CURO GROUP HOLDINGS CORP. MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
Forward-looking statements
The following discussion of financial condition, results of operations, liquidity and capital resources, our regulatory environment and certain factors that may affect future results, including company-specific, economic and industry-wide factors, should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and accompanying notes included herein. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Except as required by applicable law and regulations, we undertake no obligation to update any forward-looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made. Please see "Risk Factors" in our 2021 Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.
Insight
We are an omnichannel, technology-driven consumer finance company serving a full spectrum of unprivileged and privileged consumers in the
Story
CURO was founded in 1997 to meet the growing needs of consumers looking for alternative access to credit. With 25 years of experience, we offer a variety of convenient, accessible financial and loan services across all of our markets. The terms "CURO," "we," "our," "us" and the "Company" refer toCURO Group Holdings Corp. and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated. In theU.S. , we operate under several principal brands, including "Speedy Cash ," "Rapid Cash" and "Avio Credit ," "Covington Credit ," "Heights Finance," "Quick Credit" and "Southern Finance." We also offer demand deposit accounts in theU.S. under the Revolve Finance brand, and credit card programs under the First Phase brand, which we launched in the fourth quarter of 2021. As ofMarch 31, 2022 , our store network consisted of 550 locations across 20 U.S. states and we offered our online services in 27 U.S. states. InCanada , we operate under "Cash Money" and "LendDirect" direct lending brands and the "Flexiti" point-of-sale brand. As ofMarch 31, 2022 , we operated our direct lending and online services in eight Canadian provinces and offered our online services in one Canadian territory. Our point-of-sale operations are available at nearly 7,700 retail locations and over 3,330 merchant partners across 10 provinces and two territories. OnDecember 27, 2021 , we acquired Heights Finance, a consumer finance company that provides Installment loans and offers customary opt-in insurance and other financial products in theU.S. The acquisition of Heights Finance accelerated our strategic transition in theU.S. toward longer term, higher balance and lower credit risk products, and provided us with access to a larger addressable market while mitigating regulatory risk. OnMarch 10, 2021 , we acquired Flexiti, an emerging growth Canadian POS/BNPL provider, which provided us instant capability and scale opportunity inCanada's credit card and POS financing markets. Refer to "Item 1-Business-Company Overview" of our 2021 Form 10-K and
Note 14, “Acquisitions” for further details regarding the acquisitions of Heights Finance and Flexiti. Both acquisitions were accounted for using the purchase method and therefore their results of operations are included in our financial statements from their respective dates of acquisition.
In 2017, we made our first investment in Katapult, an e-commerce focused FinTech company offering an innovative lease financing solution to consumers and enabling essential transactions at the merchant POS. InJune 2021 , Katapult merged with FinServ, resulting in a new publicly traded company (NASDAQ: KPLT). Refer to "Item 1-Business-Company Overview" of our 2021 Form 10-K for additional information about the merger and its benefits to us. In the fourth quarter of 2021, we acquired an additional 2.6 million shares of common stock of Katapult for an aggregate purchase price of$10.0 million . Our fully diluted ownership of Katapult as ofMarch 31, 2022 was 25.2%, which assumes full pay-out of earn-out shares. 31
--------------------------------------------------------------------------------
Consolidated operating results
Comparison of consolidated operating results for the three months ended
Start
The table below presents our consolidated results of operations. A further
discussion of the results of our operating segments is provided under "--Segment
Analysis" below.
Three Months Ended March 31,
(in thousands, unaudited) 2022 2021 Change $ Change %
Revenue
Interest and fees revenue $ 264,956 $ 179,123 $ 85,833 47.9 %
Insurance premiums and commissions 18,260 11,569 6,691 57.8 %
Other revenue 6,980 5,859 1,121 19.1 %
Total revenue 290,196 196,551 93,645 47.6 %
Provision for losses 97,531 36,145 61,386 #
Net revenue 192,665 160,406 32,259 20.1 %
Operating Expenses
Salaries and benefits 79,729 54,917 24,812 45.2 %
Occupancy 17,037 14,347 2,690 18.7 %
Advertising 10,500 8,084 2,416 29.9 %
Direct operations 20,274 11,969 8,305 69.4 %
Depreciation and amortization 9,814 4,965 4,849 97.7 %
Other operating expense 16,112 12,952 3,160 24.4 %
Total operating expense 153,466 107,234 46,232 43.1 %
Other expense (income)
Interest expense 38,341 19,539 18,802 96.2 %
Income from equity method investment (1,584) (546) (1,038) #
Total other expense 36,757 18,993 17,764 93.5 %
Income before income taxes 2,442 34,179 (31,737) (92.9) %
Provision for income taxes 1,106 8,444 (7,338) (86.9) %
Net income $ 1,336 $ 25,735 $ (24,399) (94.8) %
# - Variance greater than 100% or not meaningful
The decline in Net Income was primarily driven by year-over-year comparisons for
the provision for loan losses and, secondarily, higher interest expense.
Government stimulus and other pandemic-related behavior reduced demand,
increased payment rates and lowered loss rates in the first quarter of 2021,
resulting in a provision for loan losses that was $16.5 million less than net
charge-offs ("NCOs"). Credit normalization and strong sequential loan growth in
the first quarter of 2022 resulted in a provision for loan losses that exceeded
NCOs by $12.1 million , which included the impact of purchase accounting. This
year-over-year shift resulted in a $28.7 million pretax swing year over year.
Interest expense increased because of the additional 7.50% Senior Secured Notes
issued to finance, in part, (i) the Heights Finance acquisition and (ii) the
expansion of non-recourse asset-backed facilities to support loan growth.
Revenue
During the three months endedMarch 31, 2022 , total revenue increased$93.6 million , or 47.6%, to$290.2 million , compared to the prior-year period driven by our acquisitions of Flexiti and Heights Finance, and secondarily by growth inCanada Direct Lending. Specifically, the main components were: •U.S. revenue increase of$61.9 million , or 45.4%, as a result of our Heights Finance acquisition, which accounted for$65.7 million of total revenue for the first quarter of 2022. Excluding Heights Finance,U.S. revenue decreased$3.8 million , primarily due to the Runoff Portfolios. Excluding Runoff Portfolios and Heights Finance, totalU.S. revenue increased$13.6 million , or 11.9%, for the three months endedMarch 31, 2022 compared to the three months ended 32 --------------------------------------------------------------------------------
• Increased Direct Lending Canada revenue by
•Canada POS Lending revenue of$20.3 million , an increase of$18.7 million compared to the three months endedMarch 31, 2021 , which Flexiti's results only after its acquisition onMarch 10, 2021 . The following table summarizes revenue by product, including CSO fees, for the period indicated: Three Months Ended March 31, 2022 March 31, 2021 (in thousands, Canada Direct Canada POS Canada Direct Canada POS unaudited) U.S. Lending Lending Total % of Total U.S. Lending Lending Total % of Total Revolving LOC$ 26,913 $ 45,455 $ 18,655 $ 91,023 31.4 %$ 26,923 $ 34,368 $ 1,444 $ 62,735 31.9 % Installment 162,824 11,109 - 173,933 59.9 % 105,941 10,447 - 116,388 59.2 %
Total interest and commissions 189,737 56,564 18,655
264,956 91.3 % 132,864 44,815 1,444 179,123 91.1 % Insurance premiums and commissions 5,001 13,023 236 18,260 6.3 % - 11,569 32 11,601 5.9 % Other revenue 3,661 1,901 1,418 6,980 2.4 % 3,628 2,056 143 5,827 3.0 % Total revenue$ 198,399 $ 71,488 $ 20,309 $ 290,196 100.0 %$ 136,492 $ 58,440 $ 1,619 $ 196,551 100.0 %
Product revenue for the three months ended
•Revolving LOC •Revolving LOC revenue for the three months endedMarch 31, 2022 increased$28.3 million , or 45.1%, compared to the prior-year period, driven by growth inCanada Direct Lending revenue of$11.1 million , or 32.3%, and Canada POS lending of$17.2 million .
•Payment
•Installment revenue for the three months endedMarch 31, 2022 increased$57.5 million , or 49.4%, compared to the prior-year period. The increase was a result of our acquisition of Heights Finance in the fourth quarter of 2021, which accounted for$60.4 million of Installment revenue in the first quarter of 2022. Excluding Heights Finance, Installment revenue decreased$2.8 million , 2.4% as a result of Runoff Portfolios. For the three months endedMarch 31, 2022 , Installment revenues excluding Runoff Portfolios and Heights Finance increased$11.8 million , or 12.1%, compared to the prior-year period. •Insurance premiums and commissions •Insurance premiums and commissions for the three months endedMarch 31, 2022 increased$6.7 million , or 57.4%, compared to the prior-year period, primarily driven by our acquisition of Heights Finance, which offers customary opt-in insurance and accounted for$5.0 million of insurance premiums and commissions revenue in the first quarter of 2022. Canada Direct Lending grew$1.5 million , or 12.6%, year over year due to the sale of insurance products to Revolving LOC and Installment loan customers inCanada . •Other revenue •Other revenue for the three months endedMarch 31, 2022 increased$1.2 million , or 19.8%, versus the prior-year period as Canada POS Lending included a full quarter of revenue in 2022. Provision for losses •Provision for losses increased by$61.4 million , or 169.8%, for the three months endedMarch 31, 2022 compared to the prior-year period, primarily driven by: •Continued normalization associated with loan growth as customers return to pre-COVID-19 payment behaviors as compared to the prior year, when customers received government stimulus payments. In the first quarter of 2021, theU.S. provision for loan losses was$13.3 million less than NCOs due toMarch 2021 government stimulus payments, which improved customer repayment rates and reduced NCOs and past-due rates to historic lows. In the first quarter of 2022, theU.S. provision for loan losses, excluding Heights Finance, was$0.8 million less than NCOs as the seasonal sequential decline was lower compared to prior year, and NCO rates continued to normalize; •Full quarter of provision for losses for our Heights Finance acquisition of$20.7 million ; 33
-------------------------------------------------------------------------------- •Full quarter of provision for loan losses for Canada POS Lending of$8.7 million , an increase of$7.9 million compared to the prior-year period; •Loan growth, driven by strong consumer demand, across all loan portfolios compared to the same period in the prior year; and •Higher NCO and past-due rates, as COVID-19 Impacts lessened compared to the same period in the prior year. Refer to "Segment Analysis" sections below for additional details. Operating Expenses
The following table summarizes the operating expenses for the period indicated:
Three Months Ended
(in thousands, unaudited) 2022 2021 Change $ Change %
Operating Expenses
Salaries and benefits $ 79,729 $ 54,917 $ 24,812 45.2 %
Occupancy 17,037 14,347 2,690 18.7 %
Advertising 10,500 8,084 2,416 29.9 %
Direct operations 20,274 11,969 8,305 69.4 %
Depreciation and amortization 9,814 4,965 4,849 97.7 %
Other operating expense 16,112 12,952 3,160 24.4 %
Total operating expense $ 153,466 $ 107,234 $ 46,232 43.1 %
Operating expenses increased
•Salaries and benefits were$79.7 million for the three months endedMarch 31, 2022 , an increase of$24.8 million , or 45.2%, compared to the prior-year period. Excluding costs associated with Heights Finance, salaries and benefits increased$4.6 million , or 8.4%, primarily due to a full quarter of Canada POS Lending salaries and benefits expense; •Occupancy costs were$17.0 million for the three months endedMarch 31, 2022 , an increase of$2.7 million , or 18.7%, compared to the prior-year period. Excluding costs associated with Heights Finance, occupancy costs decreased$1.4 million , or 9.4%, primarily due to store closures in theU.S. during the second and third quarters of 2021; •Advertising costs increased$2.4 million , or 29.9%, year over year on more normalized spend compared to the first quarter of 2021, which continued to be affected by COVID-19 Impacts; •Direct operations were$20.3 million for the three months endedMarch 31, 2022 , an increase of$8.3 million , or 69.4%, compared to the prior-year period. Excluding costs associated with Heights Finance, direct operations increased$5.2 million , or 43.2%, primarily due to higher volume, resulting in higher collection and variable processing costs, as well as a full quarter ofCanada POS Lending direct operations of$3.7 million for the first quarter of 2022; •Depreciation and amortization expense for the three months endedMarch 31, 2022 increased$4.8 million , or 97.7%, compared to the prior-year period, primarily due a full quarter of Canada POS Lending expense associated with the amortization of capitalized software development costs, partially offset by store closures in theU.S. during the second and third quarters of 2021; and
•Other operating expenses were
34 --------------------------------------------------------------------------------
Other expenses (income)
The following table summarizes other expenses (income) for the period indicated:
Three Months Ended
(in thousands, unaudited) 2022 2021 Change $ Change % Other expense (income) Interest expense$ 38,341 $ 19,539 $ 18,802 96.2 % Income from equity method investment (1,584) (546) (1,038) # Total other expense$ 36,757 $ 18,993 $ 17,764 93.5 %
# – Difference greater than 100% or not significant
Other expenses increased
•Interest expense for the three months endedMarch 31, 2022 increased$18.8 million , or 96.2%, primarily related to (i) interest on non-recourse debt assumed with the acquisition of Heights Finance, (ii) interest expense on the additional$250.0 million issuance of 7.50% Senior Secured Notes in the fourth quarter of 2021, (iii) interest on Flexiti's warehouse and securitization facilities, and (iv) higher utilization of the Canada SPV facility, •Partially offset by our share of Katapult's income of$1.6 million , which included a gain from revaluing Katapult's public and private warrant liability, compared to$0.5 million in the prior year.
Provision for income taxes
The effective income tax rate for the three months endedMarch 31, 2022 was 45.3%. The effective income tax rate was higher than the blended federal and state/provincial statutory rate of approximately 26%, primarily as a result of lower income before tax combined with$0.3 million lost tax benefits of non-deductible officers' compensation and$0.3 million tax expense related to share-based compensation. The effective income tax rate of adjusted tax expense included in Adjusted Net Income for the three months endedMarch 31, 2022 was 31.9%.
Analysis of loan volume and portfolio performance
The following table reconciles Company Owned gross loans receivable, a
GAAP-basis balance sheet measure, to Gross combined loans receivable, a non-GAAP
measure(1). Gross combined loans receivables includes loans originated by
third-party lenders through CSO programs, which are not included in the
unaudited Condensed Consolidated Financial Statements but from which we earn
revenue by providing a guarantee to the unaffiliated lender:
As of
March 31, December 31, September 30, June 30, March 31,
(in thousands, unaudited) 2022 2021 2021 2021 2021
U.S.
Revolving LOC $ 49,077 $
52,532
Remittance – company property
589,652 609,413 137,987 139,234 142,396 Canada Direct Lending Revolving LOC 424,485 402,405 366,509 337,700 319,307 Installment 23,578 24,792 24,315 23,564 24,385 Canada POS Lending Revolving LOC 541,776 459,176 302,349 221,453 201,539 Company Owned gross loans receivable$ 1,628,568 $
1,548,318
Gross receivables guaranteed by the Company
44,420 46,317 43,422 37,093 32,439 Gross combined loans receivable (1)$ 1,672,988 $
1,594,635
(1) See a description of non-GAAP financial measures in “Supplemental Non-GAAP Financial Information”.
35 --------------------------------------------------------------------------------
Combined gross loans receivable increased
•$462.9 million of gross loans receivable from Heights Finance; •Canada POS Lending growth of$340.2 million , or 168.8% •Canada Direct Lending growth of$104.4 million , or 30.4%; and •U.S. gross combined loans receivable growth of$2.1 million , or 0.9%, excluding Heights Finance.U.S. year-over-year growth was affected by the Runoff Portfolios, and additional government stimulus in the first half of 2021. Excluding the Runoff Portfolios and Heights Finance,U.S. gross combined loans receivable grew$52.8 million , or 34.2%. Sequentially, gross combined loans receivable increased$78.4 million , or 4.9%, primarily driven by Canada POS Lending growth of$82.6 million , or 18.0%, and Canada Direct Lending Revolving LOC growth of$22.1 million , or 5.5%. Gross combined loans receivable performance by product is described further in the following sections. Segment Analysis The following is a summary of portfolio performance and results of operations for the segment and period indicated (all periods unaudited except for Q4 2021). We report financial results for three reportable segments:U.S. , Canada Direct Lending and Canada POS Lending.U.S. Portfolio Performance (in thousands, except percentages) Q1 2022 Q4 2021(1) Q3 2021 Q2 2021 Q1 2021 Gross combined loans receivable (2) Revolving LOC$ 49,077 $ 52,532 $ 51,196 $ 47,277 $ 43,387 Installment loans - Company Owned 589,652 137,782 137,987 139,234 142,396 TotalU.S. Company Owned gross loans receivable 638,729 190,314 189,183 186,511 185,783 Installment loans - Guaranteed by the Company (3) 44,420 46,317 43,422 37,093 32,439 TotalU.S. gross combined loans receivable (2)$ 683,149 $ 236,631 $ 232,605 $ 223,604 $ 218,222 Lending Revenue: Revolving LOC$ 26,913 $ 27,911 $ 27,377 $ 24,091 $ 26,923 Installment loans - Company Owned 113,833 56,820 57,659 55,918 64,516 Installment loans - Guaranteed by the Company (3) 48,991 47,348 43,377 34,908 41,425 Total U.S. lending revenue$ 189,737 $ 132,079 $ 128,413 $ 114,917 $ 132,864 Lending Provision: Revolving LOC $ 9,577 $ 11,592 $ 8,140 $ 6,621 $ 5,039 Installment loans - Company Owned 32,962 18,618 16,792 14,048 11,159 Installment loans - Guaranteed by the Company (3) 21,749 25,967 23,146 12,583 9,648 Total U.S. lending provision$ 64,288 $ 56,177 $ 48,078 $ 33,252 $ 25,846 NCO rate (4) Revolving LOC 19.8% 22.1% 16.9% 16.0% 20.0% Installment loans - Company Owned 6.0% 14.3% 14.1% 13.2% 11.2% Total U.S. Company Owned NCO rate 7.1% 16.4% 14.8% 13.9% 13.3% Installment loans - Guaranteed by the Company (3) 47.4% 58.1% 53.2% 34.6% 31.7% Total U.S. NCO rate 14.7% 24.4% 21.6% 17.2% 16.2% ALL and CSO Liability for Losses rate (4) Revolving LOC 26.7 % 25.9% 26.3% 28.9% 33.0% Installment loans - Company Owned 4.2 % 12.7% 13.4% 15.3% 18.1% Total U.S. Company Owned ALL rate 5.9 % 16.3% 16.9% 18.7% 21.6% Installment loans - Guaranteed by the Company (3) 16.1 % 14.9% 16.1% 14.2% 14.6% 36
-------------------------------------------------------------------------------- (in thousands, except percentages) Q1 2022 Q4 2021(1) Q3 2021 Q2 2021 Q1 2021 Total ALL and CSO Liability for Losses rate 6.6 % 16.0% 16.8% 18.0% 20.6% Past-due rate (5) Revolving LOC 29.7 % 30.5% 30.5% 26.6% 26.3% Installment loans - Company Owned 19.1 % 19.4% 20.1% 18.7% 18.0% Total U.S. Company Owned past-due rate 19.9 % 22.5% 22.9% 20.7% 19.9% Installment loans - Guaranteed by the Company (3) 18.5 % 17.7% 19.8% 17.4% 12.8% (1) OnDecember 27, 2021 , we acquired Heights Finance, which accounted for approximately$472 million ofU.S. Installment loans as ofDecember 31, 2021 . As the period betweenDecember 27, 2021 andDecember 31, 2021 did not result in material loan performance, we have excluded Heights Finance from the table for the fourth quarter of 2021. (2) Non-GAAP measure. For a description of each non-GAAP metric, see "Non-GAAP Financial Measures." (3) Includes loans originated by third-party lenders through CSO programs. Installment gross loans receivable Guaranteed by the Company are not included in the Consolidated Financial Statements. (4) We calculate NCO rate as total NCOs divided by Average gross loans receivables.
(5) We calculate (i) the ALL and CSO liability rate for losses and (ii) the default rate as the respective totals divided by the gross loans receivable at each respective quarter end.
U.S. revenues increased by$61.9 million , or 45.4%, to$198.4 million , for the three months endedMarch 31, 2022 , compared to the prior-year period as a result of our acquisition of Heights Finance, with loan balances in our legacyU.S. business being affected by the Runoff Portfolios. See the loan performance discussions below for further details. Excluding Heights Finance and the impacted Runoff Portfolios,U.S. revenues increased$13.6 million , or 11.9%, year over year. The provision for losses increased$40.8 million , or 156.5%, year over year, primarily driven by (i) normalized provisioning on loan growth as customer behavior returns to pre-COVID-19 levels, (ii) full quarter provision for our Heights Finance acquisition, and (iii) higher NCO and past-due rates as COVID-19 Impacts lessened compared to the same period in the prior year. Excluding Heights Finance,U.S. NCO and past-due rates, including loans Guaranteed by the Company, increased by 440 bps, or 27.2%, and 240 bps, or 12.7%, respectively, year over year.
U.S. Revolving LOC loan balances as ofMarch 31, 2022 increased$5.7 million , or 13.1%, compared to the prior year. NCO rates improved 20 bps year over year and 230 bps sequentially. Past-due rates rose 340 bps year over year from COVID-19 Impacts in the prior year and improved 80 bps sequentially.
U.S. Installment loan balances as ofMarch 31, 2022 increased$447.3 million , or 314.1%, and revenue increased$49.3 million , or 76.4%, compared to the prior year, primarily as a result of our acquisition of Heights Finance, partially offset by the Runoff Portfolios. NCO rates improved 500 bps year over year and 820 bps sequentially as a result of Heights Finance. Past-due rates rose 110 bps year over year from COVID-19 Impacts in the prior year and improved sequentially.
U.S. Installment loans Guaranteed by the Company increased$12.0 million , or 36.9%, year over year. For the three months endedMarch 31, 2022 , NCO rates increased from 31.7% to 47.4% year over year primarily due to loan growth, and within this growth a shift to more new borrowers versus seasoned borrowers and more online originations versus store-based, both of which carry higher risk in their early stages. Past-due rates rose 575 bps year over year from COVID-19 Impacts in the prior year. 37
-------------------------------------------------------------------------------- Following is a summary of results of operations for theU.S. segment for the periods indicated. Three Months Ended March 31, (dollars in thousands, unaudited) 2022 2021 Change $ Change % Revenue Interest and fees revenue$ 189,737 $ 132,864 $ 56,873 42.8 % Insurance premiums and commissions 5,001 - 5,001 # Other revenue 3,661 3,628 33 0.9 % Total revenue 198,399 136,492 61,907 45.4 % Provision for losses 66,825 26,056 40,769 # Net revenue 131,574 110,436 21,138 19.1 % Operating expenses Salaries and benefits 59,661 41,510 18,151 43.7 % Occupancy 10,934 8,535 2,399 28.1 % Advertising 9,262 7,141 2,121 29.7 % Direct operations 13,674 9,123 4,551 49.9 % Depreciation and amortization 4,559 3,126 1,433 45.8 % Other operating expense 12,851 10,458 2,393 22.9 % Total operating expenses 110,941 79,893 31,048 38.9 % Other expense (income) Interest expense 27,685 16,358 11,327 69.2 % Income from equity method investment (1,584) (546) (1,038) # Total other expense 26,101 15,812 10,289 65.1 % Segment operating (loss) income (5,468) 14,731 (20,199) # Interest expense 27,685 16,358 11,327 69.2 % Depreciation and amortization 4,559 3,126 1,433 45.8 % EBITDA (1) 26,776 34,215 (7,439) (21.7) % Restructuring costs 1,069 - 1,069 Legal and other costs 87 - 87 Income from equity method investment (1,584) (546) (1,038) Transaction costs 168 3,160 (2,992) Acquisition-related adjustments 3 - 3 Share-based compensation 3,503 2,683 820 Other adjustments (245) (246) 1 Adjusted EBITDA (1)$ 29,777 $ 39,266 $ (9,489) (24.2) % # - Variance greater than 100% or not meaningful. (1) These are non-GAAP metrics. For a description of each non-GAAP addback, see the applicable reconciliations contained under "Consolidated Results of Operations." For a description of each non-GAAP metric, see "Non-GAAP Financial Measures."
For a discussion of revenue, provision for losses and related gross combined loans receivables for the three months endedMarch 31, 2022 and 2021, see "U.S. Portfolio Performance," above.
Operating expenses for the three months ended
U.S. interest expense for the three months endedMarch 31, 2022 increased$11.3 million , or 69.2%, primarily driven by interest on debt assumed in the acquisition of Heights Finance, (ii) interest expense on the additional$250.0 million issuance of 7.50% Senior Secured Notes, and (iii) higher interest expense on theU.S. SPV facility. 38 -------------------------------------------------------------------------------- As previously described, we recognize our share of Katapult's income or loss on a one-quarter lag. We recorded income of$1.6 million for the three months endedMarch 31, 2022 . We own 25.2% of Katapult on a fully diluted basis assuming full pay-out of earn-out shares as ofMarch 31, 2022 . Canada Direct Lending Portfolio Performance (in thousands, except percentages) Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Gross loans receivable Revolving LOC$ 424,485 $ 402,405 $ 366,509 $ 337,700 $ 319,307 Installment loans 23,578 24,792 24,315 23,564 24,385 Total gross loans receivable$ 448,063 $ 427,197 $ 390,824 $ 361,264 $ 343,692 Lending Revenue: Revolving LOC $ 45,455 $ 43,943 $ 40,239 $ 37,450$ 34,368 Installment loans 11,109 11,416 11,331 10,541 10,447 Total lending revenue $ 56,564 $ 55,359 $ 51,570 $ 47,991$ 44,815 Lending Provision: Revolving LOC $ 19,156 $ 20,080 $ 11,375 $ 7,066 $ 7,909 Installment loans 2,723 2,945 2,512 1,438 1,234 Total lending provision $ 21,879 $ 23,025 $ 13,887 $ 8,504 $ 9,143 NCO rate (1) Revolving LOC 5.2% 3.9% 2.8% 3.3% 3.6% Installment loans 10.9% 11.2% 10.2% 6.3% 6.5% Total NCO rate 5.5% 4.4% 3.3% 3.5% 3.8% ALL rate (2) Revolving LOC 7.2 % 8.0 % 7.5 % 7.9 % 9.4 % Installment loans 8.8 % 8.0 % 7.4 % 7.5 % 7.5 % Total ALL rate 7.3 % 8.0 % 7.5 % 7.9 % 9.2 % Past-due rate (2) Revolving LOC 8.0 % 8.9 % 6.8 % 5.8 % 6.4 % Installment loans 2.0 % 2.2 % 2.0 % 2.3 % 2.1 % Total past-due rate 7.7 % 8.5 % 6.5 % 5.5 % 6.1 %
(1) We calculate the NCO rate as total NCO divided by average gross loans receivable.
(2) We calculate the ALL rate and the overdue rate as the respective totals divided by the gross loans receivable at each respective quarter end.
Canada’s net direct lending revenue
Canada’s direct lending revenue increased year-over-year by
The provision for losses increased$12.8 million , or 138.2%, ($12.8 million , or 138.3%, on a constant currency basis), to$22.0 million for the three months endedMarch 31, 2022 , compared to$9.2 million in the prior-year period. The increase in provision for losses was primarily driven by (i) normalized provisioning on loan growth as customer behavior returns to pre-COVID-19 levels, and (ii) higher NCO and past-due rates as COVID-19 Impacts lessened compared to the same period in the prior year.
Canada Direct Loan Revolving Line of Credit Loan Performance
Canada Direct Lending Revolving LOC gross loans receivable increased$105.2 million , or 32.9%, ($103.0 million , or 32.3%, on a constant currency basis) year over year and$22.1 million , or 5.5% ($15.1 million , or 3.7%, on a constant currency basis) sequentially. Revolving LOC revenue increased$11.1 million , or 32.3%, year over year and$1.5 million , or 3.4%, sequentially 39 -------------------------------------------------------------------------------- ($11.1 million , or 32.3%, and$1.7 million , or 4.0%, respectively, on a constant currency basis). The quarterly NCO rate increased year over year from 3.6% to 5.2% as ofMarch 31, 2022 and from 3.9% to 5.2% as ofMarch 31, 2022 as COVID-19 Impacts lessened compared to the same period in the prior year. Past-due rates rose 160 bps year over year but improved 80 bps sequentially.
Canada Direct Lending Installment Loan Performance
Canada Direct Lending Installment revenue increased$0.7 million , or 6.3%, ($0.7 million , or 6.4%, on a constant currency basis) year over year. Installment gross loans receivable decreased$0.8 million , or 3.3% ($0.9 million , or 3.8%, on a constant currency basis) year over year. The year-over-year decrease in Installment loans was due to a continued shift to Revolving LOC loans. The NCO rate increased year over year from 6.5% to 10.9% as ofMarch 31, 2022 as COVID-19 Impacts lessened compared to the same period in the prior year. The year-over-year and sequential past-due rate for Installment loans remained consistent.
Canada Direct Lending Operating Results
Three Months Ended March 31,
(dollars in thousands, unaudited) 2022 2021 Change $ Change %
Revenue
Interest and fees revenue $ 56,564 $ 44,815 $ 11,749 26.2 %
Insurance premiums and commissions 13,023 11,569 1,454 12.6 %
Other revenue 1,901 2,056 (155) (7.5) %
Total revenue 71,488 58,440 13,048 22.3 %
Provision for losses 21,992 9,234 12,758 #
Net revenue 49,496 49,206 290 0.6 %
Operating expenses
Salaries and benefits 13,398 12,287 1,111 9.0 %
Occupancy 5,877 5,802 75 1.3 %
Advertising 938 904 34 3.8 %
Direct operations 2,853 2,118 735 34.7 %
Depreciation and amortization 1,123 1,126 (3) (0.3) %
Other operating expense 2,832 2,367 465 19.6 %
Total operating expenses 27,021 24,604 2,417 9.8 %
Other expense
Interest expense 4,030 2,355 1,675 71.1 %
Total other expense 4,030 2,355 1,675 71.1 %
Segment operating income 18,445 22,247 (3,802) (17.1) %
Interest expense 4,030 2,355 1,675 71.1 %
Depreciation and amortization 1,123 1,126 (3) (0.3) %
EBITDA (1) 23,598 25,728 (2,130) (8.3) %
Share-based compensation 115 - 115 #
Other adjustments 87 41 46
Adjusted EBITDA (1) $ 23,800 $ 25,769 $ (1,969) (7.6) %
# - Variance greater than 100% or not meaningful.
(1) These are non-GAAP metrics. For a description of each non-GAAP addback, see the applicable reconciliations
contained under "Results of Consolidated Operations." For a description of each non-GAAP metric, see "Non-GAAP
Financial Measures."
40
--------------------------------------------------------------------------------
Canadian Direct Lending Results – Three Months Ended
For an analysis of revenue, loss allowance and related gross combined loans for the three months ended
Canada Direct Lending operating expenses were$27.0 million for the three months endedMarch 31, 2022 , an increase of$2.4 million , or 9.8%, ($2.4 million , or 9.9%, on a constant currency basis), compared to the prior year, primarily due to higher variable costs, primarily collection and financial service fees, on higher volume year over year.
Interest expense for the three months ended
compared to
Performance of Canada’s POS loan portfolio
(in thousands, except percentages) Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Revolving LOC Total gross loans receivable$ 541,776 $ 459,176 $ 302,349 $ 221,453 $ 201,539 Total lending revenue $ 18,655 $ 13,704 $ 10,646 $ 6,495 $ 1,383 Total lending provision $ 8,714 $ 12,511 $ 8,285 $ 2,986 $ 855 NCO rate (1)(2) 0.5 % 0.5 % 0.7 % 0.7 % NM (3) ALL rate (4) 5.1 % 4.8 % 3.8 % 2.1 % 0.3 % Past-due rate (4)(5) 4.2 % 4.1 % 4.8 % 5.4 % 5.7 % (1) For the second, third and fourth quarters of 2021, NCOs presented above include$2.4 million ,$0.6 million and$0.8 million , respectively, of NCO's related to the fair value discount, which are excluded from provision. (2) We calculate NCO rate as total NCOs divided by Average gross loans receivables. (3) Not material or not meaningful.
(4) We calculate the ALL rate and the default rate as the respective totals divided by the gross loans receivable (excluding the fair value discount on acquired loans) at each respective quarter-end. (5) The Canada POS Loan Late Rate for loans over 31 days was 2.2%, 1.9%, 2.1%, 2.6% and 3.0% for three months completed
Yield of Revolving LOC Loans in Canada POS Lending
Canada POS Lending revenue increased year over year by$18.7 million driven by (i) a full quarter of revenue as ofMarch 31, 2022 compared to a partial quarter in the prior year, and (ii) year-over-year loan growth of$340.2 million , or 168.8%. The increase in gross loans receivables were driven by new merchant partners throughout 2021, the most notable being LFL,Canada's largest home furnishings retailer. Revolving LOC gross loans receivable generally charge-off at 180 days past due. The NCO and past-due rates for the quarter were 0.5% and 4.2%, respectively, and remained consistent sequentially. Past-due rates improved year over year by 140 bps. Originations for the three months endedMarch 31, 2022 wereC$255.3 million , an increase ofC$170.3 million , or 200.2%, from the prior-year period ofC$85.0 million . Sequentially, Canada POS Revolving LOC gross loans receivable increased$82.6 million , or 18.0%. 41
--------------------------------------------------------------------------------
Canada POS Loans Operating Results
Three Months Ended March 31,
(dollars in thousands, unaudited) 2022 2021 (1)
Revenue
Interest and fees revenue $ 18,655 $ 1,444 Insurance premiums and commissions 236 - Other revenue 1,418 175 Total revenue 20,309 1,619 Provision for losses 8,714 855 Net revenue 11,595 764 Operating expenses Salaries and benefits 6,670 1,120 Occupancy 226 10 Advertising 300 39 Direct operations 3,747 728 Depreciation and amortization 4,132 713 Other operating expense 429 127 Total operation expenses 15,504 2,737 Other expense Interest expense 6,626 826 Total other expense 6,626 826 Segment operating loss (10,535) (2,799) Interest expense 6,626 826 Depreciation and amortization 4,132 713 EBITDA (2) 223 (1,260) Acquisition-related adjustments 218 - Change in fair value of contingent consideration (264) - Share-based compensation 475 - Other adjustments 70 - Adjusted EBITDA (2) $ 722 $ (1,260) # - Variance greater than 100% or not meaningful. (1) The totals reported for the quarter endedMarch 31, 2021 include results from the date of acquisition,March 10, 2021 , throughMarch 31, 2021 . (2) These are non-GAAP metrics. For a description of each non-GAAP addback, see the applicable reconciliations contained under "Consolidated Results of Operations." For a description of each non-GAAP metric, see "Non-GAAP Financial Measures."
Canadian POS Lending Segment Results – Three Months Ended
and 2021
A comparison of the year-over-year results for the three months endedMarch 31, 2022 compared toMarch 31, 2021 are not meaningful as we acquired Flexiti as ofMarch 10, 2021 . For a discussion of revenue, provision for losses and related gross loans receivables, see the "Canada POS Lending Portfolio Performance," above for the three months endedMarch 31, 2022 . 42 --------------------------------------------------------------------------------
Additional Non-GAAP Financial Information
Non-GAAP Financial Measures
In addition to the financial information prepared in accordance with
GAAP, we provide certain “non-GAAP financial measures”, including:
•Adjusted Net Income and Adjusted Earnings Per Share, or the Adjusted Earnings Measures (net income plus or minus certain legal and other costs, income or loss from equity method investment, goodwill and intangible asset impairments, transaction-related costs, restructuring costs, adjustments related to acquisition accounting, share-based compensation, intangible asset amortization and cumulative tax effect of applicable adjustments, on a total and per share basis); •EBITDA (earnings before interest, income taxes, depreciation and amortization); •Adjusted EBITDA (EBITDA plus or minus certain non-cash and other adjusting items); •Adjusted effective income tax rate (effective tax rate plus or minus certain non-cash and other adjusting items); and •Gross Combined Loans Receivable (includes loans originated by third-party lenders through CSO programs which are not included in the Consolidated Financial Statements). We believe that the presentation of non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of the Company's operations. We believe that these non-GAAP financial measures reflect an additional way of viewing aspects of the business that, when viewed with the Company'sU.S. GAAP results, provide a more complete understanding of factors and trends affecting the business. We believe that investors regularly rely on non-GAAP financial measures, such as Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA, to assess operating performance and that such measures may highlight trends in the business that may not otherwise be apparent when relying on financial measures calculated in accordance withU.S. GAAP. In addition, we believe that the adjustments shown above are useful to investors in order to allow them to compare our financial results during the periods shown without the effect of each of these income or expense items. In addition, we believe that Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in our industry, many of which present Adjusted Net Income, Adjusted Earnings per Share, EBITDA and/or Adjusted EBITDA when reporting their results. In addition to reporting loans receivable information in accordance withU.S. GAAP, we provide Gross Combined Loans Receivable consisting of owned loans receivable plus loans originated by third-party lenders through the CSO programs, which we guarantee but do not include in the Condensed Consolidated Financial Statements. Management believes this analysis provides investors with important information needed to evaluate overall lending performance. We provide non-GAAP financial information for informational purposes and to enhance understanding of theU.S. GAAP Consolidated Financial Statements. Adjusted Net Income, Adjusted Earnings per Share, EBITDA, Adjusted EBITDA and Gross Combined Loans Receivable should not be considered as alternatives to income, segment operating income, or any other performance measure derived in accordance withU.S. GAAP, or as an alternative to cash flows from operating activities or any other liquidity measure derived in accordance withU.S. GAAP. Readers should consider the information in addition to, but not instead of or superior to, the financial statements prepared in accordance withU.S. GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
Description and reconciliations of non-GAAP financial measures
Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA Measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our income or cash flows as reported underU.S. GAAP. Some of these limitations are: •they do not include cash expenditures or future requirements for capital expenditures or contractual commitments; •they do not include changes in, or cash requirements for, working capital needs; •they do not include the interest expense, or the cash requirements necessary to service interest or principal payments on debt; •depreciation and amortization are non-cash expense items reported in the statements of cash flows; and •other companies in our industry may calculate these measures differently, limiting their usefulness as comparative measures. We calculate Adjusted Earnings per Share utilizing diluted shares outstanding at year-end. If the Company records a loss underU.S. GAAP, shares outstanding utilized to calculate Diluted Earnings per Share are equivalent to basic shares outstanding. Shares outstanding utilized to calculate Adjusted Earnings per Share reflect the number of diluted shares the Company would have reported if reporting net income underU.S. GAAP. 43 -------------------------------------------------------------------------------- As noted above, Gross Combined Loans Receivable includes loans originated by third-party lenders through CSO programs which are not included in the consolidated financial statements but from which we earn revenue and for which we provide a guarantee to the lender. Management believes this analysis provides investors with important information needed to evaluate overall lending performance. We believe Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA are used by investors to analyze operating performance and to evaluate our ability to incur and service debt and the capacity for making capital expenditures. Adjusted EBITDA is also useful to investors to help assess our estimated enterprise value. The computation of Adjusted EBITDA as presented in this Form 10-Q may differ from the computation of similarly-titled measures provided by other companies.
Reconciliation of net earnings and diluted earnings per share to adjusted net earnings and adjusted diluted earnings per share, non-GAAP measures (in thousands, except per share data, unaudited)
Three Months Ended
March 31,
2022 2021 Change $ Change %
Net income $ 1,336 $ 25,735 $ (24,399) (95) %
Adjustments:
Restructuring costs (1) 1,069 -
Legal and other costs (2) 87 -
Income from equity method investment (3) (1,584)
(546)
Transaction costs (4) 168
3,160
Acquisition-related adjustments (5) 221
–
Change in fair value of contingent consideration (6) (264)
–
Share-based compensation (7) 4,093
2,683
Intangible asset amortization (8) 2,977
831
Cumulative tax effect of adjustments (9) (1,828) (1,735) Adjusted Net Income$ 6,275 $ 30,128 $ (23,853) (79.2) % Net income$ 1,336 $ 25,735 Diluted Weighted Average Shares Outstanding 41,308
43,596
Adjusted Diluted Weighted Average Shares Outstanding 41,308
43,596
Diluted Earnings per Share$ 0.03 $ 0.59 $ (0.56) (94.9) % Per Share impact of adjustments to Net income 0.12
0.10
Adjusted Diluted Earnings per Share$ 0.15 $ 0.69 $ (0.54) (78.3) %
Note: Footnotes follow the Net Income Reconciliation table on the next page
44
--------------------------------------------------------------------------------
Reconciliation of net income to EBITDA and Adjusted EBITDA, non-GAAP measures (in thousands, except per share data, unaudited)
Three Months Ended
March 31,
2022 2021 Change $ Change %
Net income $ 1,336 $ 25,735 $ (24,399) (94.8) %
Provision for income taxes 1,106 8,444 (7,338) (86.9) %
Interest expense 38,341 19,539 18,802 96.2 %
Depreciation and amortization 9,814 4,965 4,849 97.7 %
EBITDA 50,597 58,683 (8,086) (13.8) %
Restructuring costs (1) 1,069 -
Legal and other costs (2) 87 -
Income from equity method investment (3) (1,584)
(546)
Transaction costs (4) 168
3,160
Acquisition-related adjustments (5) 221
–
Change in fair value of contingent consideration (6) (264) - Share-based compensation (7) 4,093 2,683 Other adjustments (10) (88) (205) Adjusted EBITDA$ 54,299 $ 63,775 $ (9,476) (14.9) % Adjusted EBITDA Margin 18.7 % 32.4 % # - Change greater than 100% or not meaningful
(1) Restructuring costs for the three months ended
closures and related costs and certain severance packages to eliminate duplicate roles. (2) Legal and other fees for the three months ended
settlement costs related to certain legal matters.
(3) The amount declared is our share of the capital of Katapult
quarter shift. (4) Transaction costs for the three months ended
Finance the acquisition by
Transaction costs for the three months ended
Flexiti in
the adjustments relate to the Flexiti loan portfolio acquired during
related to the fair value of the contingent consideration for the three months ended
charge on a straight-line basis over the vesting period. (8) Amortization of intangible assets in the determining ANN for the three months ended in March
31 2022 mainly includes the amortization of identifiable intangible assets established
in connection with the acquisitions of Flexiti and Heights Finance. (9) Cumulative tax effect of adjustments included in the reconciliation of net income with
The adjusted net income table is calculated using the additional tax rate estimated by
country.
(10) Other adjustments primarily reflect the impact of intercompany foreign exchange rates.
Currency Information
We operate in the
Changes in our reported revenues and net income include the effect of changes in currency exchange rates. We translate all balance sheet accounts intoU.S. dollars at the currency exchange rate in effect at the end of each period. We translate the statement of operations at the average rates of exchange for the period. We record currency translation adjustments as a component of Accumulated Other Comprehensive Income in Stockholders' Equity.
Constant Currency Analysis
We have operations in theU.S. andCanada . In the three months endedMarch 31, 2022 and 2021, 31.6% and 30.6%, respectively, of our revenues were originated inCanada . As a result, changes in our reported results include the impacts of changes in foreign currency exchange rates for the Canadian Dollar. 45 --------------------------------------------------------------------------------
Income Statement
Three Months Ended March 31,
2022 2021 $ Change % Change
Average Exchange Rates for the Canadian
Dollar 0.7893 0.7897 (0.0004) (0.1) %
Balance sheet – Exchange rate at
March 31, December 31, Change
2022 2021 $ %
Exchange Rate for the Canadian Dollar 0.7978 0.7846
0.0132 1.7%
The following constant currency analysis removes the impact of the fluctuation in foreign exchange rates and utilizes constant currency results in our analysis of the Canada Direct Lending segment performance. Our constant currency assessment assumes foreign exchange rates in the current fiscal periods remained the same as in the prior fiscal periods. All conversion rates below are based on theU.S. Dollar equivalent to the Canadian Dollar. We believe that the constant currency assessment below is a useful measure in assessing the comparable growth and profitability of our operations. We calculated the revenues and gross margin below for ourCanada segments during the three months endedMarch 31, 2022 using the actual average exchange rate during the three months endedMarch 31, 2021 (in thousands, unaudited). Three
Months ended
2022 2021 $ Change % Change
Canada Direct Lending - constant currency basis:
Revenues $ 71,515 $ 58,440 $ 13,075 22.4 %
Net revenue 49,513 49,206 307 0.6 %
Segment operating income 18,450 22,247 (3,797) (17.1) %
Canada POS Lending - constant currency basis(1):
Revenues $ 20,319 $ 1,619 $ 18,700 1,155.0 %
Net revenue 11,600 764 10,836 1,418.3 %
Segment operating income (10,539) (2,799) (7,740) 276.5 %
(1) Totals reported for the quarter ended
We calculated gross loans receivable for ourCanada segments below as ofMarch 31, 2022 using the actual exchange rate as ofDecember 31, 2021 (in thousands, unaudited). March 31, December 31, Change 2022 2021 $ % Canada Direct Lending - constant currency basis: Gross loans receivable$ 440,665 $ 427,197 $ 13,468 3.2 % Canada POS Lending - constant currency basis: Gross loans receivable$ 532,830 $ 459,176 $ 73,654 16.0 %
CASH AND CAPITAL RESOURCES
Our principal sources of liquidity to fund the loans we make to our customers are (i) cash provided by operations, (ii) our revolving credit facilities and our non-recourse funding facilities, as further described in Note 5, "Debt" of the Notes to the Consolidated Financial Statements, and (iii) funds from third-party lenders under our CSO programs. As ofMarch 31, 2022 , we were in compliance with all financial ratios, covenants and other requirements in our debt agreements. We anticipate that our primary use of cash will be to fund growth in our working capital, finance capital expenditures to further our growth strategy in both theU.S. andCanada , and meet our debt obligations. We may also use cash for potential strategic investments in and acquisitions of other companies that help us extend our reach and product portfolio. Additionally, we may use cash to fund a return on capital for our stockholders through share repurchase programs, or in the form of dividends. In the first quarter of 2021, our Board of Directors increased the quarterly dividend to$0.11 per share, an increase of 100%. Additionally, in 46 --------------------------------------------------------------------------------May 2021 our Board of Directors authorized a$50.0 million share repurchase program which concluded inFebruary 2022 . A new$25.0 million share repurchase program was authorized inFebruary 2022 , which will commence at our discretion. Refer to Note 15, "Share Repurchase Program " of the Notes to the unaudited Condensed Consolidated Financial Statements for further details of the program. Our level of cash flow provided by operating activities typically experiences seasonal fluctuations related to our levels of net income and changes in working capital levels, particularly loans receivable. Unexpected changes in our financial condition or other unforeseen factors may result in our inability to obtain third-party financing or could increase our borrowing costs in the future. We have the ability to adjust our volume of lending to consumers to the extent we experience any short-term or long-term funding shortfalls, such as tightening our credit approval practices (as we did during the COVID-19 pandemic), which has the effect of reducing cash outflow requirements while increasing cash inflows through loan repayments. We may also sell or securitize our assets, draw on our available revolving credit facility or line of credit, enter into additional refinancing agreements or reduce our capital spending to generate additional liquidity. The impacts to cash as described in "-Cash Flows" below and other factors resulted in our available cash on hand of$60.2 million and our total liquidity of$117.7 million as ofMarch 31, 2022 . We believe our cash on hand and available borrowings provide us with sufficient liquidity for at least the next 12 months. Our recent acquisitions of Flexiti and Heights Finance have increased our product offerings to include customers in the near-prime and prime space. The acquisition of Flexiti allows us to tailor our current product structure to its POS model, potentially expanding to sub-prime customers. The acquisition of Heights Finance accelerates our strategic transition in theU.S. toward longer term, higher balance and lower rate credit products and provides us with access to a larger addressable market while mitigating regulatory risk. These initiatives to expand our product offerings and grow theU.S. andCanada businesses can materially impact our future cash flows. For further information regarding the acquisitions, refer to Note 1, "Summary of Significant Accounting Policies and Nature of Operations," Note 13, "Goodwill," and Note 14, "Acquisitions" of the Notes to the unaudited Condensed Consolidated Financial Statements.
We have no other material commitments or demands that could affect our liquidity.
Debt Capitalization Summary
(in thousands, net of deferred financing costs)
Balance as of
March 31, 2022
Capacity Interest Rate Maturity Counterparties (in USD)
7.50% Senior Secured Notes (due
2028) (2) $1.0 billion 7.50% August 1, 2028 $ 981,156
BayCoast Bank; Stride Bank;
Hancock-Whitney Bank;
Senior Secured Revolving Credit Metropolitan Commercial
Facility $50.0 million 1-Mo LIBOR + 5.00% June 30, 2022 Bank 20,000
Atalaya Capital Management,
U.S. SPV $200.0 million 1-Mo LIBOR + 6.25% April 8, 2024 MetaBank 45,843
Heights Finance SPV $350.0 million 1-Mo LIBOR + 5.25% December 31, 2024 Ares Capital 324,224
Canada SPV(1) C$400.0 million 3-Mo CDOR + 6.00% August 2, 2026 Waterfall Asset Management 240,661
Credit Suisse (Class A);
Flexiti SPE(1) C$500.0 million 3-Mo CDOR + 4.40% March 10, 2024 SPF (Class B) 234,754
National Bank of Canada;
Precision Trust, an
affiliate of the Bank of
Montreal; and WF Torca,
Ltd., a fund managed by
Flexiti Securitization(1) C$526.5 million 1-Mo CDOR + 3.59% December 9, 2025 Waterfall Asset Management 243,447
CURO Canada Revolving Credit
Facility (1) C$10.0 million Canada Prime Rate +1.95% On-demand Royal Bank of Canada -
(1) Capacity amounts are denominated in Canadian dollars, while unpaid balances in
(2) OnJuly 30, 2021 , we closed our$750 million aggregate principal amount of new 7.50% Senior Secured Notes, which was used to redeem our$690.0 million 8.25% Senior Secured Notes due 2025. OnDecember 27, 2021 , we issued an additional$250.0 million of our 7.50% Senior Secured Notes for a total capacity of$1.0 billion . Refer to Note 5, "Debt," for details on each of our credit facilities and resources. 47
--------------------------------------------------------------------------------
Cash flow
The following highlights our treasury activity and sources and uses of funding during the periods indicated (in thousands):
Three
Months ended
2022 2021
Net cash provided by operating activities $ 83,733 $ 110,492
Net cash used in investing activities (187,670) (163,618)
Net cash provided by (used in) financing activities 110,322 (65)
As previously described, year-over-year comparisons were impacted by the impacts of COVID-19 and winding-up portfolios from regulatory changes.
Operational activities
Net cash provided by operating activities for the three months endedMarch 31, 2022 was$83.7 million , attributable to net income of$1.3 million , the effect of non-cash reconciling items of$107.5 million , and changes in our operating assets and liabilities of$25.1 million . Our non-cash reconciling items of$107.5 million primarily included$97.5 million of provision for losses and$9.8 million of depreciation and amortization. Our changes in operating assets and liabilities of$25.1 million were primarily related to (i)$41.6 million of lower accounts payable and accrued liabilities as a result of timing on the settlement of certain accruals, and (ii)$18.5 million of lower accrued interest on the 7.50% Senior Secured Notes related to timing of interest payments, partially offset by$28.5 million of lower accrued interest on our gross loans receivable. Investing Activities Net cash used in investing activities for the three months endedMarch 31, 2022 was$187.7 million , primarily due to net origination of loans of$176.3 million . In addition, we used cash to purchase$11.4 million of property, equipment and software, an increase from last year due to the acquisitions of Flexiti and Heights Finance.
Fundraising activities
Net cash provided by financing activities for the three months endedMarch 31, 2022 was$110.3 million . Net cash provided by financing activities included (i)$111.2 million of net proceeds from our non-recourse debt facilities and (ii)$20.0 million draw on our Senior Revolver, partially offset by (i)$13.5 million of share repurchases in the first quarter of 2022 and (ii)$4.8 million of cash dividends.
Significant Accounting Policies and Estimates
There have been no material changes to the information on critical accounting estimates described in Part II - Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates, in our 2021 Form 10-K for the year endedDecember 31, 2021 .Goodwill . We exercise judgment in evaluating assets for impairment.Goodwill is tested for impairment annually, or when circumstances arise which could more likely than not reduce the fair value of a reporting unit below its carrying value. These tests require comparing carrying values to estimated fair values of the reporting unit under review. Our reporting units consist of theU.S. , Canada Direct Lending and Canada POS Lending segments, as defined by FASB's ASC 280, Segment Reporting, for which we assess goodwill for impairment. As of the most recent annual goodwill impairment testing date (October 1, 2021 ), theU.S. , Canada Direct Lending, and Canada POS Lending reporting units' estimated fair values exceeded their carrying value. As described in our 2021 Form 10-K, an impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. Events or circumstances that could indicate an impairment include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit or economic outlook. These and other macroeconomic factors were considered when performing the annual test as ofOctober 1, 2021 . For the three months endedMarch 31, 2022 , we reviewed goodwill for triggering events that would indicate a need for an interim quantitative or qualitative assessment of goodwill impairment. As a result of the review, no additional assessment was deemed necessary, and thus there was no goodwill impairment for any reporting unit.
Uncertainty surrounding macroeconomic factors that could impact our business units continues to exist. Changes in the expected duration of the current economic downturn, timing of recovery or long-term revenue growth or profitability of these reporting units could increase the likelihood of future acquisition. Additionally, changes in market participants
48 --------------------------------------------------------------------------------
assumptions such as an increase in the discount rate or further declines in the share price could increase the likelihood of future impairment.
The following table summarizes the segment allocation of recorded goodwill on our unaudited Condensed Consolidated Balance Sheets as ofMarch 31, 2022 : (in thousands) March 31, 2022 Percent of Total December 31, 2021 Percent of Total U.S. $ 359,779 83.5 % $ 359,779 83.7 % Canada Direct Lending (1) 30,610 7.1 % 30,105 7.0 % Canada POS Lending (1) 40,578 9.4 % 39,908 9.3 % Total Goodwill $ 430,967 $ 429,792 (1) Changes inGoodwill betweenDecember 31, 2021 andMarch 31, 2022 are due to fluctuations in foreign exchange rates. Refer to Note 13, "Goodwill" for additional details.
Regulatory environment and compliance
There have been no significant developments with respect to our regulatory environment and compliance since
TheCFPB is expanding its supervisory authority using its Dormant Authority provided for in the Dodd-Frank Act. OnApril 25, 2022 , theCFPB (or "Bureau") announced that it will begin conducting supervisory examinations of non-bank financial entities (e.g., FinTechs) not currently subject to supervision and enforcement, if the Bureau believes the companies may be posing risks to consumers. The Bureau is also signaling that it may decide to publicly disclose some of its new supervisory activity so that other entities can be informed of areas the Bureau finds problematic. In the same announcement, the Bureau indicated that it is seeking public comments on a procedural rule to make the examination process more transparent.
CFPB Consumer Reviews
OnMarch 22, 2022 , theCFPB issued a compliance bulletin for financial companies and their service providers warning that restricting consumer reviews, silencing consumer reviews, pressuring consumers to remove a review, or posting fake reviews can violate the Consumer Review Fairness Act as well as constitute a UDAAP. CFPB Anti-Discrimination OnMarch 16, 2022 ,CFPB announced that it was expanding its anti-discrimination efforts in all consumer finance markets. The announcement clarified that discrimination can be "unfair" and trigger UDAAP even though the discriminatory action could be covered under the Equal Credit Opportunity Act or another law. TheCFPB updated its examination procedures manual for UDAAP to examine decision-making processes for assessing discriminatory risk and outcomes, including advertising, pricing, and other areas.
© Edgar Online, source
Comments are closed.