You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Note About Forward-Looking Statements" section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We generally refer to loans, customers and other information and data associated with each of our brands (Rise, Elastic, Sunny and Today Card) as Elevate's loans, customers, information and data, irrespective of whether Elevate directly originates the credit to the customer or whether such credit is originated by a third party. OVERVIEW We provide online credit solutions to consumers in the US and theUK who are not well-served by traditional bank products and who are looking for better options than payday loans, title loans, pawn and storefront installment loans. Non-prime consumers now represent a larger market than prime consumers but are risky to underwrite and serve with traditional approaches. We're succeeding at it - and doing it responsibly - with best-in-class advanced technology and proprietary risk analytics honed by serving more than 2.5 million customers with$8.4 billion in credit. Our current online credit products, Rise, Elastic and Sunny, and our recently test launched Today Card reflect our mission to provide customers with access to competitively priced credit and services while helping them build a brighter financial future with credit building and financial wellness features. We call this mission "Good Today, Better Tomorrow." We earn revenues on the Rise and Sunny installment loans, on the Rise and Elastic lines of credit and on the Today Card credit card product. Our revenue primarily consists of finance charges and line of credit fees. Finance charges are driven by our average loan balances outstanding and by the average annual percentage rate ("APR") associated with those outstanding loan balances. We calculate our average loan balances by taking a simple daily average of the ending loan balances outstanding for each period. Line of credit fees are recognized when they are assessed and recorded to revenue over the life of the loan. We present certain key metrics and other information on a "combined" basis to reflect information related to loans originated by us and by our bank partners that license our brands, Republic Bank,FinWise Bank andCapital Community Bank , as well as loans originated by third-party lenders pursuant to CSO programs, which loans originated through CSO programs are not recorded on our balance sheet in accordance with US GAAP. See "-Key Financial and Operating Metrics" and "-Non-GAAP Financial Measures." We use our working capital, funds provided by third-party lenders pursuant to CSO programs and our credit facility withVictory Park Management, LLC ("VPC" and the "VPC Facility") to fund the loans we make to our Rise and Sunny customers and provide working capital. Since originally entering into the VPC Facility, it has been amended several times to increase the maximum total borrowing amount available from the original amount of$250 million to approximately$492 million atMarch 31, 2020 . See "-Liquidity and Capital Resources-Debt facilities." Beginning in the fourth quarter of 2018, the Company also licenses its Rise installment loan brand to a third-party lender,FinWise Bank , which originates Rise installment loans in 18 states.FinWise Bank initially provides all of the funding and retains a percentage of the balances of all of the loans originated and sells the remaining loan participation in those Rise installment loans to a third-party SPV,EF SPV, Ltd. ("EF SPV"). Prior toAugust 1, 2019 ,FinWise Bank retained 5% of the balances and sold a 95% participation to EF SPV. OnAugust 1, 2019 , EF SPV purchased an additional 1% participation in the outstanding portfolio with the participation percentage revised going forward to 96%. These loan participation purchases are funded through a separate financing facility (the "EF SPV Facility"), effectiveFebruary 1, 2019 , and through cash flows from operations generated by EF SPV. The EF SPV Facility has a maximum total borrowing amount available of$150 million . We do not own EF SPV, but we have a credit default protection agreement with EF SPV whereby we provide credit protection to the investors in EF SPV against Rise loan losses in return for a credit premium. Elevate is required to consolidate EF SPV as a variable interest entity under GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 96% of the Rise installment loans originated byFinWise Bank and sold to EF SPV. 40 -------------------------------------------------------------------------------- The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all loans originated and sells a 90% loan participation in the Elastic lines of credit. An SPV structure was implemented such that the loan participations are sold by Republic Bank toElastic SPV, Ltd. ("Elastic SPV") and Elastic SPV receives its funding from VPC in a separate financing facility (the "ESPV Facility"), which was finalized onJuly 13, 2015 . We do not own Elastic SPV but we have a credit default protection agreement with Elastic SPV whereby we provide credit protection to the investors in Elastic SPV against Elastic loan losses in return for a credit premium. Per the terms of this agreement, under US GAAP, the Company is the primary beneficiary of Elastic SPV and is required to consolidate the financial results of Elastic SPV as a VIE in its consolidated financial results.
The ESPV Facility has also been amended several times and the original
commitment amount of
Our management assesses our financial performance and future strategic goals through key metrics based primarily on the following three themes: • Revenue growth. Key metrics related to revenue growth that we monitor by
product include the ending and average combined loan balances outstanding,
the effective APR of our product loan portfolios, the total dollar value of
loans originated, the number of new customer loans made, the ending number of
customer loans outstanding and the related customer acquisition costs ("CAC")
associated with each new customer loan made. We include CAC as a key metric
when analyzing revenue growth (rather than as a key metric within margin
expansion).
• Stable credit quality. Since the time they were managing our legacy US
products, our management team has maintained stable credit quality across the
loan portfolio they were managing. Additionally, in the periods covered in
this Management's Discussion and Analysis of Financial Condition and Results
of Operations, we have improved our credit quality. The credit quality
metrics we monitor include net charge-offs as a percentage of revenues, the
combined loan loss reserve as a percentage of outstanding combined loans,
total provision for loan losses as a percentage of revenues and the
percentage of past due combined loans receivable - principal.
• Margin expansion. We expect that our operating margins will continue to
expand over the long term as we lower our direct marketing costs and
efficiently manage our operating expenses while continuing to improve our
credit quality. Over the next several years, as we continue to scale our loan
portfolio, we anticipate that our direct marketing costs primarily associated
with new customer acquisitions will decline to approximately 10% of revenues
and our operating expenses will decline to approximately 20% of revenues. We
aim to manage our business to achieve a long-term operating margin of 20%,
and do not expect our operating margin to increase beyond that level, as we
intend to pass on any improvements over our targeted margins to our customers
in the form of lower APRs. We believe this is a critical component of our
responsible lending platform and over time will also help us continue to
attract new customers and retain existing customers.
Impact of COVID-19 InMarch 2020 , the outbreak of the novel Coronavirus Disease 2019 ("COVID-19") was recognized as a pandemic by theWorld Health Organization . The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation thatFederal Reserve policy will maintain a low interest rate environment for the foreseeable future. As COVID-19 began to impact our locations in the US and theUK , we successfully transitioned our employee base to a remote working environment. We have sought to ensure our employees feel secure in their jobs and have the flexibility and resources they need to stay safe and healthy. As an 100% online lending solutions provider, our technology and underwriting platform has continued to serve our customers and the bank originators that we support. 41 -------------------------------------------------------------------------------- In response to the COVID-19 pandemic, we, along with the banks we support, have also expanded our payment flexibility programs to provide temporary payment relief to certain customers who meet the program's qualifications. This program allows for a deferral of payments for an initial period of 60 days, which we may extend for an additional 60 days, for a maximum of 180 days on a cumulative basis. The customer will return to their normal payment schedule after the end of the deferral period with the extension of their maturity date equivalent to their deferral period not to exceed an additional 180 days. For Rise and Sunny installment loans, finance charges continue to accrue at a lower effective APR over the expected extended term of the loan considering the deferral periods provided. For Elastic lines of credit, no fees accrue during the payment deferral period. As a result, we expect the average APR of our products to decrease due to the impact of the COVID pandemic and the payment flexibility programs that have been implemented. As ofMarch 31, 2020 , 4.7% of customers have been provided relief through a COVID-19 payment deferral program for a total of$26.4 million in loans with deferred payments. As ofApril 30, 2020 , 10.8% of customers have been provided relief through a COVID-19 payment deferral program for a total of$53.4 million in loans with deferred payments. We believe the Allowance for loan losses is adequate to absorb the losses inherent in the portfolio as ofMarch 31, 2020 . Both we and the bank originators are closely monitoring early credit quality indicators such as first payment defaults, deferred payments and line of credit utilization. We have also seen a slight increase in delinquencies and expect an increase in net charge-offs as compared to prior periods. Both we, and the bank originators we support, have implemented underwriting changes to address credit risk associated with originations during the economic crisis created by the COVID-19 pandemic and have reduced loan origination applications and loan origination volume since the beginning of the COVID-19 pandemic. The portfolio of loan products we and the bank originators provide has experienced decreased demand in the US andUK as the COVID-19 pandemic began impacting those markets. Due to the impact of COVID-19, we determined that a triggering event had occurred as ofMarch 31, 2020 , and accordingly, performed interim impairment testing on the goodwill balances of ourUK and Elastic reporting units (there is no goodwill associated with the Rise or Today Card reporting units). We performed a detailed qualitative and quantitative assessment of each reporting unit and concluded that the goodwill associated with theUK reporting unit was impaired as the fair value of theUK reporting unit was less than its carrying amount. While there was a decline in the fair value of the Elastic reporting unit, there was no impairment identified during the quantitative assessment. We recognized an impairment of theUK reporting unit's$9.3 million goodwill balance and the charge was recognized to Impairment loss on the Condensed Consolidated Statements of Operations. Significant uncertainties as to future economic conditions exist, and we have taken deliberate actions in response, including assessing our minimum cash and liquidity requirement, monitoring our debt covenant compliance and implementing measures to ensure that our strong liquidity position is maintained through the current economic cycle. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain. KEY FINANCIAL AND OPERATING METRICS As discussed above, we regularly monitor a number of metrics in order to measure our current performance and project our future performance. These metrics aid us in developing and refining our growth strategies and in making strategic decisions. Certain of our metrics are non-GAAP financial measures. We believe that such metrics are useful in period-to-period comparisons of our core business. However, non-GAAP financial measures are not an alternative to any measure of financial performance calculated and presented in accordance with US GAAP. See "-Non-GAAP Financial Measures" for a reconciliation of our non-GAAP measures to US GAAP. 42
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Revenue Growth As of and for the three months ended March 31, Revenue metrics (dollars in thousands, except as noted) 2020 2019 Revenues $ 177,455 $ 189,504 Period-over-period change in revenue (6 )% (2 )% Ending combined loans receivable - principal(1) 577,697 575,131 Average combined loans receivable - principal(1)(2) 613,585 609,192 Total combined loans originated - principal 250,227 298,264 Average customer loan balance (indollars)(3 ) 1,707 1,577 Number of new customer loans 46,590 50,476 Ending number of combined loans outstanding 338,415 364,679 Customer acquisition costs (in dollars) 259 221 Effective APR of combined loan portfolio 116 % 126 %
_________
(1) Combined loans receivable is defined as loans owned by the Company and
consolidated VIEs plus loans originated and owned by third-party lenders
pursuant to our CSO programs. See "-Non-GAAP Financial Measures" for more
information and for a reconciliation of Combined loans receivable to Loans
receivable, net, the most directly comparable financial measure calculated in
accordance with US GAAP.
(2) Average combined loans receivable - principal is calculated using an average
of daily Combined loans receivable - principal balances.
(3) Average customer loan balance is an average of all four products and is
calculated for each product by dividing the ending Combined loans receivable
- principal by the number of loans outstanding at period end.
Revenues. Our revenues are composed of Rise finance charges, Rise CSO fees (which are fees we receive from customers who obtain a loan through the CSO program for the credit services, including the loan guaranty, we provide), finance charges on Sunny installment loans and revenues earned on the Rise and Elastic lines of credit. Finance charge and fee revenues from the Today Card credit card product, which expanded its test launch inNovember 2018 , were immaterial. See "-Components of our Results of Operations-Revenues." Ending and average combined loans receivable - principal. We calculate the average combined loans receivable - principal by taking a simple daily average of the ending combined loans receivable - principal for each period. Key metrics that drive the ending and average combined loans receivable - principal include the amount of loans originated in a period and the average customer loan balance. All loan balance metrics include only the 90% participation in the related Elastic line of credit advances (we exclude the 10% held by Republic Bank) and the 96% participation inFinWise Bank originated Rise installment loans, but include the full loan balances on CSO loans, which are not presented on our Condensed Consolidated Balance Sheet. Total combined loans originated - principal. The amount of loans originated in a period is driven primarily by loans to new customers as well as new loans to prior customers, including refinancings of existing loans to customers in good standing. Average customer loan balance and effective APR of combined loan portfolio.
The
average loan amount and its related APR are based on the product and the underlying credit quality of the customer. Generally, better credit quality customers are offered higher loan amounts at lower APRs. Additionally, new customers have more potential risk of loss than prior or existing customers due to lack of payment history and the potential for fraud. As a result, newer customers typically will have lower loan amounts and higher APRs to compensate for that additional risk of loss. The effective APR is calculated based on the actual amount of finance charges generated from a customer loan divided by the average outstanding balance for the loan and can be lower than the stated APR on the loan due to waived finance charges and other reasons. For example, a Rise customer may receive a$2,000 installment loan with a term of 24 months and a stated rate of 180%. In this example, the customer's monthly installment loan payment would be$310.86 . As the customer can prepay the loan balance at any time with no additional fees or early payment penalty, the customer pays the loan in full in month eight. The customer's loan earns interest of$2,337.81 over the eight-month period and has an average outstanding balance of$1,948.17 . The effective APR for this loan is 180% over the eight-month period calculated as follows: 43
-------------------------------------------------------------------------------- ($2,337.81 interest earned /$1,948.17 average balance outstanding) x 12 months per year = 180% 8 months In addition, as an example for Elastic, if a customer makes a$2,500 draw on the customer's line of credit and this draw required bi-weekly minimum payments of 5% (equivalent to 20 bi-weekly payments), and if all minimum payments are made, the draw would earn finance charges of$1,148 . The effective APR for the line of credit in this example is 109% over the payment period and is calculated as follows: ($1,148.00 fees earned /$1,369.05 average balance outstanding) x 26 bi-weekly periods per year = 109% 20 payments The actual amount of revenue we realize on a loan portfolio is also impacted by the amount of prepayments and charged-off customer loans in the portfolio. For a single loan, on average, we typically expect to realize approximately 60% of the revenues that we would otherwise realize if the loan were to fully amortize at the stated APR. From the Rise example above, if we waived$400 of interest for this customer, the effective APR for this loan would decrease to 149%. Number of new customer loans. We define a new customer loan as the first loan made to a customer for each of our products (so a customer receiving a Rise installment loan and then at a later date taking their first cash advance on an Elastic line of credit would be counted twice). The number of new customer loans is subject to seasonal fluctuations. New customer acquisition is typically slowest during the first six months of each calendar year, primarily in the first quarter, compared to the latter half of the year, as our existing and prospective US customers usually receive tax refunds during this period and, thus, have less of a need for loans from us. Further, many US customers will use their tax refunds to prepay all or a portion of their loan balance during this period, so our overall loan portfolio typically decreases during the first quarter of the calendar year. Overall loan portfolio growth and the number of new customer loans tends to accelerate during the summer months (typically June and July), at the beginning of the school year (typically late August to early September) and during the winter holidays (typically late November to early December). Customer acquisition costs. A key expense metric we monitor related to loan growth is our CAC. This metric is the amount of direct marketing costs incurred during a period divided by the number of new customer loans originated during that same period. New loans to former customers are not included in our calculation of CAC (except to the extent they receive a loan through a different product) as we believe we incur no material direct marketing costs to make additional loans to a prior customer through the same product. The following tables summarize the changes in customer loans by product for the three months endedMarch 31, 2020 and 2019. Three Months Ended March
31, 2020
Rise (US) Elastic (US)(1) Total Domestic Sunny (UK) Total Beginning number of combined loans outstanding 152,435 149,524 301,959 72,525 374,484 New customer loans originated 24,413 11,337 35,750 10,840 46,590 Former customer loans originated 16,556 131 16,687 - 16,687 Attrition (50,771 ) (22,139 ) (72,910 ) (26,436 ) (99,346 ) Ending number of combined loans outstanding 142,633 138,853 281,486 56,929 338,415 Customer acquisition cost$ 309 $ 303 $ 307$ 102 $ 259 Average customer loan balance$ 2,269 $ 1,656$ 1,966 $ 425 $ 1,707 44
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Three Months Ended March 31, 2019 Rise (US) Elastic (US)(1) Total Domestic Sunny (UK) Total Beginning number of combined loans outstanding 142,758 166,397 309,155 89,449 398,604 New customer loans originated 17,365 4,838 22,203 28,273 50,476 Former customer loans originated 17,791 9 17,800 - 17,800 Attrition (52,893 ) (25,484 ) (78,377 ) (23,824 ) (102,201 ) Ending number of combined loans outstanding 125,021 145,760 270,781 93,898 364,679 Customer acquisition cost$ 333 $ 294 $ 324$ 140 $ 221 Average customer loan balance$ 2,241 $ 1,685$ 1,941 $ 527 $ 1,577 (1) Includes immaterial balances related to the Today Card, which expanded its test launch inNovember 2018 . Recent trends. Our revenues for the three months endedMarch 31, 2020 totaled$177.5 million , a decrease of 6% versus the three months endedMarch 31, 2019 . Both Elastic andUK Sunny products experienced year-over-year declines in revenues, partially offset by an increase in revenues from our Rise product. Almost all the decline in Elastic and Sunny revenues resulted from a decrease in loan balances. Elastic loan balances atMarch 31, 2020 , totaled$224.7 million , down roughly$20 million from a year ago. Elastic was the product that was initially most impacted by the COVID-19 pandemic as customer multidraw activity (or line utilization on this line of credit product) was surprisingly lower than expected. Elastic originations were almost$10 million lower in the month ofMarch 2020 versus what we had originally expected at the beginning of the quarter, and this trend has continued throughApril 2020 . As a result of these lower loan balances, Elastic revenues declined almost$6.0 million in the first quarter of 2020 compared to a year ago. Our Sunny loan portfolio has decreased from$49.4 million at the end of the first quarter of 2019 down to just$24.2 million at the end of the 2020 first quarter. As has been previously disclosed, despite very low customer acquisition costs due to a lack of competition, we continue to approve fewer new customers each quarter because of ever-stringent customer affordability regulations in theUK . We only approved just over ten thousand new customer loans in the first quarter of 2020, at a very low CAC of$102 , but down from almost thirty thousand new customer loans in the first quarter of 2019. As a result of these lower loan balances, Sunny revenue declined$14.4 million in the first quarter of 2020 compared to a year ago. Rise revenue increased$8.4 million on a year-over-year basis, partially offsetting the decline from the other two products. Rise installment loan balances were up$43.5 million to$323.6 million atMarch 31, 2020 , compared to$280.1 million a year ago. Most of the increase in the Rise loan balances resulted from loans originated byFinWise Bank , which began originating Rise loans in the fourth quarter of 2018. In response to the COVID-19 pandemic, we have also expanded our payment flexibility programs to provide temporary payment relief to certain customers who meet the program's qualifications. This program allows for a deferral of payments for an initial period of 60 days, for a maximum of 180 days on a cumulative basis. The customer will return to their normal payment schedule after the end of the deferral period with the extension of their maturity date equivalent to their deferral period not to exceed an additional 180 days. For Rise and Sunny installment loans, finance charges continue to accrue at a lower effective APR over the expected extended term of the loan considering the deferral periods provided. For Elastic lines of credit, no fees accrue during the payment deferral period. As a result, we expect the average APR of our products to decrease due to the impact of the COVID pandemic and the payment flexibility programs that have been implemented. 45 -------------------------------------------------------------------------------- Additionally, all products were impacted by the COVID-19 pandemic as we experienced reduced demand and application volume in March for both new and former customers in addition to implementing underwriting changes that limited the volume of new customer loan originations inMarch 2020 . As a result, our CAC was higher in the first quarter of 2020 as compared to the first quarter of 2019 but was within our long-term targeted range of$250 to$300 . In the first quarter of 2019, we moderated our customer growth and marketing spend, primarily for the Elastic product, as we focused on rolling out new credit models for the remainder of the year. Prior to COVID-19, we had resumed our seasonal marketing efforts in the first quarter of 2020, which experienced increased new loan volume as compared to prior year as well as increased our direct marketing costs. The CAC for our US products decreased due to more efficient marketing spend. The Sunny CAC also decreased for the three months endedMarch 31, 2020 from$140 to$102 due to more efficient marketing spend coupled with diminished competition in theUK market. We believe our CAC in future quarters will remain within or below our long-term target range of$250 to$300 as we continue to optimize the efficiency of our marketing channels with our recently launched credit models and benefit from continued less competition in theUK market. Credit quality As of and for the three months ended March 31, Credit quality metrics (dollars in thousands) 2020 2019 Net charge-offs(1) $ 88,064$ 103,985 Additional provision for loan losses(1) (5,311 ) (16,554 ) Provision for loan losses $ 82,753$ 87,431 Past due combined loans receivable - principal as a percentage of combined loans receivable - principal(2) 10 % 10 % Net charge-offs as a percentage of revenues(1) 50 % 55 %
Total provision for loan losses as a percentage of revenues
47 % 46 % Combined loan loss reserve(3) $ 83,387$ 79,699 Combined loan loss reserve as a percentage of combined loans receivable(3)(4) 14 % 13 %
_________
(1) Net charge-offs and additional provision for loan losses are not financial
measures prepared in accordance with US GAAP. Net charge-offs include the
amount of principal and accrued interest on loans that are more than 60 days
past due, or sooner if we receive notice that the loan will not be collected,
such as a bankruptcy notice or identified fraud, offset by any recoveries.
Additional provision for loan losses is the amount of provision for loan
losses needed for a particular period to adjust the combined loan loss
reserve to the appropriate level in accordance with our underlying loan loss
reserve methodology. See "-Non-GAAP Financial Measures" for more information
and for a reconciliation to Provision for loan losses, the most directly
comparable financial measure calculated in accordance with US GAAP.
(2) Combined loans receivable is defined as loans owned by the Company and
consolidated VIEs plus loans originated and owned by third-party lenders
pursuant to our CSO programs. See "-Non-GAAP Financial Measures" for more
information and for a reconciliation of Combined loans receivable to Loans
receivable, net, the most directly comparable financial measure calculated in
accordance with US GAAP.
(3) Combined loan loss reserve is defined as the loan loss reserve for loans
originated and owned by the Company plus the loan loss reserve for loans
owned by third-party lenders and guaranteed by the Company. See "-Non-GAAP
Financial Measures" for more information and for a reconciliation of Combined
loan loss reserve to Allowance for loan losses, the most directly comparable
financial measure calculated in accordance with US GAAP.
(4) Combined loan loss reserve as a percentage of combined loans receivable is
determined using period-end balances. 46
-------------------------------------------------------------------------------- Net principal charge-offs as a percentage of average combined loans receivable - First Second Third Fourth principal (1) (2) (3) Quarter Quarter Quarter Quarter 2020 11% N/A N/A N/A 2019 13% 11% 11% 13% 2018 13% 12% 13% 14% _________
(1) Net principal charge-offs is comprised of gross principal charge-offs less
recoveries.
(2) Average combined loans receivable - principal is calculated using an average
of daily Combined loans receivable - principal balances during each quarter.
(3) Combined loans receivable is defined as loans owned by the Company and
consolidated VIEs plus loans originated and owned by third-party lenders
pursuant to our CSO programs. See "-Non-GAAP Financial Measures" for more
information and for a reconciliation of Combined loans receivable to Loans
receivable, net, the most directly comparable financial measure calculated in
accordance with US GAAP.
In reviewing the credit quality of our loan portfolio, we break out our total provision for loan losses that is presented on our statement of operations under US GAAP into two separate items-net charge-offs and additional provision for loan losses. Net charge-offs are indicative of the credit quality of our underlying portfolio, while additional provision for loan losses is subject to more fluctuation based on loan portfolio growth, recent credit quality trends and the effect of normal seasonality on our business. The additional provision for loan losses is the amount needed to adjust the combined loan loss reserve to the appropriate amount at the end of each month based on our loan loss reserve methodology. Net charge-offs. Net charge-offs comprise gross charge-offs offset by recoveries on prior charge-offs. Gross charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due, or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud. Any payments received on loans that have been charged off are recorded as recoveries and reduce the total amount of gross charge-offs. Recoveries are typically less than 10% of the amount charged off, and thus, we do not view recoveries as a key credit quality metric. Net charge-offs as a percentage of revenues can vary based on several factors, such as whether or not we experience significant growth or lower the APR of our products. Additionally, although a more seasoned portfolio will typically result in lower net charge-offs as a percentage of revenues, we do not intend to drive down this ratio significantly below our historical ratios and would instead seek to offer our existing products to a broader new customer base to drive additional revenues. Net charge-offs as a percentage of average combined loans receivable-principal allow us to determine credit quality and evaluate loss experience trends across our loan portfolio. Additional provision for loan losses. Additional provision for loan losses is the amount of provision for loan losses needed for a particular period to adjust the combined loan loss reserve to the appropriate level in accordance with our underlying loan loss reserve methodology. Additional provision for loan losses relates to an increase in future inherent losses in the loan portfolio as determined by our loan loss reserve methodology. This increase could be due to a combination of factors such as an increase in the size of the loan portfolio or a worsening of credit quality or increase in past due loans. It is also possible for the additional provision for loan losses for a period to be a negative amount, which would reduce the amount of the combined loan loss reserve needed (due to a decrease in the loan portfolio or improvement in credit quality). The amount of additional provision for loan losses is seasonal in nature, mirroring the seasonality of our new customer acquisition and overall loan portfolio growth, as discussed above. The combined loan loss reserve typically decreases during the first quarter or first half of the calendar year due to a decrease in the loan portfolio from year end. Then, as the rate of growth for the loan portfolio starts to increase during the second half of the year, additional provision for loan losses is typically needed to increase the reserve for future losses associated with the loan growth. Because of this, our provision for loan losses can vary significantly throughout the year without a significant change in the credit quality of our portfolio. 47
-------------------------------------------------------------------------------- The following provides an example of the application of our loan loss reserve methodology and the break-out of the provision for loan losses between the portion associated with replenishing the reserve due to net charge-offs and the amount related to the additional provision for loan losses. If the beginning combined loan loss reserve were$25 million , and we incurred$10 million of net charge-offs during the period and the ending combined loan loss reserve needed to be$30 million according to our loan loss reserve methodology, our total provision for loan losses would be$15 million , comprising$10 million in net charge-offs (provision needed to replenish the combined loan loss reserve) plus$5 million of additional provision related to an increase in future inherent losses in the loan portfolio identified by our loan loss reserve methodology. Example (dollars in thousands) Beginning combined loan loss reserve$ 25,000 Less: Net charge-offs (10,000 ) Provision for loan losses: Provision for net charge-offs 10,000
Additional provision for loan losses 5,000 Total provision for loan losses
15,000 Ending combined loan loss reserve balance$ 30,000 Loan loss reserve methodology. Our loan loss reserve methodology is calculated separately for each product and, in the case of Rise loans originated under the state lending model (including CSO program loans), is calculated separately based on the state in which each customer resides to account for varying state license requirements that affect the amount of the loan offered, repayment terms and other factors. For each product, loss factors are calculated based on the delinquency status of customer loan balances: current, 1 to 30 days past due or 31 to 60 days past due. These loss factors for loans in each delinquency status are based on average historical loss rates by product (or state) associated with each of these three delinquency categories. Hence, another key credit quality metric we monitor is the percentage of past due combined loans receivable - principal, as an increase in past due loans will cause an increase in our combined loan loss reserve and related additional provision for loan losses to increase the reserve. For customers that are not past due, we further stratify these loans into loss rates by payment number, as a new customer that is about to make a first loan payment has a significantly higher risk of loss than a customer who has successfully made ten payments on an existing loan with us. Based on this methodology, during the past three years we have seen our combined loan loss reserve as a percentage of combined loans receivable fluctuate between approximately 12% and 17% depending on the overall mix of new, former and past due customer loans. Recent trends. Total loan loss provision for the three months endedMarch 31, 2020 was 47% of revenues, which was within our targeted range of 45% to 55%, and slightly higher than the 46% for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 , net charge-offs as a percentage of revenues decreased to 50% compared to 55% in the prior year period. In the near-term, due to the impact of the COVID-19 pandemic, we expect to see an increase in our net charge-offs as a percentage of revenues. We continue to monitor the portfolio during this economic crisis resulting from COVID-19 and continue to adjust our underwriting and credit policies to mitigate any potential negative impacts. In the long-term (post-COVID-19), we expect to continue to manage our total loan loss provision as a percentage of revenues to continue to remain within our targeted range due to ongoing maturation of the loan portfolio and continued improvements in our underwriting models and processes. The combined loan loss reserve as a percentage of combined loans receivable totaled 13.6% and 13.1% as ofMarch 31, 2020 andMarch 31, 2019 , respectively. Historically, our combined loan loss reserve has decreased by 3-6% during the first quarter of the year due to the seasonal loan paydowns and slower new customer loan origination activities during that period. As ofMarch 31, 2020 , our combined loan loss reserve was 13.6%, an increase of 4% from the combined loan loss reserve rate of 13.1% atDecember 31, 2019 . This increase in the loan loss reserve is due to a shift in the mix of the portfolio products and a slight increase in our delinquencies due to COVID-19 atMarch 31, 2020 . Past due loan balances atMarch 31, 2020 were 10.2% of total combined loans receivable - principal, slightly up from 9.7% from a year ago. 48
-------------------------------------------------------------------------------- Additionally, we also look at principal loan charge-offs (including both credit and fraud losses) by vintage as a percentage of combined loans originated - principal. As the below table shows, our cumulative principal loan charge-offs throughMarch 31, 2020 for each annual vintage since the 2013 vintage are generally under 30% and continue to trend at or slightly below our 25% to 30% long-term targeted range. In the beginning of 2019, we implemented new fraud tools that have helped lower fraud losses for the 2019 vintage. Additionally, we rolled out our next generation of credit models during the second quarter of 2019 and continued refining the models during the third and fourth quarters of 2019. The preliminary data on the 2019 vintage is that it is performing better than both 2017 and 2018 vintages. We expect that the cumulative loss rates on all vintages will increase and may exceed our recent historical cumulative loss experience due to the impact of the economic crisis resulting from the COVID-19 pandemic. [[Image Removed: cumulativecreditloss32020a01.jpg]] 1) The 2019 and 2020 vintages are not yet fully mature from a loss perspective. 49
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Margins
Three Months Ended March 31, Margin metrics (dollars in thousands) 2020 2019 Revenues$ 177,455 $ 189,504 Net charge-offs(1) (88,064 ) (103,985 ) Additional provision for loan losses(1) 5,311 16,554 Direct marketing costs (12,071 ) (11,154 ) Other cost of sales (8,330 ) (5,060 ) Gross profit 74,301 85,859 Operating expenses (48,619 ) (47,880 ) Operating income$ 25,682 $ 37,979 As a percentage of revenues: Net charge-offs 50 % 55 % Additional provision for loan losses (3 ) (9 ) Direct marketing costs 7 6 Other cost of sales 5 3 Gross margin 42 45 Operating expenses 27 25 Operating margin 14 % 20 % _________
(1) Non-GAAP measure. See "-Non-GAAP Financial Measures-Net charge-offs and
additional provision for loan losses."
Gross margin is calculated as revenues minus cost of sales, or gross profit, expressed as a percentage of revenues, and operating margin is calculated as operating income expressed as a percentage of revenues. Due to the uncertain impact of COVID-19, we are monitoring our margins closely. Long-term, we expect our margins to increase as we continue to scale our business while maintaining stable credit quality. We allocate all marketing spend only to new customer loans. As our loan portfolio continues to mature with more customer loans that are from repeat customers, we will be generating revenue from those repeat customer loans without incurring any related marketing expense. As a result, we expect marketing expense as a percentage of revenue to continue to decline over time resulting in an increased gross profit margin. Additionally, being an online fintech company, we believe that as we continue to scale our business, we will generate operating efficiencies and our operating expense as a percentage of revenues will decline resulting in an increased operating margin. However, short-term, due to the expected impact of COVID-19, we expect our operating margin to decrease as both net charge-offs and operating expenses as a percentage of revenue are expected to increase, due to a combination of higher net charge-offs combined with a decrease in revenues and operating expenses that will be flat to slightly declining. Recent operating margin trends. For the three months endedMarch 31, 2020 , our operating margin was 14%, which was a decrease from 20% in the prior year period. This decrease was primarily driven by a decrease in revenue, higher total loan loss provision due to an increased combined loan loss reserve as compared to the prior year, higher direct marketing costs due to expanded marketing activities during the period and increased other cost of sales. 50 -------------------------------------------------------------------------------- NON-GAAP FINANCIAL MEASURES We believe that the inclusion of the following non-GAAP financial measures in this Quarterly Report on Form 10-Q can provide a useful measure for period-to-period comparisons of our core business, provide transparency and useful information to investors and others in understanding and evaluating our operating results, and enable investors to better compare our operating performance with the operating performance of our competitors. Management uses these non-GAAP financial measures frequently in its decision-making because they provide supplemental information that facilitates internal comparisons to the historical operating performance of prior periods and give an additional indication of the Company's core operating performance. However, non-GAAP financial measures are not a measure calculated in accordance with US generally accepted accounting principles, or US GAAP, and should not be considered an alternative to any measures of financial performance calculated and presented in accordance with US GAAP. Other companies may calculate these non-GAAP financial measures differently than we do. Adjusted Net (Loss) Income Adjusted net (loss) income represents our net (loss) income, adjusted to exclude: • Impairment on goodwill
• Contingent loss related to a legal matter
• Cumulative tax effect of adjustments
Adjusted diluted earnings per share is Adjusted net income divided by Diluted weighted average shares outstanding. The following table presents a reconciliation of net (loss) income and diluted (loss) earnings per share to Adjusted net income and Adjusted diluted earnings per share, which excludes the impact of the contingent loss for each of the periods indicated: Three Months
Ended
March 31, (Dollars in thousands except per share amounts) 2020 2019 Net (loss) income$ (4,911 ) $ 13,358 Impact of impairment loss (1) 9,251 - Impact of contingent legal loss 4,263
-
Cumulative tax effect of adjustments (1,006 )
-
Adjusted net income$ 7,597 $
13,358
Diluted (loss) earnings per share$ (0.11 ) $
0.30
Impact of impairment loss (1) 0.21
-
Impact of contingent legal loss 0.09
-
Cumulative tax effect of adjustments (0.02 )
-
Adjusted diluted earnings per share$ 0.17 $
0.30
Diluted weighted average shares outstanding 43,161,716
43,875,410
Effect of potentially dilutive shares outstanding (2) 470,021
-
Adjusted diluted weighted average shares outstanding 43,631,737 43,875,410
(1) No tax effect as impairment loss relates toUK goodwill. (2) Represents potentially dilutive shares that had not been included in the Company's quarter-endedMarch 31, 2020 diluted weighted average shares outstanding as the Company is in a net loss position underU.S. GAAP. Including these shares would have been anti-dilutive when in a net loss position. 51
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Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA represents our net (loss) income, adjusted to exclude: • Net interest expense, primarily associated with notes payable under the VPC
Facility, EF SPV Facility and ESPV Facility used to fund the loan portfolios;
• Share-based compensation;
• Foreign currency gains and losses associated with our
• Depreciation and amortization expense on fixed assets and intangible assets;
• Impairment loss on goodwill;
• Gains and losses from fair value adjustments, dispositions or contingent
losses related to legal matters included in non-operating losses; and
• Income taxes.
Adjusted EBITDA margin is Adjusted EBITDA divided by revenue. Management believes that Adjusted EBITDA and Adjusted EBITDA margin are useful supplemental measures to assist management and investors in analyzing the operating performance of the business and provide greater transparency into the results of operations of our core business. Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to net (loss) income or any other performance measure derived in accordance with US GAAP. Our use of Adjusted EBITDA and Adjusted EBITDA margin has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are: • Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized may have to be replaced in the future, and Adjusted
EBITDA does not reflect expected cash capital expenditure requirements for
such replacements or for new capital assets;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs; and
• Adjusted EBITDA does not reflect interest associated with notes payable used
for funding the loan portfolios, for other corporate purposes or tax payments
that may represent a reduction in cash available to us.
The following table presents a reconciliation of net (loss) income to Adjusted EBITDA and Adjusted EBITDA margin for each of the periods indicated:
Three Months Ended March 31, (Dollars in thousands) 2020 2019 Net (loss) income$ (4,911 ) $ 13,358 Adjustments: Net interest expense 14,195 19,219 Share-based compensation 2,777 2,435 Foreign currency transaction loss (gain) 812 (613 ) Depreciation and amortization 4,797 4,266 Impairment loss 9,251 - Non-operating loss 4,263 - Income tax expense 2,072 6,015 Adjusted EBITDA$ 33,256 $ 44,680 Adjusted EBITDA margin 19 % 24 % 52
-------------------------------------------------------------------------------- Free cash flow Free cash flow ("FCF") represents our net cash provided by operating activities, adjusted to include: • Net charge-offs - combined principal loans; and
• Capital expenditures.
The following table presents a reconciliation of net cash provided by operating activities to FCF for each of the periods indicated:
Three Months Ended March 31, (Dollars in thousands) 2020 2019 Net cash provided by operating activities(1)$ 76,699 $ 97,762 Adjustments: Net charge-offs - combined principal loans (67,352 ) (81,166 ) Capital expenditures (5,565 ) (7,105 ) FCF$ 3,782 $ 9,491 _________
(1) Net cash provided by operating activities includes net charge-offs - combined
finance charges.
Net charge-offs and additional provision for loan losses We break out our total provision for loan losses into two separate items-first, the amount related to net charge-offs, and second, the additional provision for loan losses needed to adjust the combined loan loss reserve to the appropriate amount at the end of each month based on our loan loss provision methodology. We believe this presentation provides more detail related to the components of our total provision for loan losses when analyzing the gross margin of our business. Net charge-offs. Net charge-offs comprise gross charge-offs offset by recoveries on prior charge-offs. Gross charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due, or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud. Any payments received on loans that have been charged off are recorded as recoveries and reduce the total amount of gross charge-offs. Additional provision for loan losses. Additional provision for loan losses is the amount of provision for loan losses needed for a particular period to adjust the combined loan loss reserve to the appropriate level in accordance with our underlying loan loss reserve methodology. Three Months Ended March 31, (Dollars in thousands) 2020 2019 Net charge-offs$ 88,064 $ 103,985 Additional provision for loan losses (5,311 ) (16,554 ) Provision for loan losses$ 82,753 $ 87,431 Combined loan information The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all of the loans originated and sells a 90% loan participation in the Elastic lines of credit to a third-party SPV,Elastic SPV, Ltd. Elevate is required to consolidateElastic SPV, Ltd. as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 90% of Elastic lines of credit originated by Republic Bank and sold to Elastic SPV. 53 -------------------------------------------------------------------------------- Beginning in the fourth quarter of 2018, the Company also licenses its Rise installment loan brand to a third-party lender,FinWise Bank , which originates Rise installment loans in 18 states. Prior toAugust 1, 2019 ,Finwise Bank retained 5% of the balances of all originated loans and sold a 95% loan participation in those Rise installment loans to a third-party SPV, EF SPV. OnAugust 1, 2019 , EF SPV purchased an additional 1% participation in the outstanding portfolio with the participation percentage revised going forward to 96%. We do not own EF SPV, but we are required to consolidate EF SPV as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 96% of Rise installment loans originated byFinWise Bank and sold to EF SPV. The information presented in the tables below on a combined basis are non-GAAP measures based on a combined portfolio of loans, which includes the total amount of outstanding loans receivable that we own and that are on our balance sheet plus outstanding loans receivable originated and owned by third parties that we guarantee pursuant to CSO programs in which we participate. See "-Basis of Presentation and Critical Accounting Policies-Allowance and liability for estimated losses on consumer loans" and "-Basis of Presentation and Critical Accounting Policies-Liability for estimated losses on credit service organization loans." We believe these non-GAAP measures provide investors with important information needed to evaluate the magnitude of potential loan losses and the opportunity for revenue performance of the combined loan portfolio on an aggregate basis. We also believe that the comparison of the combined amounts from period to period is more meaningful than comparing only the amounts reflected on our balance sheet since both revenues and cost of sales as reflected in our financial statements are impacted by the aggregate amount of loans we own and those CSO loans we guarantee. Our use of total combined loans and fees receivable has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are: • Rise CSO loans are originated and owned by a third-party lender and
• Rise CSO loans are funded by a third-party lender and are not part of the VPC
Facility.
As of each of the period ends indicated, the following table presents a reconciliation of: • Loans receivable, net, Company owned (which reconciles to our Condensed
Consolidated Balance Sheets included elsewhere in this Quarterly Report on
Form 10-Q);
• Loans receivable, net, guaranteed by the Company (as disclosed in Note 3 of
our condensed consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q);
• Combined loans receivable (which we use as a non-GAAP measure); and
• Combined loan loss reserve (which we use as a non-GAAP measure).
54
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2019 2020 (Dollars in thousands) March 31 June 30 September 30
Company Owned Loans: Loans receivable - principal, current, company owned$ 491,208 $ 523,785 $ 543,565 $ 559,169 $ 506,408 Loans receivable - principal, past due, company owned 55,286 55,711 65,824 63,413 58,119 Loans receivable - principal, total, company owned 546,494 579,496 609,389 622,582 564,527 Loans receivable - finance charges, company owned 32,491 31,805 35,702 38,091 33,959 Loans receivable - company owned 578,985 611,301 645,091 660,673 598,486 Allowance for loan losses on loans receivable, company owned (76,457 ) (75,896 ) (89,667 ) (86,996 ) (81,816 ) Loans receivable, net, company owned$ 502,528 $ 535,405 $ 555,424 $ 573,677 $ 516,670 Third Party Loans Guaranteed by the Company: Loans receivable - principal, current, guaranteed by company$ 27,941 $ 21,099 $ 18,633 $ 17,474 $ 12,606 Loans receivable - principal, past due, guaranteed by company 696 596 697 723 564 Loans receivable - principal, total, guaranteed by company(1) 28,637 21,695 19,330 18,197 13,170 Loans receivable - finance charges, guaranteed by company(2) 2,164 1,676 1,553 1,395 1,150 Loans receivable - guaranteed by company 30,801 23,371 20,883 19,592 14,320 Liability for losses on loans receivable, guaranteed by company (3,242 ) (1,983 ) (1,972 ) (2,079 ) (1,571 ) Loans receivable, net, guaranteed by company(2)$ 27,559 $ 21,388 $ 18,911 $ 17,513 $ 12,749 Combined Loans Receivable(3): Combined loans receivable - principal, current$ 519,149 $ 544,884 $ 562,198 $ 576,643 $ 519,014 Combined loans receivable - principal, past due 55,982 56,307 66,521 64,136 58,683 Combined loans receivable - principal 575,131 601,191 628,719 640,779 577,697 Combined loans receivable - finance charges 34,655 33,481 37,255 39,486 35,109 Combined loans receivable$ 609,786 $ 634,672 $ 665,974 $ 680,265 $ 612,806 Combined Loan Loss Reserve(3): Allowance for loan losses on loans receivable, company owned$ (76,457 ) $ (75,896 ) $ (89,667 ) $ (86,996 ) $ (81,816 ) Liability for losses on loans receivable, guaranteed by company (3,242 ) (1,983 ) (1,972 ) (2,079 ) (1,571 ) Combined loan loss reserve$ (79,699 ) $ (77,879 ) $ (91,639 ) $ (89,075 ) $ (83,387 ) Combined loans receivable - principal, past due(3)$ 55,982 $ 56,307 $ 66,521 $ 64,136 $ 58,683 Combined loans receivable - principal(3) 575,131$ 601,191 $ 628,719 $ 640,779 $ 577,697 Percentage past due(1) 10 % 9 % 11 % 10 % 10 % Combined loan loss reserve as a percentage of combined loans receivable(3)(4) 13 % 12 % 14 % 13 % 14 % Allowance for loan losses as a percentage of loans receivable - company owned 13 % 12 % 14 % 13 % 14 % _________
(1) Represents loans originated by third-party lenders through the CSO programs,
which are not included in our condensed consolidated financial statements.
(2) Represents finance charges earned by third-party lenders through the CSO
programs, which are not included in our condensed consolidated financial
statements. (3) Non-GAAP measure.
(4) Combined loan loss reserve as a percentage of combined loans receivable is
determined using period-end balances. 55
-------------------------------------------------------------------------------- COMPONENTS OF OUR RESULTS OF OPERATIONS Revenues Our revenues are composed of Rise finance charges and CSO fees (inclusive of finance charges attributable to the participation in Rise installment loans originated byFinWise Bank ), finance charges on Sunny installment loans, cash advance fees attributable to the participation in Elastic lines of credit that we consolidate and marketing and licensing fees received from third-party lenders related to the Rise, Rise CSO and Elastic products. See "-Overview" above for further information on the structure of Elastic. Finance charge and fee revenues related to the test launch of the Today Card credit card product were immaterial. Cost of sales Provision for loan losses. Provision for loan losses consists of amounts charged against income during the period related to net charge-offs and the additional provision for loan losses needed to adjust the loan loss reserve to the appropriate amount at the end of each month based on our loan loss methodology. Direct marketing costs. Direct marketing costs consist of online marketing costs such as sponsored search and advertising on social networking sites, and other marketing costs such as purchased television and radio air time and direct mail print advertising. In addition, direct marketing cost includes affiliate costs paid to marketers in exchange for referrals of potential customers. All direct marketing costs are expensed as incurred. Other cost of sales. Other cost of sales includes data verification costs associated with the underwriting of potential customers, automated clearing house ("ACH") transaction costs associated with customer loan funding and payments, and settlement expense associated withUK affordability claims. Operating expenses Operating expenses consist of compensation and benefits, professional services, selling and marketing, occupancy and equipment, depreciation and amortization as well as other miscellaneous expenses. Compensation and benefits. Salaries and personnel-related costs, including benefits, bonuses and share-based compensation expense, comprise a majority of our operating expenses and these costs are driven by our number of employees. Professional services. These operating expenses include costs associated with legal, accounting and auditing, recruiting and outsourced customer support and collections. Selling and marketing. Selling and marketing costs include costs associated with the use of agencies that perform creative services and monitor and measure the performance of the various marketing channels. Selling and marketing costs also include the production costs associated with media advertisements that are expensed as incurred over the licensing or production period. These expenses do not include direct marketing costs incurred to acquire customers, which comprises CAC. Occupancy and equipment. Occupancy and equipment includes rent expense on our leased facilities, as well as telephony and web hosting expenses. Depreciation and amortization. We capitalize all acquisitions of property and equipment of$500 or greater as well as certain software development costs. Costs incurred in the preliminary stages of software development are expensed. Costs incurred thereafter, including external direct costs of materials and services as well as payroll and payroll-related costs, are capitalized. Post-development costs are expensed. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. 56
-------------------------------------------------------------------------------- Other expense Net interest expense. Net interest expense primarily includes the interest expense associated with the VPC Facility that funds the Rise and Sunny installment loans, the EF SPV Facility that funds Rise installment loans originated byFinWise Bank and the interest expense associated with the ESPV Facility related to the Elastic lines of credit and related Elastic SPV entity. For the three months endedMarch 31, 2019 , amortization of the costs of and realized gains from the interest rate caps on the VPC and ESPV Facility are included within Net interest expense. Foreign currency transaction (loss) gain. We incur foreign currency transaction gains and losses related to activities associated with ourUK entity,Elevate Credit International, Ltd. , primarily with regard to the VPC Facility used to fund Sunny installment loans. Impairment loss. Impairment loss for the three months endedMarch 31, 2020 included a charge recognized related to the goodwill impairment on ourUK reporting unit. Non-operating loss. Non-operating loss for the three months endedMarch 31, 2020 included a contingent loss related to a legal matter. 57
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