10-Q 1 enva-10q_20170930.htm 10-Q enva-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

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 1-35503

 

Enova International, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

45-3190813

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

175 West Jackson Blvd.

Chicago, Illinois

 

60604

(Address of principal executive offices)

 

(Zip Code)

(312) 568-4200

(Registrant’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes      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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

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 Exchange Act). Yes      No  

33,464,780 of the Registrant’s common shares, $.00001 par value, were outstanding as of October 30, 2017.

 

 


CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. These forward-looking statements give current expectations or forecasts of future events and reflect the views and assumptions of senior management with respect to the business, financial condition, operations and prospects of Enova International, Inc. and its subsidiaries (collectively, the “Company”). When used in this report, terms such as “believes,” “estimates,” “should,” “could,” “would,” “plans,” “expects,” “intends,” “anticipates,” “may,” “forecast,” “project” and similar expressions or variations as they relate to the Company or its management are intended to identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties that are beyond the ability of the Company to control and, in some cases, predict. Accordingly, there are or will be important factors that could cause the Company’s actual results to differ materially from those indicated in these statements. Key factors that could cause the Company’s actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements include, but are not limited to, the following:

 

the effect of laws and regulations targeting our industry that directly or indirectly regulate or prohibit our operations or render them unprofitable or impractical;

 

the effect of and compliance with domestic and international consumer credit, tax and other laws and government rules and regulations applicable to our business, including changes in such laws, rules and regulations, or changes in the interpretation or enforcement thereof, and the regulatory and examination authority of the Consumer Financial Protection Bureau with respect to providers of consumer financial products and services in the United States and the Financial Conduct Authority in the United Kingdom;

 

changes in our United Kingdom (“U.K.”) business practices in response to the requirements of the Financial Conduct Authority;

 

the effect of and compliance with enforcement actions, orders and agreements issued by applicable regulators, such as the November 2013 Consent Order issued by the Consumer Financial Protection Bureau;

 

our ability to process or collect payments through the Automated Clearing House system;

 

the deterioration of the political, regulatory or economic environment in countries where we operate or in the future may operate;

 

the actions of third parties who provide, acquire or offer products and services to, from or for us;

 

public and regulatory perception of the consumer loan business, the receivables purchases industry and our business practices;

 

the effect of any current or future litigation proceedings and any judicial decisions or rulemaking that affects us, our products or the legality or enforceability of our arbitration agreements;

 

changes in demand for our services, changes in competition and the continued acceptance of the online channel by our customers;

 

changes in our ability to satisfy our debt obligations or to refinance existing debt obligations or obtain new capital to finance growth;

 

a prolonged interruption in the operations of our facilities, systems and business functions, including our information technology and other business systems;

 

our ability to maintain an allowance or liability for estimated losses on loans and finance receivables that is adequate to absorb losses;

 

compliance with laws and regulations applicable to our international operations, including anti-corruption laws such as the Foreign Corrupt Practices Act and the U.K. Bribery Act 2010 and international anti-money laundering, trade and economic sanctions laws;

 

our ability to attract and retain qualified officers;

 

interest rate and foreign currency exchange rate fluctuations;

 

the time and costs associated with our exit from the Canadian and Australian markets;

 

cyber-attacks or security breaches;

 

acts of God, war or terrorism, pandemics and other events;

 

the ability to successfully integrate acquired businesses into our operations;

 

changes in the capital markets, including the debt and equity markets;

 

the effect of any of the above changes on our business or the markets in which we operate; and

 

other risks and uncertainties described herein.


The foregoing list of factors is not exhaustive and new factors may emerge or changes to these factors may occur that would impact the Company’s business and cause actual results to differ materially from those expressed in any of our forward-looking statements. Additional information regarding these and other factors may be contained in the Company’s filings with the Securities and Exchange Commission (the “SEC”). Readers of this report are encouraged to review all of the Risk Factors contained in the Company’s filings with the SEC to obtain more detail about the Company’s risks and uncertainties. All forward-looking statements involve risks, assumptions and uncertainties. The occurrence of the events described, and the achievement of the expected results, depends on many events, some or all of which are not predictable or within the Company’s control. If one or more events related to these or other risks or uncertainties materialize, or if management’s underlying assumptions prove to be incorrect, actual results may differ materially from what the Company anticipates. The forward-looking statements in this report are made as of the date of this report, and the Company disclaims any intention or obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of this report. All forward-looking statements in this report are expressly qualified in their entirety by the foregoing cautionary statements.

 

 


ENOVA INTERNATIONAL, INC.

INDEX TO FORM 10-Q

 

 

 

 

  

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

 

Financial Statements (Unaudited)

  

 

 

 

Consolidated Balance Sheets – September 30, 2017 and 2016 and December 31, 2016

  

1

 

 

Consolidated Statements of Income – Three and Nine Months Ended September 30, 2017 and 2016

  

2

 

 

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2017 and 2016

  

3

 

 

Consolidated Statements of Stockholders’ Equity – Three and Nine Months Ended September 30, 2017 and 2016

  

4

 

 

Consolidated Statements of Cash Flows – Three and Nine Months Ended September 30, 2017 and 2016

  

5

 

 

Notes to Consolidated Financial Statements

  

6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

38

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

60

Item 4.

 

Controls and Procedures

  

60

 

 

PART II. OTHER INFORMATION

  

 

 

 

 

Item 1.

 

Legal Proceedings

  

61

Item 1A.

 

Risk Factors

  

61

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

65

Item 3.

 

Defaults upon Senior Securities

  

65

Item 4.

 

Mine Safety Disclosures

  

65

Item 5.

 

Other Information

  

65

Item 6.

 

Exhibits

  

66

 

 

SIGNATURES

  

67

 

 

 


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

110,054

 

 

$

45,681

 

 

$

39,934

 

Restricted cash and cash equivalents (includes restricted cash of consolidated VIEs of $22,161, $18,119 and $19,468 as of September 30, 2017 and 2016 and December 31, 2016, respectively)

 

 

29,866

 

 

 

39,272

 

 

 

26,306

 

Loans and finance receivables, net (includes loans of consolidated VIEs of $296,478, $191,534 and $234,497 and allowance for losses of $22,115, $15,518 and $17,731 as of September 30, 2017 and 2016 and December 31, 2016, respectively)

 

 

637,736

 

 

 

542,865

 

 

 

561,550

 

Income taxes receivable

 

 

9,319

 

 

 

 

 

 

 

Other receivables and prepaid expenses

 

 

23,796

 

 

 

18,649

 

 

 

19,524

 

Property and equipment, net

 

 

46,557

 

 

 

47,486

 

 

 

47,100

 

Goodwill

 

 

267,015

 

 

 

267,012

 

 

 

267,010

 

Intangible assets, net

 

 

4,593

 

 

 

5,675

 

 

 

5,404

 

Other assets

 

 

10,842

 

 

 

8,439

 

 

 

11,051

 

Total assets

 

$

1,139,778

 

 

$

975,079

 

 

$

977,879

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

78,897

 

 

$

85,433

 

 

$

71,671

 

Income taxes currently payable

 

 

 

 

 

5,149

 

 

 

282

 

Deferred tax liabilities, net

 

 

20,681

 

 

 

16,233

 

 

 

14,316

 

Long-term debt (includes long-term debt of consolidated VIEs of $186,533, $136,953 and $165,419 and debt issuance costs of $762, $2,416 and $1,869, as of September 30, 2017 and 2016 and December 31, 2016, respectively)

 

 

765,395

 

 

 

635,179

 

 

 

649,911

 

Total liabilities

 

 

864,973

 

 

 

741,994

 

 

 

736,180

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.00001 par value, 250,000,000 shares authorized, 33,828,668, 33,260,017 and 33,364,525 shares issued and 33,608,611, 33,214,594 and 33,293,100 outstanding as of September 30, 2017 and 2016 and December 31, 2016, respectively

 

 

 

 

 

 

 

 

 

Preferred stock, $0.00001 par value, 25,000,000 shares authorized, no shares issued and outstanding

 

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

26,749

 

 

 

16,338

 

 

 

18,446

 

Retained earnings

 

 

257,812

 

 

 

226,741

 

 

 

235,455

 

Accumulated other comprehensive loss

 

 

(7,017

)

 

 

(9,692

)

 

 

(11,578

)

Treasury stock, at cost (220,057, 45,423 and 71,425 shares as of September 30, 2017 and 2016 and December 31, 2016, respectively)

 

 

(2,739

)

 

 

(302

)

 

 

(624

)

Total stockholders' equity

 

 

274,805

 

 

 

233,085

 

 

 

241,699

 

Total liabilities and stockholders' equity

 

$

1,139,778

 

 

$

975,079

 

 

$

977,879

 

 

 

 

See notes to consolidated financial statements.

 

 

1


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

217,878

 

 

$

195,943

 

 

$

600,045

 

 

$

543,131

 

Cost of Revenue

 

 

107,341

 

 

 

95,391

 

 

 

269,087

 

 

 

230,421

 

Gross Profit

 

 

110,537

 

 

 

100,552

 

 

 

330,958

 

 

 

312,710

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

27,000

 

 

 

26,722

 

 

 

69,993

 

 

 

73,500

 

Operations and technology

 

 

27,163

 

 

 

20,637

 

 

 

72,512

 

 

 

61,706

 

General and administrative

 

 

25,164

 

 

 

21,307

 

 

 

77,105

 

 

 

76,747

 

Depreciation and amortization

 

 

3,533

 

 

 

3,789

 

 

 

10,396

 

 

 

12,004

 

Total Expenses

 

 

82,860

 

 

 

72,455

 

 

 

230,006

 

 

 

223,957

 

Income from Operations

 

 

27,677

 

 

 

28,097

 

 

 

100,952

 

 

 

88,753

 

Interest expense, net

 

 

(18,292

)

 

 

(16,117

)

 

 

(52,526

)

 

 

(48,058

)

Foreign currency transaction gain

 

 

65

 

 

 

145

 

 

 

354

 

 

 

2,184

 

Loss on early extinguishment of debt

 

 

(14,927

)

 

 

 

 

 

(14,927

)

 

 

 

(Loss) Income before Income Taxes

 

 

(5,477

)

 

 

12,125

 

 

 

33,853

 

 

 

42,879

 

(Benefit from) provision for income taxes

 

 

(2,109

)

 

 

4,288

 

 

 

11,496

 

 

 

16,991

 

Net (Loss) Income

 

$

(3,368

)

 

$

7,837

 

 

$

22,357

 

 

$

25,888

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

$

0.24

 

 

$

0.67

 

 

$

0.78

 

Diluted

 

$

(0.10

)

 

$

0.23

 

 

$

0.66

 

 

$

0.78

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33,670

 

 

 

33,211

 

 

 

33,533

 

 

 

33,176

 

Diluted

 

 

33,670

 

 

 

33,558

 

 

 

34,119

 

 

 

33,360

 

 

 

 

See notes to consolidated financial statements.

 

 

2


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net (Loss) Income

 

$

(3,368

)

 

$

7,837

 

 

$

22,357

 

 

$

25,888

 

Other comprehensive gain (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)(1)

 

 

2,052

 

 

 

(1,245

)

 

 

4,561

 

 

 

(5,070

)

Total other comprehensive gain (loss), net of tax

 

 

2,052

 

 

 

(1,245

)

 

 

4,561

 

 

 

(5,070

)

Comprehensive (Loss) Income

 

$

(1,316

)

 

$

6,592

 

 

$

26,918

 

 

$

20,818

 

 

(1)

Net of tax (provision) benefit of $(1,161) and $707 for the three months ended September 30, 2017 and 2016, respectively, and $(2,578) and $2,860 for the nine months ended September 30, 2017 and 2016, respectively.

 

 

 

See notes to consolidated financial statements.

 

 

3


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock, at cost

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance at December 31, 2015

 

 

33,151

 

 

$

 

 

$

9,924

 

 

$

200,853

 

 

$

(4,622

)

 

 

(29

)

 

$

(187

)

 

$

205,968

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

6,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,414

 

Shares issued under stock-based plans

 

 

109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

25,888

 

 

 

 

 

 

 

 

 

 

 

 

 

25,888

 

Foreign currency translation loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,070

)

 

 

 

 

 

 

 

 

 

(5,070

)

Purchases of treasury shares, at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16

)

 

 

(115

)

 

 

(115

)

Balance at September 30, 2016

 

 

33,260

 

 

$

 

 

$

16,338

 

 

$

226,741

 

 

$

(9,692

)

 

 

(45

)

 

$

(302

)

 

$

233,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

 

33,365

 

 

$

 

 

$

18,446

 

 

$

235,455

 

 

$

(11,578

)

 

 

(71

)

 

$

(624

)

 

$

241,699

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

8,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,303

 

Shares issued under stock-based plans

 

 

464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

22,357

 

 

 

 

 

 

 

 

 

 

 

 

 

22,357

 

Foreign currency translation gain, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,561

 

 

 

 

 

 

 

 

 

 

4,561

 

Purchases of treasury shares, at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(149

)

 

 

(2,115

)

 

 

(2,115

)

Balance at September 30, 2017

 

 

33,829

 

 

$

 

 

$

26,749

 

 

$

257,812

 

 

$

(7,017

)

 

 

(220

)

 

$

(2,739

)

 

$

274,805

 

 

 

 

See notes to consolidated financial statements.

 

 

4


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net Income

 

$

22,357

 

 

$

25,888

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,396

 

 

 

12,004

 

Amortization of deferred loan costs and debt discount

 

 

4,515

 

 

 

5,056

 

Cost of revenue

 

 

269,087

 

 

 

230,421

 

Stock-based compensation expense

 

 

8,303

 

 

 

6,414

 

Loss on early extinguishment of debt

 

 

14,927

 

 

 

 

Deferred income taxes, net

 

 

3,802

 

 

 

(1,364

)

Other

 

 

 

 

 

(151

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Finance and service charges on loans and finance receivables

 

 

(10,232

)

 

 

(12,043

)

Other receivables and prepaid expenses

 

 

(3,290

)

 

 

1,700

 

Accounts payable and accrued expenses

 

 

1,033

 

 

 

22,130

 

Current income taxes

 

 

(9,601

)

 

 

10,652

 

Net cash provided by operating activities

 

 

311,297

 

 

 

300,707

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Loans and finance receivables originated or acquired

 

 

(998,333

)

 

 

(987,255

)

Loans and finance receivables repaid

 

 

672,474

 

 

 

651,865

 

Change in restricted cash

 

 

(3,030

)

 

 

(32,776

)

Purchases of property and equipment

 

 

(10,804

)

 

 

(11,466

)

Other investing activities

 

 

1,798

 

 

 

72

 

Net cash used in investing activities

 

 

(337,895

)

 

 

(379,560

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Borrowings under revolving line of credit

 

 

30,000

 

 

 

45,000

 

Repayments under revolving line of credit

 

 

(30,000

)

 

 

(88,400

)

Borrowings under securitization facility

 

 

137,200

 

 

 

218,961

 

Repayments under securitization facility

 

 

(116,085

)

 

 

(82,008

)

Issuance of senior notes

 

 

250,000

 

 

 

 

Repayments of senior notes

 

 

(155,000

)

 

 

 

Debt issuance costs paid

 

 

(9,564

)

 

 

(3,516

)

Debt prepayment penalty paid

 

 

(11,335

)

 

 

 

Treasury shares purchased

 

 

(2,115

)

 

 

(115

)

Net cash provided by financing activities

 

 

93,101

 

 

 

89,922

 

Effect of exchange rates on cash

 

 

3,617

 

 

 

(7,454

)

Net increase in cash and cash equivalents

 

 

70,120

 

 

 

3,615

 

Cash and cash equivalents at beginning of year

 

 

39,934

 

 

 

42,066

 

Cash and cash equivalents at end of period

 

$

110,054

 

 

$

45,681

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

 

 

 

Loans and finance receivables renewed

 

$

234,258

 

 

$

238,696

 

 

 

 

See notes to consolidated financial statements.

 

 

5


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1.

Significant Accounting Policies

Basis of Presentation

On September 7, 2011, Cash America International, Inc. (“Cash America,” now known as FirstCash, Inc. due to its merger with First Cash Financial Services, Inc. on September 1, 2016), formed a new company, Enova International, Inc. (the “Company”). On September 13, 2011, Cash America contributed to the Company all of the stock of its wholly-owned subsidiary, Enova Online Services, Inc., in exchange for 33 million shares of the Company’s common stock. The Company became an independent, publicly traded company on November 13, 2014 when Cash America completed the tax-free spin-off of approximately 80% of the outstanding shares of the Company to holders of Cash America’s common stock (the “Spin-off”). Cash America (and then First Cash) retained approximately 20% of the Company’s stock but completed the sale of its entire holding in the Company as of December 6, 2016. The consolidated financial statements of the Company reflect the historical results of operations and cash flows of the Company during each respective period. The financial statements include goodwill and intangible assets arising from businesses previously acquired.

The Company operates an internet-based lending platform to serve customers in need of cash to fulfill their financial responsibilities. Through a network of direct and indirect marketing channels, the Company offers funds to its customers through a variety of unsecured loan and finance receivable products. The business is operated primarily through the internet to provide convenient, fully-automated financial solutions to its customers. The Company originates, arranges, guarantees or purchases consumer loans and provides financing to small businesses through a line of credit account, installment loan or receivables purchase agreement product (“RPAs”). Consumer loans include short-term loans, line of credit accounts and installment loans. RPAs represent a right to receive future receivables from a small business. “Loans and finance receivables” include consumer loans, small business lines of credit, small business installment loans and RPAs.

The Company consolidates any variable interest entity (“VIE”) where it has been determined it is the primary beneficiary. The primary beneficiary is the entity which has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance as well as the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE.

The financial statements presented as of September 30, 2017 and 2016 and for the three and nine-month periods ended September 30, 2017 and 2016 are unaudited but, in management’s opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim periods. Operating results for three and nine-month periods are not necessarily indicative of the results that may be expected for the full fiscal year.

These financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 and related notes, which are included on Form 10-K filed with the SEC on February 24, 2017.

Restricted Cash

The Company includes funds to be used for future debt payments relating to its securitization transactions and escrow deposits in restricted cash and cash equivalents.

Revenue Recognition

The Company recognizes revenue based on the financing products and services it offers and on loans it acquires. “Revenue” in the consolidated statements of income includes: interest income, finance charges, fees for services provided through the Company’s credit services organization and credit access business programs (“CSO programs”) (“CSO fees”), revenue on RPAs, service charges, draw fees, minimum billing fees, purchase fees, late fees and non-sufficient funds fees as permitted by applicable laws and pursuant to the agreement with the customer. For short-term loans that the Company offers, interest and finance charges are recognized on an effective yield basis over the term of the loan. For line of credit accounts, interest is recognized over the reporting period based upon the balance outstanding and the contractual interest rate, draw fees are recognized on an effective yield basis over the estimated outstanding period of the draw, and minimum billing fees are recognized when assessed to the customer. For installment loans, interest is recognized on an effective yield basis over the term of the loan. For RPAs, revenue and purchase fees are recognized on an effective yield basis over the projected delivery term of the agreements and fees are recognized when assessed. CSO fees are recognized on an effective yield basis over the term of the loan. Late and nonsufficient funds fees are recognized when assessed to the customer. Direct costs associated with originating loans and purchasing RPAs, such as third-party customer acquisition costs, are deferred and amortized against revenue on an effective yield basis over the term of the loan or the projected delivery term of the finance receivable. Short-term loans, line of credit accounts, installment loans, RPAs, unpaid and accrued interest, fees and revenue and deferred origination costs are included in “Loans and finance receivables, net” in the consolidated balance sheets.

6


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. In accordance with Accounting Standards Codification (“ASC”) 350, Goodwill, the Company tests goodwill and intangible assets with an indefinite life for potential impairment annually as of June 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount.

The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In assessing the qualitative factors, management considers relevant events and circumstances including but not limited to macroeconomic conditions, industry and market environment, overall financial performance of the Company, cash flow from operating activities, market capitalization and stock price. If the Company determines that the two-step quantitative impairment test is required, management uses the income approach to complete its annual goodwill assessment. The income approach uses future cash flows and estimated terminal values for the Company that are discounted using a market participant perspective to determine the fair value, which is then compared to the carrying value to determine if there is impairment. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. The Company completed its annual assessment of goodwill as of June 30, 2017 based on qualitative factors and determined that the fair value of its goodwill exceeded carrying value, and, as a result, no impairment existed at that date. Although no goodwill impairment was noted, there can be no assurances that future goodwill impairments will not occur.

Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 on January 1, 2017. The adoption of ASU 2016-09 did not have a material impact on the Company’s financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”). The amendments in ASU 2016-15 provide guidance on eight specific cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, distributions received from equity method investees and beneficial interests in securitization transactions. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted ASU 2016-15 on July 1, 2017. The adoption of ASU 2016-15 did not have a material impact on the Company’s financial statements.

Accounting Standards to be Adopted in Future Periods

In May 2017, the FASB issued ASU 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”) clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The adoption of ASU 2017-09 is not expected to have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”) to clarify the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. ASU 2017-05 is effective at the same time as the amendments in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). Therefore, for public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company does not expect that the adoption of ASU 2017-05 will have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) to simplify the accounting for goodwill impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a

7


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect that the adoption of ASU 2017-04 will have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 provides a screen to determine when an asset or group of assets acquired is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. ASU 2017-01 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. The Company does not expect that the adoption of ASU 2017-01 will have a material effect on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash (“ASU 2016-18”). ASU 2016-18 clarifies certain existing principles in ASC 230, Statement of Cash Flows, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2016-18 will modify the Company's current disclosures and classifications within the consolidated statement of cash flows but it is not expected to have a material effect on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires entities to recognize the income tax impact of an intra-entity sale or transfer of an asset other than inventory when the sale or transfer occurs, rather than when the asset has been sold to an outside party. ASU 2016-16 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company does not expect that the adoption of ASU 2016-16 will have a material effect on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016‑13”). The amendments in ASU 2016‑13 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016‑13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is assessing the impact of ASU 2016‑13, which at the date of adoption will increase the allowance for credit losses with a resulting negative adjustment to retained earnings.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessee recognition on the balance sheet of a right-of-use asset and a lease liability, initially measured at the present value of the lease payments. It further requires recognition in the income statement of a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. Finally, it requires classification of all cash payments within operating activities in the statement of cash flows. ASU 2016-02 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted for all entities upon issuance. Upon adoption of ASU 2016-02, the Company expects to report higher assets and liabilities as a result of including additional leases on the consolidated balance sheet. The Company does not expect the adoption of ASU 2016-02 to have a material impact on the consolidated statements of income or the consolidated statements of stockholders' equity.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016‑01”), which requires that equity investments, except for those accounted for under the equity method or those that result in consolidation of the investee, be measured at fair value, with subsequent changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 also impacts the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted only for certain provisions. The Company does not expect that the adoption of ASU 2016-01 will have a material effect on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer

8


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, Deferral of the Effective Date, deferring the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), to clarify revenue recognition accounting when a third party is involved in providing goods or services to a customer. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, to clarify the implementation guidance on identifying performance obligations and licensing. Early adoption of ASU 2016‑10 is permitted only as of an annual reporting period beginning after December 15, 2016. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, to reduce the risk of diversity in practice for certain aspects in ASU 2014-09, including collectibility, noncash consideration, presentation of sales tax and transition. In December 2016, the FASB issued ASU 2016-20Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies the guidance in Topic 606 on assessing certain aspects of the new revenue standard. The Company plans to adopt the revenue recognition guidance in the first quarter of 2018 using the modified retrospective method of adoption. The Company has completed its initial assessment of the guidance and determined its loan and finance receivables are excluded from the scope of ASU 2014-09. As a result of this scope exception, the Company has concluded the impact to the consolidated financial statements will not be material in the period of adoption and in future periods. The Company is finalizing its assessment of ASU 2014-09 and the impact on its financial statement disclosures.

Out-of-Period Adjustment

In a review of marketing expenses related to the origination of loans, the Company determined during the quarter that certain amounts should be deferred over the life the corresponding loans. The Company recorded a reduction to revenue and marketing expense of $0.7 million and $1.9 million, respectively, in the third quarter of 2017 as an out-of-period adjustment related to amounts from prior periods previously recognized as expense. The Company believes this adjustment was not material to the current period or any previously issued financial statements.

 

 

2.

Acquisitions

On June 23, 2015, the Company completed the purchase of certain assets of a company operating as The Business Backer, LLC, which purchases discounted future accounts receivables from small businesses in the United States through RPAs, which provide working capital for small businesses. The total consideration of $26.4 million was comprised of $17.7 million in cash at closing, a $3.0 million promissory note (included in “Accounts payable and accrued expenses” in the consolidated balance sheets) and estimated contingent consideration of $5.7 million based on future earn-out opportunities. The contingent purchase consideration was recorded at its estimated fair value at the date of acquisition based upon the Company’s assessment of the probable earnings attributable to the business as defined in the purchase agreement. To the extent operating results exceed the Company’s estimate, additional contingent consideration would be due, however the total consideration paid may not exceed $71 million. The contingent purchase consideration is revalued each reporting period with changes in fair value of the contingent consideration obligations recognized as a gain or loss on fair value remeasurement in our consolidated statements of income. The fair value of the contingent purchase consideration was remeasured as of December 31, 2016 and a gain from the fair value remeasurement of $3.3 million was recognized. There was no change in fair value measurement of contingent consideration for the three and nine months ended September 30, 2017.

This purchase was not material to the Company’s consolidated financial statements. The operating results of the purchased assets, which were not material, have been included in the Company’s consolidated financial statements from the date of acquisition.

 

 

3.

Loans and Finance Receivables, Credit Quality Information and Allowances and Liabilities for Estimated Losses on Loans and Finance Receivables

Revenue generated from the Company’s loans and finance receivables for the three and nine months ended September 30, 2017 and 2016 was as follows (dollars in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Short-term loans

 

$

49,875

 

 

$

51,999

 

 

$

144,074

 

 

$

146,237

 

Line of credit accounts

 

 

68,889

 

 

 

59,090

 

 

 

187,172

 

 

 

158,338

 

Installment loans and RPAs

 

 

98,929

 

 

 

84,823

 

 

 

268,069

 

 

 

237,320

 

Total loans and finance receivables revenue

 

 

217,693

 

 

 

195,912

 

 

 

599,315

 

 

 

541,895

 

Other

 

 

185

 

 

 

31

 

 

 

730

 

 

 

1,236

 

Total revenue

 

$

217,878

 

 

$

195,943

 

 

$

600,045

 

 

$

543,131

 

9


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

Current and Delinquent Loans and Finance Receivables

The Company classifies its loans and finance receivables as either current or delinquent. Short-term loans are considered delinquent when payment of an amount due is not made as of the due date. If a line of credit account or installment loan customer misses one payment, that payment is considered delinquent and the balance of the loan is considered current. If a line of credit account or installment loan customer does not make two consecutive payments, the entire account or loan is classified as delinquent and placed on a non-accrual status. The Company allows for normal payment processing time before considering a loan delinquent but does not provide for any additional grace period.

The Company does not accrue interest on delinquent loans and does not resume accrual of interest on a delinquent loan unless it is returned to current status. In addition, delinquent loans generally may not be renewed, and if, during its attempt to collect on a delinquent loan, the Company allows additional time for payment through a payment plan or a promise to pay, it is still considered delinquent. Generally, all payments received are first applied against accrued but unpaid interest and fees and then against the principal balance of the loan.

Allowance and Liability for Estimated Losses on Loans and Finance Receivables

The Company monitors the performance of its loan and finance receivable portfolios and maintains either an allowance or liability for estimated losses on loans and finance receivables (including revenue, fees and/or interest) at a level estimated to be adequate to absorb losses inherent in the portfolio. The allowance for losses on the Company’s owned loans and finance receivables reduces the outstanding loans and finance receivables balance in the consolidated balance sheets. The liability for estimated losses related to loans guaranteed under its CSO programs is initially recorded at fair value and is included in “Accounts payable and accrued expenses” in the consolidated balance sheets.

In determining the allowance or liability for estimated losses on loans and finance receivables, the Company applies a documented systematic methodology. In calculating the allowance or liability for receivable losses, outstanding loans and finance receivables are divided into discrete groups of short-term loans, line of credit accounts, installment loans and RPAs and are analyzed as current or delinquent. Increases in either the allowance or the liability, net of charge-offs and recoveries, are recorded as a “Cost of revenue” in the consolidated statements of income.

The allowance or liability for short-term loans classified as current is based on historical loss rates adjusted for recent default trends for current loans. For delinquent short-term loans, the allowance or liability is based on a six-month rolling average of loss rates by stage of collection. For line of credit account, installment loan and RPA portfolios, the Company generally uses either a migration analysis or roll-rate based methodology to estimate losses inherent in the portfolio. The allowance or liability calculation under the migration analysis and roll-rate methodology is based on historical charge-off experience and the loss emergence period, which represents the average amount of time between the first occurrence of a loss event and the charge-off of a loan or RPA. The factors the Company considers to assess the adequacy of the allowance or liability include past due performance, historical behavior of monthly vintages, underwriting changes and recent trends in delinquency in the migration analysis. The roll-rate methodology is based on delinquency status, payment history and recency factors to estimate future charge-offs.

The Company fully reserves for loans and finance receivables once the receivable or a portion of the receivable has been classified as delinquent for 60 consecutive days and generally charges off loans and finance receivables between 60 – 65 days delinquent. If a loan or finance receivable is deemed uncollectible before it is fully reserved, it is charged off at that point. Loans and finance receivables classified as delinquent generally have an age of one to 64 days from the date any portion of the receivable became delinquent, as defined above. Recoveries on loans and finance receivables previously charged to the allowance are credited to the allowance when collected.

10


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

The components of Company-owned loans and finance receivables at September 30, 2017 and 2016 and December 31, 2016 were as follows (dollars in thousands):

 

 

 

As of September 30, 2017

 

 

 

Short-term

 

 

Line of Credit

 

 

Installment Loans and

 

 

 

 

 

 

 

Loans

 

 

Accounts

 

 

RPAs

 

 

Total

 

Current receivables

 

$

40,588

 

 

$

146,891

 

 

$

480,522

 

 

$

668,001

 

Delinquent receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delinquent payment amounts(1)

 

 

 

 

 

5,913

 

 

 

3,382

 

 

 

9,295

 

Receivables on non-accrual status

 

 

27,131

 

 

 

1,885

 

 

 

36,484

 

 

 

65,500

 

Total delinquent receivables

 

 

27,131

 

 

 

7,798

 

 

 

39,866

 

 

 

74,795

 

Total loans and finance receivables, gross

 

 

67,719

 

 

 

154,689

 

 

 

520,388

 

 

 

742,796

 

Less: Allowance for losses

 

 

(19,161

)

 

 

(26,810

)

 

 

(59,089

)

 

 

(105,060

)

Loans and finance receivables, net

 

$

48,558

 

 

$

127,879

 

 

$

461,299

 

 

$

637,736

 

 

 

 

As of September 30, 2016

 

 

 

Short-term

 

 

Line of Credit

 

 

Installment Loans and

 

 

 

 

 

 

 

Loans

 

 

Accounts

 

 

RPAs

 

 

Total

 

Current receivables

 

$

35,815

 

 

$

120,951

 

 

$

412,010

 

 

$

568,776

 

Delinquent receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delinquent payment amounts(1)

 

 

 

 

 

4,975

 

 

 

1,721

 

 

 

6,696

 

Receivables on non-accrual status

 

 

24,310

 

 

 

6,462

 

 

 

31,368

 

 

 

62,140

 

Total delinquent receivables

 

 

24,310

 

 

 

11,437

 

 

 

33,089

 

 

 

68,836

 

Total loans and finance receivables, gross

 

 

60,125

 

 

 

132,388

 

 

 

445,099

 

 

 

637,612

 

Less: Allowance for losses

 

 

(17,726

)

 

 

(26,795

)

 

 

(50,226

)

 

 

(94,747

)

Loans and finance receivables, net

 

$

42,399

 

 

$

105,593

 

 

$

394,873

 

 

$

542,865

 

 

 

 

As of December 31, 2016

 

 

 

Short-term

 

 

Line of Credit

 

 

Installment Loans and

 

 

 

 

 

 

 

Loans

 

 

Accounts

 

 

RPAs

 

 

Total

 

Current receivables

 

$

35,516

 

 

$

130,576

 

 

$

413,638

 

 

$

579,730

 

Delinquent receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delinquent payment amounts(1)

 

 

 

 

 

4,560

 

 

 

2,110

 

 

 

6,670

 

Receivables on non-accrual status

 

 

27,489

 

 

 

9,047

 

 

 

37,559

 

 

 

74,095

 

Total delinquent receivables

 

 

27,489

 

 

 

13,607

 

 

 

39,669

 

 

 

80,765

 

Total loans and finance receivables, gross

 

 

63,005

 

 

 

144,183

 

 

 

453,307

 

 

 

660,495

 

Less: Allowance for losses

 

 

(17,770

)

 

 

(26,594

)

 

 

(54,581

)

 

 

(98,945

)

Loans and finance receivables, net

 

$

45,235

 

 

$

117,589

 

 

$

398,726

 

 

$

561,550

 

 

(1)

Represents the delinquent portion of installment loans and line of credit account balances for customers that have only missed one payment and RPA customers who have not delivered agreed upon receivables. See “Current and Delinquent Loans and Finance Receivables” above for additional information.

11


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Changes in the allowance for losses for the Company-owned loans and finance receivables and the liability for losses on the Company’s guarantees of third-party lender-owned loans during the three and nine months ended September 30, 2017 and 2016 were as follows (dollars in thousands):

 

 

 

Three Months Ended September 30, 2017

 

 

 

Short-term

 

 

Line of Credit

 

 

Installment Loans and

 

 

 

 

 

 

 

Loans

 

 

Accounts

 

 

RPAs

 

 

Total

 

Allowance for losses for Company-owned loans and finance receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

15,688

 

 

$

22,847

 

 

$

45,304

 

 

$

83,839

 

Cost of revenue

 

 

23,724

 

 

 

23,439

 

 

 

60,102

 

 

 

107,265

 

Charge-offs

 

 

(25,521

)

 

 

(22,708

)

 

 

(57,228

)

 

 

(105,457

)

Recoveries

 

 

5,082

 

 

 

3,232

 

 

 

10,630

 

 

 

18,944

 

Effect of foreign currency translation

 

 

188

 

 

 

 

 

 

281

 

 

 

469

 

Balance at end of period

 

$

19,161

 

 

$

26,810

 

 

$

59,089

 

 

$

105,060

 

Liability for third-party lender-owned loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,761

 

 

$

 

 

$

180

 

 

$

1,941

 

Increase (decrease) in liability

 

 

125

 

 

 

 

 

 

(49

)

 

 

76

 

Balance at end of period

 

$

1,886

 

 

$

 

 

$

131

 

 

$

2,017

 

 

 

 

Three Months Ended September 30, 2016

 

 

 

Short-term

 

 

Line of Credit

 

 

Installment Loans and

 

 

 

 

 

 

 

Loans

 

 

Accounts

 

 

RPAs

 

 

Total

 

Allowance for losses for Company-owned loans and finance receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

13,354

 

 

$

18,029

 

 

$

42,437

 

 

$

73,820

 

Cost of revenue

 

 

20,464

 

 

 

29,739

 

 

 

45,293

 

 

 

95,496

 

Charge-offs

 

 

(21,301

)

 

 

(24,639

)

 

 

(44,804

)

 

 

(90,744

)

Recoveries

 

 

5,345

 

 

 

3,666

 

 

 

7,421

 

 

 

16,432

 

Effect of foreign currency translation

 

 

(136

)

 

 

 

 

 

(121

)

 

 

(257

)

Balance at end of period

 

$

17,726

 

 

$

26,795

 

 

$

50,226

 

 

$

94,747

 

Liability for third-party lender-owned loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,392

 

 

$

 

 

$

441

 

 

$

1,833

 

Increase (decrease) in liability

 

 

66

 

 

 

 

 

 

(172

)

 

 

(106

)

Balance at end of period

 

$

1,458

 

 

$

 

 

$

269

 

 

$

1,727

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

Short-term

 

 

Line of Credit

 

 

Installment Loans and

 

 

 

 

 

 

 

Loans

 

 

Accounts

 

 

RPAs

 

 

Total

 

Allowance for losses for Company-owned loans and finance receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

17,770

 

 

$

26,594

 

 

$

54,581

 

 

$

98,945

 

Cost of revenue

 

 

55,865

 

 

 

63,138

 

 

 

150,063

 

 

 

269,066

 

Charge-offs

 

 

(70,962

)

 

 

(73,252

)

 

 

(177,002

)

 

 

(321,216

)

Recoveries

 

 

16,009

 

 

 

10,330

 

 

 

30,782

 

 

 

57,121

 

Effect of foreign currency translation

 

 

479

 

 

 

 

 

 

665

 

 

 

1,144

 

Balance at end of period

 

$

19,161

 

 

$

26,810

 

 

$

59,089

 

 

$

105,060

 

Liability for third-party lender-owned loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,716

 

 

$

 

 

$

280

 

 

$

1,996

 

Increase (decrease) in liability

 

 

170

 

 

 

 

 

 

(149

)

 

 

21

 

Balance at end of period

 

$

1,886

 

 

$

 

 

$

131

 

 

$

2,017

 

 

12


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

 

Nine Months Ended September 30, 2016

 

 

 

Short-term

 

 

Line of Credit

 

 

Installment Loans and

 

 

 

 

 

 

 

Loans

 

 

Accounts

 

 

RPAs

 

 

Total

 

Allowance for losses for Company-owned loans and finance receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

14,652

 

 

$

15,727

 

 

$

36,943

 

 

$

67,322

 

Cost of revenue

 

 

47,860

 

 

 

63,461

 

 

 

119,128

 

 

 

230,449

 

Charge-offs

 

 

(59,664

)

 

 

(63,236

)

 

 

(127,473

)

 

 

(250,373

)

Recoveries

 

 

15,448

 

 

 

10,843

 

 

 

21,217

 

 

 

47,508

 

Effect of foreign currency translation

 

 

(570

)

 

 

 

 

 

411

 

 

 

(159

)

Balance at end of period

 

$

17,726

 

 

$

26,795

 

 

$

50,226

 

 

$

94,747

 

Liability for third-party lender-owned loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,298

 

 

$

 

 

$

458

 

 

$

1,756

 

Increase (decrease) in liability

 

 

160

 

 

 

 

 

 

(189

)

 

 

(29

)

Balance at end of period

 

$

1,458

 

 

$

 

 

$

269

 

 

$

1,727

 

 

Guarantees of Consumer Loans

In connection with its CSO programs, the Company guarantees consumer loan payment obligations to unrelated third-party lenders for short-term and installment loans and is required to purchase any defaulted loans it has guaranteed. The guarantee represents an obligation to purchase specific loans that go into default. As of September 30, 2017 and 2016 and December 31, 2016, the amount of consumer loans guaranteed by the Company was $28.9 million, $29.7 million and $32.2 million, respectively, representing amounts due under consumer loans originated by third-party lenders under the CSO programs. The estimated fair value of the liability for estimated losses on consumer loans guaranteed by the Company of $2.0 million, $1.7 million and $2.0 million, as of September 30, 2017 and 2016 and December 31, 2016, respectively, is included in “Accounts payable and accrued expenses” in the consolidated balance sheets.

Bank Program Loans

In order to leverage its online lending platform, the Company launched a program with a bank in 2016 to provide technology, marketing services, and loan servicing for near-prime unsecured consumer installment loans. Under the program, the Company receives marketing and servicing fees while the bank receives an origination fee. The bank has the ability to sell the loans it originates to the Company. The Company does not guarantee the performance of the loans originated by the bank.

 

 

4.

Investment in Unconsolidated Investee

The Company records an investment in the preferred stock of a privately-held developing financial services entity under the cost method. The carrying value of the Company’s investment in this unconsolidated investee was $6.7 million as of September 30, 2017 and 2016 and December 31, 2016, and was held in “Other assets” in the Company’s consolidated balance sheets. The Company evaluates this investment for impairment if an event occurs or circumstances change that would more likely than not reduce the fair value of the investment below carrying value. Based on the Company’s evaluation of this investment at September 30, 2017, the Company determined that an impairment loss was not probable at that date.

 

 

13


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

5.

Long-term debt

The Company’s long-term debt instruments and balances outstanding as of September 30, 2017 and 2016 and December 31, 2016 were as follows (dollars in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitization notes

 

$

186,533

 

 

$

136,953

 

 

$

165,419

 

Revolving line of credit

 

 

 

 

 

15,000

 

 

 

 

9.75% senior notes due 2021

 

 

342,407

 

 

 

495,427

 

 

 

495,622

 

8.50% senior notes due 2024

 

 

250,000

 

 

 

 

 

 

 

Subtotal

 

 

778,940

 

 

 

647,380

 

 

 

661,041

 

Less: Long-term debt issuance costs

 

 

(13,545

)

 

 

(12,201

)

 

 

(11,130

)

Total long-term debt

 

$

765,395

 

 

$

635,179

 

 

$

649,911

 

 

8.50% Senior Unsecured Notes Due 2024

On September 1, 2017, the Company issued and sold $250.0 million in aggregate principal amount of 8.50% Senior Notes due 2024 (the “2024 Senior Notes”). The 2024 Senior Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the United States pursuant to Regulation S under the Securities Act. The 2024 Senior Notes bear interest at a rate of 8.50% annually on the principal amount payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2018. The 2024 Senior Notes were sold at a price of 100%. The 2024 Senior Notes will mature on September 1, 2024. The 2024 Senior Notes are unsecured debt obligations of the Company, and are unconditionally guaranteed by certain of the Company’s domestic subsidiaries.

The 2024 Senior Notes are redeemable at the Company’s option, in whole or in part, (i) at any time prior to September 1, 2020 at 100% of the aggregate principal amount of 2024 Senior Notes redeemed plus the applicable “make whole” premium specified in the indenture that governs the Company’s 2024 Notes (the "2024 Senior Notes Indenture"), plus accrued and unpaid interest, if any, to the redemption date and (ii) at any time on or after September 1, 2020 at the premium, if any, specified in the 2024 Senior Notes Indenture that will decrease over time, plus accrued and unpaid interest, if any, to the redemption date. In addition, prior to September 1, 2020, at its option, the Company may redeem up to 40% of the aggregate principal amount of the 2024 Senior Notes at a redemption price of 108.5% of the aggregate principal amount of 2024 Senior Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date, with the proceeds of certain equity offerings as described in the 2024 Senior Notes Indenture.

The 2024 Senior Notes and the related guarantees have not been and will not be registered under the Securities Act, or the securities laws of any state or other jurisdiction, and may not be offered or sold in the United States without registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities or blue sky laws and foreign securities laws.

In connection with the issuance of the 2024 Senior Notes, the Company incurred approximately $7.6 million of issuance costs, which primarily consisted of underwriting fees, legal and other professional expenses.

The Company used the net proceeds of the 2024 Senior Notes offering to retire a portion of its outstanding 9.75% senior notes due 2021, to pay the related accrued interest, premiums, fees and expenses associated therewith and for general corporate purposes, which may include working capital and future repurchases of its outstanding debt securities.

As of September 30, 2017, the carrying amount of the 2024 Senior Notes was $242.5 million, which includes unamortized issuance costs of $7.5 million. The total interest expense recognized was $1.9 million for the nine months ended September 30, 2017.

Consumer Loan Securitization

2016-1 Facility

On January 15, 2016, the Company and certain of its subsidiaries entered into a receivables securitization (as amended, the “2016‑1 Securitization Facility”) with certain purchasers, Jefferies Funding LLC, as administrative agent (the “Administrative Agent”) and Bankers Trust Company, as indenture trustee and securities intermediary (the “Indenture Trustee”). The 2016‑1 Securitization Facility securitizes unsecured consumer installment loans (“Receivables”) that have been, or will be, originated or acquired under the Company’s

14


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NetCredit brand and that meet specified eligibility criteria. Under the 2016‑1 Securitization Facility, Receivables are sold to EFR 2016‑1, LLC, a wholly-owned special purpose subsidiary (the “Issuer”), and serviced by another subsidiary.

The Issuer issued an initial term note of $107.4 million (the “Initial Term Note”), which was secured by $134 million in unsecured consumer loans, and variable funding notes (the “Variable Funding Notes”) with an aggregate availability of $20 million per month; the 2016‑1 Securitization Facility was amended to increase the availability to $40 million until December 31, 2016, and $30 million thereafter, as discussed below. As described below, the Issuer has issued and will subsequently issue term notes (the “Term Notes” and, together with the Initial Term Note and the Variable Funding Notes, the “Securitization Notes”). The maximum principal amount of the Securitization Notes that may be outstanding at any time under the 2016‑1 Securitization Facility was limited to $175 million; the 2016‑1 Securitization Facility was amended to increase the maximum principal amount to $275 million, as discussed below.

At the end of each month during the nine-month revolving period, the Receivables funded by the Variable Funding Notes have been and will be refinanced through the creation of two Term Notes, which Term Notes have been and will be issued to the holders of the Variable Funding Notes. The non-recourse Securitization Notes mature at various dates, the latest of which will be October 15, 2020 (the “Final Maturity Date”). The 2016‑1 Securitization Facility has been amended to extend the revolving period to October 2017 and the latest maturity to October 2021, as discussed below.

The Securitization Notes are issued pursuant to an indenture, dated as of January 15, 2016 (the “Closing Date”). The Securitization Notes bear interest at an annual rate equal to the one month London Interbank Offered Rate (“LIBOR”) (subject to a floor of 1%) plus 7.75%, which rate was initially 8.75%. In addition, the Issuer paid certain customary upfront closing fees and will pay customary annual commitment and other fees to the purchasers under the 2016‑1 Securitization Facility. The Issuer is permitted to voluntarily prepay any outstanding Securitization Notes, subject to an optional redemption premium. Interest and principal payments on outstanding Securitization Notes are made monthly. Any remaining amounts outstanding will be payable no later than the Final Maturity Date. The Securitization Notes are supported by the cash flows from the underlying Receivables. The holders of the Securitization Notes have no recourse to the Company if the cash flows from the underlying Receivables are not sufficient to pay all of the principal and interest on the Securitization Notes unless the underlying Receivables breach the representations and warranties made by us as of the related sale date as described below. Additionally, the Receivables will be held by the Issuer at least until the obligations under the Securitization Notes are satisfied. For so long as the Receivables are owned by the Issuer, the outstanding Receivables will not be available to satisfy the Company’s other debts and obligations.

All amounts due under the Securitization Notes are secured by all of the Issuer’s assets, which include the Receivables transferred to the Issuer, related rights under the Receivables, specified bank accounts, and certain other related collateral.

The 2016‑1 Securitization Facility documents contain customary provisions for securitizations, including: representations and warranties as to the eligibility of the Receivables and other matters; indemnification for specified losses not including losses due to the inability of consumers to repay their loans; covenants regarding special purpose entity matters and other subjects; and default and termination provisions which provide for the acceleration of the Securitization Notes under the 2016‑1 Securitization Facility in circumstances including, but not limited to, failure to make payments when due, servicer defaults, certain insolvency events, breaches of representations, warranties or covenants, failure to maintain the security interest in the receivables, defaults under other material indebtedness and certain regulatory matters.

The agreements evidencing the 2016‑1 Facility, all dated as of the Closing Date, include (i) an Indenture between the Issuer and the Indenture Trustee, (ii) a Note Purchase Agreement among the Issuer, NetCredit Loan Services, LLC (f/k/a Enova Lending Services, LLC), as the Master Servicer, the Administrative Agent and certain purchasers, and (iii) a Receivables Purchase Agreement between the Company and Enova Finance 5, LLC. On July 26, 2016, the Company and certain of its subsidiaries entered into a First Omnibus Amendment (the “First Amendment”) of the 2016‑1 Facility that was established on the Closing Date, pursuant to various agreements with certain purchasers, the Administrative Agent and the Indenture Trustee. The First Amendment effected a variety of minor technical changes to the Indenture, the Note Purchase Agreement, the Receivables Purchase Agreement and the servicing agreement for the 2016‑1 Facility. These changes included revised procedures under the Note Purchase Agreement for the disbursement to the Issuer of proceeds from draws under the Variable Funding Notes and clarification of modifications that the servicer is permitted to effect to the terms of the Receivables that have been transferred into the EFR 2016‑1 Facility.

On August 17, 2016, the Company and one of its subsidiaries entered into an Amendment to the Receivables Purchase Agreement. This amendment modified an eligibility criterion for Receivables that the Company sells under the Agreement.

On September 12, 2016, the Company and certain of its subsidiaries entered into a Second Omnibus Amendment (the “Second Amendment”) to amend the Indenture and the Receivables Purchase Agreement. The Second Amendment authorized the Company to

15


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

include in the 2016‑1 Facility Receivables originated by a state-chartered bank and acquired by a subsidiary of the Company from that bank, and it adjusted the Investment Pool Cumulative Net Loss Trigger for the Initial Term Note Investment Pool (as such terms are defined in the Indenture), which was the seasoned pool of receivables securitized under the 2016‑1 Facility on the Closing Date.

On October 20, 2016, the Company and certain of its subsidiaries entered into a Third Amendment and Limited Waiver (the “Third Amendment”) to amend the Indenture and Receivables Purchase Agreement. The Third Amendment increased the maximum principal amount of the 2016‑1 Facility to $275 million, increased the Variable Funding Notes maximum principal amount to $40 million until December 31, 2016, and $30 million thereafter, and extended the revolving period of the facility to October 2017. The Third Amendment also adjusted the Note Interest Rate on Term Notes issued after, and amounts outstanding under the Variable Funding Notes after, the date of the Third Amendment (as such terms are defined in the Indenture). The weighted average interest rate on such adjusted Notes is 9.5%.

On November 14, 2016, the Company and certain of its subsidiaries entered into a Fourth Amendment (the “Fourth Amendment”) to amend the Indenture and Receivables Purchase Agreement. The Fourth Amendment adjusted the Investment Pool Cumulative Delinquency Trigger (as such term is defined in the Indenture), with an effective date of October 31, 2016.

On December 14, 2016, the Company and certain of its subsidiaries entered into a Fifth Amendment (the “Fifth Amendment”) to amend the Indenture and Receivables Purchase Agreement. The Fifth Amendment adjusted the Investment Pool Cumulative Delinquency Trigger (as such term is defined in the Indenture) for the Initial Term Notes, with an effective date of November 30, 2016, expanded the categories of Receivables that could be financed through the 2016‑1 Facility and made certain other minor changes. These changes provide the Company with additional flexibility under the 2016‑1 Facility.

As of September 30, 2017 and 2016, the carrying amount of the 2016‑1 Securitization Facility was $173.7 million and $134.5 million, respectively, which included unamortized issuance costs of $0.8 million and $2.4 million, respectively. The issuance costs are being amortized to interest expense over a period of four years. The total interest expense recognized was $11.4 million and $9.5 million of which $1.1 million and $2.6 million represented the non-cash amortization of the issuance costs for the nine months ended September 30, 2017 and 2016, respectively.

2016‑2 Facility

On December 1, 2016, the Company and certain of its subsidiaries entered into a receivables securitization (the “2016‑2 Facility”) with Redpoint Capital Asset Funding, LLC, as lender (the “Lender”). The 2016‑2 Facility securitizes unsecured consumer installment loans (“Redpoint Receivables”) that have been and will be originated or acquired under the Company’s NetCredit brand by several of the Company’s subsidiaries (the “Originators”) and that meet specified eligibility criteria, including that the annual percentage rate for each securitized consumer loan is greater than or equal to 90%. Under the 2016‑2 Facility, Redpoint Receivables are sold to a wholly-owned special purpose subsidiary of the Company (the “Debtor”) and serviced by another subsidiary of the Company.

The Debtor has issued a revolving note with an initial maximum principal balance of $20.0 million (the “Initial Facility Size”), which is required to be secured by $25.0 million in unsecured consumer loans. The Initial Facility Size may be increased under the 2016‑2 Facility to $40 million. The 2016‑2 Facility is non-recourse to the Company and matures on December 1, 2019.

The 2016‑2 Facility is governed by a loan and security agreement, dated as of December 1, 2016, between the Lender and the Debtor. The 2016‑2 Facility bears interest at a rate per annum equal to LIBOR (subject to a floor) plus an applicable margin, which rate per annum was initially 12.50%. In addition, the Debtor paid certain customary upfront closing fees to the Lender. Interest payments on the 2016‑2 Facility will be made monthly. Subject to certain exceptions, the Debtor is not permitted to prepay the 2016‑2 Facility prior to October 1, 2018. Following such date, the Debtor is permitted to voluntarily prepay the 2016‑2 Facility without penalty. Any remaining amounts outstanding will be payable no later than December 1, 2019.

All amounts due under the 2016‑2 Facility are secured by all of the Debtor’s assets, which include the Redpoint Receivables transferred to the Debtor, related rights under the Redpoint Receivables, a bank account and certain other related collateral.

The 2016‑2 Facility documents contain customary provisions for securitizations, including: representations and warranties as to the eligibility of the Redpoint Receivables and other matters; indemnification for specified losses not including losses due to the inability of consumers to repay the related Receivables; and default and termination provisions which provide for the acceleration of the 2016‑2 Facility in circumstances including, but not limited to, failure to make payments when due, certain insolvency events, breaches of representations, warranties or covenants, failure to maintain the security interest in the receivables and defaults under other material indebtedness of the Debtor.

16


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

As of September 30, 2017, the carrying amount of the 2016‑2 Facility was $12.1 million. In connection with the issuance of the 2016‑2 Facility, the Company incurred debt issuance costs of approximately $0.2 million. The unamortized balance of these costs as of September 30, 2017 is included in “Other assets” in the consolidated balance sheets. These costs are being amortized to interest expense over a period of 36 months, the term of the 2016‑2 Facility. The total interest expense recognized was $1.4 million for the nine months ended September 30, 2017.

Revolving Credit Facilities

On May 14, 2014, the Company and certain of its subsidiaries as guarantors entered into a credit agreement among the Company, the guarantors, Jefferies Finance LLC as administrative agent and Jefferies Group LLC as lender (the “2014 Credit Agreement”). The 2014 Credit Agreement was terminated on June 30, 2017. The Company had no outstanding borrowings under the 2014 Credit Agreement as of September 30, 2016 and December 31, 2016.

The 2014 Credit Agreement also included a sub-limit of up to $20.0 million for standby or commercial letters of credit. In the event that an amount was paid by the issuing bank under a letter of credit, it would have been due and payable by the Company on demand. The Company had outstanding letters of credit under the 2014 Credit Agreement of $6.6 million as of each of September 30, 2016 and December 31, 2016.

In connection with the issuance of the 2014 Credit Agreement, as amended, the Company incurred debt issuance costs of approximately $1.6 million, which primarily consisted of underwriting fees and legal expenses. The unamortized balance of these costs was included in “Other assets” in the consolidated balance sheets. These costs were amortized to interest expense over a period of 37 months, the term of the 2014 Credit Agreement.

On June 30, 2017, the Company and certain of its operating subsidiaries entered into an asset-backed secured revolving credit agreement with a syndicate of banks including TBK Bank, SSB (“TBK”), as Administrative Agent and Collateral Agent, Jefferies Finance LLC and TBK as Joint Lead Arrangers and Joint Lead Bookrunners, and Green Bank, N.A., as Lender (the “2017 Credit Agreement”).

The 2017 Credit Agreement is secured by domestic receivables and replaced the 2014 Credit Agreement. The borrowing limit in the 2017 Credit Agreement increased to $40 million from $35 million in the 2014 Credit Agreement, and its maturity date is May 1, 2020. The Company had no outstanding borrowings under the 2017 Credit Agreement as of September 30, 2017.

The 2017 Credit Agreement provides for a revolving credit line with interest on borrowings under the facility at prime rate plus 1.00%. In addition, the 2017 Credit Agreement provides for payment of a commitment fee calculated with respect to the unused portion of the line, and ranges from 0.30% per annum to 0.50% per annum depending on usage. A portion of the revolving credit facility, up to a maximum of $20 million, is available for the issuance of letters of credit. The Company had outstanding letters of credit under the 2017 Credit Agreement of $8.0 million as of September 30, 2017. The 2017 Credit Agreement provides for certain prepayment penalties if it is terminated on or before its first and second anniversary date, subject to certain exceptions.

The 2017 Credit Agreement contains certain limitations on the incurrence of additional indebtedness, investments, the attachment of liens to the Company’s property, the amount of dividends and other distributions, fundamental changes to the Company or its business and certain other activities of the Company. The 2017 Credit Agreement contains standard financial covenants for a facility of this type based on a leverage ratio and a fixed charge coverage ratio. The 2017 Credit Agreement also provides for customary affirmative covenants, including financial reporting requirements, and certain events of default, including payment defaults, covenant defaults and other customary defaults.

In connection with the issuance of the 2017 Credit Agreement, as amended, the Company incurred debt issuance costs of approximately $2.0 million, which primarily consisted of underwriting fees and legal expenses. The unamortized balance of these costs as of September 30, 2017 is included in “Other assets” in the consolidated balance sheets. These costs are being amortized to interest expense over a period of 34 months, the term of the 2017 Credit Agreement.

9.75% Senior Unsecured Notes Due 2021

On May 30, 2014, the Company issued and sold $500.0 million in aggregate principal amount of 9.75% Senior Notes due 2021 (the “2021 Senior Notes”). The 2021 Senior Notes bear interest at a rate of 9.75% annually on the principal amount payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2014. The 2021 Senior Notes were sold at a discount of the principal amount to yield 10.0% to maturity and will mature on June 1, 2021.

17


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

During the three months ended September 30, 2017, the Company repurchased $155.0 million principal amount of the 2021 Senior Notes for aggregate cash consideration of $166.3 million plus accrued interest. In connection with these purchases, the Company recorded a loss on extinguishment of debt of approximately $14.9 million ($9.2 million net of tax), which is included in “Loss on early extinguishment of debt” in the consolidated statements of income.

As of September 30, 2017 and 2016, the carrying amount of the 2021 Senior Notes was $337.1 million and $485.6 million, respectively, which included an unamortized discount of $2.6 million and $4.6 million, respectively, and unamortized issuance costs of $5.3 million and $9.8 million, respectively. The discount and issuance costs are being amortized to interest expense over a period of seven years, through the maturity date of June 1, 2021. The total interest expense recognized for the nine months ended September 30, 2017 and 2016 was $38.0 million and $38.7 million, respectively, of which $0.6 million for each period represented the non-cash amortization of the discount and $1.5 million and $1.6 million, respectively, represented the non-cash amortization of the issuance costs.

Weighted-average interest rates on long-term debt were 10.58% and 10.75% during the nine months ended September 30, 2017 and 2016, respectively.

As of September 30, 2017 and 2016 and December 31, 2016, the Company was in compliance with all covenants and other requirements set forth in the prevailing long-term debt agreement(s).

 

 

6.

Earnings Per Share

Basic earnings per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the period. Restricted stock units issued under the Company’s stock-based employee compensation plans are included in diluted shares upon the granting of the awards even though the vesting of shares will occur over time.

The following table sets forth the reconciliation of numerators and denominators of basic and diluted earnings per share computations for the three and nine months ended September 30, 2017 and 2016 (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,368

)

 

$

7,837

 

 

$

22,357

 

 

$

25,888

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total weighted average basic shares

 

 

33,670

 

 

 

33,211

 

 

 

33,533

 

 

 

33,176

 

Shares applicable to stock-based compensation

 

 

 

 

 

347

 

 

 

586

 

 

 

184

 

Total weighted average diluted shares

 

 

33,670

 

 

 

33,558

 

 

 

34,119

 

 

 

33,360

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share – basic

 

$

(0.10

)

 

$

0.24

 

 

$

0.67

 

 

$

0.78

 

Net (loss) income per share – diluted

 

$

(0.10

)

 

$

0.23

 

 

$

0.66

 

 

$

0.78

 

For the three months ended September 30, 2017 and 2016, 2,138,180 and 1,467,202 shares of common stock underlying stock options, respectively, and 1,592,937 and 343,663 shares of common stock underlying restricted stock units, respectively, were excluded from the calculation of diluted net (loss) income per share because their effect would have been antidilutive. For the nine months ended September 30, 2017 and 2016, 1,552,045 and 1,783,073 shares of common stock underlying stock options, respectively, and 242,677 and 520,688 shares of common stock underlying restricted stock units, respectively, were excluded from the calculation of diluted net (loss) income per share because their effect would have been antidilutive.

 

 

7.

Operating Segment Information

The Company provides online financial services to alternative credit consumers and small businesses in the United States, United Kingdom and Brazil and has one reportable segment, which is composed of the Company’s domestic and international operations and corporate services. Corporate services primarily includes personnel, occupancy and other operating expenses for shared functions, such as executive management, technology, analytics, business development, legal and licensing, compliance, risk management, internal audit, human resources, payroll, treasury, finance, accounting, and tax. Corporate Services assets primarily include: corporate property

18


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

and equipment, nonqualified savings plan assets, marketable securities, restricted cash and prepaid expenses. The Company has aggregated all components of its business into a single reportable segment based on the similarities of the economic characteristics, the nature of the products and services, the nature of the production and distribution methods, the type of customer and the nature of the regulatory environment.

The following tables present information on the Company’s domestic, international operations and corporate services as of and for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

181,584

 

 

$

165,330

 

 

$

504,326

 

 

$

449,100

 

International

 

 

36,294

 

 

 

30,613

 

 

 

95,719

 

 

 

94,031

 

Total revenue

 

$

217,878

 

 

$

195,943

 

 

$

600,045

 

 

$

543,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

55,767

 

 

$

44,015

 

 

$

176,402

 

 

$

148,717

 

International

 

 

(1,983

)

 

 

5,659

 

 

 

3,939

 

 

 

16,136

 

Corporate services

 

 

(26,107

)

 

 

(21,577

)

 

 

(79,389

)

 

 

(76,100

)

Total income from operations

 

$

27,677

 

 

$

28,097

 

 

$

100,952

 

 

$

88,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

1,634

 

 

$

1,385

 

 

$

4,692

 

 

$

4,552

 

International

 

 

396

 

 

 

409

 

 

 

1,136

 

 

 

1,813

 

Corporate services

 

 

1,503

 

 

 

1,995

 

 

 

4,568

 

 

 

5,639

 

Total depreciation and amortization

 

$

3,533

 

 

$

3,789

 

 

$

10,396

 

 

$

12,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for property and equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

2,231

 

 

$

2,395

 

 

$

4,271

 

 

$

5,425

 

International

 

 

1,281

 

 

 

1,043

 

 

 

3,401

 

 

 

2,489

 

Corporate services

 

 

1,991

 

 

 

379

 

 

 

3,132

 

 

 

3,552

 

Total expenditures for property and equipment

 

$

5,503

 

 

$

3,817

 

 

$

10,804

 

 

$

11,466

 

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Property and equipment, net

 

 

 

 

 

 

 

 

Domestic

 

$

22,541

 

 

$

19,259

 

International

 

 

7,106

 

 

 

5,094

 

Corporate services

 

 

16,910

 

 

 

23,133

 

Total property and equipment, net

 

$

46,557

 

 

$

47,486

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Domestic

 

$

899,495

 

 

$

823,737

 

International

 

 

126,583

 

 

 

98,842

 

Corporate services

 

 

113,700

 

 

 

52,500

 

Total assets

 

$

1,139,778

 

 

$

975,079

 

 

19


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Geographic Information

The following table presents the Company’s revenue by geographic region for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

181,584

 

 

$

165,330

 

 

$

504,326

 

 

$

449,100

 

United Kingdom

 

 

30,679

 

 

 

26,793

 

 

 

82,528

 

 

 

78,882

 

Other international countries

 

 

5,615

 

 

 

3,820

 

 

 

13,191

 

 

 

15,149

 

Total revenue

 

$

217,878

 

 

$

195,943

 

 

$

600,045

 

 

$

543,131

 

The Company’s long-lived assets, which consist of the Company’s property and equipment, were $46.6 million and $47.5 million at September 30, 2017 and 2016, respectively. The operations for the Company’s domestic and international businesses are primarily located within the United States, and the value of any long-lived assets located outside of the United States is immaterial.

 

 

8.

Commitments and Contingencies

Litigation

On March 8, 2013, Flemming Kristensen, on behalf of himself and others similarly situated, filed a purported class action lawsuit in the U.S. District Court of Nevada against the Company and other unaffiliated lenders and lead providers. The lawsuit alleges that the lead provider defendants sent unauthorized text messages to consumers on behalf of the Company and the other lender defendants in violation of the Telephone Consumer Protection Act. The complaint seeks class certification, statutory damages, an injunction against “wireless spam activities,” and attorneys’ fees and costs. The Company filed an answer to the complaint denying all liability. On March 26, 2014, the Court granted class certification. On July 20, 2015, the court granted the Company’s motion for summary judgment, denied Plaintiff’s motion for summary judgment and, on July 21, 2015, entered judgment in favor of the Company. Plaintiff filed a motion for reconsideration, which was denied. On May 3, 2016, Plaintiff filed a notice of appeal of the order granting summary judgment for the Company, the judgment in favor of the company, and the order denying Plaintiff’s motion to reconsider. Appellate briefing is now complete, and the court has heard oral arguments. Neither the likelihood of an unfavorable appellate decision nor the ultimate liability, if any, with respect to this matter can be determined at this time, and the Company is currently unable to estimate a range of reasonably possible losses, as defined by ASC 450-20-20, Contingencies–Loss Contingencies–Glossary, for this litigation. The Company believes that the Plaintiff’s claims in the complaint are without merit and intends to vigorously defend this lawsuit.

The Company is also involved in certain routine legal proceedings, claims and litigation matters encountered in the ordinary course of its business. Certain of these matters may be covered to an extent by insurance or by indemnification agreements with third parties. The Company has recorded accruals in its consolidated financial statements for those matters in which it is probable that it has incurred a loss and the amount of the loss, or range of loss, can be reasonably estimated. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

Headquarters Relocation

During 2014 the Company accelerated the lease expiration date for approximately 86,000 rentable square feet at its prior headquarters office space effective June 30, 2015. The Company relocated to its current headquarters in 2015 and recognized an expense of $3.7 million which was included as “General and administrative expense” and consisted of a lease exit liability of $2.9 million for the remaining lease payments, net of estimated sublease income of $1.7 million, and $0.8 million for the removal of property and restoration costs related to the prior headquarters lease. The Company did not incur further material costs related to the relocation.

The following table is a summary of the exit and disposal activity and liability balances as a result of the headquarters relocation for the nine months ended September 30, 2017 and the twelve months ended December 31, 2016 (in thousands):

 

20


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

 

Lease Termination Costs

 

 

Other Exit Costs

 

 

Total

 

Balance at January 1, 2016

 

$

1,425

 

 

$

204

 

 

$

1,629

 

Payments

 

 

(1,132

)

 

 

 

 

 

(1,132

)

Adjustments

 

 

344

 

 

 

(69

)

 

 

275

 

Balance at December 31, 2016

 

$

637

 

 

$

135

 

 

$

772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

$

637

 

 

$

135

 

 

$

772

 

Payments

 

 

(554

)

 

 

(9

)

 

 

(563

)

Adjustments

 

 

(83

)

 

 

(126

)

 

 

(209

)

Balance at September 30, 2017

 

$

 

 

$

 

 

$

 

 

 

9.

Derivative Instruments

The Company has periodically used derivative instruments to manage risk from changes in market conditions that may affect the Company’s financial performance. The Company has primarily used derivative instruments to manage its primary market risks, which are interest rate risk and foreign currency exchange rate risk.

The Company has periodically used forward currency exchange contracts to minimize the effects of foreign currency risk in the United Kingdom. The forward currency exchange contracts are non-designated derivatives. Any gain or loss resulting from these contracts is recorded as income or loss and is included in “Foreign currency transaction gain” in the Company’s consolidated statements of income. As of September 30, 2017, the Company did not manage its exposure to risk from foreign currency exchange rate fluctuations through the use of forward currency exchange contracts in the United Kingdom or Brazil.

The Company had no outstanding derivative instruments as of September 30, 2017 and 2016 and December 31, 2016.

There were no effects of derivative instruments on the consolidated results of operations and accumulated other comprehensive income (“AOCI”) for the three months ended September 30, 2017 and 2016.

The following table presents information on the effect of derivative instruments on the consolidated results of operations and accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016 (dollars in thousands):

 

 

 

Gains (Losses)

 

 

 

 

 

 

 

 

 

 

Gains (Losses)

 

 

 

Recognized in

 

 

Gains (Losses)

 

 

Reclassified From

 

 

 

Income

 

 

Recognized in AOCI

 

 

AOCI into Income

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Non-designated derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward currency exchange contracts(1)

 

$

 

 

$

3,020

 

 

$

 

 

$

 

 

$

 

 

$

 

Total

 

$

 

 

$

3,020

 

 

$

 

 

$

 

 

$

 

 

$

 

 

(1)

The gains (losses) on these derivatives substantially offset the (losses) gains on the economically hedged portion of the foreign intercompany balances.

 

 

10.

Related Party Transactions

A current officer of the Company has an ongoing ownership interest in the small business from which the Company acquired certain assets and assumed certain liabilities in June 2015 (see Note 2 for additional information). In the normal course of business, the Company attains certain customer relationships from the small business by entering into transactions with the customers to provide additional RPA financing. In these transactions, the Company satisfies the customer’s existing RPA balance with the small business which terminates such customer’s responsibilities to the small business. During the nine months ended September 30, 2017 the Company did not attain any relationships through these transactions with the small business. During the nine months ended September 30, 2016, the Company paid $0.4 million to the small business to satisfy customers’ existing RPA balances. Pursuant to the acquisition, a subsidiary of the Company issued a promissory note to the small business in the amount of $3.0 million (the “Promissory Note”) and granted the company an opportunity to earn certain contingent purchase consideration (see Note 2 for additional information), both of which are

21


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

guaranteed by the Company. The Promissory Note accrues interest at a rate of 4.0% per annum and will mature on June 23, 2018. During the nine months ended September 30, 2017 and 2016, the Company incurred interest expense of $95 thousand and $91 thousand, respectively, related to the Promissory Note. In addition, as a condition precedent to the acquisition, a subsidiary of the Company executed a Transition Services Agreement with the small business from which the Company acquired certain assets whereby it agreed to provide certain transition services to the business for three years following the acquisition. During the nine months ended September 30, 2017 and 2016, the Company was paid $24 thousand and $27 thousand, respectively, for such services.

The Company and Cash America entered into an agreement in conjunction with the Spin-off for the Company to administer the consumer loan underwriting model utilized by Cash America’s Retail Services Division in exchange for a fee per transaction paid to the Company as well as the reimbursement of the Company’s direct third-party costs incurred in providing the service. The Company received $0.6 million and $0.7 million for the nine months ended September 30, 2017 and 2016, respectively, pursuant to this agreement.

Since May 30, 2014, amounts due from or due to Cash America or FirstCash have been settled a month in arrears. The balance due from FirstCash of $0.1 million as of September 30, 2017 and 2016 and December 31, 2016, respectively, is included in “Other receivables and prepaid expenses” in the consolidated balance sheets.

 

 

11.

Variable Interest Entities

As part of the Company’s overall funding strategy and as part of its efforts to support its liquidity from sources other than its traditional capital market sources, the Company has established a securitization program through the 2016-1 and 2016-2 Securitization Facilities. The Company transferred certain consumer loan receivables to wholly owned, bankruptcy-remote special purpose subsidiaries (VIEs), which issue term notes backed by the underlying consumer loan receivables and are serviced by another wholly owned subsidiary.

The Company is required to evaluate the VIEs for consolidation. The Company has the ability to direct the activities of the VIEs that most significantly impact the economic performance of the entities as the servicer of the securitized loan receivables. Additionally, the Company has the right to receive residual payments, which expose it to potentially significant losses and returns. Accordingly, the Company determined it is the primary beneficiary of the VIEs and is required to consolidate them.

The assets and liabilities related to the VIEs are included in the Company’s consolidated financial statements and are accounted for as secured borrowings.

The Company parenthetically discloses on its consolidated balance sheets the VIE’s assets that can only be used to settle the VIE’s obligations and the VIE liabilities if the VIE’s creditors have no recourse against the Company’s general credit. The carrying amounts of consolidated VIE assets and liabilities associated with the Company’s securitization entities were as follows (dollars in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

105

 

 

$

 

Restricted cash and cash equivalents

 

 

22,161

 

 

 

18,119

 

 

 

19,468

 

Loans and finance receivables, net

 

 

274,363

 

 

 

176,016

 

 

 

216,766

 

Other receivables and prepaid expenses

 

 

 

 

 

3

 

 

 

3

 

Other assets

 

 

2,056

 

 

 

 

 

 

2,459

 

Total assets

 

$

298,580

 

 

$

194,243

 

 

$

238,696

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,793

 

 

$

991

 

 

$

1,350

 

Long-term debt

 

 

185,771

 

 

 

134,537

 

 

 

163,550

 

Total liabilities

 

$

187,564

 

 

$

135,528

 

 

$

164,900

 

 

12.

Fair Value Measurements

Recurring Fair Value Measurements

In accordance with ASC 820, Fair Value Measurements and Disclosures, certain of the Company’s assets and liabilities, which are carried at fair value, are classified in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

22


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Level 3: Unobservable inputs that are not corroborated by market data.

During the nine months ended September 30, 2017 and 2016, there were no transfers of assets or liabilities in or out of Level 1, Level 2 or Level 3 fair value measurements. It is the Company’s policy to value any transfers between levels of the fair value hierarchy based on end of period fair values.

The Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2017 and 2016 and December 31, 2016 are as follows (dollars in thousands):

 

 

 

September 30,

 

 

Fair Value Measurements Using

 

 

 

2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets (liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified savings plan assets(1)

 

$

1,443

 

 

$

1,443

 

 

$

 

 

$

 

Contingent consideration

 

 

(2,358

)

 

 

 

 

 

 

 

 

(2,358

)

Total

 

$

(915

)

 

$

1,443

 

 

$

 

 

$

(2,358

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Fair Value Measurements Using

 

 

 

2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets (liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified savings plan assets(1)

 

$

1,528

 

 

$

1,528

 

 

$

 

 

$

 

Contingent consideration

 

 

(5,658

)

 

 

 

 

 

 

 

 

(5,658

)

Total

 

$

(4,130

)

 

$

1,528

 

 

$

 

 

$

(5,658

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

Fair Value Measurements Using

 

 

 

2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets (liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified savings plan assets(1)

 

$

1,590

 

 

$

1,590

 

 

$

 

 

$

 

Contingent consideration

 

 

(2,358

)

 

 

 

 

 

 

 

 

(2,358

)

Total

 

$

(768

)

 

$

1,590

 

 

$

 

 

$

(2,358

)

 

(1)

The non-qualified savings plan assets are included in “Other receivables and prepaid expenses” in the Company’s consolidated balance sheets and have an offsetting liability of equal amount, which is included in “Accounts payable and accrued expenses” in the Company’s consolidated balance sheets.

The Company determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This analysis reflects the contractual terms of the purchase agreement and utilizes assumptions with regard to future earnings, probabilities of achieving such future earnings, the timing of expected payments and a discount rate. Significant increases with respect to assumptions as to future earnings and probabilities of achieving such future earnings would result in a higher fair value measurement while an increase in the discount rate would result in a lower fair value measurement. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in the fair value hierarchy.

The changes in the fair value of the contingent consideration, which is a Level 3 liability measured at fair value on a recurring basis, are summarized in the tables below for the nine months ended September 30, 2017 and 2016 (dollars in thousands):

 

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

 

 

Contingent consideration

 

 

Total

 

Balance at December 31, 2015

 

$

5,658

 

 

$

5,658

 

Adjustments

 

 

 

 

 

 

Balance at September 30, 2016

 

$

5,658

 

 

$

5,658

 

 

23


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

 

 

Contingent consideration

 

 

Total

 

Balance at December 31, 2016

 

$

2,358

 

 

$

2,358

 

Adjustments

 

 

 

 

 

 

Balance at September 30, 2017

 

$

2,358

 

 

$

2,358

 

Fair Value Measurements on a Non-Recurring Basis

The Company measures non-financial assets and liabilities such as property and equipment and intangible assets at fair value on a non-recurring basis or when events or circumstances indicate that the carrying amount of the assets may be impaired. At September 30, 2017 and 2016 and December 31, 2016, there were no assets or liabilities recorded at fair value on a non-recurring basis.

24


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Financial Assets and Liabilities Not Measured at Fair Value

The Company’s financial assets and liabilities as of September 30, 2017 and 2016 and December 31, 2016 that are not measured at fair value in the consolidated balance sheets are as follows (dollars in thousands):

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Fair Value Measurements Using

 

 

 

2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

110,054

 

 

$

110,054

 

 

$

 

 

$

 

Short-term loans and line of credit accounts, net (1)

 

 

176,437

 

 

 

 

 

 

 

 

 

176,437

 

Installment loans and RPAs, net (1)(4)

 

 

461,299

 

 

 

 

 

 

 

 

 

496,377

 

Restricted cash (5)

 

 

29,866

 

 

 

29,866

 

 

 

 

 

 

 

Investment in unconsolidated investee (2)(3)

 

 

6,703

 

 

 

 

 

 

 

 

 

6,703

 

Total

 

$

784,359

 

 

$

139,920

 

 

$

 

 

$

679,517

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for estimated losses on consumer loans guaranteed by the Company

 

$

2,017

 

 

$

 

 

$

 

 

$

2,017

 

Promissory note

 

 

3,000

 

 

 

 

 

 

 

 

 

3,245

 

Securitization Notes

 

 

186,533

 

 

 

 

 

 

189,005

 

 

 

 

9.75% senior notes due 2021

 

 

342,407

 

 

 

 

 

 

363,796

 

 

 

 

8.50% senior notes due 2024

 

 

250,000

 

 

 

 

 

 

252,000

 

 

 

 

Total

 

$

783,957

 

 

$

 

 

$

804,801

 

 

$

5,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Fair Value Measurements Using

 

 

 

2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,681

 

 

$

45,681

 

 

$

 

 

$

 

Short-term loans and line of credit accounts, net (1)

 

 

147,992

 

 

 

 

 

 

 

 

 

147,992

 

Installment loans and RPAs, net (1)(4)

 

 

394,873

 

 

 

 

 

 

 

 

 

448,111

 

Restricted cash (5)

 

 

39,272

 

 

 

39,272

 

 

 

 

 

 

 

Investment in unconsolidated investee (2)(3)

 

 

6,703

 

 

 

 

 

 

 

 

 

6,703

 

Total

 

$

634,521

 

 

$

84,953

 

 

$

 

 

$

602,806

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for estimated losses on consumer loans guaranteed by the Company

 

$

1,727

 

 

$

 

 

$

 

 

$

1,727

 

Promissory note

 

 

3,000

 

 

 

 

 

 

 

 

 

3,076

 

Credit agreement borrowings

 

 

15,000

 

 

 

 

 

 

 

 

 

15,000

 

Securitization Notes

 

 

136,953

 

 

 

 

 

 

139,911

 

 

 

 

9.75% senior notes due 2021

 

 

495,427

 

 

 

 

 

 

455,875

 

 

 

 

Total

 

$

652,107

 

 

$

 

 

$

595,786

 

 

$

19,803

 

 

25


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

Fair Value Measurements Using

 

 

 

2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,934

 

 

$

39,934

 

 

$

 

 

$

 

Short-term loans and line of credit accounts, net (1)

 

 

162,824

 

 

 

 

 

 

 

 

 

162,824

 

Installment loans and RPAs, net (1)(4)

 

 

398,726

 

 

 

 

 

 

 

 

 

430,895

 

Restricted cash (5)

 

 

26,306

 

 

 

26,306

 

 

 

 

 

 

 

Investment in unconsolidated investee (2)(3)

 

 

6,703

 

 

 

 

 

 

 

 

 

6,703

 

Total

 

$

634,493

 

 

$

66,240

 

 

$

 

 

$

600,422

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability for estimated losses on consumer loans guaranteed by the Company

 

$

1,996

 

 

$

 

 

$

 

 

$

1,996

 

Promissory note

 

 

3,000

 

 

 

 

 

 

 

 

 

3,111

 

Securitization Notes

 

 

165,419

 

 

 

 

 

 

168,216

 

 

 

 

9.75% senior notes due 2021

 

 

495,622

 

 

 

 

 

 

495,940

 

 

 

 

Total

 

$

666,037

 

 

$

 

 

$

664,156

 

 

$

5,107

 

 

(1)

Short-term loans, line of credit accounts, installment loans and RPAs are included in “Loans and finance receivables, net” in the consolidated balance sheets.

(2)

Investment in unconsolidated investee is included in “Other assets” in the consolidated balance sheets.

(3)

See Note 4 for additional information related to the investment in unconsolidated investee.

(4)

Installment loan and RPAs, net include $274.4 million, $176.0 million and $216.8 million in net assets of consolidated VIEs as of September 30, 2017 and 2016 and December 31, 2016, respectively.

(5)

Restricted cash includes $22.2 million, $18.1 million and $19.5 million in assets of consolidated VIEs as of September 30, 2017 and 2016 and December 31, 2016, respectively.

Cash and cash equivalents and restricted cash bear interest at market rates and have original maturities of less than 90 days. The carrying amount of restricted cash and cash equivalents approximates fair value.

Short-term loans, line of credit accounts, installment loans and RPAs are carried in the consolidated balance sheet net of the allowance for estimated losses, which is calculated by applying historical loss rates combined with recent default trends to the gross receivable balance. Short-term loans and line of credit accounts have relatively short maturity periods that are generally 12 months or less. The unobservable inputs used to calculate the fair value of these receivables include historical loss rates, recent default trends and estimated remaining loan term; therefore, the carrying value approximates the fair value. The fair value of installment loans and RPAs is estimated using discounted cash flow analyses, which consider interest rates on loans and discounts offered for receivables with similar terms to customers with similar credit quality, the timing of expected payments, estimated customer default rates and/or valuations of comparable portfolios. As of September 30, 2017 and 2016 and December 31, 2016, the fair value of the Company’s installment loans and RPAs was greater than the carrying value of these loans and finance receivables. Unsecured installment loans typically have terms between two and 60 months. RPAs typically have estimated delivery terms between six and 18 months.

The Company measures the fair value of its investment in unconsolidated investee using Level 3 inputs. Because the unconsolidated investee is a private company and financial information is limited, the Company estimates the fair value based on the best available information at the measurement date. As of September 30, 2017 and 2016 and December 31, 2016 the Company estimated the fair value of its investment to be approximately equal to the book value.

In connection with its CSO programs, the Company guarantees consumer loan payment obligations to unrelated third-party lenders for short-term and installment loans the Company arranges for consumers on the third-party lenders’ behalf and is required to purchase any defaulted loans it has guaranteed. The estimated fair value of the liability for estimated losses on consumer loans guaranteed by the Company was $2.0 million, $1.7 million and $2.0 million as of September 30, 2017 and 2016 and December 31, 2016, respectively. The Company measures the fair value of its liability for third-party lender-owned consumer loans under Level 3 inputs. The fair value of these liabilities is calculated by applying historical loss rates combined with recent default trends to the gross consumer loan balance. The unobservable inputs used to calculate the fair value of these loans include historical loss rates, recent default trends and estimated remaining loan terms; therefore, the carrying value of these liabilities approximates the fair value.

26


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

The Company measures the fair value of the Promissory Note using Level 3 inputs. The fair value of the Promissory Note is estimated using a discounted cash flow analysis. As of September 30, 2017 and 2016 and December 31, 2016, the Promissory Note had a higher fair value than the carrying value.

The Company measures the fair value of its Securitization Notes using Level 2 inputs. The fair value of the Company’s Securitization Notes is estimated based on quoted prices in markets that are not active. As of September 30, 2017 and 2016 and December 31, 2016, the Company’s Securitization Notes had a higher fair value than the carrying value.

The Company measures the fair value of its 9.75% senior notes due 2021 using Level 2 inputs. The fair value of the Company’s 9.75% senior notes due 2021 is estimated based on quoted prices in markets that are not active. As of September 30, 2017 and December 31, 2016, the Company’s 9.75% senior notes due 2021 had a higher fair value than the carrying value. As of September 30, 2016, the fair value of the Company’s 9.75% senior notes due 2021 was lower than the carrying value.

The Company measures the fair value of its 8.50% senior notes due 2024 using Level 2 inputs. The fair value of the Company’s 8.50% senior notes due 2024 is estimated based on quoted prices in markets that are not active. As of September 30, 2017 the Company’s 8.50% senior notes due 2024 had a higher fair value than the carrying value.

 

 

13.

Condensed Consolidating Financial Statements

The Company’s Senior Notes are unconditionally guaranteed by certain of the Company’s subsidiaries (the “Guarantor Subsidiaries”) and are not secured by its other subsidiaries (the “Non-Guarantor Subsidiaries”). The Guarantor Subsidiaries are 100% owned, all guarantees are full and unconditional, and all guarantees are joint and several. As a result of the guarantee arrangements, the Company is required, in accordance with Rule 3-10 of Regulation S-X, to present the following condensed consolidating financial statements.

The condensed consolidating financial statements reflect the investments in subsidiaries of the Company using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Condensed consolidating financial statements of Enova International, Inc. (the “Parent”), its Guarantor Subsidiaries and Non-Guarantor Subsidiaries as of September 30, 2017 and 2016 and December 31, 2016 and for the periods ended September 30, 2017 and 2016 are shown on the following pages.

27


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

As of September 30, 2017

(dollars in thousands)

 

 

 

 

 

 

 

Guarantor

 

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,055

 

 

$

50,996

 

 

$

5,003

 

 

$

 

 

$

110,054

 

Restricted cash

 

 

 

 

 

7,705

 

 

 

22,161

 

 

 

 

 

 

29,866

 

Loans and finance receivables, net

 

 

 

 

 

351,627

 

 

 

286,109

 

 

 

 

 

 

637,736

 

Income taxes receivable

 

 

105,140

 

 

 

(95,852

)

 

 

31

 

 

 

 

 

 

9,319

 

Other receivables and prepaid expenses

 

 

245

 

 

 

21,271

 

 

 

2,280

 

 

 

 

 

 

23,796

 

Property and equipment, net

 

 

 

 

 

45,925

 

 

 

632

 

 

 

 

 

 

46,557

 

Goodwill

 

 

 

 

 

267,015

 

 

 

 

 

 

 

 

 

267,015

 

Intangible assets, net

 

 

 

 

 

4,593

 

 

 

 

 

 

 

 

 

4,593

 

Investment in subsidiaries

 

 

362,991

 

 

 

45,924

 

 

 

 

 

 

(408,915

)

 

 

 

Intercompany receivable

 

 

343,514

 

 

 

 

 

 

 

 

 

(343,514

)

 

 

 

Other assets

 

 

1,826

 

 

 

6,960

 

 

 

2,056

 

 

 

 

 

 

10,842

 

Total assets

 

$

867,771

 

 

$

706,164

 

 

$

318,272

 

 

$

(752,429

)

 

$

1,139,778

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

13,795

 

 

$

62,348

 

 

$

2,754

 

 

$

 

 

$

78,897

 

Intercompany payables

 

 

 

 

 

252,154

 

 

 

91,360

 

 

 

(343,514

)

 

 

 

Deferred tax liabilities, net

 

 

(453

)

 

 

21,634

 

 

 

(500

)

 

 

 

 

 

20,681

 

Long-term debt

 

 

579,624

 

 

 

 

 

 

185,771

 

 

 

 

 

 

765,395

 

Total liabilities

 

 

592,966

 

 

 

336,136

 

 

 

279,385

 

 

 

(343,514

)

 

 

864,973

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

274,805

 

 

 

370,028

 

 

 

38,887

 

 

 

(408,915

)

 

 

274,805

 

Total liabilities and stockholders' equity

 

$

867,771

 

 

$

706,164

 

 

$

318,272

 

 

$

(752,429

)

 

$

1,139,778

 


28


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

As of September 30, 2016

(dollars in thousands)

 

 

 

 

 

 

 

Guarantor

 

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

43,127

 

 

$

2,554

 

 

$

 

 

$

45,681

 

Restricted cash

 

 

 

 

 

21,152

 

 

 

18,120

 

 

 

 

 

 

39,272

 

Loans and finance receivables, net

 

 

 

 

 

358,142

 

 

 

184,723

 

 

 

 

 

 

542,865

 

Income taxes receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other receivables and prepaid expenses

 

 

141

 

 

 

18,222

 

 

 

286

 

 

 

 

 

 

18,649

 

Property and equipment, net

 

 

 

 

 

47,050

 

 

 

436

 

 

 

 

 

 

47,486

 

Goodwill

 

 

 

 

 

267,012

 

 

 

 

 

 

 

 

 

267,012

 

Intangible assets, net

 

 

 

 

 

5,670

 

 

 

5

 

 

 

 

 

 

5,675

 

Investment in subsidiaries

 

 

278,999

 

 

 

22,358

 

 

 

 

 

 

(301,357

)

 

 

 

Intercompany receivable

 

 

413,472

 

 

 

 

 

 

 

 

 

(413,472

)

 

 

 

Other assets

 

 

460

 

 

 

7,979

 

 

 

 

 

 

 

 

 

8,439

 

Total assets

 

$

693,072

 

 

$

790,712

 

 

$

206,124

 

 

$

(714,829

)

 

$

975,079

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

16,386

 

 

$

67,931

 

 

$

1,116

 

 

$

 

 

$

85,433

 

Intercompany payables

 

 

 

 

 

357,650

 

 

 

55,826

 

 

 

(413,476

)

 

 

 

Income taxes currently payable

 

 

(56,364

)

 

 

61,521

 

 

 

(8

)

 

 

 

 

 

5,149

 

Deferred tax liabilities, net

 

 

(677

)

 

 

17,394

 

 

 

(484

)

 

 

 

 

 

16,233

 

Long-term debt

 

 

500,642

 

 

 

 

 

 

134,537

 

 

 

 

 

 

635,179

 

Total liabilities

 

 

459,987

 

 

 

504,496

 

 

 

190,987

 

 

 

(413,476

)

 

 

741,994

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

233,085

 

 

 

286,216

 

 

 

15,137

 

 

 

(301,353

)

 

 

233,085

 

Total liabilities and stockholders' equity

 

$

693,072

 

 

$

790,712

 

 

$

206,124

 

 

$

(714,829

)

 

$

975,079

 


29


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

As of December 31, 2016

(dollars in thousands)

 

 

 

 

 

 

 

Guarantor

 

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

36,057

 

 

$

3,877

 

 

$

 

 

$

39,934

 

Restricted cash

 

 

 

 

 

6,838

 

 

 

19,468

 

 

 

 

 

 

26,306

 

Loans and finance receivables, net

 

 

 

 

 

335,160

 

 

 

226,390

 

 

 

 

 

 

561,550

 

Other receivables and prepaid expenses

 

 

127

 

 

 

19,095

 

 

 

302

 

 

 

 

 

 

19,524

 

Property and equipment, net

 

 

 

 

 

46,507

 

 

 

593

 

 

 

 

 

 

47,100

 

Goodwill

 

 

 

 

 

267,010

 

 

 

 

 

 

 

 

 

267,010

 

Intangible assets, net

 

 

 

 

 

5,400

 

 

 

4

 

 

 

 

 

 

5,404

 

Investment in subsidiaries

 

 

294,646

 

 

 

25,131

 

 

 

 

 

 

(319,777

)

 

 

 

Intercompany receivable

 

 

363,942

 

 

 

 

 

 

 

 

 

(363,942

)

 

 

 

Other assets

 

 

597

 

 

 

7,995

 

 

 

2,459

 

 

 

 

 

 

11,051

 

Total assets

 

$

659,312

 

 

$

749,193

 

 

$

253,093

 

 

$

(683,719

)

 

$

977,879

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

4,310

 

 

$

65,714

 

 

$

1,647

 

 

$

 

 

$

71,671

 

Intercompany payables

 

 

 

 

 

295,763

 

 

 

68,179

 

 

 

(363,942

)

 

 

 

Income taxes currently payable

 

 

(72,704

)

 

 

73,006

 

 

 

(20

)

 

 

 

 

 

282

 

Deferred tax liabilities, net

 

 

(354

)

 

 

15,156

 

 

 

(486

)

 

 

 

 

 

14,316

 

Long-term debt

 

 

486,361

 

 

 

 

 

 

163,550

 

 

 

 

 

 

649,911

 

Total liabilities

 

 

417,613

 

 

 

449,639

 

 

 

232,870

 

 

 

(363,942

)

 

 

736,180

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

241,699

 

 

 

299,554

 

 

 

20,223

 

 

 

(319,777

)

 

 

241,699

 

Total liabilities and stockholders' equity

 

$

659,312

 

 

$

749,193

 

 

$

253,093

 

 

$

(683,719

)

 

$

977,879

 


30


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the Three Months Ended September 30, 2017

(in thousands)

 

 

 

 

 

 

 

Guarantor

 

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Revenue

 

$

 

 

$

178,908

 

 

$

40,374

 

 

$

(1,404

)

 

$

217,878

 

Cost of Revenue

 

 

 

 

 

79,349

 

 

 

27,992

 

 

 

 

 

 

107,341

 

Gross Profit

 

 

 

 

 

99,559

 

 

 

12,382

 

 

 

(1,404

)

 

 

110,537

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

 

 

 

26,423

 

 

 

577

 

 

 

 

 

 

27,000

 

Operations and technology

 

 

 

 

 

22,911

 

 

 

4,252

 

 

 

 

 

 

27,163

 

General and administrative

 

 

131

 

 

 

25,746

 

 

 

691

 

 

 

(1,404

)

 

 

25,164

 

Depreciation and amortization

 

 

 

 

 

3,486

 

 

 

47

 

 

 

 

 

 

3,533

 

Total Expenses

 

 

131

 

 

 

78,566

 

 

 

5,567

 

 

 

(1,404

)

 

 

82,860

 

(Loss) Income from Operations

 

 

(131

)

 

 

20,993

 

 

 

6,815

 

 

 

 

 

 

27,677

 

Interest expense, net

 

 

(14,238

)

 

 

(33

)

 

 

(4,021

)

 

 

 

 

 

(18,292

)

Foreign currency transaction gain

 

 

65

 

 

 

 

 

 

 

 

 

 

 

 

65

 

Loss on early extinguishment of debt

 

 

(14,927

)

 

 

 

 

 

 

 

 

 

 

 

(14,927

)

(Loss) Income before Income Taxes and Equity in Net Earnings of Subsidiaries

 

 

(29,231

)

 

 

20,960

 

 

 

2,794

 

 

 

 

 

 

(5,477

)

(Benefit from) provision for income taxes

 

 

(9,760

)

 

 

6,746

 

 

 

905

 

 

 

 

 

 

(2,109

)

(Loss) Income before Equity in Net Earnings of Subsidiaries

 

 

(19,471

)

 

 

14,214

 

 

 

1,889

 

 

 

 

 

 

(3,368

)

Net earnings of subsidiaries

 

 

16,103

 

 

 

1,889

 

 

 

 

 

 

(17,992

)

 

 

 

Net (Loss) Income

 

$

(3,368

)

 

$

16,103

 

 

$

1,889

 

 

$

(17,992

)

 

$

(3,368

)

Other comprehensive gain (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

2,052

 

 

 

1,304

 

 

 

749

 

 

 

(2,053

)

 

 

2,052

 

Total other comprehensive gain (loss), net of tax

 

 

2,052

 

 

 

1,304

 

 

 

749

 

 

 

(2,053

)

 

 

2,052

 

Comprehensive (Loss) Income

 

$

(1,316

)

 

$

17,407

 

 

$

2,638

 

 

$

(20,045

)

 

$

(1,316

)


31


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the Three Months Ended September 30, 2016

(in thousands)

 

 

 

 

 

 

 

Guarantor

 

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Revenue

 

$

 

 

$

170,288

 

 

$

24,157

 

 

$

1,498

 

 

$

195,943

 

Cost of Revenue

 

 

 

 

 

78,283

 

 

 

17,108

 

 

 

 

 

 

95,391

 

Gross Profit

 

 

 

 

 

92,005

 

 

 

7,049

 

 

 

1,498

 

 

 

100,552

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

 

 

 

26,348

 

 

 

374

 

 

 

 

 

 

26,722

 

Operations and technology

 

 

 

 

 

19,505

 

 

 

1,132

 

 

 

 

 

 

20,637

 

General and administrative

 

 

37

 

 

 

18,539

 

 

 

1,233

 

 

 

1,498

 

 

 

21,307

 

Depreciation and amortization

 

 

 

 

 

3,761

 

 

 

28

 

 

 

 

 

 

3,789

 

Total Expenses

 

 

37

 

 

 

68,153

 

 

 

2,767

 

 

 

1,498

 

 

 

72,455

 

(Loss) Income from Operations

 

 

(37

)

 

 

23,852

 

 

 

4,282

 

 

 

 

 

 

28,097

 

Interest expense, net

 

 

(13,342

)

 

 

(123

)

 

 

(2,652

)

 

 

 

 

 

(16,117

)

Foreign currency transaction gain

 

 

145

 

 

 

 

 

 

 

 

 

 

 

 

145

 

(Loss) Income before Income Taxes and Equity in Net Earnings of Subsidiaries

 

 

(13,234

)

 

 

23,729

 

 

 

1,630

 

 

 

 

 

 

12,125

 

(Benefit from) provision for income taxes

 

 

(4,832

)

 

 

8,451

 

 

 

669

 

 

 

 

 

 

4,288

 

(Loss) Income before Equity in Net Earnings of Subsidiaries

 

 

(8,402

)

 

 

15,278

 

 

 

961

 

 

 

 

 

 

7,837

 

Net earnings of subsidiaries

 

 

16,239

 

 

 

961

 

 

 

 

 

 

(17,200

)

 

 

 

Net Income (Loss)

 

$

7,837

 

 

$

16,239

 

 

$

961

 

 

$

(17,200

)

 

$

7,837

 

Other comprehensive (loss) gain, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(1,245

)

 

 

(1,084

)

 

 

(160

)

 

 

1,244

 

 

 

(1,245

)

Total other comprehensive (loss) gain, net of tax

 

 

(1,245

)

 

 

(1,084

)

 

 

(160

)

 

 

1,244

 

 

 

(1,245

)

Comprehensive Income (Loss)

 

$

6,592

 

 

$

15,155

 

 

$

801

 

 

$

(15,956

)

 

$

6,592

 

 


32


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the Nine Months Ended September 30, 2017

(in thousands)

 

 

 

 

 

 

 

Guarantor

 

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Revenue

 

$

 

 

$

497,081

 

 

$

106,902

 

 

$

(3,938

)

 

$

600,045

 

Cost of Revenue

 

 

 

 

 

197,281

 

 

 

71,806

 

 

 

 

 

 

269,087

 

Gross Profit

 

 

 

 

 

299,800

 

 

 

35,096

 

 

 

(3,938

)

 

 

330,958

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

 

 

 

68,686

 

 

 

1,307

 

 

 

 

 

 

69,993

 

Operations and technology

 

 

 

 

 

65,090

 

 

 

7,422

 

 

 

 

 

 

72,512

 

General and administrative

 

 

265

 

 

 

76,060

 

 

 

4,718

 

 

 

(3,938

)

 

 

77,105

 

Depreciation and amortization

 

 

 

 

 

10,261

 

 

 

135

 

 

 

 

 

 

10,396

 

Total Expenses

 

 

265

 

 

 

220,097

 

 

 

13,582

 

 

 

(3,938

)

 

 

230,006

 

(Loss) Income from Operations

 

 

(265

)

 

 

79,703

 

 

 

21,514

 

 

 

 

 

 

100,952

 

Interest expense, net

 

 

(40,780

)

 

 

(97

)

 

 

(11,649

)

 

 

 

 

 

(52,526

)

Foreign currency transaction gain

 

 

349

 

 

 

5

 

 

 

 

 

 

 

 

 

354

 

Loss on early extinguishment of debt

 

 

(14,927

)

 

 

 

 

 

 

 

 

 

 

 

(14,927

)

(Loss) Income before Income Taxes and Equity in Net Earnings of Subsidiaries

 

 

(55,623

)

 

 

79,611

 

 

 

9,865

 

 

 

 

 

 

33,853

 

(Benefit from) provision for income taxes

 

 

(18,889

)

 

 

27,034

 

 

 

3,351

 

 

 

 

 

 

11,496

 

(Loss) Income before Equity in Net Earnings of Subsidiaries

 

 

(36,734

)

 

 

52,577

 

 

 

6,514

 

 

 

 

 

 

22,357

 

Net earnings of subsidiaries

 

 

59,091

 

 

 

6,514

 

 

 

 

 

 

(65,605

)

 

 

 

Net Income (Loss)

 

$

22,357

 

 

$

59,091

 

 

$

6,514

 

 

$

(65,605

)

 

$

22,357

 

Other comprehensive gain (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

4,561

 

 

 

4,197

 

 

 

365

 

 

 

(4,562

)

 

 

4,561

 

Total other comprehensive gain (loss), net of tax

 

 

4,561

 

 

 

4,197

 

 

 

365

 

 

 

(4,562

)

 

 

4,561

 

Comprehensive Income (Loss)

 

$

26,918

 

 

$

63,288

 

 

$

6,879

 

 

$

(70,167

)

 

$

26,918

 


33


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the Nine Months Ended September 30, 2016

(in thousands)

 

 

 

 

 

 

 

Guarantor

 

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Revenue

 

$

 

 

$

478,434

 

 

$

64,697

 

 

$

 

 

$

543,131

 

Cost of Revenue

 

 

 

 

 

182,729

 

 

 

47,692

 

 

 

 

 

 

230,421

 

Gross Profit

 

 

 

 

 

295,705

 

 

 

17,005

 

 

 

 

 

 

312,710

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

 

 

 

72,488

 

 

 

1,012

 

 

 

 

 

 

73,500

 

Operations and technology

 

 

 

 

 

58,642

 

 

 

3,064

 

 

 

 

 

 

61,706

 

General and administrative

 

 

185

 

 

 

72,867

 

 

 

3,695

 

 

 

 

 

 

76,747

 

Depreciation and amortization

 

 

 

 

 

11,936

 

 

 

68

 

 

 

 

 

 

12,004

 

Total Expenses

 

 

185

 

 

 

215,933

 

 

 

7,839

 

 

 

 

 

 

223,957

 

(Loss) Income from Operations

 

 

(185

)

 

 

79,772

 

 

 

9,166

 

 

 

 

 

 

88,753

 

Interest (expense) income, net

 

 

(39,793

)

 

 

613

 

 

 

(8,878

)

 

 

 

 

 

(48,058

)

Foreign currency transaction gain

 

 

2,184

 

 

 

 

 

 

 

 

 

 

 

 

2,184

 

(Loss) Income before Income Taxes and Equity in Net Earnings of Subsidiaries

 

 

(37,794

)

 

 

80,385

 

 

 

288

 

 

 

 

 

 

42,879

 

(Benefit from) provision for income taxes

 

 

(14,977

)

 

 

31,853

 

 

 

115

 

 

 

 

 

 

16,991

 

(Loss) Income before Equity in Net Earnings of Subsidiaries

 

 

(22,817

)

 

 

48,532

 

 

 

173

 

 

 

 

 

 

25,888

 

Net earnings of subsidiaries

 

 

48,705

 

 

 

173

 

 

 

 

 

 

(48,878

)

 

 

 

Net Income (Loss)

 

$

25,888

 

 

$

48,705

 

 

$

173

 

 

$

(48,878

)

 

$

25,888

 

Other comprehensive (loss) gain, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(5,070

)

 

 

(6,342

)

 

 

1,270

 

 

 

5,072

 

 

 

(5,070

)

Total other comprehensive (loss) gain, net of tax

 

 

(5,070

)

 

 

(6,342

)

 

 

1,270

 

 

 

5,072

 

 

 

(5,070

)

Comprehensive Income (Loss)

 

$

20,818

 

 

$

42,363

 

 

$

1,443

 

 

$

(43,806

)

 

$

20,818

 

 


34


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2017

(in thousands)

 

 

 

 

 

 

 

Guarantor

 

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Cash Flows from Operating Activities

 

$

(17,931

)

 

$

346,948

 

 

$

(8,712

)

 

$

(9,008

)

 

$

311,297

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and finance receivables originated or acquired

 

 

 

 

 

(974,211

)

 

 

(24,122

)

 

 

 

 

 

(998,333

)

Securitized loans transferred

 

 

 

 

 

201,518

 

 

 

(201,518

)

 

 

 

 

 

 

Loans and finance receivables repaid

 

 

 

 

 

467,011

 

 

 

205,463

 

 

 

 

 

 

672,474

 

Change in restricted cash

 

 

 

 

 

(337

)

 

 

(2,693

)

 

 

 

 

 

(3,030

)

Purchases of property and equipment

 

 

 

 

 

(10,651

)

 

 

(153

)

 

 

 

 

 

(10,804

)

Capital contributions to subsidiaries

 

 

 

 

 

(11,785

)

 

 

 

 

 

11,785

 

 

 

 

Other investing activities

 

 

 

 

 

1,798

 

 

 

 

 

 

 

 

 

1,798

 

Net cash (used in) provided by investing activities

 

 

 

 

 

(326,657

)

 

 

(23,023

)

 

 

11,785

 

 

 

(337,895

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Payments for) proceeds from member's equity

 

 

 

 

 

(9,008

)

 

 

11,785

 

 

 

(2,777

)

 

 

 

Debt issuance costs paid

 

 

(9,564

)

 

 

 

 

 

 

 

 

 

 

 

(9,564

)

Debt prepayment penalty

 

 

(11,335

)

 

 

 

 

 

 

 

 

 

 

 

(11,335

)

Treasury shares purchased

 

 

(2,115

)

 

 

 

 

 

 

 

 

 

 

 

(2,115

)

Issuance of Senior Notes

 

 

250,000

 

 

 

 

 

 

 

 

 

 

 

 

250,000

 

Repayments of Senior Notes

 

 

(155,000

)

 

 

 

 

 

 

 

 

 

 

 

(155,000

)

Borrowings under revolving line of credit

 

 

30,000

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Repayments under revolving line of credit, net

 

 

(30,000

)

 

 

 

 

 

 

 

 

 

 

 

(30,000

)

Borrowings under securitization facility

 

 

 

 

 

 

 

 

137,200

 

 

 

 

 

 

137,200

 

Repayments under securitization facility

 

 

 

 

 

 

 

 

(116,085

)

 

 

 

 

 

(116,085

)

Net cash provided by (used in) financing activities

 

 

71,986

 

 

 

(9,008

)

 

 

32,900

 

 

 

(2,777

)

 

 

93,101

 

Effect of exchange rates on cash

 

 

 

 

 

3,656

 

 

 

(39

)

 

 

 

 

 

3,617

 

Net increase in cash and cash equivalents

 

 

54,055

 

 

 

14,939

 

 

 

1,126

 

 

 

 

 

 

70,120

 

Cash and cash equivalents at beginning of year

 

 

 

 

 

36,057

 

 

 

3,877

 

 

 

 

 

 

39,934

 

Cash and cash equivalents at end of period

 

$

54,055

 

 

$

50,996

 

 

$

5,003

 

 

$

 

 

$

110,054

 


35


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2016

(in thousands)

 

 

 

 

 

 

 

Guarantor

 

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

Cash Flows from Operating Activities

 

$

87,477

 

 

$

216,799

 

 

$

40,569

 

 

$

(44,138

)

 

$

300,707

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and finance receivables originated or acquired

 

 

 

 

 

(976,614

)

 

 

(10,641

)

 

 

 

 

 

(987,255

)

Securitized loans transferred

 

 

 

 

 

278,076

 

 

 

(278,076

)

 

 

 

 

 

 

Loans and finance receivables repaid

 

 

 

 

 

525,636

 

 

 

126,229

 

 

 

 

 

 

651,865

 

Change in restricted cash

 

 

 

 

 

(14,656

)

 

 

(18,120

)

 

 

 

 

 

(32,776

)

Purchases of property and equipment

 

 

 

 

 

(11,262

)

 

 

(204

)

 

 

 

 

 

(11,466

)

Capital contributions to subsidiaries

 

 

(43,962

)

 

 

(8,005

)

 

 

 

 

 

51,967

 

 

 

 

Other investing activities

 

 

 

 

 

72

 

 

 

 

 

 

 

 

 

72

 

Net cash (used in) provided by investing activities

 

 

(43,962

)

 

 

(206,753

)

 

 

(180,812

)

 

 

51,967

 

 

 

(379,560

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Payments for) proceeds from member's equity

 

 

 

 

 

(176

)

 

 

8,005

 

 

 

(7,829

)

 

 

 

Debt issuance costs paid

 

 

 

 

 

 

 

 

(3,516

)

 

 

 

 

 

(3,516

)

Treasury shares purchased

 

 

(115

)

 

 

 

 

 

 

 

 

 

 

 

(115

)

Borrowings under revolving line of credit

 

 

45,000

 

 

 

 

 

 

 

 

 

 

 

 

45,000

 

Repayments under revolving line of credit

 

 

(88,400

)

 

 

 

 

 

 

 

 

 

 

 

(88,400

)

Borrowings under securitization facility

 

 

 

 

 

 

 

 

218,961

 

 

 

 

 

 

218,961

 

Repayments under securitization facility

 

 

 

 

 

 

 

 

(82,008

)

 

 

 

 

 

(82,008

)

Net cash (used in) provided by financing activities

 

 

(43,515

)

 

 

(176

)

 

 

141,442

 

 

 

(7,829

)

 

 

89,922

 

Effect of exchange rates on cash

 

 

 

 

 

(7,670

)

 

 

216

 

 

 

 

 

 

(7,454

)

Net increase in cash and cash equivalents

 

 

 

 

 

2,200

 

 

 

1,415

 

 

 

 

 

 

3,615

 

Cash and cash equivalents at beginning of year

 

 

 

 

 

40,927

 

 

 

1,139

 

 

 

 

 

 

42,066

 

Cash and cash equivalents at end of period

 

$

 

 

$

43,127

 

 

$

2,554

 

 

$

 

 

$

45,681

 

 

14.

Subsequent Events

Subsequent events have been reviewed through the date these financial statements were available to be issued.

Amendment of 2016-1 Securitization Facility

On October 20, 2017, the Company and certain of its subsidiaries amended and restated the 2016‑1 Securitization Facility (the “Amended Facility”). The counterparties to the Amended Facility included certain purchasers, the Administrative Agent and the Indenture Trustee. The Amended Facility relates to Receivables that have been and will be originated or acquired under the Company’s NetCredit brand by the Originators and that meet specified eligibility criteria. Under the Amended Facility, additional Receivables may be sold to the Issuer and serviced by another subsidiary of the Company. As of the Closing Date, the Issuer owned eligible Receivables with an outstanding principal balance equal to $226.4 million.

In connection with the amendment and restatement, all of the outstanding notes issued by the Issuer prior to the Closing Date were redeemed and the Issuer issued an initial term note with an initial principal amount of $181.1 million (the “2017 Initial Term Note”) and variable funding notes (the “2017 Variable Funding Notes”) with an aggregate committed availability of $75 million per quarter with an option to increase the commitment to $90 million with the consent of the holders of the 2017 Variable Funding Notes. As described below, the Issuer will subsequently issue term notes (the “2017 Term Notes”) and, together with the 2017 Initial Term Note and the 2017 Variable Funding Notes, (the “2017 Securitization Notes”) at the end of each calendar quarter. The maximum principal amount of the 2017 Securitization Notes that may be outstanding at any time under the Amended Facility is $275 million.

On each of January 2, 2018, April 2, 2018, July 2, 2018, October 1, 2018, December 31, 2018 and April 1, 2019, the Receivables financed under the 2017 Variable Funding Notes will be allocated to a 2017 Term Note, which 2017 Term Note will be issued to the holders of the 2017 Variable Funding Notes and the 2017 Variable Funding Note on such date will be reduced to zero. The 2017

36


ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Securitization Notes are non-recourse to the Company and mature at various dates, the latest of which will be April 15, 2021 (the “2017 Final Maturity Date”).

The 2017 Securitization Notes are issued pursuant to an amended and restated indenture, dated as of the Closing Date, between the Issuer and the Indenture Trustee. The 2017 Securitization Notes bear interest at a rate per annum equal to One-Month LIBOR (subject to a floor) plus 7.50%. In addition, the Issuer paid certain customary upfront closing fees to the Administrative Agent and will pay customary annual commitment and other fees to the purchasers under the Amended Facility. Subject to certain exceptions, the Issuer is not permitted to prepay or redeem any of the 2017 Securitization Notes prior to April 15, 2019 except for a one-time prepayment of the 2017 Securitization Notes related to a removal of Receivables in an amount no greater than $100 million. Following such date, the Issuer is permitted to voluntarily prepay any of the 2017 Securitization Notes, subject to an optional redemption premium. Interest and principal payments on the 2017 Securitization Notes will be made monthly. Any remaining amounts outstanding will be payable no later than the 2017 Final Maturity Date.

All amounts due under the 2017 Securitization Notes are secured by all of the Issuer’s assets, which include the Receivables transferred to the Issuer, related rights under the Receivables, specified bank accounts and certain other related collateral.

The Amended Facility documents contain customary provisions for securitizations, including: representations and warranties as to the eligibility of the Receivables and other matters; indemnification for specified losses not including losses due to the inability of consumers to repay their loans; covenants regarding special purpose entity matters and other subjects; and default and termination provisions which provide for the acceleration of the 2017 Securitization Notes under the Amended Facility in circumstances including, but not limited to, failure to make payments when due, servicer defaults, certain insolvency events, breaches of representations, warranties or covenants, failure to maintain the security interest in the receivables, and defaults under other material indebtedness.

On October 26, 2017, the Issuer and the Indenture Trustee amended the Amended Facility to permit a holder of a 2017 Term Note or the 2017 Initial Term Note to exchange its notes for notes with an alternative structure with terms not materially different to the Issuer than the exchanged Term Notes or Initial Term Notes.

 

 

 

 

37


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of financial condition, results of operations, liquidity and capital resources and certain factors that may affect future results, including economic and industry-wide factors, of Enova International, Inc. and its subsidiaries should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

BUSINESS OVERVIEW

We are a leading technology and analytics company focused on providing online financial services to consumers and small businesses. In 2016, we extended approximately $2.1 billion in credit to borrowers. As of September 30, 2017, we offered or arranged loans or draws on lines of credit to consumers in 33 states in the United States and in the United Kingdom and Brazil. We also offered financing to small businesses in all 50 states and Washington D.C. in the United States. We use our proprietary technology, analytics and customer service capabilities to quickly evaluate, underwrite and fund loans or provide financing, allowing us to offer consumers and small businesses credit or financing when and how they want it. Our customers include the large and growing number of consumers who and small businesses which have bank accounts but use alternative financial services because of their limited access to more traditional credit from banks, credit card companies and other lenders. We were an early entrant into online lending, launching our online business in 2004, and through September 30, 2017, we have completed over 42.2 million customer transactions and collected approximately 16 terabytes of currently accessible customer behavior data since launch, allowing us to better analyze and underwrite our specific customer base. We have significantly diversified our business over the past several years having expanded the markets we serve and the financing products we offer. These financing products include short-term loans, line of credit accounts, installment loans and receivables purchase agreements (“RPAs”).

We believe our customers highly value our products and services as an important component of their personal or business finances because our products are convenient, quick and often less expensive than other available alternatives. We attribute the success of our business to our advanced and innovative technology systems, the proprietary analytical models we use to predict the performance of loans and finance receivables, our sophisticated customer acquisition programs, our dedication to customer service and our talented employees.

We have developed proprietary underwriting systems based on data we have collected over our 13 years of experience. These systems employ advanced risk analytics to decide whether to approve financing transactions, to structure the amount and terms of the financings we offer pursuant to jurisdiction-specific regulations and to provide customers with their funds quickly and efficiently. Our systems closely monitor collection and portfolio performance data that we use to continually refine the analytical models and statistical measures used in making our credit, purchase, marketing and collection decisions.

Our flexible and scalable technology platform allows us to process and complete customers’ transactions quickly and efficiently. In 2016, we processed approximately 3.8 million transactions, and we continue to grow our loans and finance receivable portfolios and increase the number of customers we serve through desktop, tablet and mobile platforms. Our highly customizable technology platform allows us to efficiently develop and deploy new products to adapt to evolving regulatory requirements and consumer preference, and to enter new markets quickly. In 2012, we launched a new product in the United States designed to serve near-prime customers, and in April 2014 we introduced a similar product in the United Kingdom. In June 2014, we launched our business in Brazil, where we arrange financing for borrowers through a third party lender. In addition, in July 2014, we introduced a new line of credit product in the United States to serve the needs of small businesses. In June 2015, we further expanded our product offering by acquiring certain assets of a company that provides financing to small businesses by offering RPAs (see Note 2 in the Notes to Consolidated Financial Statements included in this report). In May 2017, we expanded products available to small businesses by offering installment loans. These new products are intended to allow us to further diversify our product offerings, customer base and geographic scope. In the nine-month period ended September 30, 2017, we derived 84.0% of our total revenue from the United States and 16.0% of our total revenue internationally, with 86.2% of international revenue (representing 13.8% of our total revenue) generated in the United Kingdom.

We have been able to consistently acquire new customers and successfully generate repeat business from returning customers when they need financing. We believe our customers are loyal to us because they are satisfied with our products and services. We acquire new customers from a variety of sources, including visits to our own websites, mobile sites or applications, and through direct marketing, affiliate marketing, lead providers and relationships with other lenders. We believe that the online convenience of our products and our 24/7 availability to accept applications with quick approval decisions are important to our customers.

38


 

Once a potential customer submits an application, we quickly provide a credit or purchase decision. If a loan or financing is approved, we or our lending partners typically fund the loan or financing the next business day or, in some cases, the same day. During the entire process, from application through payment, we provide access to our well-trained customer service team. All of our operations, from customer acquisition through collections, are structured to build customer satisfaction and loyalty, in the event that a customer has a need for our products in the future. We have developed a series of sophisticated proprietary scoring models to support our various products. We believe that these models are an integral component of our operations and they allow us to complete a high volume of customer transactions while actively managing risk and the related quality of our loan and finance receivable portfolios. We believe our successful application of these technology innovations differentiates our capabilities relative to competitive platforms as evidenced by our history of strong growth and stable portfolio quality.

PRODUCTS AND SERVICES

Our online financing products and services provide customers with a deposit of funds into their bank account in exchange for a commitment to repay the amount deposited plus fees, interest and/or revenue. We originate, arrange, guarantee or purchase short-term consumer loans, line of credit accounts, installment loans and RPAs. We have one reportable segment that includes all of our online financial services.

 

Short-term consumer loans. Short-term consumer loans are unsecured loans written by us or by a third-party lender through our credit services organization and credit access business programs, which we refer to as our CSO programs, that we arrange and guarantee. As of September 30, 2017, we offered or arranged short-term consumer loans in 18 states in the United States and in the United Kingdom. Short-term consumer loans generally have terms of seven to 90 days, with proceeds promptly deposited in the customer’s bank account in exchange for a pre-authorized debit from their account. Due to the credit risk and high transaction costs of serving our customer segment, the interest and/or fees we charge are generally considered to be higher than the interest or fees charged to consumers with superior credit histories by banks and similar lenders who are typically unwilling to make unsecured loans to alternative credit consumers. Our short-term consumer loans contributed approximately 24.0% of our total revenue for the nine months ended September 30, 2017 and 26.9% for the nine months ended September 30, 2016.

 

Line of credit accounts. As of September 30, 2017 we offered new consumer line of credit accounts in six states (and continue to service existing line of credit accounts in one additional state) in the United States and business line of credit accounts in 28 states in the United States, which allow customers to draw on their unsecured line of credit in increments of their choosing up to their credit limit. Customers may pay off their account balance in full at any time or make required minimum payments in accordance with the terms of their line of credit account. As long as the customer’s account is in good standing and has credit available, customers may continue to borrow on their line of credit. As a result of regulatory changes in 2014, we discontinued offering line of credit accounts to customers in the United Kingdom effective January 1, 2015. Our line of credit accounts contributed approximately 31.2% of our total revenue for the nine months ended September 30, 2017 and 29.2% for the nine months ended September 30, 2016.

 

Installment loans. Installment loans are longer-term loans that require the outstanding principal balance to be paid down in multiple installments. We offer, or arrange through our CSO programs or market and purchase through our Bank program, multi-payment unsecured consumer installment loan products in 29 states in the United States and small business installment loans in 10 states. We also offer multi-payment unsecured consumer installment loan products in the United Kingdom and Brazil. Terms for our installment loan products range between two and 60 months. These loans generally have higher principal amounts than short-term loans. Loans may be repaid early at any time with no additional prepayment charges. Installment loans that we originated and purchased contributed approximately 42.7% of our total revenue for the nine months ended September 30, 2017 and 41.0% for the nine months ended September 30, 2016.

 

Receivables purchase agreements. Under RPAs, small businesses receive funds in exchange for a portion of the business’s future receivables at an agreed upon discount. In contrast, lending is a commitment to repay principal and interest. A small business customer who enters into a RPA commits to delivering a percentage of its receivables through ACH or wire debits or by splitting credit card receipts until all purchased receivables are delivered. We offer RPAs in all 50 states and in Washington D.C. in the United States. Revenue earned from RPAs contributed 2.0% of our total revenue for the nine months ended September 30, 2017 and 2.7% for the nine months ended September 30, 2016.

 

CSO Programs. Through our CSO programs, we provide services related to third-party lenders’ short-term and installment consumer loan products by acting as a credit services organization or credit access business on behalf of consumers in accordance with applicable state laws. Services offered under our CSO programs include credit-related services such as arranging loans with independent third-party lenders and assisting in the preparation of loan applications and loan documents (“CSO loans”). Under our CSO programs, we guarantee consumer loan payment obligations to the third party lender in the event the customer defaults on the loan. When a consumer executes an agreement with us under our CSO programs, we agree, for a fee payable to us by the consumer, to provide certain services, one of which is to guarantee the consumer’s obligation to repay the loan received by the consumer from the third-party lender if the consumer fails to do so. For CSO loans, each lender is responsible for providing the criteria by which the consumer’s application is underwritten and, if approved, determining the amount of the consumer loan. We

39


 

 

in turn are responsible for assessing whether or not we will guarantee such loan. The guarantee represents an obligation to purchase specific short-term loans, which generally have terms of less than 90 days, and specific installment loans, which have terms of four to 12 months, if they go into default.

As of September 30, 2017 and 2016, the outstanding amount of active short-term consumer loans originated by third-party lenders under the CSO programs was $24.2 million and $23.4 million, respectively, which were guaranteed by us.

As of September 30, 2017 and 2016, the outstanding amount of active installment loans originated by third-party lenders under the CSO programs was $4.7 million and $6.3 million, respectively, which were guaranteed by us.

 

Bank program. In March 2016, we launched a program with a state-chartered bank where we provide technology, loan servicing and marketing services to the bank in 15 states and Washington D.C. in the United States as of September 30, 2017. Our bank partner offers unsecured consumer installment loans with an annual percentage rate (“APR”) at or below 36%. We also have the ability to purchase loans originated through this program. We plan to grow this program through expanding to more states and adding additional partners. Revenue generated from this program for the nine months ended September 30, 2017 and 2016 was 2.1% and less than 0.4% of our total revenue, respectively.

OUR MARKETS

We currently provide our services in the following countries:

 

United States. We began our online business in the United States in May 2004. As of September 30, 2017, we provide services in all 50 states and Washington D.C. We market our financing products under the names CashNetUSA at www.cashnetusa.com, NetCredit at www.netcredit.com, Headway Capital at www.headwaycapital.com and The Business Backer at www.businessbacker.com.

 

United Kingdom. We provide services in the United Kingdom under the names QuickQuid at www.quickquid.co.uk, Pounds to Pocket at www.poundstopocket.co.uk and On Stride Financial at www.onstride.co.uk. We began our QuickQuid short-term consumer loan business in July 2007, our Pounds to Pocket installment loan business in September 2010, and our On Stride near-prime installment loan business in April 2014.

 

Brazil. On June 30, 2014, we launched our business in Brazil where we arrange installment loans for a third party lender under the name Simplic at www.simplic.com.br. We plan to continue to invest and expand our lending in Brazil.

Our internet websites and the information contained therein or connected thereto are not intended to be incorporated by reference into this Quarterly Report on Form 10-Q.

Exiting Australia and Canada Markets

We previously provided services under the name DollarsDirect at www.dollarsdirect.com.au in Australia, and we began providing services there in May 2009. We previously provided services in Canada in the provinces of Ontario, British Columbia, Alberta and Saskatchewan under the name DollarsDirect at www.dollarsdirect.ca, and we began providing services there in October 2009. Due to the small size of the Australian and Canadian markets and our limited operations there, we decided to exit those markets in 2016 and reallocate our resources to our other existing businesses. As a result, we have stopped lending activities and have wound down our loan portfolios.

RECENT REGULATORY DEVELOPMENTS

On November 29, 2016, the Financial Conduct Authority (“FCA”), our primary regulator in the United Kingdom, issued a Call for Input seeking evidence and feedback to further inform its previous reviews of the high-cost credit market, including a review of the loan price cap that was implemented on January 2, 2015. On July 31, 2017, the FCA published the outcome of its review and decided not to change the price cap but to review it again in three years. The FCA found that regulation of high-cost short-term credit, including the price cap, has led to substantial benefits to consumers. The FCA validated concerns about specific products and segments of the high-cost credit market, including unarranged overdrafts and long-term use of high-cost credit and the rent-to-own, home-collected credit and catalog credit markets. The FCA plans to investigate those products and segments further and issue a Consultation Paper on proposed solutions in the spring of 2018.

On July 4, 2017, the FCA issued a Consultation Paper on proposed changes to its rules and guidance on staff incentives, remuneration and performance management in consumer credit. The FCA completed a thematic review of staff incentives, remuneration and performance management and found that some firms have inadequate systems and controls to manage the risks of staff incentives. The FCA is consulting on measures to address risks that can arise from the way consumer credit firms pay or incentivize their staff. The FCA requested responses to the consultation paper by October 4, 2017, and expects to publish its Policy Statement and finalized guidance in the first quarter of 2018.

40


 

On July 26, 2017, the FCA issued a Consultation Paper on proposed changes to its rules and guidance on individual accountability. The Senior Managers and Certification Regime currently applies to deposit taking institutions and, following the Bank of England and Financial Services Act 2016, is now being extended to FCA solo-regulated firms. The Senior Managers and Certification Regime would replace the Approved Persons Regime, changing how individuals working in financial services are regulated. The objective of the new Senior Managers and Certification Regime is to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. The FCA has requested responses to the consultation paper by November 3, 2017, and expects to publish its Policy Statement in the summer of 2018.

On July 31, 2017, the FCA issued a Consultation Paper on proposed changes to its rules and guidance on assessing creditworthiness in consumer credit. The FCA requested responses to the consultation by October 31, 2017, and expects to publish its findings in the second quarter of 2018.

On July 10, 2017, the CFPB issued a final rule on arbitration. The rule would have prohibited class action waivers in certain consumer financial services contracts beginning on March 19, 2018 and would have required financial services providers to submit certain records to the CFPB if arbitration were used to resolve disputes with consumers. However, on July 25, 2017, and October 24, 2017, respectively, the House and Senate each passed a resolution of disapproval of the rule, pursuant to their powers under the Congressional Review Act, and the President signed the bill on November 1, 2017. Because the rule was disapproved, it cannot be reissued in substantially the same form, and the CFPB cannot issue a substantially similar rule unless the new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.

On October 6, 2017, the CFPB issued its final rule on payday and certain high-cost installment loans, which would cover some of the loans we offer. The rule requires that lenders who make short-term loans and longer-term loans with balloon payments reasonably determine consumers’ ability to repay the loans according to their terms before issuing the loans. The rule also introduces new limitations on repayment processes for those lenders as well as lenders of other longer-term loans with an annual percentage rate greater than 36 percent that include an ACH authorization or similar payment provision. If a consumer has two consecutive failed payment attempts, the lender must obtain the consumer’s new and specific authorization to make further withdrawals from the consumer’s bank account. For loans covered by the rule, lenders must provide certain notices to consumers before attempting a first payment withdrawal or an unusual withdrawal and after two consecutive failed payment attempts. The rule will apply to loan contracts entered into beginning in mid-2019. However, under the Congressional Review Act, Congress has 60 legislative days after publication of the rule in the Federal Register (which has not yet occurred) to overturn it by a majority vote in both Houses of Congress. It is also likely that there will be legal challenges to the final rule.

CRITICAL ACCOUNTING POLICIES

There have been no changes in critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2016.

Recent Accounting Pronouncements

See Note 1 in the Notes to Consolidated Financial Statements included in this report for a discussion of recent accounting pronouncements.

RESULTS OF OPERATIONS

HIGHLIGHTS

Our financial results for the three-month period ended September 30, 2017, or the current quarter, are summarized below.

 

Consolidated total revenue increased $22.0 million, or 11.2%, to $217.9 million in the current quarter compared to $195.9 million for the three months ended September 30, 2016, or the prior year quarter. Domestic revenue increased $16.3 million, or 9.8%, to $181.6 million in the current quarter from $165.3 million for the prior year quarter and international revenue increased $5.7 million, or 18.6%, to $36.3 million from $30.6 million.

 

Consolidated gross profit increased $10.0 million, or 9.9%, to $110.5 million in the current quarter compared to $100.5 million in the prior year quarter.

 

Consolidated income from operations decreased $0.4 million, or 1.5%, to $27.7 million in the current quarter, compared to $28.1 million in the prior year quarter.

 

Consolidated net loss was $3.4 million in the current quarter compared to net income of $7.8 million in the prior year quarter. Consolidated diluted loss per share was $0.10 in the current quarter compared to diluted earnings per share of $0.23 in the prior year quarter.

41


 

OVERVIEW

The following tables reflect our results of operations for the periods indicated, both in dollars and as a percentage of total revenue (dollars in thousands, except per share data):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and finance receivables revenue

 

$

217,693

 

 

$

195,912

 

 

$

599,315

 

 

$

541,895

 

Other

 

 

185

 

 

 

31

 

 

 

730

 

 

 

1,236

 

Total Revenue

 

 

217,878

 

 

 

195,943

 

 

 

600,045

 

 

 

543,131

 

Cost of Revenue

 

 

107,341

 

 

 

95,391

 

 

 

269,087

 

 

 

230,421

 

Gross Profit

 

 

110,537

 

 

 

100,552

 

 

 

330,958

 

 

 

312,710

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

27,000

 

 

 

26,722

 

 

 

69,993

 

 

 

73,500

 

Operations and technology

 

 

27,163

 

 

 

20,637

 

 

 

72,512

 

 

 

61,706

 

General and administrative

 

 

25,164

 

 

 

21,307

 

 

 

77,105

 

 

 

76,747

 

Depreciation and amortization

 

 

3,533

 

 

 

3,789

 

 

 

10,396

 

 

 

12,004

 

Total Expenses

 

 

82,860

 

 

 

72,455

 

 

 

230,006

 

 

 

223,957

 

Income from Operations

 

 

27,677

 

 

 

28,097

 

 

 

100,952

 

 

 

88,753

 

Interest expense, net

 

 

(18,292

)

 

 

(16,117

)

 

 

(52,526

)

 

 

(48,058

)

Foreign currency transaction gain

 

 

65

 

 

 

145

 

 

 

354

 

 

 

2,184

 

Loss on early extinguishment of debt

 

 

(14,927

)

 

 

 

 

 

(14,927

)

 

 

 

(Loss) Income before Income Taxes

 

 

(5,477

)

 

 

12,125

 

 

 

33,853

 

 

 

42,879

 

(Benefit from) provision for income taxes

 

 

(2,109

)

 

 

4,288

 

 

 

11,496

 

 

 

16,991

 

Net (Loss) Income

 

$

(3,368

)

 

$

7,837

 

 

$

22,357

 

 

$

25,888

 

Diluted net (loss) income per share

 

$

(0.10

)

 

$

0.23

 

 

$

0.66

 

 

$

0.78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and finance receivables revenue

 

 

99.9

%

 

 

100.0

%

 

 

99.9

%

 

 

99.8

%

Other

 

 

0.1

 

 

 

 

 

 

0.1

 

 

 

0.2

 

Total Revenue

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

Cost of Revenue

 

 

49.3

 

 

 

48.7

 

 

 

44.8

 

 

 

42.4

 

Gross Profit

 

 

50.7

 

 

 

51.3

 

 

 

55.2

 

 

 

57.6

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

12.4

 

 

 

13.7

 

 

 

11.7

 

 

 

13.6

 

Operations and technology

 

 

12.5

 

 

 

10.5

 

 

 

12.1

 

 

 

11.4

 

General and administrative

 

 

11.5

 

 

 

10.9

 

 

 

12.9

 

 

 

14.1

 

Depreciation and amortization

 

 

1.6

 

 

 

1.9

 

 

 

1.7

 

 

 

2.2

 

Total Expenses

 

 

38.0

 

 

 

37.0

 

 

 

38.4

 

 

 

41.3

 

Income from Operations

 

 

12.7

 

 

 

14.3

 

 

 

16.8

 

 

 

16.3

 

Interest expense, net

 

 

(8.4

)

 

 

(8.2

)

 

 

(8.8

)

 

 

(8.8

)

Foreign currency transaction gain

 

 

 

 

 

0.1

 

 

 

0.1

 

 

 

0.4

 

Loss on early extinguishment of debt

 

 

(6.8

)

 

 

 

 

 

(2.5

)

 

 

 

(Loss) Income before Income Taxes

 

 

(2.5

)

 

 

6.2

 

 

 

5.6

 

 

 

7.9

 

(Benefit from) provision for income taxes

 

 

(1.0

)

 

 

2.2

 

 

 

1.9

 

 

 

3.1

 

Net (Loss) Income

 

 

(1.5

%)

 

 

4.0

%

 

 

3.7

%

 

 

4.8

%

 

NON-GAAP DISCLOSURE

In addition to the financial information prepared in conformity with generally accepted accounting principles, or GAAP, we provide historical non-GAAP financial information. Management believes that presentation of non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting our business.

42


 

Management provides non-GAAP financial information for informational purposes and to enhance understanding of our GAAP consolidated financial statements. Readers should consider the information in addition to, but not instead of or superior to, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.

Adjusted Earnings Measures

In addition to reporting financial results in accordance with GAAP, we have provided adjusted earnings and adjusted earnings per share, or, collectively, the Adjusted Earnings Measures, which are non-GAAP measures. Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments and amortization methods, which provides a more complete understanding of our financial performance, competitive position and prospects for the future. Management also believes that investors regularly rely on non-GAAP financial measures, such as the Adjusted Earnings Measures, to assess operating performance and that such measures may highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. In addition, management believes that the adjustments shown below are useful to investors in order to allow them to compare our financial results during the periods shown without the effect of each of these expense items.

The following table provides reconciliations between net (loss) income and diluted earnings per share calculated in accordance with GAAP to the Adjusted Earnings Measures, which are shown net of tax (in thousands, except per share data):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net (Loss) Income

 

$

(3,368

)

 

$

7,837

 

 

$

22,357

 

 

$

25,888

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on early extinguishment of debt

 

 

14,927

 

 

 

 

 

 

14,927

 

 

 

 

Intangible asset amortization

 

 

269

 

 

 

271

 

 

 

811

 

 

 

867

 

Stock-based compensation expense

 

 

2,996

 

 

 

2,265

 

 

 

8,303

 

 

 

6,414

 

Foreign currency transaction gain

 

 

(65

)

 

 

(145

)

 

 

(354

)

 

 

(2,184

)

Cumulative tax effect of adjustments

 

 

(6,121

)

 

 

(902

)

 

 

(8,044

)

 

 

(2,020

)

Adjusted earnings

 

$

8,638

 

 

$

9,326

 

 

$

38,000

 

 

$

28,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net (loss) income per share

 

$

(0.10

)

 

$

0.23

 

 

$

0.66

 

 

$

0.78

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on early extinguishment of debt

 

 

0.44

 

 

 

 

 

 

0.44

 

 

 

 

Intangible asset amortization

 

 

0.01

 

 

 

0.01

 

 

 

0.02

 

 

 

0.03

 

Stock-based compensation expense

 

 

0.08

 

 

 

0.07

 

 

 

0.24

 

 

 

0.19

 

Foreign currency transaction gain

 

 

 

 

 

 

 

 

(0.01

)

 

 

(0.07

)

Cumulative tax effect of adjustments

 

 

(0.18

)

 

 

(0.03

)

 

 

(0.24

)

 

 

(0.06

)

Adjusted earnings per share

 

$

0.25

 

 

$

0.28

 

 

$

1.11

 

 

$

0.87

 

43


 

Adjusted EBITDA

The table below shows Adjusted EBITDA, which is a non-GAAP measure that we define as earnings excluding depreciation, amortization, interest, foreign currency transaction gains or losses, taxes, and stock-based compensation expense. Management believes Adjusted EBITDA is used by investors to analyze operating performance and evaluate our ability to incur and service debt and our capacity for making capital expenditures. Adjusted EBITDA is also useful to investors to help assess our estimated enterprise value. In addition, management believes that the adjustment for loss on early extinguishment of debt shown below is useful to investors in order to allow them to compare our financial results during the periods shown without the effect of the expense item. The computation of Adjusted EBITDA, as presented below, may differ from the computation of similarly-titled measures provided by other companies (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net (Loss) Income

 

$

(3,368

)

 

$

7,837

 

 

$

22,357

 

 

$

25,888

 

Depreciation and amortization expenses

 

 

3,533

 

 

 

3,789

 

 

 

10,396

 

 

 

12,004

 

Interest expense, net

 

 

18,292

 

 

 

16,117

 

 

 

52,526

 

 

 

48,058

 

Foreign currency transaction gain

 

 

(65

)

 

 

(145

)

 

 

(354

)

 

 

(2,184

)

(Benefit from) provision for income taxes

 

 

(2,109

)

 

 

4,288

 

 

 

11,496

 

 

 

16,991

 

Stock-based compensation expense

 

 

2,996

 

 

 

2,265

 

 

 

8,303

 

 

 

6,414

 

Adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on early extinguishment of debt

 

 

14,927

 

 

 

 

 

 

14,927

 

 

 

 

Adjusted EBITDA

 

$

34,206

 

 

$

34,151

 

 

$

119,651

 

 

$

107,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA margin calculated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

217,878

 

 

$

195,943

 

 

$

600,045

 

 

$

543,131

 

Adjusted EBITDA

 

 

34,206

 

 

 

34,151

 

 

 

119,651

 

 

 

107,171

 

Adjusted EBITDA as a percentage of total revenue

 

 

15.7

%

 

 

17.4

%

 

 

19.9

%

 

 

19.7

%

Constant Currency Basis

In addition to reporting financial results in accordance with GAAP, we have provided certain other non-GAAP financial information on a constant currency basis. We operate in the United Kingdom and Brazil. During the current quarter and nine months ended September 30, 2017 16.7% and 16.0%, respectively, of our revenue originated in currencies other than the U.S. Dollar, principally the British Pound Sterling. As a result, changes in our reported revenue and profits include the impacts of changes in foreign currency exchange rates. As additional information to the reader, we provide constant currency assessments in the following discussion and analysis to remove and/or quantify the impact of the fluctuation in foreign exchange rates and utilize constant currency results in our analysis of performance. Our constant currency assessment assumes foreign exchange rates in the current fiscal periods remained the same as in the prior fiscal year periods. All conversion rates below are based on the U.S. Dollar equivalent to one of the applicable foreign currencies:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2017

 

 

2016

 

 

% Change

 

British Pound

 

 

1.3091

 

 

 

1.3133

 

 

 

(0.3

)%

Brazilian real

 

 

0.3162

 

 

 

0.3079

 

 

 

2.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2017

 

 

2016

 

 

% Change

 

British Pound

 

 

1.2760

 

 

 

1.3934

 

 

 

(8.4

)%

Brazilian real

 

 

0.3153

 

 

 

0.2833

 

 

 

11.3

%

Management believes that our non-GAAP constant currency assessments are a useful measure, as they indicate the actual growth and profitability of our operations.

Combined Loans and Finance Receivables Measures

In addition to reporting loans and finance receivables balance information in accordance with GAAP (see Note 3 in the Notes to Consolidated Financial Statements included in this report), we have provided metrics on a combined basis. The Combined Loans and

44


 

Finance Receivables Measures are non-GAAP measures that include both loans and RPAs we own or have purchased and loans we guarantee, which are either GAAP items or disclosures required by GAAP. See “—Loan and Finance Receivable Balances,” “—Loans and Finance Receivables Loss Experience” and “—Loans and Finance Receivables Loss Experience by Product” below for reconciliations between Company owned and purchased loans and finance receivables, gross, allowance and liability for losses, cost of revenue and charge-offs (net of recoveries) calculated in accordance with GAAP to the Combined Loans and Finance Receivables Measures.

Management believes these non-GAAP measures provide investors with important information needed to evaluate the magnitude of potential receivable losses and the opportunity for revenue performance of the loans and finance receivable portfolio on an aggregate basis. Management also believes that the comparison of the aggregate amounts from period to period is more meaningful than comparing only the amounts reflected on our balance sheet since both revenue and cost of revenue are impacted by the aggregate amount of receivables we own and those we guarantee as reflected in our financial statements.

THREE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2016

Revenue and Gross Profit

Revenue increased $22.0 million, or 11.2%, to $217.9 million for the current quarter as compared to $195.9 million for the prior year quarter. Foreign currency exchange rates did not have a significant impact on revenue in the current quarter as compared to the prior year quarter. Our domestic operations contributed an increase of $16.3 million, primarily resulting from a 16.8% increase in line of credit account revenue and a 13.4% increase in installment loan and RPA revenue in the current quarter compared to the prior year quarter driven by strong customer demand for these products. Our international operations contributed an increase of $5.7 million, primarily resulting from a 34.6% increase in installment loan and RPA revenue and a 6.3% increase in short-term loan revenue.

Our gross profit increased by $10.0 million to $110.5 million for the current quarter from $100.5 million for the prior year quarter. Foreign currency exchange rates did not have a significant impact on gross profit in the current quarter as compared to the prior year quarter. Our consolidated gross profit as a percentage of revenue, or our gross profit margin, decreased to 50.7% for the current quarter, from 51.3% for the prior year quarter. The decrease in gross profit margin was primarily driven by the continued strong new customer growth of our installment and short-term portfolios, which requires higher loss provisions as new customers default at a higher rate than returning customers with a successful history of loan performance.

The following tables set forth the components of revenue and gross profit, separated by product and between domestic and international for the current quarter and the prior year quarter (in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Revenue by product:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term loans

 

$

49,875

 

 

$

51,999

 

 

$

(2,124

)

 

 

(4.1

)%

Line of credit accounts

 

 

68,889

 

 

 

59,090

 

 

 

9,799

 

 

 

16.6

 

Installment loans and RPAs

 

 

98,929

 

 

 

84,823

 

 

 

14,106

 

 

 

16.6

 

Total loans and finance receivables revenue

 

 

217,693

 

 

 

195,912

 

 

 

21,781

 

 

 

11.1

 

Other

 

 

185

 

 

 

31

 

 

 

154

 

 

 

496.8

 

Total revenue

 

$

217,878

 

 

$

195,943

 

 

$

21,935

 

 

 

11.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue by product (% to total):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term loans

 

 

22.9

%

 

 

26.5

%

 

 

 

 

 

 

 

 

Line of credit accounts

 

 

31.6

 

 

 

30.2

 

 

 

 

 

 

 

 

 

Installment loans and RPAs

 

 

45.4

 

 

 

43.3

 

 

 

 

 

 

 

 

 

Total loans and finance receivables revenue

 

 

99.9

 

 

 

100.0

 

 

 

 

 

 

 

 

 

Other

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

 

 

45


 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Domestic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

181,584

 

 

$

165,330

 

 

$

16,254

 

 

 

9.8

%

Cost of revenue

 

 

88,419

 

 

 

85,862

 

 

 

2,557

 

 

 

3.0

 

Gross profit

 

$

93,165

 

 

$

79,468

 

 

$

13,697

 

 

 

17.2

 

Gross profit margin

 

 

51.3

%

 

 

48.1

%

 

 

3.2

%

 

 

6.7

%

International:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

36,294

 

 

$

30,613

 

 

$

5,681

 

 

 

18.6

%

Cost of revenue

 

 

18,922

 

 

 

9,529

 

 

 

9,393

 

 

 

98.6

 

Gross profit

 

$

17,372

 

 

$

21,084

 

 

$

(3,712

)

 

 

(17.6

)

Gross profit margin

 

 

47.9

%

 

 

68.9

%

 

 

(21.0

)%

 

 

(30.5

)%

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

217,878

 

 

$

195,943

 

 

$

21,935

 

 

 

11.2

%

Cost of revenue

 

 

107,341

 

 

 

95,391

 

 

 

11,950

 

 

 

12.5

 

Gross profit

 

$

110,537

 

 

$

100,552

 

 

$

9,985

 

 

 

9.9

 

Gross profit margin

 

 

50.7

%

 

 

51.3

%

 

 

(0.6

)%

 

 

(1.2

)%

 

Loan and Finance Receivable Balances

Our loan and finance receivable balance in our consolidated financial statements for September 30, 2017 and 2016 was $742.8 million and $637.6 million, respectively, before the allowance for losses of $105.1 million and $94.7 million, respectively. The combined loan and finance receivable balance includes $28.9 million and $29.7 million as of September 30, 2017 and 2016, respectively, of consumer loan balances that are guaranteed by us but not owned by us, which are not included in our consolidated financial statements for September 30, 2017 and 2016, respectively, before the liability for estimated losses of $2.0 million and $1.7 million provided in “Accounts payable and accrued expenses” in our consolidated financial statements for September 30, 2017 and 2016, respectively.

The ending portfolio balance of loans and finance receivables, net of allowance for losses, increased $94.9 million, or 17.5%, to $637.7 million as of September 30, 2017 from $542.9 million as of September 30, 2016, and the outstanding combined portfolio balance of loans and finance receivables, net of allowance and liability for estimated losses, increased $93.8 million, or 16.4%, to $664.7 million as of September 30, 2017 from $570.8 million as of September 30, 2016, primarily due to increased demand for all of our installment products and, to a lesser extent, our short-term and line of credit products. The outstanding loan balance for our domestic near-prime product increased 20.0% in the current quarter compared to the prior year quarter resulting in a domestic near-prime portfolio balance that comprises 42.8% of our total loan and finance receivable portfolio balance while short-term loans comprised approximately 11.9% of our total loan and finance receivable portfolio balance in the current quarter, compared to 12.5% in the prior year quarter. We expect this trend to continue as we increase the number of states offering a near-prime installment lending product under our bank program. Management expects the loan balances for our domestic near-prime installment loan product will continue to comprise a larger percentage of the total loan and finance receivable portfolio, due to customer demand for these products and their longer loan term. Our portfolio of loans and finance receivables serving the needs of small businesses decreased slightly to 10.9% in the current quarter from 13.3% in the prior year quarter as growth in the installment products has outpaced the growth of the small-business portfolio. See “—Non-GAAP Disclosure—Combined Loans and Finance Receivables” above for additional information related to combined loans and finance receivables.

46


 

The following tables summarize loan and finance receivable balances outstanding as of September 30, 2017 and 2016 (in thousands):

 

 

 

As of September 30,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

Guaranteed

 

 

 

 

 

 

 

 

 

 

Guaranteed

 

 

 

 

 

 

 

Company

 

 

by the

 

 

 

 

 

 

Company

 

 

by the

 

 

 

 

 

 

 

Owned(a)

 

 

Company(a)

 

 

Combined(b)

 

 

Owned(a)

 

 

Company(a)

 

 

Combined(b)

 

Ending loans and finance receivables balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term loans

 

$

67,719

 

 

$

24,248

 

 

$

91,967

 

 

$

60,124

 

 

$

23,379

 

 

$

83,503

 

Line of credit accounts

 

 

154,689

 

 

 

 

 

 

154,689

 

 

 

132,388

 

 

 

 

 

 

132,388

 

Installment loans and RPAs

 

 

520,388

 

 

 

4,695

 

 

 

525,083

 

 

 

445,100

 

 

 

6,321

 

 

 

451,421

 

Total ending loans and finance receivables, gross

 

 

742,796

 

 

 

28,943

 

 

 

771,739

 

 

 

637,612

 

 

 

29,700

 

 

 

667,312

 

Less: Allowance and liabilities for losses(a)

 

 

(105,060

)

 

 

(2,017

)

 

 

(107,077

)

 

 

(94,747

)

 

 

(1,727

)

 

 

(96,474

)

Total ending loans and finance receivables, net

 

$

637,736

 

 

$

26,926

 

 

$

664,662

 

 

$

542,865

 

 

$

27,973

 

 

$

570,838

 

Allowance and liability for losses as a % of loans and finance receivables, gross

 

 

14.1

%

 

 

7.0

%

 

 

13.9

%

 

 

14.9

%

 

 

5.8

%

 

 

14.5

%

 

 

 

As of September 30,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

Guaranteed

 

 

 

 

 

 

 

 

 

 

Guaranteed

 

 

 

 

 

 

 

Company

 

 

by the

 

 

 

 

 

 

Company

 

 

by the

 

 

 

 

 

 

 

Owned(a)

 

 

Company(a)

 

 

Combined(b)

 

 

Owned(a)

 

 

Company(a)

 

 

Combined(b)

 

Ending loans and finance receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total domestic, gross

 

$

640,793

 

 

$

28,943

 

 

$

669,736

 

 

$

556,056

 

 

$

29,700

 

 

$

585,756

 

Total international, gross

 

 

102,003

 

 

 

 

 

 

102,003

 

 

 

81,556

 

 

 

 

 

 

81,556

 

Total ending loans and finance receivables, gross

 

$

742,796

 

 

$

28,943

 

 

$

771,739

 

 

$

637,612

 

 

$

29,700

 

 

$

667,312

 

 

(a)

GAAP measure. The loans and finance receivables balances guaranteed by us relate to loans originated by third-party lenders through the CSO programs and are not included in our financial statements.

(b)

Except for allowance and liability for estimated losses, amounts shown represent non-GAAP measures.

Average Amount Outstanding per Loan

The average amount outstanding per loan is calculated as the total combined loans, gross balance at the end of the period divided by the total number of combined loans outstanding at the end of the period. The following table shows the average amount outstanding per loan by product at September 30, 2017 and 2016:

 

 

 

As of September 30,

 

 

 

2017

 

 

2016

 

Average amount outstanding per loan (in ones)(a)

 

 

 

 

 

 

 

 

Short-term loans(b)

 

$

480

 

 

$

462

 

Line of credit accounts

 

 

1,378

 

 

 

1,247

 

Installment loans(b)(c)

 

 

1,989

 

 

 

1,962

 

Total loans(b)(c)

 

$

1,333

 

 

$

1,252

 

 

(a)

The disclosure regarding the average amount per loan and finance receivable is statistical data that is not included in our consolidated financial statements.

(b)

Includes loans guaranteed by us, which represent loans originated by third-party lenders through the CSO programs and are not included in our consolidated financial statements.

(c)

Excludes RPAs.

The average amount outstanding per loan increased to $1,333 from $1,252 during the current quarter compared to the prior year quarter, primarily due to a greater mix of installment loans and line of credit accounts, which have higher average amounts outstanding relative to short-term loans, in the current quarter compared to the prior year quarter.

47


 

Average Loan Origination

The average loan origination amount is calculated as the total amount of combined loans originated and renewed for the period divided by the total number of combined loans originated and renewed for the period. The following table shows the average loan origination amount by product for the current quarter compared to the prior year quarter:

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Average loan origination amount (in ones) (a)

 

 

 

 

 

 

 

 

Short-term loans (b)

 

$

459

 

 

$

455

 

Line of credit accounts (c)

 

 

314

 

 

 

315

 

Installment loans (b)(d)

 

 

1,661

 

 

 

1,849

 

Total loans (b)(d)

 

$

560

 

 

$

539

 

 

(a)

The disclosure regarding the average loan origination amount is statistical data that is not included in our consolidated financial statements.

(b)

Includes loans guaranteed by us, which represent loans originated by third-party lenders through the CSO programs and are not included in our consolidated financial statements.

(c)

Represents the average amount of each incremental draw on line of credit accounts.

(d)

Excludes RPAs.

The average loan origination amount increased to $560 from $539 during the current quarter compared to the prior year quarter, mainly due to a greater mix of installment loan originations which have higher principal amounts. The average installment loan origination decreased to $1,661 from $1,849 as sub-prime installment loan originations, which have lower origination amounts, outpaced the near-prime originations in the current quarter.

Loans and Finance Receivables Loss Experience

The allowance and liability for estimated losses as a percentage of combined loans and RPAs decreased to 13.9% as of September 30, 2017 from 14.5% as of September 30, 2016, primarily due to improved credit quality in the line of credit portfolio.

The cost of revenue in the current quarter was $107.4 million, which was composed of $107.3 million related to Company-owned loans and finance receivables and a $0.1 million increase in the liability for estimated losses related to loans we guaranteed through the CSO programs. The cost of revenue in the prior year quarter was $95.4 million, which was composed of $95.5 million related to Company-owned loans and finance receivables offset by a $0.1 million decrease in the liability for estimated losses related to loans we guaranteed through the CSO programs. Total charge-offs, net of recoveries, were $86.5 million and $74.3 million in the current quarter and the prior year quarter, respectively.

The following tables show loan and finance receivable balances and fees receivable and the relationship of the allowance and liability for losses to the combined balances of loans and finance receivables for each of the last five quarters (in thousands):

 

 

 

2016

 

 

2017

 

 

 

Third

 

 

Fourth

 

 

First

 

 

Second

 

 

Third

 

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

Loans and finance receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross - Company owned

 

$

637,612

 

 

$

660,495

 

 

$

598,717

 

 

$

647,835

 

 

$

742,796

 

Gross - Guaranteed by the Company(a)

 

 

29,700

 

 

 

32,199

 

 

 

22,546

 

 

 

28,013

 

 

 

28,943

 

Combined loans and finance receivables, gross(b)

 

 

667,312

 

 

 

692,694

 

 

 

621,263

 

 

 

675,848

 

 

 

771,739

 

Allowance and liability for losses on loans and finance receivables

 

 

96,474

 

 

 

100,941

 

 

 

84,441

 

 

 

85,780

 

 

 

107,077

 

Combined loans and finance receivables, net(b)

 

$

570,838

 

 

$

591,753

 

 

$

536,822

 

 

$

590,068

 

 

$

664,662

 

Allowance and liability for losses as a % of loans and finance receivables, gross(b)

 

 

14.5

%

 

 

14.6

%

 

 

13.6

%

 

 

12.7

%

 

 

13.9

%

 

(a)

Represents loans originated by third-party lenders through the CSO programs, which are not included in our consolidated financial statements.

(b)

Non-GAAP measure.

48


 

Loans and Finance Receivables Loss Experience by Product

Management evaluates loss rates for all financing products in our portfolio to determine credit quality and evaluate trends. For our products, we evaluate loans and finance receivables losses as a percentage of the average loan and finance receivable balance outstanding or the average combined loan and finance receivable balance outstanding, whichever is applicable, for each portfolio.

Short-term Loans

Demand for our short-term loan product in the United States has historically been highest in the third and fourth quarters of each year, corresponding to the holiday season, and lowest in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds. Customer demand for short-term loans in both the United States and the United Kingdom has been very strong in 2017. This led to higher short-term consumer loan balances.

Our gross profit margin for short-term loans is typically highest in the first quarter of each year, corresponding to the seasonal decline in consumer loan balances outstanding. The cost of revenue as a percentage of the average combined loan balance for short-term loans outstanding is typically lower in the first quarter and generally peaks in the second half of the year with higher loan demand.

The following table includes information related only to short-term loans and shows our loss experience trends for short-term loans for each of the last five quarters (in thousands):

 

 

 

2016

 

 

2017

 

 

 

Third

 

 

Fourth

 

 

First

 

 

Second

 

 

Third

 

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

Short-term loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

20,531

 

 

$

21,600

 

 

$

15,602

 

 

$

16,584

 

 

$

23,849

 

Charge-offs (net of recoveries)

 

 

15,956

 

 

 

21,021

 

 

 

18,975

 

 

 

15,539

 

 

 

20,439

 

Average short-term combined loan balance, gross:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company owned(a)

 

 

60,761

 

 

 

59,728

 

 

 

58,729

 

 

 

57,653

 

 

 

65,949

 

Guaranteed by the Company(a)(b)

 

 

24,678

 

 

 

24,709

 

 

 

23,153

 

 

 

21,368

 

 

 

25,787

 

Average short-term combined loan balance, gross(a)(c)

 

$

85,439

 

 

$

84,437

 

 

$

81,882

 

 

$

79,021

 

 

$

91,736

 

Ending short-term combined loan balance, gross:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company owned

 

$

60,124

 

 

$

63,005

 

 

$

53,205

 

 

$

61,565

 

 

$

67,719

 

Guaranteed by the Company(b)

 

 

23,379

 

 

 

26,092

 

 

 

18,854

 

 

 

24,123

 

 

 

24,248

 

Ending short-term combined loan balance, gross(c)

 

$

83,503

 

 

$

89,097

 

 

$

72,059

 

 

$

85,688

 

 

$

91,967

 

Ending allowance and liability for losses

 

$

19,184

 

 

$

19,486

 

 

$

16,205

 

 

$

17,449

 

 

$

21,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term loan ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue as a % of average short-term combined loan balance, gross(a)(c)

 

 

24.0

%

 

 

25.6

%

 

 

19.1

%

 

 

21.0

%

 

 

26.0

%

Charge-offs (net of recoveries) as a % of average short-term combined loan balance, gross(a)(c)

 

 

18.7

%

 

 

24.9

%

 

 

23.2

%

 

 

19.7

%

 

 

22.3

%

Gross profit margin

 

 

60.5

%

 

 

56.8

%

 

 

67.1

%

 

 

64.5

%

 

 

52.2

%

Allowance and liability for losses as a % of combined loan balance, gross(c)(d)

 

 

23.0

%

 

 

21.9

%

 

 

22.5

%

 

 

20.4

%

 

 

22.9

%

 

(a)

The average short-term combined loan balance is the average of the month-end balances during the period.

(b)

Represents loans originated by third-party lenders through the CSO programs, which are not included in our consolidated financial statements.

(c)

Non-GAAP measure.

(d)

Allowance and liability for losses as a % of combined loan balance, gross, is determined using period-end balances.

Line of Credit Accounts

The cost of revenue as a percentage of average loan balance for line of credit accounts exhibits a similar quarterly seasonal trend to short-term loan loss rates as the ratio is typically lower in the first quarter and increases throughout the remainder of the year, peaking in the second half of the year with higher loan demand. The gross profit margin is generally lower for line of credit accounts as compared to short-term loans because the highest levels of default are exhibited in the early stages of the account, while revenue is recognized over the term of the account. Underwriting changes made in the second quarter of 2017 have led to improved credit quality and higher year over year gross margin. The year over year decrease in the allowance for losses as a percentage of loan balance was also driven by the underwriting changes in the second quarter of 2017.

49


 

The following table includes information related only to line of credit accounts and shows our loss experience trends for line of credit accounts for each of the last five quarters (in thousands):

 

 

 

2016

 

 

2017

 

 

 

Third

 

 

Fourth

 

 

First

 

 

Second

 

 

Third

 

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

Line of credit accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

29,739

 

 

$

25,028

 

 

$

19,831

 

 

$

19,868

 

 

$

23,439

 

Charge-offs (net of recoveries)

 

 

20,973

 

 

 

25,229

 

 

 

24,660

 

 

 

18,786

 

 

 

19,476

 

Average loan balance(a)

 

 

126,371

 

 

 

138,259

 

 

 

135,621

 

 

 

128,348

 

 

 

145,398

 

Ending loan balance

 

 

132,388

 

 

 

144,183

 

 

 

124,498

 

 

 

134,154

 

 

 

154,689

 

Ending allowance for losses balance

 

$

26,795

 

 

$

26,594

 

 

$

21,765

 

 

$

22,847

 

 

$

26,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit account ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue as a % of average loan balance(a)

 

 

23.5

%

 

 

18.1

%

 

 

14.6

%

 

 

15.5

%

 

 

16.1

%

Charge-offs (net of recoveries) as a % of average loan balance(a)

 

 

16.6

%

 

 

18.2

%

 

 

18.2

%

 

 

14.6

%

 

 

13.4

%

Gross profit margin

 

 

49.7

%

 

 

59.7

%

 

 

66.6

%

 

 

66.2

%

 

 

66.0

%

Allowance for losses as a % of loan balance(b)

 

 

20.2

%

 

 

18.4

%

 

 

17.5

%

 

 

17.0

%

 

 

17.3

%

 

(a)

The average loan balance for line of credit accounts is the average of the month-end balances during the period.

(b)

Allowance for losses as a % of loan balance is determined using period-end balances.

Installment Loans and RPAs

The cost of revenue as a percentage of average loan and finance receivable balance for installment loans and RPAs is typically more consistent throughout the year as compared to short-term loans and line of credit accounts. Due to the scheduled monthly or bi-weekly payments and delivery of receivables that are inherent with installment loans and RPAs, we do not experience the higher level of repayments in the first quarter for these products as we experience with short-term loans and, to a lesser extent, line of credit accounts.

The gross profit margin is generally lower for the installment loan product than for other loan products, primarily because the highest levels of default are exhibited in the early stages of the loan, while revenue is recognized over the term of the loan. In addition, installment loans and RPAs typically have higher average origination amounts. Another factor contributing to the lower gross profit margin is that the product yield for installment loans and RPAs is typically lower than the yield for the other financing products we offer. As a result, particularly in periods of higher growth for the installment loan and RPA portfolios, which has been the case in recent years, the gross profit margin is typically lower for this product than for our short-term loan and line of credit products. Our average installment combined loan and RPA portfolio balance outstanding at September 30, 2017 increased 15.6% in the current quarter compared to the prior year quarter. During the current quarter, we experienced a lower gross profit margin than we experienced in the prior year quarter as a result of strong growth in our domestic sub-prime installment portfolio.

50


 

The following table includes information related only to our installment loans and RPAs and shows our loss experience trends for installment loans and RPAs for each of the last five quarters (in thousands):

 

 

 

2016

 

 

2017

 

 

 

Third

 

 

Fourth

 

 

First

 

 

Second

 

 

Third

 

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

Installment loans and RPAs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

45,121

 

 

$

50,917

 

 

$

46,451

 

 

$

43,410

 

 

$

60,053

 

Charge-offs (net of recoveries)

 

 

37,383

 

 

 

46,411

 

 

 

55,179

 

 

 

44,443

 

 

 

46,598

 

Average installment and RPA combined loan and finance receivable balance, gross:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company owned(a)

 

 

419,225

 

 

 

448,953

 

 

 

440,886

 

 

 

433,698

 

 

 

487,436

 

Guaranteed by the Company(a)(b)

 

 

6,600

 

 

 

6,093

 

 

 

4,874

 

 

 

3,631

 

 

 

4,628

 

Average installment and RPA combined loan and finance receivable balance, gross (a)(c)

 

$

425,825

 

 

$

455,046

 

 

$

445,760

 

 

$

437,329

 

 

$

492,064

 

Ending installment and RPA combined loan and finance receivable balance, gross:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company owned

 

$

445,100

 

 

$

453,307

 

 

$

421,014

 

 

$

452,116

 

 

$

520,388

 

Guaranteed by the Company(b)

 

 

6,321

 

 

 

6,107

 

 

 

3,692

 

 

 

3,890

 

 

 

4,695

 

Ending installment and RPA combined loan and finance receivable balance, gross (c)

 

$

451,421

 

 

$

459,414

 

 

$

424,706

 

 

$

456,006

 

 

$

525,083

 

Ending allowance and liability for losses

 

$

50,495

 

 

$

54,861

 

 

$

46,471

 

 

$

45,484

 

 

$

59,220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Installment and RPA loan ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue as a % of average installment and RPA combined loan and finance receivable balance, gross(a)(c)

 

 

10.6

%

 

 

11.2

%

 

 

10.4

%

 

 

9.9

%

 

 

12.2

%

Charge-offs (net of recoveries) as a % of average installment and RPA combined loan and finance receivable balance, gross (a)(c)

 

 

8.8

%

 

 

10.2

%

 

 

12.4

%

 

 

10.2

%

 

 

9.5

%

Gross profit margin

 

 

46.8

%

 

 

43.5

%

 

 

45.4

%

 

 

48.4

%

 

 

39.3

%

Allowance and liability for losses as a % of combined loan and finance receivable balance, gross(c)(d)

 

 

11.2

%

 

 

11.9

%

 

 

10.9

%

 

 

10.0

%

 

 

11.3

%

 

(a)

The average installment and RPA combined loan and finance receivable balance is the average of the month-end balances during the period.

(b)

Represents loans originated by third-party lenders through the CSO programs, which are not included in our consolidated financial statements.

(c)

Non-GAAP measure.

(d)

Allowance and liability for losses as a % of combined loan and finance receivable balance, gross, is determined using period-end balances.

Total Expenses

Total expenses increased $10.4 million, or 14.4%, to $82.9 million in the current quarter, compared to $72.5 million in the prior year quarter. Foreign currency exchange rates did not have a significant impact on total expenses in the current quarter as compared to the prior year quarter.

Marketing expense increased slightly to $27.0 million in the current quarter compared to $26.7 million in the prior year quarter. The slight increase was primarily due to higher direct mail costs related to our domestic products and volume from lead providers in both segments, partially offset by lower digital marketing costs.

Operations and technology expense increased to $27.2 million in the current quarter compared to $20.7 million in the prior year quarter, primarily due to higher volume-driven underwriting and transaction expenses and headcount costs in our call center.

General and administrative expense increased $3.9 million, or 18.1%, to $25.2 million in the current quarter compared to $21.3 million in the prior year quarter, primarily due to higher corporate services personnel costs primarily driven by an increase in headcount in the current quarter compared to the prior year quarter.

51


 

Depreciation and amortization expense decreased $0.3 million, or 6.8%, in the current quarter compared to the prior year quarter, primarily due to the acceleration of depreciation in the prior year quarter resulting from the relocation of a datacenter in 2016.

Interest Expense, Net

Interest expense, net increased $2.2 million, or 13.5%, to $18.3 million in the current quarter compared to $16.1 million in the prior year quarter. The increase was primarily due to an increase in the average amount of debt outstanding, which increased $90.1 million to $717.4 million during the current quarter from $627.3 million during the prior year quarter, partially offset by a decrease in the weighted average interest rate on our outstanding debt to 10.34% during the current quarter from 10.42% during the prior year quarter.

(Benefit from) Provision for Income Taxes

(Benefit from) provision for income taxes decreased $6.4 million, or 149.2%, to a tax benefit of $2.1 million in the current quarter compared to a provision of $4.3 million in the prior year quarter. The decrease was primarily due to a 145.2% decrease in income before income taxes primarily related to the early extinguishment of a portion of our long-term debt.

As of September 30, 2017, the balance of unrecognized tax benefits was $631 thousand ($561 thousand net of the federal benefit of state matters), all of which, if recognized, would favorably affect the effective tax rate in any future periods. We had no unrecognized tax benefits as of September 30, 2016. We do not believe it is reasonably possible that, within the next twelve months, unrecognized domestic tax benefits will change by a significant amount. We record interest and penalties related to tax matters as income tax expense in the consolidated statement of income.

Our U.S. tax returns are subject to examination by federal and state taxing authorities. The IRS audits for tax years 2011 through 2014 were concluded with no adjustments to the financial statements. The 2015 tax year is open to examination by the IRS. The years open to examination by state, local, and foreign government authorities vary by jurisdiction, but the statute of limitation is generally three to four years from the date the tax return is filed.

Net (Loss) Income

Net (loss) income decreased $11.2 million, or 143.0%, to a net loss of $3.4 million during the current quarter compared to net income of $7.8 million during the prior year quarter. The decrease was primarily due to expenses related to the early extinguishment of a portion of our long-term debt.

NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2016

Revenue and Gross Profit

Revenue increased $56.9 million, or 10.5%, to $600.0 million for the nine-month period ended September 30, 2017, or current nine-month period, as compared to $543.1 million for the nine-month period ended September 30, 2016, or prior year nine-month period. On a constant currency basis, revenue increased by $63.1 million, or 11.6%, for the current nine-month period compared to the prior year nine-month period. Our domestic operations contributed an increase of $55.2 million, resulting from a 18.5% increase in line of credit revenue and a 14.0% increase in domestic installment loan and RPA revenue in the current nine-month period compared to the prior year nine-month period primarily driven by growth in our line of credit account and installment products. Additionally, international operations of revenue increased $1.7 million (an increase of $7.9 million on a constant currency basis).

Our gross profit increased by $18.3 million to $331.0 million for the current nine-month period from $312.7 million for the prior year nine-month period. On a constant currency basis, gross profit increased by $23.2 million for the current nine-month period compared to the prior year nine-month period. Our consolidated gross profit margin decreased to 55.2% for the current nine-month period, from 57.6% for the prior year nine-month period. The decrease in gross profit margin was primarily driven by the strong new customer growth of our domestic and international installment loan portfolios resulting in a higher mix of new customers overall which requires higher loss provisions as new customers default at a higher rate than returning customers with a successful history of loan performance. Management expects the consolidated gross profit margin will continue to be influenced by the mix of loans to new and returning customers, the mix of lower yielding and higher yielding loan products, and loan originations.

The following tables set forth the components of revenue and gross profit, separated by product and between domestic and international for the current nine-month period and the prior year nine-month period (in thousands):

 

52


 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Revenue by product:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term loans

 

$

144,074

 

 

$

146,237

 

 

$

(2,163

)

 

 

(1.5

)%

Line of credit accounts

 

 

187,172

 

 

 

158,338

 

 

 

28,834

 

 

 

18.2

 

Installment loans and RPAs

 

 

268,069

 

 

 

237,320

 

 

 

30,749

 

 

 

13.0

 

Total loans and finance receivables revenue

 

 

599,315

 

 

 

541,895

 

 

 

57,420

 

 

 

10.6

 

Other

 

 

730

 

 

 

1,236

 

 

 

(506

)

 

 

(40.9

)

Total revenue

 

$

600,045

 

 

$

543,131

 

 

$

56,914

 

 

 

10.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue by product (% to total):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term loans

 

 

24.0

%

 

 

26.9

%

 

 

 

 

 

 

 

 

Line of credit accounts

 

 

31.2

 

 

 

29.2

 

 

 

 

 

 

 

 

 

Installment loans and RPAs

 

 

44.7

 

 

 

43.7

 

 

 

 

 

 

 

 

 

Total loans and finance receivables revenue

 

 

99.9

 

 

 

99.8

 

 

 

 

 

 

 

 

 

Other

 

 

0.1

 

 

 

0.2

 

 

 

 

 

 

 

 

 

Total revenue

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Domestic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

504,326

 

 

$

449,100

 

 

$

55,226

 

 

 

12.3

%

Cost of revenue

 

 

226,461

 

 

 

204,070

 

 

 

22,391

 

 

 

11.0

 

Gross profit

 

$

277,865

 

 

$

245,030

 

 

$

32,835

 

 

 

13.4

 

Gross profit margin

 

 

55.1

%

 

 

54.6

%

 

 

0.5

%

 

 

0.9

%

International:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

95,719

 

 

$

94,031

 

 

$

1,688

 

 

 

1.8

%

Cost of revenue

 

 

42,626

 

 

 

26,351

 

 

 

16,275

 

 

 

61.8

 

Gross profit

 

$

53,093

 

 

$

67,680

 

 

$

(14,587

)

 

 

(21.6

)

Gross profit margin

 

 

55.5

%

 

 

72.0

%

 

 

(16.5

)%

 

 

(22.9

)%

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

600,045

 

 

$

543,131

 

 

$

56,914

 

 

 

10.5

%

Cost of revenue

 

 

269,087

 

 

 

230,421

 

 

 

38,666

 

 

 

16.8

 

Gross profit

 

$

330,958

 

 

$

312,710

 

 

$

18,248

 

 

 

5.8

 

Gross profit margin

 

 

55.2

%

 

 

57.6

%

 

 

(2.4

)%

 

 

(4.2

)%

Average Loan Origination

The average loan origination amount is calculated as the total amount of combined loans originated and renewed for the period divided by the total number of combined loans originated and renewed for the period. The following table shows the average loan origination amount by product for the current nine-month period compared to the prior year nine-month period:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Average loan origination amount (in ones) (a)

 

 

 

 

 

 

 

 

Short-term loans (b)

 

$

453

 

 

$

455

 

Line of credit accounts (c)

 

 

297

 

 

 

305

 

Installment loans (b)(d)

 

 

1,617

 

 

 

1,810

 

Total loans (b)(d)

 

$

522

 

 

$

523

 

 

(a)

The disclosure regarding the average loan origination amount is statistical data that is not included in our consolidated financial statements.

(b)

Includes loans guaranteed by us, which represent loans originated by third-party lenders through the CSO programs and are not included in our consolidated financial statements.

(c)

Represents the average amount of each incremental draw on line of credit accounts.

53


 

(d)

Excludes RPAs.

The average loan origination amount remained flat at $522 during the current nine-month period compared to $523 during the prior year nine-month period.

Loans and Finance Receivables Loss Experience

The cost of revenue in the current nine-month period was $269.0 million, which was composed of $269.0 million related to Company-owned loans and finance receivables. The cost of revenue in the prior year nine-month period was $230.4 million, which was composed of $230.4 million related to Company-owned loans and finance receivables. Total charge-offs, net of recoveries, were $264.1 million and $202.9 million in the current nine-month period and the prior year nine-month period, respectively.

Total Expenses

Total expenses increased $6.0 million, or 2.7%, to $230.0 million in the current nine-month period, compared to $224.0 million in the prior year nine-month period. On a constant currency basis, total expenses increased $7.6 million, or 3.4%, for the current nine-month period compared to the prior year nine-month period.

Marketing expense decreased to $70.0 million in the current nine-month period compared to $73.5 million in the prior year nine-month period. Lower online marketing costs were partially offset by higher direct mail costs.

Operations and technology expense increased to $72.5 million in the current nine-month period compared to $61.7 million in the prior year nine-month period, primarily due to higher personnel expenses, underwriting and transaction costs and software costs primarily related to our domestic operations.

General and administrative expense was flat increasing only $0.3 million, or 0.5%, to $77.1 million in the current nine-month period compared to $76.8 million in the prior year nine-month period.

Depreciation and amortization expense decreased $1.6 million, or 13.4%, in the current nine-month period compared to the prior year nine-month period, primarily due to the acceleration of depreciation in the prior year nine-month period resulting from our exit from the Australian and Canadian markets and the relocation of a datacenter in 2016.

Interest Expense, Net

Interest expense, net increased $4.4 million, or 9.3%, to $52.5 million in the current nine-month period compared to $48.1 million in the prior year nine-month period. The increase was primarily due to an increase in the average amount of debt outstanding, which increased $60.0 million to $663.5 million during the current nine-month period from $603.5 million during the prior year nine-month period, partially offset by a slight decrease in the weighted average interest rate on our outstanding debt to 10.58% during the current nine-month period from 10.75% during the prior year nine-month period.

(Benefit from) Provision for Income Taxes

(Benefit from) provision for income taxes decreased $5.5 million, or 32.3%, to $11.5 million in the current nine-month period compared to $17.0 million in the prior year nine-month period. The decrease was primarily due to the decrease in income before income taxes and share-based compensation excess tax benefits.

Net Income

Net income decreased $3.5 million, or 13.6%, to $22.4 million during the current nine-month period compared to $25.9 million during the prior year nine-month period. The decrease was primarily due to expenses related to the early extinguishment of a portion of our long-term debt and higher operating expenses partially offset by higher gross profit driven primarily by an additional contribution of $32.3 million from our domestic line of credit product in the current nine-month period compared to the prior year nine-month period.

LIQUIDITY AND CAPITAL RESOURCES

Capital Funding Strategy

Historically, we have generated significant cash flow through normal operating activities for funding both long-term and short-term needs. Our near-term liquidity is managed to ensure that adequate resources are available to fund our seasonal working capital growth, which is driven by demand for our loan and financing products, and to meet the continued growth in the demand for our near-prime

54


 

installment products. On May 30, 2014, we issued and sold $500.0 million in 2021 Senior Notes. On September 1, 2017, we issued and sold $250.0 million in aggregate principal amount of 8.50% Senior Notes due 2024 (the “2024 Senior Notes”) and used the net proceeds, in part, to retire $155.0 million in 2021 Senior Notes. On June 30, 2017, we entered into an asset-backed secured revolving credit agreement (the “2017 Credit Agreement”) which replaced our previous credit agreement (the “2014 Credit Agreement”) that was terminated on June 30, 2017, as further described below under “Revolving Credit Facilities.” As of October 30, 2017, our available borrowings under the 2017 Credit Agreement were $32.0 million. On January 15, 2016 and December 1, 2016, we entered into the 2016‑1 and 2016‑2 Securitization Facilities, respectively, as further described below. On October 20, 2017, we amended and restated the 2016-1 Securitization Facility, as further described below. As of October 30, 2017, the outstanding balance under our securitization facilities was $196.3 million. We expect that our operating needs, including satisfying our obligations under our debt agreements and funding our working capital growth, will be satisfied by a combination of cash flows from operations, borrowings under the 2017 Credit Agreement, or any refinancing, replacement thereof or increase in borrowings thereunder, and securitization or sale of loans and finance receivables under our consumer loan securitization facilities.

As of September 30, 2017, we were in compliance with all financial ratios, covenants and other requirements set forth in our debt agreements. 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. To the extent we experience short-term or long-term funding disruptions, we have the ability to adjust our volume of lending and financing to consumers and small businesses that would reduce cash outflow requirements while increasing cash inflows through repayments. Additional alternatives may include the securitization or sale of assets, increased borrowings under the 2017 Credit Agreement, or any refinancing or replacement thereof, and reductions in capital spending which could be expected to generate additional liquidity.

8.50% Senior Unsecured Notes Due 2024

On September 1, 2017, we issued and sold the 2024 Senior Notes. The 2024 Senior Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the United States pursuant to Regulation S under the Securities Act. The 2024 Senior Notes bear interest at a rate of 8.50% annually on the principal amount payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2018. The 2024 Senior Notes were sold at a price of 100%. The 2024 Senior Notes will mature on September 1, 2024. The 2024 Senior Notes are unsecured debt obligations of ours, and are unconditionally guaranteed by certain of our domestic subsidiaries.

The 2024 Senior Notes are redeemable at our option, in whole or in part, (i) at any time prior to September 1, 2020 at 100% of the aggregate principal amount of 2024 Senior Notes redeemed plus the applicable “make whole” premium specified in the 2024 Senior Notes Indenture, plus accrued and unpaid interest, if any, to the redemption date and (ii) at any time on or after September 1, 2020 at the premium, if any, specified in the 2024 Senior Notes Indenture that will decrease over time, plus accrued and unpaid interest, if any, to the redemption date. In addition, prior to September 1, 2020, at our option, we may redeem up to 40% of the aggregate principal amount of the 2024 Senior Notes at a redemption price of 108.5% of the aggregate principal amount of 2024 Senior Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date, with the proceeds of certain equity offerings as described in the 2024 Senior Notes Indenture.

The 2024 Senior Notes and the related guarantees have not been and will not be registered under the Securities Act, or the securities laws of any state or other jurisdiction, and may not be offered or sold in the United States without registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities or blue sky laws and foreign securities laws.

We used the net proceeds of the 2024 Senior Notes offering to retire a portion of our outstanding 9.75% senior notes due 2021, to pay the related accrued interest, premiums, fees and expenses associated therewith and for general corporate purposes, which may include working capital and future repurchases of our outstanding debt securities.

Consumer Loan Securitization

2016‑1 Facility

On January 15, 2016, we and certain of our subsidiaries entered into a receivables securitization (as amended, the “2016‑1 Securitization Facility”) with certain purchasers, Jefferies Funding LLC, as administrative agent (the “Administrative Agent”) and Bankers Trust Company, as indenture trustee and securities intermediary (the “Indenture Trustee”). The 2016‑1 Securitization Facility securitizes unsecured consumer installment loans (“Receivables”) that have been, or will be, originated or acquired under our NetCredit brand and that meet specified eligibility criteria. Under the 2016‑1 Securitization Facility, Receivables are sold to a wholly-owned special purpose subsidiary (the “Issuer”) and serviced by another subsidiary.

The Issuer issued an initial term note of $107.4 million (the “Initial Term Note”), which was secured by $134 million in unsecured consumer loans, and variable funding notes (the “Variable Funding Notes”) with an aggregate availability of $20 million per month. As

55


 

described below, the Issuer has issued and will subsequently issue term notes (the “Term Notes” and, together with the Initial Term Note and the Variable Funding Notes, the “Securitization Notes”). The maximum principal amount of the Securitization Notes that may be outstanding at any time under the 2016‑1 Securitization Facility is limited to $175 million.

At the end of each month during the nine-month revolving period, the Receivables funded by the Variable Funding Notes will be refinanced through the creation of two Term Notes, which Term Notes will be issued to the holders of the Variable Funding Notes. The non-recourse Securitization Notes mature at various dates, the latest of which will be October 15, 2020 (the “Final Maturity Date”). The 2016‑1 Securitization Facility has been amended to extend the revolving period to October 2017 and the latest maturity to October 2021, as discussed below.

The Securitization Notes are issued pursuant to an indenture, dated as of January 15, 2016 (the “Closing Date”). The Securitization Notes bear interest at an annual rate equal to the one month London Interbank Offered Rate (“LIBOR”) rate (subject to a floor of 1%) plus 7.75%, which rate is initially 8.75%. In addition, the Issuer paid certain customary upfront closing fees and will pay customary annual commitment and other fees to the purchasers under the 2016‑1 Securitization Facility. The Issuer is permitted to voluntarily prepay any outstanding Securitization Notes, subject to an optional redemption premium. Interest and principal payments on outstanding Securitization Notes are made monthly. Any remaining amounts outstanding will be payable no later than the Final Maturity Date. The Securitization Notes are supported by the cash flows from the underlying Receivables. The holders of the Securitization Notes have no recourse to us if the cash flows from the underlying Receivables are not sufficient to pay all of the principal and interest on the Securitization Notes unless the underlying Receivables breach the representations and warranties made by us as of the related sale date as described below. Additionally, the Receivables will be held by the Issuer at least until the obligations under the Securitization Notes are satisfied. For so long as the Receivables are owned by the Issuer, the outstanding Receivables will not be available to satisfy our other debts and obligations.

All amounts due under the Securitization Notes are secured by all of the Issuer’s assets, which include the Receivables transferred to the Issuer, related rights under the Receivables, specified bank accounts, and certain other related collateral.

The 2016‑1 Securitization Facility documents contain customary provisions for securitizations, including: representations and warranties as to the eligibility of the Receivables and other matters; indemnification for specified losses not including losses due to the inability of consumers to repay their loans; covenants regarding special purpose entity matters and other subjects; and default and termination provisions which provide for the acceleration of the Securitization Notes under the 2016‑1 Securitization Facility in circumstances including, but not limited to, failure to make payments when due, servicer defaults, certain insolvency events, breaches of representations, warranties or covenants, failure to maintain the security interest in the receivables, defaults under other material indebtedness and certain regulatory matters.

The agreements evidencing the 2016‑1 Facility, all dated as of the Closing Date, include (i) an Indenture between the Issuer and the Indenture Trustee, (ii) a Note Purchase Agreement among the Issuer, NetCredit Loan Services, LLC (f/k/a Enova Lending Services, LLC), as the Master Servicer, the Administrative Agent and certain purchasers, and (iii) a Receivables Purchase Agreement between us and Enova Finance 5, LLC. On July 26, 2016, we and certain of our subsidiaries entered into a First Omnibus Amendment (the “First Amendment”) of the 2016‑1 Facility that was established on the Closing Date, pursuant to various agreements with certain purchasers, the Administrative Agent and the Indenture Trustee. The First Amendment effected a variety of minor technical changes to the Indenture, the Note Purchase Agreement, the Receivables Purchase Agreement and the servicing agreement for the 2016‑1 Facility. These changes included revised procedures under the Note Purchase Agreement for the disbursement to the Issuer of proceeds from draws under the Variable Funding Notes and clarification of modifications that the servicer is permitted to effect to the terms of the Receivables that have been transferred into the EFR 2016‑1 Facility.

On August 17, 2016, we and one of our subsidiaries entered into an Amendment to the Receivables Purchase Agreement. This amendment modified an eligibility criterion for Receivables that we sell under the Agreement.

On September 12, 2016, we and certain of our subsidiaries entered into a Second Omnibus Amendment (the “Second Amendment”) to amend the Indenture and the Receivables Purchase Agreement. The Second Amendment authorized us to include in the 2016‑1 Facility Receivables originated by a state-chartered bank and acquired by a subsidiary of us from that bank, and it adjusted the Investment Pool Cumulative Net Loss Trigger for the Initial Term Note Investment Pool (as such terms are defined in the Indenture), which was the seasoned pool of receivables securitized under the 2016‑1 Facility on the Closing Date.

On October 20, 2016, we and certain of our subsidiaries entered into a Third Amendment and Limited Waiver (the “Third Amendment”) to amend the Indenture. The Third Amendment increased the maximum principal amount of the 2016‑1 Facility to $275 million, increased the Variable Funding Notes maximum principal amount to $40 million until December 31, 2016, and $30 million thereafter, and extended the term of the facility to October 2017. The Third Amendment also adjusted the Note Interest Rate on Term Notes issued after, and amounts outstanding under the Variable Funding Notes after, the date of the Third Amendment (as such terms are defined in the Indenture). The weighted average interest rate on such adjusted Notes will be 9.5%.

56


 

On November 14, 2016, we and certain of our subsidiaries entered into a Fourth Amendment (the “Fourth Amendment”) to amend the Indenture and Receivables Purchase Agreement. The Fourth Amendment adjusted the Investment Pool Cumulative Delinquency Trigger (as such term is defined in the Indenture), with an effective date of October 31, 2016.

On December 14, 2016, we and certain of our subsidiaries entered into a Fifth Amendment (the “Fifth Amendment”) to amend the Indenture and Receivables Purchase Agreement. The Fifth Amendment adjusted the Investment Pool Cumulative Delinquency Trigger (as such term is defined in the Indenture) for the Initial Term Notes, with an effective date of November 30, 2016, expanded the categories of Receivables that could be financed through the 2016‑1 Facility and made certain other minor changes. These changes will provide us with additional flexibility under the 2016‑1 Facility.

2016‑2 Facility

On December 1, 2016, we and certain of our subsidiaries entered into a receivables securitization (the “2016‑2 Facility”) with Redpoint Capital Asset Funding, LLC, as lender (the “Lender”). The 2016‑2 Facility securitizes unsecured consumer installment loans (“Redpoint Receivables”) that have been and will be originated or acquired under our NetCredit brand by several of our subsidiaries (the “Originators”) and that meet specified eligibility criteria, including that the annual percentage rate for each securitized consumer loan is greater than or equal to 90%. Under the 2016‑2 Facility, Redpoint Receivables are sold to a wholly-owned special purpose subsidiary of ours (the “Debtor”) and serviced by another subsidiary of ours.

The Debtor has issued a revolving note with an initial maximum principal balance of $20.0 million (the “Initial Facility Size”), which is required to be secured by $25.0 million in unsecured consumer loans. The Initial Facility Size may be increased under the 2016‑2 Facility to $40 million. The 2016‑2 Facility is non-recourse to us and matures on December 1, 2019.

The 2016‑2 Facility is governed by a loan and security agreement, dated as of December 1, 2016, between the Lender and the Debtor. The 2016‑2 Facility bears interest at a rate per annum equal to LIBOR (subject to a floor) plus an applicable margin, which rate per annum was initially 12.50%. In addition, the Debtor paid certain customary upfront closing fees to the Lender. Interest payments on the 2016‑2 Facility will be made monthly. Subject to certain exceptions, the Debtor is not permitted to prepay the 2016‑2 Facility prior to October 1, 2018. Following such date, the Debtor is permitted to voluntarily prepay the 2016‑2 Facility without penalty. Any remaining amounts outstanding will be payable no later than December 1, 2019.

All amounts due under the 2016‑2 Facility are secured by all of the Debtor’s assets, which include the Redpoint Receivables transferred to the Debtor, related rights under the Redpoint Receivables, a bank account and certain other related collateral.

The 2016‑2 Facility documents contain customary provisions for securitizations, including: representations and warranties as to the eligibility of the Redpoint Receivables and other matters; indemnification for specified losses not including losses due to the inability of consumers to repay the related Receivables; and default and termination provisions which provide for the acceleration of the 2016‑2 Facility in circumstances including, but not limited to, failure to make payments when due certain insolvency events, breaches of representations, warranties or covenants, failure to maintain the security interest in the receivables and defaults under other material indebtedness of the Debtor.

Amended Facility

On October 20, 2017, we and certain of our subsidiaries amended and restated the 2016‑1 Securitization Facility (the “Amended Facility”). The counterparties to the Amended Facility included certain purchasers, the Administrative Agent and the Indenture Trustee. The Amended Facility relates to Receivables that have been and will be originated or acquired under our NetCredit brand by the Originators and that meet specified eligibility criteria. Under the Amended Facility, additional Receivables may be sold to the Issuer and serviced by another subsidiary of ours. As of the Closing Date, the Issuer owned eligible Receivables with an outstanding principal balance equal to $226.4 million.

In connection with the amendment and restatement, all of the outstanding notes issued by the Issuer prior to the Closing Date were redeemed and the Issuer issued an initial term note with an initial principal amount of $181.1 million (the “2017 Initial Term Note”) and variable funding notes (the “2017 Variable Funding Notes”) with an aggregate committed availability of $75 million per quarter with an option to increase the commitment to $90 million with the consent of the holders of the 2017 Variable Funding Notes. As described below, the Issuer will subsequently issue term notes (the “2017 Term Notes”) and, together with the 2017 Initial Term Note and the 2017 Variable Funding Notes, (the “2017 Securitization Notes”) at the end of each calendar quarter. The maximum principal amount of the 2017 Securitization Notes that may be outstanding at any time under the Amended Facility is $275 million.

On each of January 2, 2018, April 2, 2018, July 2, 2018, October 1, 2018, December 31, 2018 and April 1, 2019, the Receivables financed under the 2017 Variable Funding Notes will be allocated to a 2017 Term Note, which 2017 Term Note will be issued to the holders of the 2017 Variable Funding Notes and the 2017 Variable Funding Note on such date will be reduced to zero. The 2017

57


 

Securitization Notes are non-recourse to us and mature at various dates, the latest of which will be April 15, 2021 (the “2017 Final Maturity Date”).

The 2017 Securitization Notes are issued pursuant to an amended and restated indenture, dated as of the Closing Date, between the Issuer and the Indenture Trustee. The 2017 Securitization Notes bear interest at a rate per annum equal to One-Month LIBOR (subject to a floor) plus 7.50%. In addition, the Issuer paid certain customary upfront closing fees to the Administrative Agent and will pay customary annual commitment and other fees to the purchasers under the Amended Facility. Subject to certain exceptions, the Issuer is not permitted to prepay or redeem any of the 2017 Securitization Notes prior to April 15, 2019 except for a one-time prepayment of the 2017 Securitization Notes related to a removal of Receivables in an amount no greater than $100 million. Following such date, the Issuer is permitted to voluntarily prepay any of the 2017 Securitization Notes, subject to an optional redemption premium. Interest and principal payments on the 2017 Securitization Notes will be made monthly. Any remaining amounts outstanding will be payable no later than the 2017 Final Maturity Date.

All amounts due under the 2017 Securitization Notes are secured by all of the Issuer’s assets, which include the Receivables transferred to the Issuer, related rights under the Receivables, specified bank accounts and certain other related collateral.

The Amended Facility documents contain customary provisions for securitizations, including: representations and warranties as to the eligibility of the Receivables and other matters; indemnification for specified losses not including losses due to the inability of consumers to repay their loans; covenants regarding special purpose entity matters and other subjects; and default and termination provisions which provide for the acceleration of the 2017 Securitization Notes under the Amended Facility in circumstances including, but not limited to, failure to make payments when due, servicer defaults, certain insolvency events, breaches of representations, warranties or covenants, failure to maintain the security interest in the receivables, and defaults under other material indebtedness.

On October 26, 2017, the Issuer and the Indenture Trustee amended the Amended Facility to permit a holder of a 2017 Term Note or the 2017 Initial Term Note to exchange its notes for notes with an alternative structure with terms not materially different to the Issuer than the exchanged Term Notes or Initial Term Notes.

Revolving Credit Facilities

2017 Credit Agreement

On June 30, 2017, we and certain of our operating subsidiaries entered into an asset-backed secured revolving credit agreement with a syndicate of banks including TBK Bank, SSB (“TBK”), as Administrative Agent and Collateral Agent, Jefferies Finance LLC and TBK as Joint Lead Arrangers and Joint Lead Bookrunners, and Green Bank, N.A., as Lender.

The 2017 Credit Agreement is secured by domestic receivables and replaced the 2014 Credit Agreement (as described below). The borrowing limit in the 2017 Credit Agreement increased to $40 million from $35 million in the 2014 Credit Agreement, and its maturity date is May 1, 2020. We had no outstanding borrowings under the 2017 Credit Agreement as of September 30, 2017.

The 2017 Credit Agreement provides for a revolving credit line with interest on borrowings under the facility at prime rate plus 1.00%. In addition, the 2017 Credit Agreement provides for payment of a commitment fee calculated with respect to the unused portion of the line, and ranges from 0.30% per annum to 0.50% per annum depending on usage. A portion of the revolving credit facility, up to a maximum of $20 million, is available for the issuance of letters of credit. We had outstanding letters of credit under the 2017 Credit Agreement of $8.0 million as of September 30, 2017. The 2017 Credit Agreement provides for certain prepayment penalties if it is terminated on or before its first and second anniversary date, subject to certain exceptions.

The 2017 Credit Agreement contains certain limitations on the incurrence of additional indebtedness, investments, the attachment of liens to our property, the amount of dividends and other distributions, fundamental changes to us or our business and certain other of our activities. The 2017 Credit Agreement contains standard financial covenants for a facility of this type based on a leverage ratio and a fixed charge coverage ratio. The 2017 Credit Agreement also provides for customary affirmative covenants, including financial reporting requirements, and certain events of default, including payment defaults, covenant defaults and other customary defaults.

2014 Credit Agreement

On March 25, 2015, we and certain of our subsidiaries, as guarantors, entered into an amendment to our revolving credit facility with Jefferies Finance LLC, as administrative agent. The amendment reduced our unsecured revolving line of credit to $65.0 million (from $75.0 million) and increased an additional senior secured indebtedness basket to the greater of $20.0 million or 2.75% of consolidated total assets (as defined in the 2014 Credit Agreement) (from $15.0 million or 2% of consolidated total assets). In addition, the March 25, 2015 amendment revised certain definitions and provisions relating to limitations on indebtedness, investments, dispositions, fundamental changes and burdensome agreements to allow certain of our foreign subsidiaries, which opt to become guarantors of our obligations under the 2014 Credit Agreement, to be treated as domestic subsidiaries for purposes of those provisions.

58


 

On December 29, 2015, we and certain of our subsidiaries, as guarantors, entered into an amendment to the 2014 Credit Agreement, which temporarily increased our unsecured revolving line of credit to $75.0 million, an increase of $15.0 million ($5.0 million on December 29, 2015 and $10.0 million on January 4, 2016). Once we received the proceeds from the 2016‑1 Securitization Facility, we repaid the outstanding balance on the revolving line of credit in full and, in accordance with the terms of the amendment, the revolving commitment amount was reduced to $40.0 million.

On June 30, 2016, we and certain of our subsidiaries, as guarantors, entered into an amendment to the 2014 Credit Agreement, which increased the maximum allowable leverage ratio (as defined in the 2014 Credit Agreement) for the fiscal quarter ended June 30, 2016 to 4.00 to 1.00 (from 3.00 to 1.00) and for the fiscal quarters ended September 30, 2016 and December 31, 2016 to 3.50 to 1.00 (in each case, from 3.00 to 1.00).

On September 30, 2016, we and certain of our subsidiaries, as guarantors, entered into an amendment to the 2014 Credit Agreement, which increased the maximum allowable leverage ratio (as defined in the 2014 Credit Agreement) for the fiscal quarters ended September 30, 2016 and thereafter to 4.25 to 1.00 (from 3.50 to 1.00) and decreased our unsecured revolving line of credit to $35.0 million.

Our 2014 Credit Agreement was terminated on June 30, 2017.

Cash Flows

Our cash flows and other key indicators of liquidity are summarized as follows (dollars in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows provided by operating activities

 

$

311,297

 

 

$

300,707

 

Cash flows used in investing activities

 

 

 

 

 

 

 

 

Loans and finance receivables

 

$

(325,859

)

 

$

(335,390

)

Change in restricted cash

 

 

(3,030

)

 

 

(32,776

)

Purchases of property and equipment

 

 

(10,804

)

 

 

(11,466

)

Other investing activities

 

 

1,798

 

 

 

72

 

Total cash flows used in investing activities

 

$

(337,895

)

 

$

(379,560

)

Cash flows provided by financing activities

 

$

93,101

 

 

$

89,922

 

Cash Flows from Operating Activities

Net cash provided by operating activities increased $10.6 million, or 3.5%, to $311.3 million for the current nine-month period from $300.7 million for the prior year nine-month period. The increase was primarily driven by a $38.7 million increase in cost of revenue, a non-cash expense, during the current nine-month period, offset by a $3.5 million decrease in net income.

Other significant changes in net cash provided by operating activities for the current nine-month period compared to the prior year nine-month period included cash flows from the following activities:

 

changes in the loss on early on extinguishment of debt resulted in a $14.9 million increase in net cash provided by operating activities;

 

changes in deferred income taxes, net resulted in a $5.2 million increase in net cash provided by operating activities, primarily due to the change in the loan loss reserve balances;

 

changes in accounts payable and accrued expenses resulted in a $21.1 million decrease in net cash provided by operating activities, primarily due to lower accrued expense liabilities and a lower fair value of the contingent consideration liability related to a prior acquisition; and

 

changes in current income taxes resulted in a $20.3 million decrease in net cash provided by operating activities, primarily due to the prepayment of tax expenses.

Management believes cash flows from operations and available cash balances and borrowings under our consumer loan securitization facilities and 2017 Credit Agreement, which may include increased borrowings under our 2017 Credit Agreement, any refinancing or replacement thereof, and additional securitization of consumer loans, will be sufficient to fund our future operating liquidity needs, including to fund our working capital growth.

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Cash Flows from Investing Activities

Net cash used in investing activities decreased $41.7 million, or 11.0%, for the current nine-month period compared to the prior year nine-month period. This decrease was primarily due to a $9.5 million decrease in net cash invested in loans and finance receivables, reflecting a $20.6 million increase in payments received from customers partially offset by an $11.1 million increase in the amount of loan originated or acquired, as well as an increase in the change in restricted cash resulting in a $29.7 million decrease in cash used in investing activities.

Cash Flows from Financing Activities

Cash flows provided by financing activities for the current nine-month period primarily reflects $95.0 million in net borrowings under our senior notes facilities, $21.1 million in net borrowings under our securitization facilities, an $11.3 million penalty paid in connection with the early payment of our 2021 Senior Notes and $9.6 million of debt issuance costs paid in connection with the 2017 Credit Agreement and 2024 Senior Notes. Additionally, on September 15, 2017, we announced the Board of Directors had authorized a share repurchase program for the repurchase of up to $25.0 million of our common stock through December 31, 2019 (the “September 2017 Authorization”). During the current nine-month period, we paid $1.1 million to repurchase common stock under the September 2017 Authorization. Cash flows provided by financing activities for the prior year nine-month period primarily reflects $137.0 million in net borrowings under our 2016‑1 Securitization Facility, partially offset by $43.4 million of net repayments under our unsecured revolving line of credit under the Credit Agreement and $3.5 million of debt issuance costs paid in connection with the consumer loan securitization financing transactions.

OFF-BALANCE SHEET ARRANGEMENTS

In certain markets, we arrange for consumers to obtain consumer loan products from independent third-party lenders through our CSO programs. For consumer loan products originated by third-party lenders under the CSO programs, each lender is responsible for providing the criteria by which the customer’s application is underwritten and, if approved, determining the amount of the consumer loan. We are responsible for assessing whether or not we will guarantee such loan. When a customer executes an agreement with us under our CSO programs, we agree, for a fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customer’s obligation to repay the loan received by the customer from the third-party lender if the customer fails to do so. The guarantee represents an obligation to purchase specific loans if they go into default, which generally occurs after one payment is missed. As of September 30, 2017 and 2016, the outstanding amount of active consumer loans originated by third-party lenders under the CSO programs was $28.9 million and $29.7 million, respectively, which were guaranteed by us. The estimated fair value of the liability for estimated losses on consumer loans guaranteed by us of $2.0 million and $1.7 million, as of September 30, 2017 and 2016, respectively, is included in “Accounts payable and accrued expenses” in the consolidated balance sheets. Our CSO programs are further described under the caption “Products and Services” above.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to our operations result primarily from changes in foreign currency exchange rates. We do not engage in speculative or leveraged transactions, nor do we hold or issue financial instruments for trading purposes. There have been no material changes to our exposure to market risks since December 31, 2016.

 

 

ITEM 4.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the “Exchange Act”) as of September 30, 2017 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective and provide reasonable assurance (i) to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms; and (ii) to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

There was no change in our internal control over financial reporting during the quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls will prevent or detect all possible misstatements due to error or fraud. Our disclosure controls and procedures and internal controls are, however, designed to provide reasonable assurance of achieving their objectives, and our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at that reasonable assurance level.

 

 

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PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

See the “Litigation” section of Note 8 of the notes to our unaudited consolidated financial statements of Part I, “Item 1 Financial Statements.”

 

 

ITEM 1A.

RISK FACTORS

There have been no material changes from the Risk Factors described in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, except as follows:

The CFPB recently finalized a new rule that may affect the consumer lending industry, and this rule could have a material adverse effect on our U.S. consumer lending business.

On October 6, 2017, the CFPB issued its final rule on payday and certain high-cost installment loans, which would cover some of the loans we offer. The rule requires that lenders who make short-term loans and longer-term loans with balloon payments reasonably determine consumers’ ability to repay the loans according to their terms before issuing the loans. The rule also introduces new limitations on repayment processes for those lenders as well as lenders of other longer-term loans with an annual percentage rate greater than 36 percent that include an ACH authorization or similar payment provision. If a consumer has two consecutive failed payment attempts, the lender must obtain the consumer’s new and specific authorization to make further withdrawals from the consumer’s bank account. For loans covered by the rule, lenders must provide certain notices to consumers before attempting a first payment withdrawal or an unusual withdrawal and after two consecutive failed payment attempts. The rule will apply to loan contracts entered into beginning in mid-2019. However, under the Congressional Review Act, Congress has 60 legislative days after publication of the rule in the Federal Register (which has not yet occurred) to overturn it by a majority vote in both Houses of Congress. It is also likely that there will be legal challenges to the final rule. We cannot currently assess the likelihood of the rule becoming effective. If the rule does become effective, we will need to make certain changes to our underwriting, payment processes and customer notifications in our U.S. consumer lending business. If we are not able to execute these changes effectively because of unexpected complexities, costs or otherwise, we cannot guarantee that the final rule will not have a material adverse impact on our business, prospects, results of operations, financial condition and cash flows.

The lending and financing industry continues to be targeted by new laws or regulations in many jurisdictions that could restrict the lending and financing products and services we offer, impose additional compliance costs on us, render our current operations unprofitable or even prohibit our current operations.

Governments at the national, state and local levels, as well as international governments, may seek to impose new laws, regulatory restrictions or licensing requirements that affect the products or services we offer, the terms on which we may offer them, and the disclosure, compliance and reporting obligations we must fulfill in connection with our lending and financing business. They may also interpret or enforce existing requirements in new ways that could restrict our ability to continue our current methods of operation or to expand operations, impose significant additional compliance costs, and may have a negative effect on our business, prospects, results of operations, financial condition and cash flows. In some cases, these measures could even directly prohibit some or all of our current business activities in certain jurisdictions, or render them unprofitable and/or impractical to continue.

In recent years, consumer loans, and in particular the category commonly referred to as “payday loans,” which includes certain of our short-term loan products, have come under increased regulatory scrutiny that has resulted in increasingly restrictive regulations and legislation that makes offering such loans in certain states in the United States or the international countries where we operate (as further described below) less profitable or unattractive. Laws or regulations in some states in the United States require that all borrowers of certain short-term loan products be reported to a centralized database and limit the number of loans a borrower may receive or have outstanding. Other laws limit the availability of some of our consumer loan products in the United States to active duty military personnel, active members of the National Guard or members on active reserve duty and their spouses and immediate dependents.

Certain consumer advocacy groups and federal and state legislators and regulators have advocated that laws and regulations should be tightened so as to severely limit, if not eliminate, the type of loan products and services we offer to consumers, and this has resulted in both the executive and legislative branches of the U.S. federal government and state governmental bodies exhibiting an interest in debating legislation that could further regulate consumer loan products and services such as those that we offer. The U.S. Congress, as well as other similar federal, state and local bodies and similar international governmental authorities, have debated, and may in the future adopt, legislation or regulations that could, among other things, place a cap (or decrease a current cap) on the interest or fees that we can charge or a cap on the effective annual percentage rate that limits the amount of interest or fees that may be charged, ban or limit loan renewals or extensions of short-term loans (where the customer agrees to pay the current finance charge on a loan for the right to make payment of the outstanding principal balance of such loan at a later date plus an additional finance charge), including the rates to

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be charged for loan renewals or extensions, require us to offer an extended payment plan, limit origination fees for loans, require changes to our underwriting or collections practices, require lenders to be bonded or to report consumer loan activity to databases designed to monitor or restrict consumer borrowing activity, impose “cooling off” periods between the time a loan is paid off and another loan is obtained or prohibit us from providing any of our consumer loan products in the United States to active duty military personnel, active members of the National Guard or members on active reserve duty and their spouses and immediate dependents.

The Maryland General Assembly passed House Bill 1270 on March 31, 2017 and Senate Bill 527 on April 10, 2017. The governor of Maryland signed the legislation into law on May 25, 2017. The new law limits the total fees, charges and interest that can be assessed on unsecured revolving credit plans with Maryland consumers to an effective rate of 33% per year. The law went into effect on July 1, 2017 with regard to new revolving credit plans.

We cannot currently assess the likelihood of any future unfavorable federal, state, local or international legislation or regulations being proposed or enacted that could affect our products and services. We closely monitor proposed legislation in jurisdictions where we offer our loan products. Additional legislative or regulatory provisions could be enacted that could severely restrict, prohibit or eliminate our ability to offer a consumer or small business loan or financing product. In addition, under statutory authority, U.S. state regulators have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes, that could adversely affect the way we do business and may force us to terminate or modify our operations in particular states or affect our ability to obtain new licenses or renew the licenses we hold.

Significant new laws and regulations have also been adopted in the United Kingdom, and further new laws and regulations will continue to be imposed. See “— The United Kingdom has imposed, and continues to impose, increased regulation of the short-term high-cost credit industry with the stated expectation that some firms will exit the market” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for additional information. Furthermore, legislative or regulatory actions may be influenced by negative perceptions of us and our industry, even if such negative perceptions are inaccurate, attributable to conduct by third parties not affiliated with us (such as other industry members), or attributable to matters not specific to our industry.

Any of these or other legislative or regulatory actions that affect our lending and financing business at the national, state, international and local level could, if enacted or interpreted differently, have a material adverse impact on our business, prospects, results of operations, financial condition and cash flows and could prohibit or directly or indirectly impair our ability to continue current operations.

Judicial decisions, CFPB rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements we use illegal or unenforceable.

We include arbitration provisions in our consumer and business loan and financing agreements. These provisions are designed to allow us to resolve any customer disputes through individual arbitration rather than in court and explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, our arbitration agreements, if enforced, have the effect of shielding us from class action liability. Our arbitration agreements do not generally have any impact on regulatory enforcement proceedings. We take the position that the arbitration provisions in loan and financing agreements, including class action waivers, are valid and enforceable; however, the enforceability of arbitration provisions is often challenged in court. If those challenges are successful, our arbitration and class action waiver provisions could be unenforceable, which could subject us to additional litigation, including additional class action litigation.

In addition, the U.S. Congress has considered legislation that would generally limit or prohibit mandatory arbitration agreements in consumer contracts and has enacted legislation with such a prohibition with respect to certain mortgage loan agreements and also certain consumer loan agreements to members of the military on active duty and their dependents. Further, the Dodd-Frank Act directed the CFPB to study consumer arbitration and report to the U.S. Congress, and it authorized the CFPB to adopt rules limiting or prohibiting consumer arbitration, consistent with the results of its study.

On July 10, 2017, the CFPB issued a final rule on arbitration. The rule would have prohibited class action waivers in certain consumer financial services contracts beginning on March 19, 2018 and would have required financial services providers to submit certain records to the CFPB if arbitration were used to resolve disputes with consumers. However, on July 25, 2017, and October 24, 2017, respectively, the House and Senate each passed a resolution of disapproval of the rule, pursuant to their powers under the Congressional Review Act, and the President signed the bill on November 1, 2017. Because the rule was disapproved, it cannot be reissued in substantially the same form, and the CFPB cannot issue a substantially similar rule unless the new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.

Any judicial decisions, legislation or other rules or regulations that impair our ability to enter into and enforce consumer arbitration agreements and class action waivers will increase our exposure to class action litigation as well as litigation in plaintiff-friendly

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jurisdictions, which would be costly and could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.

The United Kingdom has imposed, and continues to impose, increased regulation of the short-term high-cost credit industry and previously stated its expectation that some firms will exit the market.

In the United Kingdom, the FCA regulates consumer credit and related activities pursuant to the FSMA and the FCA Handbook, which includes prescriptive rules and regulations and carries across many of the standards set out in the CCA and its secondary legislation as well as previous guidance initially set out by the OFT. The regulations under the FCA consumer credit regime are more prescriptive than the former U.K. consumer credit regime. The FSMA gives the FCA the power to authorize, supervise, examine and bring enforcement actions against providers of consumer credit, as well as to make rules for the regulation of consumer credit. On February 28, 2014, the FCA issued the CONC contained in the FCA Handbook. The CONC incorporates prescriptive regulations for consumer loans such as those that we offer, including mandatory affordability checks on borrowers, limiting the number of rollovers on short-term loans to two, restricting how lenders can advertise, banning advertisements that the FCA deems misleading, and introducing a limit of two unsuccessful attempts on the use of continuous payment authority (which provides a creditor the ability to directly debit a customer’s account for payment when authorized by the customer to do so) to pay off a loan. Certain provisions of the CONC took effect on April 1, 2014, and other provisions for high-cost short-term credit providers, such as the limits on rollovers, continuous payment authority and advertising, took effect on July 1, 2014. As a result of the FCA’s requirements, we made significant adjustments to many of our business practices in the United Kingdom, as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 “— Our primary regulators in the United Kingdom have previously expressed serious concerns about our compliance with applicable U.K. regulations, which caused us to make significant changes to our U.K. business that have impacted and will continue to negatively impact our operations and results, and this impact has been and will continue to be significant.”

On January 2, 2015, the FCA implemented a cap on the total cost of high-cost short-term credit, which includes a maximum rate of 0.8% of principal per day and limits the total fees, interest (including post-default interest) and charges (including late fees which are capped at £15) to an aggregate amount not to exceed 100% of the principal amount loaned. The final rule required us to make changes to all of our high-cost short-term products in the United Kingdom. As a result of the final rule, we discontinued offering line of credit accounts to new customers in the United Kingdom in late 2014 and effective January 1, 2015, we discontinued draws on existing line of credit accounts in the United Kingdom.

The FCA conducted a consultation in 2015 and published its response on September 28, 2015, allowing firms to use continuous payment authority to collect repayments where a customer is in arrears or default and the lender is exercising forbearance. The FCA also imposed a number of regulatory changes on credit brokers and lenders operating in the high-cost-short-term credit market in the United Kingdom. The FCA also implemented a provision that requires providers of high-cost short-term credit include a risk warning in all financial promotions, including previously exempted size-limited ads like SMS text messages and pay-per-click ads. The majority of these changes came into force on November 2, 2015.

On November 29, 2016, the FCA issued a Call for Input seeking evidence and feedback to further inform its previous reviews of the high-cost credit market, including a review of the loan price cap that was implemented on January 2, 2015. On July 31, 2017, the FCA published the outcome of its review and decided not to change the price cap but to review it again in three years. The FCA found that regulation of high-cost short-term credit, including the price cap, has led to substantial benefits to consumers. The FCA validated concerns about specific products and segments of the high-cost credit market, including unarranged overdrafts and long-term use of high-cost credit and the rent-to-own, home-collected credit and catalog credit markets. The FCA plans to investigate those products and segments further and issue a Consultation Paper on proposed solutions in the spring of 2018. We do not currently know what solutions the FCA may implement as a result or how any changes may affect our business operations. If any new rules or guidance significantly restrict the conduct of our business, such implementation could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.

On July 31, 2017, the FCA issued a Consultation Paper on proposed changes to its rules and guidance on assessing creditworthiness in consumer credit. The FCA requested responses to the consultation by October 31, 2017 and expects to publish its findings in the second quarter of 2018. We do not currently know whether or how the FCA may amend its rules and guidance on assessing creditworthiness in consumer credit or how it will affect our business operations. If any new rules or guidance significantly restrict the conduct of our business, such implementation could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.

During the years ended December 31, 2016 and 2015, our U.K. operations represented 13.9% and 19.9%, respectively, of our consolidated total revenue.

These changes that we have implemented or are required to implement in the future as a result of such legislative and regulatory activities could have a material adverse effect on our U.K. business, as discussed in our Annual Report on Form 10-K for the fiscal year ended

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December 31, 2016 “— Our primary regulators in the United Kingdom have previously expressed serious concerns about our compliance with applicable U.K. regulations, which caused us to make significant changes to our U.K. business that have impacted and will continue to negatively impact our operations and results, and this impact has been and will continue to be significant ,” and “— Due to restructuring of the consumer credit regulatory framework in the United Kingdom, we are required to obtain full authorization from our U.K. regulators to continue providing consumer credit and perform related activities in the United Kingdom, and there is no guarantee that we will receive full authorization to continue offering consumer loans in the United Kingdom.” We cannot give any assurances that the result of the FCA’s review of the high-cost credit market and the loan price cap and any potential new rules will not have a material impact on our U.K. products and services.

The use of personal data for credit underwriting is highly regulated.

In the United States, the FCRA regulates the collection, dissemination and use of consumer information, including consumer credit information. Compliance with the FCRA and related laws and regulations concerning consumer reports has recently been under regulatory scrutiny. The FCRA requires us to provide a Notice of Adverse Action to a consumer loan applicant when we deny an application for credit, which, among other things, informs the applicant of the action taken regarding the credit application and the specific reasons for the denial of credit. The FCRA also requires us to promptly update any credit information reported to a consumer reporting agency about a consumer and to allow a process by which consumers may inquire about credit information furnished by us to a consumer reporting agency. Historically, the FTC has played a key role in the implementation, oversight, enforcement and interpretation of the FCRA. Pursuant to the Dodd-Frank Act, the CFPB has primary supervisory, regulatory and enforcement authority of FCRA issues, although the FTC also retains its enforcement role regarding the FCRA but shares that role in many respects with the CFPB. The CFPB has taken a more active approach than the FTC, including with respect to regulation, enforcement and supervision of the FCRA. Changes in the regulation, enforcement or supervision of the FCRA may materially affect our business if new regulations or interpretations by the CFPB or the FTC require us to materially alter the manner in which we use personal data in our credit underwriting.

In the United Kingdom, we are also subject to the requirements of the Data Protection Act 1988 (the “DPA”) and are required to be fully registered as a data-controller under the DPA. The DPA controls how organizations, businesses and/or the government use personal data and how they should process it. The current Data Protection regime will be strengthened by changes from the EU General Data Protection Regulation (“GDPR”), a regulation by which the European Parliament, the European Council and the European Commission intend to strengthen and unify data protection for individuals within the European Union (“EU”). It also addresses export of personal data outside the EU. The primary objectives of the GDPR are to give citizens back the control of their personal data and to simplify the regulatory environment for international business by unifying the regulation within the EU. When the GDPR takes effect, it will replace the data protection directive from 1995. The GDPR contains a number of new protections for EU data subjects and threatens significant fines and penalties for non-compliant data controllers and processors once it comes into effect. The regulation was adopted on April 27, 2016. It is effective May 25, 2018 after a two-year transition period and, unlike a directive, it does not require any enabling legislation to be passed by national governments.

On October 6, 2015, the European Court of Justice invalidated the so-called “Safe Harbor” framework, which previously evidenced compliance with the DPA and the European Union Data Protection Directive and allowed companies to pass European Union data to non-European Union countries if certain certification requirements were met by the company. Although many companies, including us, had Safe Harbor certification, the European Union and the United Kingdom provide other guidance regarding compliance with their data protection laws and regulations for companies who pass data outside the European Union. In addition, there are circumstances under which a company is exempt from complying with those laws and regulations. Despite the invalidation of the Safe Harbor framework, we believe we are exempt from and/or in compliance with all E.U. and U.K. privacy laws and regulations.

On February 2, 2016, the European Commission and the United States agreed on a new framework for transatlantic data flows: the “EU-US Privacy Shield”, which will replace the invalided Safe harbor framework. The EU-US Privacy Shield is a framework designed by the U.S. Department of Commerce (the “Commerce Department”) and European Commission to provide companies on both sides of the Atlantic with a mechanism to comply with EU personal data from the European Union to the United States in support of transatlantic commerce. On July 12, 2016, the European Commission adopted the EU-US Privacy Shield, which consists of four components: (i) the privacy shield principles, which is a code of conduct outlining protections for the handling of personal data; (ii) oversight and enforcement; (iii) ombudsperson mechanism; and (iv) safeguards and limitations. The Commerce Department began accepting certifications to the EU-US Privacy Shield on August 1, 2016. We expect to apply for certification to the EU-US Privacy Shield, and in the interim, despite the invalidation of the Safe Harbor framework, we believe we are exempt from and/or are in compliance with all E.U. and U.K. privacy laws and regulations.

On June 23, 2016, the United Kingdom voted to exit the European Union. The details and timeline of the exit have not yet been finalized. When the United Kingdom exits the European Union, it is expected that the United Kingdom will establish a new framework for data flow between the United Kingdom and the United States or will agree to continue the protections of the EU-US Privacy Shield for the transfer of personal data into and out of the United Kingdom. We expect to comply with any framework established by the United Kingdom for the transfer of personal data into and out of the United Kingdom.

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The oversight of the FCRA by both the CFPB and the FTC and any related investigation or enforcement activities or our failure to comply with the DPA may have a material adverse impact on our business, including our operations, our mode and manner of conducting business and our financial results.

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides the information with respect to purchases made by us of shares of our common stock.

 

Period

 

Total Number of Shares Purchased(a)

 

 

Average Price Paid Per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plan(b)

 

 

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan(b)

(in thousands)

 

January 1 – January 31, 2017

 

 

 

 

$

 

 

 

 

 

$

 

February 1 – February 28, 2017

 

 

34,301

 

 

 

14.80

 

 

 

 

 

 

 

March 1 – March 31, 2017

 

 

2,122

 

 

 

13.55

 

 

 

 

 

 

 

April 1 – April 30, 2017

 

 

920

 

 

 

14.80

 

 

 

 

 

 

 

May 1 – May 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

June 1 – June 30, 2017

 

 

8,679

 

 

 

14.10

 

 

 

 

 

 

 

July 1 – July 31, 2017

 

 

22,610

 

 

 

16.22

 

 

 

 

 

 

 

August 1 – August 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

September 1 – September 30, 2017

 

 

80,000

 

 

 

13.45

 

 

 

80,000

 

 

 

23,924

 

Total

 

 

148,632

 

 

$

14.23

 

 

 

80,000

 

 

$

23,924

 

 

(a)

Includes shares withheld from employees as tax payments for shares issued under the Company’s stock-based compensation plans of 34,301, 2,122, 920, 8,679, and 22,610 shares for the months of February, March, April, June, and July, respectively.

(b)

On September 15, 2017, the Company announced the Board of Directors had authorized a share repurchase program for the repurchase of up to $25.0 million of the Company’s common stock through December 31, 2019 (the “September 2017 Authorization”). All share repurchases made under the September 2017 Authorization have been through open market transactions.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION

None.

 

 

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ITEM 6.

EXHIBITS

 

Exhibit No.

 

Exhibit Description

 

 

 

 

4.1

 

Indenture, dated as of September 1, 2017, by and among Enova International, Inc., each of the guarantors party thereto and Computershare Trust Company, N.A., as trustee and the Form of 8.500% Senior Note due 2024 (included as Exhibit A) (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K, filed September 8, 2017)

 

 

4.2

 

Fourth Supplemental Indenture, dated as of September 1, 2017, by and among Enova International, Inc., CNU of Iowa, LLC, Computershare Trust Company, N.A. and Computer Trust Company of Canada, as trustee (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K, filed September 8, 2017)

 

 

10.1

 

Enova International, Inc. Supplemental Executive Retirement Plan, as amended and restated effective September 13, 2017

 

 

10.2

 

Second Amendment to Lease Agreement, dated September 13, 2017, between 175 Jackson L.L.C. and Enova International, Inc.

 

 

10.3

 

Form of Executive Change-in-Control Severance and Restrictive Covenant Agreement (Chief Executive Officer) (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed September 15, 2017)

 

 

10.4

 

Form of Executive Change-in-Control Severance and Restrictive Covenant Agreement (Executive Officers other than the CEO) (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, filed September 15, 2017)

 

 

10.5

 

Purchase Agreement by and among Enova International, Inc., the Guarantors party thereto and Jefferies LLC, as Representative of the Initial Purchasers listed therein, dated August 18, 2017 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed August 24, 2017)

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 1, 2017

 

 

ENOVA INTERNATIONAL, INC.

 

 

 

 

 

 

 

 

 

By:

 

/s/ Steven E. Cunningham

 

 

 

 

 

Steven E. Cunningham

 

 

 

 

 

Executive Vice President, Chief Financial Officer

 

 

 

 

 

(On behalf of the Registrant and as Principal Financial Officer)

 

67