values exceeded their carrying value. As describedThere has been one change in our 2021critical accounting policies from those disclosed in our 2022 Form 10-K an impairment would occur ifrelated to adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendments to 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 changeguidance: ASU 2018-19 in the business climate, a changeNovember 2018, ASU 2019-04 in strategic direction, legal factors, operating performance indicators, a changeApril 2019, ASU 2019-05 in the competitive environment, the sale or divestiture of a significant portion of a reporting unit or economic outlook. TheseMay 2019, ASU 2019-10 and other macroeconomic factors were considered when performing the annual test as of October 1, 2021.-11 in November 2019, ASU 2020-02 in February 2020 and ASU 2022-02 in March 2022.
ForAllowance for Credit Losses
We adopted ASC 326 for measurement of current expected credit losses on January 1, 2023. CECL is not prescriptive in the three months ended September 30, 2022, we reviewed goodwillmethodology used to determine the expected credit loss estimate. Therefore, management has flexibility in selecting the methodology. However, the expected credit losses must be estimated over a financial asset's remaining expected life, adjusted for triggeringprepayments, utilizing quantitative and qualitative factors. The estimate of current expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable economic forecasts that would indicate a need for an interim quantitative or qualitative assessment of goodwill impairment. As a resultaffect the collectability of the review, no additional assessment was deemed necessary, and thus there was no goodwill impairmentreported amounts. Historical loss experience is the starting point for any reporting unit.
There continues to be uncertainty surrounding macroeconomic factors that could impact our reporting units. Changes in theestimating expected length of the current economic downturn, timing of recovery, or long-term revenue growth or profitability for these reporting units could increase the likelihood of a future goodwill 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.
credit losses. Adjustments are
made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards, portfolio mix or asset terms, and differences in economic conditions - both current conditions and reasonable and supportable forecasts. When we are not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset, we have estimated expected credit losses for the remaining life after the forecasted period using an approach that reverts to historical credit loss information.
We begin consideration of credit losses by determining loan groups of similar qualitative criteria. We identified seven loan groups based on qualitative factors including, financial asset type, loan term, size, geographic location and risk ratings. The following table summarizesloan groups are further disaggregated and analyzed by number of days past due. We selected a static pool Probability of Default (“PD”) / Loss Given Default (“LGD”) / Exposure at Default ("EAD") model to estimate base allowance for credit losses, in which the segment allocationestimated loss is equal to the product of PD, LGD and EAD. Each of these methods use historical loss experience to forecast expected credit losses. Historical information about losses generally provides a basis for the estimate of expected credit losses. We also consider the need to adjust historical information to reflect the extent to which current conditions differ from the conditions that existed for the period over which historical information was evaluated. These adjustments to historical loss information may be qualitative or quantitative in nature.
Reasonable and supportable macroeconomic forecasts are required for the ACL model. We review macroeconomic forecasts to use in ACL. The projected change in creditworthiness is modeled using Congressional Budget Office data, such as unemployment rate, labor participation rate and personal income. We adjust the historical loss experience by relevant qualitative factors for these expectations.
As loans receivable are originated, provisions for credit losses are recorded goodwillin amounts sufficient to maintain an ACL at an adequate level to provide for estimated losses over the remaining expected life of the finance receivables. Subsequent changes to the contractual terms that are a result of re-underwriting are not included in the loans receivable’s expected life. We use our historical loss experience and macroeconomic factors to forecast expected credit losses.
While we utilize a systematic methodology in determining our allowance, the allowance is based on our unaudited Condensed Consolidated Balance Sheetsestimates, and ultimate losses may vary from current estimates. The estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known.
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(in thousands) | September 30, 2022 | Percent of Total | | December 31, 2021 | Percent of Total |
U.S. (1) | $ | 359,392 | | 84.7 | % | | $ | 359,779 | | 83.7 | % |
Canada Direct Lending | 27,906 | | 6.6 | % | | 30,105 | | 7.0 | % |
Canada POS Lending | 36,994 | | 8.7 | % | | 39,908 | | 9.3 | % |
Total Goodwill | $ | 424,292 | | | | $ | 429,792 | | |
(1) Changes in Goodwill between December 31, 2021 and September 30, 2022 are primarily due to the acquisition of First Heritage, offset by the sale of the Legacy U.S. Direct Lending business, refer to FN 14 "Acquisitions and Divestitures".
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Significant Accounting Policies and Nature of Operations" for additional information.
Regulatory Environment and Compliance
There have been no significant developments with respect to our regulatory environment and compliance since December 31, 2021,2022, as described in our 20212022 Form 10-K except for the following:following, which we disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023:
CFPB Supervisory AuthorityCanada Regulations
The CFPB is expanding its supervisory authority using its Dormant Authority provided for in the Dodd-Frank Act. On April 25, 2022, the CFPB (or “Bureau”) announced that it will begin conducting supervisory examinations of non-bank financial entities (e.g., FinTechs) not currently subject to supervisionUnsecured Installment Loans and enforcement, if the Bureau believes the companies may be posing risks to consumers. The Bureau is also signaling that it may decide to publicly disclose some of its new supervisory activity so that other entities can be informed of areas the Bureau finds problematic. In the same announcement, the Bureau indicated that it is seeking public comments on a procedural rule to make the examination process more transparent.Revolving LOC Loans
CFPB Consumer ReviewsUnsecured Installment loans and Revolving LOC loans products are regulated at both the federal and provincial level in Canada. At the federal level, such lending products are subject to the criminal rate of interest provisions of the Criminal Code, which prohibits receiving (or entering into an agreement to receive) interest at an Effective Annual Rate that exceeds 60% on the credit advanced under the loan agreement. These provisions have been in place since 1980. In March 2023, the federal government of Canada announced, in connection with its proposed federal budget, its intent to introduce legislation to reduce the maximum allowable rate of interest under its criminal code from an Effective Annual Rate of 60%, or annual percentage rate of 47%, to 35%. While the 2023 Budget includes language effectuating this change, we are waiting for the final regulations to be proposed, a comment period to pass and final regulations presented before any final rule or law will be effective. In addition, there may be an implementation period before the industry will need to adhere to the new law. Further, a new consultation period has begun wherein the federal government is looking into whether the criminal rate cap should be further reduced below the yet not implemented new 35% rate cap. Any further reduction in the rate cannot be by regulation and would have to proceed through the traditional legislative process. We are currently in the comment period in response to the consultation, which will close November 30, 2023.
On March 22,However, we expect this legislation, if adopted in its current form and/or if further reduction is required, would adversely affect the pricing for newly originated loans and may require us to reevaluate our underwriting criteria. We expect that our results of operations would be adversely impacted as a result. See the Risk Factors in our 2022 the CFPB issued a compliance bulletinForm 10-K for financial companies and their service providers warning that restricting consumer reviews, silencing consumer reviews, pressuring consumers to remove a review, or posting fake reviewsmore information on how changes in regulations such as this change can violate the Consumer Review Fairness Act as well as constitute a UDAAP.adversely impact our business.
CFPB Anti-Discrimination
On March 16, 2022, CFPB announcedWe are also subject to provincial legislation that it was expanding its anti-discrimination efforts in all consumer finance markets. The announcement clarified that discrimination can be “unfair” and trigger UDAAP even though the discriminatory action could be covered under the Equal Credit Opportunity Act or another law. The CFPB updated its examination procedures manual for UDAAPrequires lenders to examine decision-making processes for assessing discriminatory risk and outcomes, including advertising, pricing, and other areas.
CFPB and Consumer Data Privacy
The CFPB continues to focus on protecting consumer information. On July 7, 2022, the CFPB issued an advisory opinion stating that usersprovide cost of credit reports have an obligationdisclosures and extend consumer protection rights to protectcustomers, such as prepayment rights, and prohibits the public’s data privacy and reminding userscharging of the criminal liability provisions of the Fair Credit Reporting Act (“FCRA”). Further, on August 11, 2022, the CFPB issued Circular 2022-04 which states that financial companies may violate Federal consumer financial protection laws if they fail to safeguard customer data.
2017 and 2020 Final CFPB Rules Update
On October 19, 2022, the Fifth Circuit U.S. Court of Appeals handed down a decision invalidating the balance of the 2017 and 2020 Final CFPB Rule on the basis that the CFPB’s funding mechanism is unconstitutional. Specifically, the Fifth Circuit ruled that the CFPB’s funding structure violates the Constitution because the CFPB does not receive its funding from annual congressional appropriations, but instead receives funding directly from the Federal Reserve based on a request from the CFPB’s director. Thus, while Congress properly authorized the CFPB to promulgate the 2017 and 2020 Final Rule, the CFPB itself did not have the ability to exercise that power via constitutionally appropriated funds. Following this logic, the Fifth Circuit ruled that the appropriate remedy for the resulting harm due to this improper use of unappropriated funds in conducting the rulemaking associated with the 2017 and 2020 Final CFPB Rule was to nullify the CFPB’s action. We anticipate the CFPB will appeal this decision to either an en banc Fifth Circuit or the Supreme Court.certain default fees.
In addition, some provinces have enacted legislation that regulates high-cost lenders. These laws define a high-cost credit product and require licensing and additional consumer protection oversight.
Single-Pay
Canadian federal legislation exempts from the criminal rate of interest provisions of the Criminal Code cash advance loans of $1,500 or less if the term of the loan is 62 days or less (“payday loans”) and the lender is licensed under provincial legislation as a short-term cash advance lender and the province has been designated under the Criminal Code. In March 2023, the federal government of Canada announced in connection with its proposed Federal budget its intent to create regulations to set the maximum charge on payday loans in any province where payday loans are regulated. Similar to the above, we await final language and effective date decisions by the Canadian government.
Check Cashing
In Canada, the federal government generally does not regulate check cashing businesses, other than federally regulated financial institutions (and other than the prohibition noted above regarding charging or receiving in excess of 60% annual interest rate on the credit advanced for the fee of a check cashing transaction), nor do most provincial governments impose regulations specific to the check cashing industry. There are some minor exceptions in various provinces.
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 20212022 Form 10-K. There have been no material changes to the quantitative and qualitative information presented therein.
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 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.
In conducting the evaluation of the effectiveness of its internal control over financial reporting as of September 30, 2022, the Company has excluded the operations of Heights Finance and First Heritage as permitted by the guidance issued by the Office of the Chief Accountant of the SEC (not to extend more than one year beyond the date of the acquisition or for more than one annual reporting period). The Heights Finance acquisition was completed on December 27, 2021. As of September 30, 2022, Heights Finance's assets represented approximately 30.0% of the Company’s consolidated assets and for the three and nine months ended September 30, 2022, its revenues represented approximately 31.2% and 25.6% respectively of the Company’s consolidated revenues. The First Heritage acquisition was completed on July 13, 2022. As of September 30, 2022, First Heritage's assets represented approximately 11.8% of the Company’s consolidated assets and for the three and nine months ended September 30, 2022, its revenues represented approximately 11.9% and 3.2% respectively of the Company’s consolidated revenues.
See Note 14,13,"Acquisitions and Divestiture"Divestitures" of the Notes to the unaudited Condensed Consolidated Financial Statements for additional details on our acquisition of Heights Finance and First Heritage and its impact on our unaudited Condensed Consolidated Financial Statements.
Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by our management, with the participation of the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures were effective as of September 30, 2022.2023.
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.
Changes in Internal Control over Financial Reporting
During the third quarter of 2023, we completed our migration of all U.S. Direct Lending loans to one consolidated loan management system. The Company is workingmigration was performed in the ordinary course of business to integrate Heights Finance and First Heritage into its overall internal control over financial reporting processes. Additionally, on March 10, 2021, the Company acquired Flexiti. See Note 14,"Acquisitions and Divestiture"standardize technology used for purposes of the Notes to the unaudited Condensed Consolidated Financial Statements for additional details. The Company continued the process of refining financial reporting controls on the operations associated with Flexiti as of September 30, 2022. Except for changes made inloan
management. In connection with the integrationmigration, where applicable, modifications were made to the design of Heights Financethe control environment associated with the new loan management system and First Heritage, thererelated technology.
During the third quarter of 2023, as part of the preparation of the discontinued operations presentation in the consolidated financial statements as a result of the sale of Flexiti, we implemented changes to internal controls to meet the related reporting and disclosure requirements.
There were no other 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 monthsquarter ended September 30, 2022,2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item is included in Note 11,7, "Commitments and Contingencies" 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 wereAside from the items listed below, there have been no material changes to ourthe risk factors as describedpreviously disclosed in our 20212022 Form 10-K and in our Form 10-Q for the yearquarter ended DecemberMarch 31, 2021.2023.
There can be no assurance that we will be able to comply with the continued listing standards of the NYSE.
On October 16, 2023, we received written notice from the NYSE that we were not in compliance with the continued listing criteria set forth in Section 802.01B of the NYSE's Listed Company Manual with respect to the minimum market capitalization and shareholders' equity requirements. We are committed to regaining and maintaining compliance with the continued listing standards within the 18-month cure period following receipt of notice.
On October 27, 2023, we received written notice from the NYSE that we are not in compliance with the continued listing criteria set forth in 802.01C of the NYSE's Listed Company Manual with respect to stock price requirements. We are committed to regaining and maintaining compliance with the continued listing standards within the six-month cure period. The Company has a period of six months following the receipt of this notice to regain compliance. As a result, the Company has until April 27, 2024 to regain compliance. If we determine that in order to cure the price condition it is necessary to take an action that requires shareholder approval, we must obtain shareholder approval no later than our 2024 annual meeting and must implement the action promptly thereafter.
There can be no assurance that we will be able to comply with the continued listing standards of the NYSE. Our common stock is currently listed on the NYSE. If the NYSE delists our securities from trading on its exchange for failure to meet the listing standards, we and our stockholders could face significant material adverse consequences including:
•a limited availability of market quotations for our securities;
•a determination that the common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the common stock;
•a limited amount of analyst coverage; and
•a decreased ability to issue additional securities or obtain additional financing in the future.
If we fail to regain and maintain compliance with the NYSE continued listing standards, including but not limited to the above, the NYSE may take steps to delist our securities. There can be no assurance that we will continue to meet the minimum market capitalization, shareholders' equity, stock price requirements or any other NYSE listing requirement in the future. If our common stock was to be delisted, the liquidity of our common stock would be adversely affected, our market prices could decrease and our ability to raise equity capital and our reputation and relationships with business partners could be materially impaired.
The outcome of a CFPB civil complaint regarding certain of Heights’s business practices is uncertain and could materially and adversely affect our business.
The CFPB has filed a complaint against Heights related to certain business practices before we acquired it.
Refer to Note 7, "Commitments and Contingencies" for information related to this complaint. The complaint is in its early stages and we are unable to predict the ultimate timing or outcome of the CFPB investigation. The former owners of Heights agreed to indemnify us for certain losses arising after the consummation of the transaction, including relating to underlying matters in the CFPB complaint.
The indemnification obligations of the former owners of Heights are limited to an indemnity holdback of $10 million cash plus $20 million of CURO stock valued as of the date of close, which was escrowed at the closing of the transaction, and will be the Company’s sole recourse against the former owners of Heights with respect to all of the indemnifiable claims under the definitive transaction agreement. The value of the stock portion of the escrow as of September 30, 2023 is $1.2 million.
We can provide no assurance that the escrowed amount will be sufficient to address all covered losses related to this matter. However, the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements or changes to our business practices or operations could materially and adversely affect the Company’s business, financial condition, results of operations or reputation.
We face risks associated with our business strategy, including those related to acquisitions and dispositions.
We have expanded our products and markets in part through strategic acquisitions, including the acquisitions of Heights and First Heritage. Acquisitions involve numerous risks, including risks inherent in entering new markets in which we may not have prior experience; failure to advance our strategic objectives or generate satisfactory synergies or return on investment; potential loss of significant customers or key personnel of the acquired business; not obtaining the expected benefits of the acquisition on a timely basis or at all; managing geographically-remote operations or different technology platforms; or potential diversion of management's attention from other aspects of our business operations.
Acquisitions may also cause us to incur debt or result in dilutive issuances of equity securities, additional write-offs of goodwill and substantial amortization expenses associated with acquired intangible assets. We may not be able to obtain financing for future acquisitions on favorable terms, making any such acquisitions more expensive. Any such financing may have terms that restrict our operations. In addition, acquisitions may involve unanticipated costs and liabilities, including litigation and new or increased regulatory exposure, which may not be covered, either in part or full, by indemnity or escrow provisions in the acquisition agreements. We may not be able to successfully integrate the operations of any acquired businesses into our operations and achieve the expected benefits of any acquisitions. The failure to successfully integrate newly acquired businesses or achieve the expected benefits of strategic acquisitions in the future, or consummate a potential acquisition after incurring material costs, could have an adverse effect on our business, results of operations and financial position.
As business circumstances dictate, we may also decide to dispose of assets or businesses. We may not be successful in identifying or managing the risks involved in any divestiture, including our ability to obtain a reasonable purchase price for the assets, potential liabilities that may continue to apply to us following the divestiture, potential tax implications, employee issues or other matters. Our inability to address these risks could adversely affect our business, results of operations and financial condition.
In addition, our interest in deferred consideration received from dispositions may not be fully realizable. As partial consideration for the disposition of assets, we may receive certain deferred cash arrangements, such as we did in the disposition of our Legacy U.S. Direct Lending Business. We are currently involved in litigation matters related to amounts due in connection with the sale of the Legacy U.S. Direct Lending Business and we can provide no assurance that we will be able to realize the full value of the deferred consideration in such transaction.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales or issuer repurchases of our common stock during the period covered by this Quarterly Report on Form 10-Q.
Issuer Purchases of Equity Securities
In May 2021, our Board of Directors authorized a share repurchase program providing for the repurchase of up to $50.0 million of our common stock. The program commenced in June 2021 and was completed in February 2022. In February 2022, our Board of Directors authorized a new share repurchase program for the repurchase of up to $25.0 million of CURO common stock. There were no repurchases under this program as of September 30, 2022.
The following table provides information with respect to repurchases we made of our common stock during the quarter ended September 30, 2022.
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Period | Total Number of Shares Purchased(1) | 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 (in millions) |
July 2022 | 11,586 | | $ | 6.21 | | — | | $ | — | |
August 2022 | 2,774 | | $ | 7.92 | | — | | — | |
September 2022 | 213 | | $ | 5.84 | | — | | — | |
Total | 14,573 | | $ | 10.54 | | — | | $ | — | |
(1) Includes shares withheld from employees as tax payments for shares issued under our stock-based compensation plans. See Note 11, "Share-based compensation" of the 2021 Form 10-K for additional details on our stock-based compensation plans. |
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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.
(b) Material Changes to Director Nominee Procedures
None.
Item 6. Exhibits
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Exhibit no. | | Exhibit Description | Filed/Incorporated by Reference from Form | Incorporated by Reference from Exhibit Number | Filing Date |
2.1 | | | 8-K | 2.1 | 5/19/2022 |
2.2 | | Agreement and Plan of Merger, dated as of May 18, 2022, among CURO Group Holdings Corp,. Sugarcane Sub, LLC, First Heritage Credit, LLC and Ernest L. Coward, Jr., solely in his capacity as Member Representative. Previously filed as an exhibit to the Company's Form 8-K filed May 19, 2022. | 8-K | 2.2 | 5/19/2022 |
3.1 | | | 10-Q | 10.1 | 8/5/2020 |
3.2 | | | 8-K | 3.2 | 12/11/17 |
4.1 | | | S-1 | 4.1 | 11/28/17 |
4.2 | | | S-1 | 4.2 | 11/28/17 |
4.3 | | | S-1 | 4.3 | 5/17/18 |
10.1 | | | Filed herewith | | |
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31.1 | | | Filed herewith | | |
31.2 | | | Filed herewith | | |
32.1 | | | Filed herewith | | |
101 | | The following unaudited financial information from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2022, filed with the SEC on May 3, 2022, formatted in Extensible Business Reporting Language (“XBRL”) includes: (i) Condensed Consolidated Balance Sheets at September 30, 2022 and December 31, 2021, (ii) Condensed Consolidated Statements of Operations for the three months ended September 30, 2022 and 2021, (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2022 and 2021, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, and (v) Notes to Condensed Consolidated Financial Statements* | Filed herewith | | |
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Exhibit no. | | Exhibit Description | Filed/Incorporated by Reference from Form | Incorporated by Reference from Exhibit Number | Filing Date |
2.1 | | | 8-K/A | 2.1 | 8/3/2023 |
2.2 | | | 8-K | 2.2 | 9/5/2023 |
3.1 | | | 10-Q | 10.1 | 8/5/2020 |
3.2 | | | 8-K | 3.2 | 12/11/17 |
4.1 | | | S-1 | 4.1 | 11/28/17 |
4.2 | | | S-1 | 4.2 | 11/28/17 |
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31.1 | | | Filed herewith | | |
31.2 | | | Filed herewith | | |
32.1 | | | Filed herewith | | |
101 | | The following unaudited financial information from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2023, filed with the SEC on November 2, 2023, formatted in Extensible Business Reporting Language (“XBRL”) includes: (i) Condensed Consolidated Balance Sheets at September 30, 2023 and December 31, 2022, (ii) Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2023 and 2022, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended September 30, 2023 and 2022, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 and (v) Notes to Condensed Consolidated Financial Statements* | Filed herewith | | |
* | | Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish supplementally to the SEC a copy of any omitted schedule or exhibit upon request by the SEC. |
Signature
Pursuant to the requirements 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: November 2, 20222023 CURO Group Holdings Corp.
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| By: | /s/ Roger DeanIsmail Dawood | |
| | Roger DeanIsmail Dawood | |
| | Executive Vice President and Chief Financial Officer |