S-1/A 1 d310075ds1a.htm AMENDMENT NO. 7 TO FORM S-1 Amendment No. 7 to Form S-1
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As filed with the Securities and Exchange Commission on April 6, 2017

Registration No. 333-207888

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 7 TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

ELEVATE CREDIT, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   6199   46-4714474

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

  4150 International Plaza, Suite 300  
  Fort Worth, Texas 76109  
  (817) 928-1500  
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

  Kenneth E. Rees  
  Chief Executive Officer  
  Elevate Credit, Inc.  
  4150 International Plaza, Suite 300  
  Fort Worth, Texas 76109  
  (817) 928-1500  
(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

  Copies to:  

Brandon C. Parris, Esq.

Sara L. Terheggen, Esq.

Morrison & Foerster LLP

425 Market Street

San Francisco, California 94105

(415) 268-7000

 

Sarah Fagin Cutrona, Esq.

Chief Counsel

Elevate Credit, Inc.

4150 International Plaza, Suite 300

Fort Worth, Texas 76109

(817) 928-1500

 

Andrew D. Thorpe, Esq.

Peter M. Lamb, Esq.

Orrick, Herrington & Sutcliffe LLP

The Orrick Building

405 Howard Street

San Francisco, California 94105

(415) 773-5700

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (do not check if a smaller reporting company)    Smaller reporting company  

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of

Securities to be Registered

  Amount to be
Registered(1)
  Proposed
Maximum
Offering Price
Per Share(2)
 

Proposed
Maximum
Aggregate

Offering

Price(1)(2)

  Amount of
Registration Fee(3)

Common Stock, par value $0.0004 per share

  14,260,000   $6.50   $92,690,000   $10,742.77

 

 

(1)   Includes 1,860,000 shares that the underwriters have the option to purchase.
(2)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended.
(3)   The Registrant previously paid a registration fee of $14,368.12 in connection with the initial filing and Amendment No. 6 to this Registration Statement.

 

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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LOGO

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS Subject to Completion April 6, 2017

12,400,000 Shares Common Stock Elevate Credit, Inc. is offering 12,400,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be $6.50 per share. / Our common stock has been approved for listing on the New York Stock Exchange under the symbol “ELVT.” / We are an “emerging growth company” under the federal securities laws and are therefore subject to reduced public company reporting requirements. Investing in our common stock involves risks. See “Risk factors” beginning on page 19.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if the prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Per Share Total

Public offering price $$ Underwriting discounts and commissions(1) $ $ Proceeds, before expenses, to us $ $

(1) See “Underwriting” beginning on page 203 for additional information regarding underwriting compensation.

We have granted the underwriters the right to purchase up to an additional 1,860,000 shares of common stock.

The underwriters expect to deliver the shares of common stock to purchasers on , 2017.

UBS Investment Bank Credit Suisse Jefferies

Stifel William Blair


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LOGO

 

Elevate

100%

revenue compound annual growth rate 1 billion $4 in loan originations 2

1.6 million

customers served 2

170 million

non-prime consumers in the US and UK market combined 3

1 For the period from 2013 ($72M) through 2016 ($580M).

2 Originations and customers from 2002 through December 2016, attributable to the combined current and predecessor direct and branded products.

3 Based on US population with a TransRisk Score of less than 700, Americans over 18 treated as “unscorable” by traditional credit scoring models and the UK population comprising the “non-standard” credit market.


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LOGO

 

The next generation of re

Approval in seconds Rates that go do

Credit building features


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LOGO

 

responsible online credit

down over time Financial wellness features

Flexible payment terms

Good Today, Better Tomorrow


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You should rely only on the information contained in this prospectus or contained in any free writing prospectus prepared by or on behalf of us. Neither we nor the underwriters have authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any related free writing prospectus. This prospectus is an offer to sell only the shares offered hereby and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of its delivery. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                     , 2017 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

CERTAIN CONVENTIONS GOVERNING INFORMATION IN THIS PROSPECTUS

Presentation of information related to periods before the Spin-Off

We were incorporated in Delaware in January 2014. Prior to May 1, 2014, we operated as a separately identifiable line of business of Think Finance, Inc., or “TFI,” our predecessor company. On May 1, 2014, TFI contributed the assets and liabilities associated with its direct lending and branded products business to us, and distributed its interest in our company to its stockholders. We refer to this as the “Spin-Off.” Unless expressly indicated or the context requires otherwise, the terms “Elevate,” “Company,” “we,” “us” and “our” in this prospectus refer to Elevate Credit, Inc. and, where appropriate, our wholly owned subsidiaries, as well as the direct lending and branded product business of TFI for periods prior to the Spin-Off. Financial and operational information for periods before the Spin-Off refer solely to the direct lending and branded product business of TFI. For further information regarding the Spin-Off, see “Business—Our History.”

Presentation of information related to our products

Our products are Rise and Elastic in the US and Sunny in the UK. Rise is an installment loan product that operates under individual state laws and may have significantly different rates, terms and conditions in each of the states in which Rise is offered. In Texas and Ohio, we do not make Rise loans directly, but rather act as a Credit Services Organization (which is also known as a Credit Access Business in Texas), or, collectively, “CSO,” and the loans are originated by an unaffiliated third party. Texas and Ohio are currently the only states in which Rise is offered pursuant to a CSO program. Our other US product, Elastic, is an open-end line of credit that is originated by a third-party lender under a contractual relationship whereby we provide marketing and technology services to support the lender’s origination of Elastic lines of credit. Unless expressly indicated or the context requires otherwise, and to simplify the disclosures contained herein, “Elevate’s products,” “our products,” “Elevate’s customers,” and “our customers,” as well as these products being “offered” by us and similar or related phrases, refer to these three products and their customers irrespective of whether Elevate directly originates the credit to the customer or whether such credit is originated by a third party.

 

 

 

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Prospectus summary

     1  

The offering

     10  

Summary historical and pro forma financial data

     12  

Letter from Ken Rees, CEO of Elevate

     16  

Risk factors

     19  

Forward-looking statements

     58  

Industry and market data

     61  

Use of proceeds

     62  

Dividend policy

     63  

Capitalization

     64  

Dilution

     66  

Selected historical consolidated financial data

     69  

Management’s discussion and analysis of financial condition and results of operations

     77  

Business

     113  

Management

     150  

Executive compensation

     163  

Certain relationships and related party transactions

     177  

Principal stockholders

     186  

Description of capital stock

     189  

Shares eligible for future sale

     196  

Material US federal income tax consequences to non-US holders of our common stock

     199  

Underwriting

     203  

Legal matters

     213  

Experts

     213  

Where you can find more information

     213  

Index to consolidated financial statements contents

     F-1  

 

 

 

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Prospectus summary

This summary overview of the key aspects of the offering identifies those aspects of the offering that are the most significant. This summary is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary may not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the sections titled “Risk factors,” “Forward-looking statements” and “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. See “Certain conventions governing information in this prospectus” for detailed information on how we discuss our business.

OUR COMPANY

We provide online credit solutions to consumers in the United States, or the “US,” and the United Kingdom, or the “UK,” 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—approximately 170 million people in the US and UK, typically defined as those with credit scores of less than 700—now represent a larger market than prime consumers but are difficult 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 1.6 million customers with $4.0 billion in credit. Our current online credit products, Rise, Elastic and Sunny, 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 have experienced rapid growth and improving operating margins since launching our current generation of products in 2013. As of December 31, 2016, Rise, Elastic and Sunny, together, have provided approximately $2.5 billion in credit to approximately 785,000 customers and generated strong revenue growth. Our revenues for the year ended December 31, 2016 grew 34% to $580.4 million from $434.0 million for the year ended December 31, 2015. Our operating income for the years ended December 31, 2016 and 2015 was $47.8 million and $9.0 million, respectively. Our net losses for the years ended December 31, 2016 and 2015 were $22.4 million and $19.9 million, respectively. We have committed diversified funding sources to support our growth. Rise, Elastic and Sunny are funded by five different sources through four lending facilities (of which one source and one facility related to our Rise CSO relationships in Texas and Ohio are expected to be replaced before the end of the second quarter of 2017). See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and Capital Resources.”

Along with increased revenue growth and improving operating margins, we have also reduced the effective APR of our products for our customers. For the year ended December 31, 2016 our effective APR was 146%, a drop of approximately 42% compared to the year ended December 31, 2013 when the effective APR was 251%. We estimate that our products have saved our customers more than $1 billion since 2013 over what they would have paid for payday loans. This estimate, which has not been independently confirmed, is based on our internal comparison of revenues from our combined loan portfolio and the same portfolio with an APR of 400%, which is the approximate average APR for a payday loan according to the Consumer Financial Protection Bureau, or the “CFPB.” As of December 31, 2016, approximately two-thirds of Rise customers in good standing had received a rate reduction, and thousands of Rise customers have received or are eligible for credit from us at near-prime interest rates of 36% based on their on-time repayment history. Furthermore, with help from our reporting their

 

 

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successful payment history to a major credit bureau, tens of thousands of our customers have seen their credit scores improve appreciably, according to data from that credit bureau. We believe that these rate reductions and other benefits help differentiate our products in the market and reflect improvements in our underwriting and the maturing of our loan portfolios. Moreover, we believe doing business this way is the right thing to do.

Our products in the US and the UK are:

 

    

LOGO

 

 

LOGO

 

  LOGO

Product type

  Installment   Line of credit   Installment

Geographies served(1)

  US - 15 states   US - 40 states   UK

Loan size

  $500 to $7,000(5)   $500 to $3,500   £100 to £2,500

Loan term(2)

  4-26 months   Up to 10 months   6-14 months

Pricing(3)

  36% to 299%(6)
annualized. Rates drop
by 50% after 24 months
of payments, and to
36% after 36 months of
payments
  Initially $5 per $100
borrowed plus up to 5.0%
of outstanding principal
per billing period
  10.5% to 24% monthly

Other fees

  None   None   None

Effective APR of combined loan portfolio(1)(4)

  156%   91%   230%

 

(1)   As of and for the year ended December 31, 2016. Includes loans originated through Credit Services Organization, or “CSO,” programs.
(2)   Elastic term is based on minimum principal payments of 10% of last draw amount per month.
(3)   In Texas and Ohio, Rise charges a CSO fee instead of interest. See “Management’s discussion and analysis of financial condition and results of operations—Key Financial and Operating Metrics—Revenue growth—Revenues.” Rise interest rates may differ significantly by state. See “Regulatory Environment—APR by geography” for a breakdown of the APR for each of our products. Rise interest rates of 36% are available to qualified customers based on on-time repayment history.
(4)   Elastic is a fee-based product. The number shown is based on a calculation of an effective APR.
(5)   Maximum loan size of $7,000 available in Georgia.
(6)   As of March 31, 2017. Some legacy customers will have rates as high as 365%, the previous maximum rate.

 

We differentiate ourselves in the following ways:

 

Ø   Online and mobile products that are “Good Today, Better Tomorrow.”     Our products are “Good Today” because they help solve our customers’ immediate financial needs with competitively priced credit and a simple online application process that provides credit decisions in seconds and funds as soon as the next business day (in the US) or in minutes (in the UK). We are committed to transparent pricing with no prepayment penalties or punitive fees as well as amortizing loan balances and flexible repayment schedules that let customers design the loan repayment terms that they can afford. Our five-day risk-free guarantee provides confidence to customers that if they can find a better financial solution within that time they simply repay the principal with no other fees. In addition, our products are “Better Tomorrow” because they reward successful payment history with rates on subsequent loans (installment loan products) that can decrease over time and can help customers improve their long-term financial well-being with features like credit bureau reporting, free credit monitoring (for US customers), and online financial literacy videos and tools.

 

Ø  

Industry-leading technology and proprietary risk analytics optimized for the non-prime credit market.     We have made substantial investments in our IQ and DORA technology and analytics platforms to support rapid scaling and innovation, robust regulatory compliance, and ongoing improvements in underwriting. Our proven IQ technology platform provides for nimble testing and optimization of our user interface and underwriting strategies, highly automated loan originations, cost-effective servicing, and robust compliance oversight. Our DORA risk analytics infrastructure utilizes a massive (greater than 40 terabyte) Hadoop database composed of more than ten thousand potential data variables related to each of the 1.6 million customers we have served and the over 5 million applications that we have processed. Our team of over 35 data scientists uses DORA to build

 

 

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and test scores and strategies across the entire underwriting process, including segmented credit scores, fraud scores, affordability scores and former customer scores. We use a variety of analytical techniques, from traditional multivariate regression to machine learning and artificial intelligence, to continue to enhance our underwriting accuracy while complying with applicable US and UK lending laws and regulations. As a result of our proprietary technology and risk analytics, approximately 95% of loan applications are automatically decisioned in seconds with no manual review required.

 

Ø   Integrated multi-channel marketing strategy.    We use an integrated multi-channel marketing strategy to directly reach potential customers. Our marketing strategy includes coordinated direct mail programs, TV campaigns, search engine marketing and digital campaigns, as well as strategic partnerships. We believe our direct-to-consumer approach allows us to focus on higher quality, lower cost customer acquisitions while maximizing reach and enhancing awareness of our products as trusted brands. We have maintained steady customer acquisition costs over the past three years within the range of $230 to $300. Approximately 88% of our customers during 2016 were sourced from direct marketing channels. We continue to invest in new marketing channels, including social media, which we believe will provide us with further competitive advantages and support our ongoing growth. We expect to continue to expand growth in each of our channels based on improved customer targeting analytics and increasingly sophisticated response models that allow us to expand our marketing reach while maintaining target customer acquisition costs or “CAC.”

Our seasoned management team has, on average, more than 15 years of online technology and financial services experience and has worked together for an average of over seven years in the non-prime consumer credit industry. Our management team has overseen the origination of $4.0 billion in credit to more than 1.6 million consumers for the combined current and predecessor direct lending and branded products business that was contributed to Elevate in the Spin-Off. In addition, our management team achieved stable credit performance for our predecessor products through the last decade’s financial crisis, maintaining total principal losses as a percentage of loan originations of between 17% and 20% each year from 2006 through 2011. See “Business—Advanced Analytics and Risk Management—History of stable credit quality through the economic downturn.”

INDUSTRY OVERVIEW

Non-prime consumers represent the largest segment of the credit market.    Today, 170 million people in the US and UK have low credit scores or no credit score at all and therefore would struggle to obtain traditional bank credit. This includes more than half of the adult US population, who often face increased financial pressures due to macro-economic changes over the past few decades and tightened credit markets. We refer to this growing segment of consumers as the “New Middle Class” and we believe they represent a massive and underserved market—a larger population than the market for prime credit. Our typical customer is middle-income and has a mainstream demographic profile, in line with the average of the populations of the US and UK, respectively, in terms of income, educational background and rate of homeownership.

The New Middle Class has an unmet need for credit.    Due to wage stagnation over the past several decades and the continued impact of the last decade’s financial crisis, the New Middle Class is characterized by a lack of savings and significant income volatility. As a result, our customer base often must rely on credit to fund unexpected expenses, like car and home repairs or medical emergencies.

Non-prime credit can be less vulnerable to recessionary factors.    Based on our own experiences during the last decade’s financial crisis, we believe that patterns of credit charge-offs for non-prime consumers can be acyclical or counter-cyclical when compared to prime consumers in credit downturns. In a

 

 

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recession, banks and traditional prime credit providers often experience increases in credit charge-off rates and tighten standards which reduces access to traditional credit and pushes certain consumers out of the market for bank credit. Conversely, with advanced underwriting, lenders serving non-prime consumers are able to maintain comparatively flat charge off rates in part because of these new customers who are unable to avail themselves of the traditional credit market. See “Business—Advanced Analytics and Risk Management—History of stable credit quality through the economic downturn.”

Non-prime consumers have different needs for credit.    Non-prime consumers generally have unique and immediate credit needs, which differ greatly from the typical prime consumer. Where prime consumers consider price most in selecting their credit products, we believe that non-prime consumers will often consider a variety of features, including the simplicity of the application process, speed of decisioning and funding, how they will be treated if they cannot pay their loan back on time, and flexible repayment terms.

Banks do not adequately serve the New Middle Class.    Following the last decade’s financial crisis, most banks tightened their underwriting standards and increased their minimum FICO score requirements for borrowers, leaving non-prime borrowers with severely reduced access to traditional credit. Despite the improving economy, banks continue to underserve the New Middle Class. We estimate that revolving credit available to non-prime US borrowers was reduced by approximately $142 billion from 2008 to 2016. This reduction has had a profound impact on non-prime consumers in the US and UK who typically have little to no savings. Often, the only credit-like product offered by banks that is available to non-prime borrowers is overdraft protection, which can have an extremely high effective APR of over 3,500% depending upon the amount of the overdraft transaction and the length of time to bring the account positive, according to the FDIC.

Legacy non-prime lenders are not innovative.    As a result of limited access to credit products offered by banks, the New Middle Class has historically had to rely on a variety of legacy non-prime lenders, such as storefront installment lenders, payday lenders, title lenders, pawn and rent-to-own providers that typically do not offer customers the convenience of online and mobile access. While legacy non-prime credit products may fulfill a borrower’s immediate funding needs, many of these products have significant drawbacks for consumers, including a potential “cycle of debt,” higher interest rates, punitive fees and aggressive collection tactics. Additionally, legacy non-prime lenders do not typically report to major credit bureaus, so non-prime consumers often remain in a “cycle of non-prime” and rarely improve their financial options.

Fintech startups have largely ignored the non-prime credit market.    Despite the growing and unmet need for non-prime credit, few innovative solutions tailored for non-prime consumers have come to market and achieved any meaningful scale. Where new online marketplace lenders and small business lenders have emerged to serve prime consumers, we believe that non-prime consumers still have relatively few responsible online credit options. We believe this is because underwriting non-prime consumers presents significantly greater analytical challenges than underwriting prime consumers. Unlike prime consumers, the credit profiles of non-prime consumers vary greatly and may contain significant derogatory information, yet non-prime consumers expect instant decisions with a minimum of paperwork and inconvenience. While new data and techniques can assist in improving underwriting capabilities, we believe lenders still require deep insight and extensive experience to successfully serve non-prime consumers while maintaining target loss rates. Additionally, we believe the compliance and other systems necessary to serve non-prime consumers in a manner consistent with regulatory requirements can be a barrier to entry. Having originated $4.0 billion in credit to more than 1.6 million customers, we believe we have a significant lead over new entrants.

 

 

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Consumers are embracing the internet for their personal finances.    Consumers are increasingly turning to online and mobile solutions to fulfill their personal finance needs. We believe this growth is an indication of borrower preferences for online and mobile financial products that are more convenient and easier to access than products provided by legacy brick-and-mortar lenders.

OUR SOLUTIONS

Our innovative online credit solutions provide immediate relief to customers today and can help them build a brighter financial future. We call this mission “Good Today, Better Tomorrow” and it drives our product design.

We provide more convenient, competitively priced financial solutions to our customers, who are not well-served by either banks or legacy non-prime lenders, by using our advanced technology platform and proprietary risk analytics. We also offer a number of financial wellness and consumer-friendly features that we believe are unmatched in the non-prime lending market.

We have made substantial investments in our IQ and DORA technology and analytics platforms to support rapid scaling and innovation, robust regulatory compliance, and ongoing improvements in underwriting. We have also established a research organization focused on non-prime consumers called the “Center for the New Middle Class” to raise the awareness of their unique needs and to guide our product development. As a result, we believe we are leading a new breed of more responsible online credit providers for the New Middle Class.

Our products provide the following key benefits:

 

Ø   Competitive pricing with no hidden or punitive fees.     Our US products offer rates that we believe are typically more than 50% lower than many generally available alternatives from legacy non-prime lenders. We estimate that our products have saved our customers more than $1 billion since 2013 over what they would have paid for payday loans. Our products offer rates on subsequent loans (installment loan products) that can decrease over time based on successful loan payment history. For instance, as of December 31, 2016, approximately two-thirds of Rise customers in good standing had received a rate reduction, typically after a refinance or on a subsequent loan. In addition, in order to help our customers facing financial hardships, we have eliminated “punitive” fees, including returned payment fees and late charges, among others.

 

Ø   Access and convenience.     We provide convenient, easy-to-use products via online and mobile platforms. Consumers are able to apply using a mobile-optimized online application, which takes only minutes to complete from a mobile or desktop device. Credit determinations are made in seconds and approximately 95% of loan applications are fully automated with no manual review required. Funds are typically available next-day in the US and within minutes in the UK.

 

Ø   Flexible payment terms and responsible lending features.     Our customers can select a payment schedule that fits their needs, with no prepayment penalties. We do not offer any “single-payment” or “balloon payment” credit products that can lead to a cycle of debt and are criticized by many consumer groups as well as the CFPB. To ensure that consumers fully understand the product and their alternatives, we provide extensive “Know Before You Borrow” disclosures as well as an industry-leading five-day “Risk-Free Guarantee” during which customers can rescind their loan at no cost. Consistent with our goal of being sensitive to the unique needs of non-prime consumers, we also offer flexible solutions to help customers facing issues impacting their ability to make scheduled payments. Our solutions include notifications before payment processing, extended due dates, grace periods, payment plans and settlement offers.

 

 

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Ø   Financial wellness features.     Our products include credit building and financial wellness programs, such as credit reporting, free credit monitoring (in the US) and online financial literacy videos and tools. Our goal is to help our customers improve their financial options and behaviors at no additional charge. We are very proud of the fact that, with help from our reporting their successful payment history to a major credit bureau, tens of thousands of our customers have seen an appreciable increase in their credit scores.

OUR COMPETITIVE ADVANTAGES

Using our IQ technology platform and DORA risk analytics infrastructure, we are able to offer our customers innovative credit solutions that place us as a leader among a new breed of more responsible, online non-prime lenders. We believe the following are our key competitive advantages:

 

Ø   Differentiated online and mobile products for non-prime consumers.     Our product development is driven by a deep commitment to solving customers’ immediate financial need for credit and helping them improve their long-term financial future. We call this mission “Good Today, Better Tomorrow.” Our products are “good today” due to their convenience, cost, transparency and flexibility. However, we go even further in creating credit products that can help enable customers to have a “better tomorrow.” Based on successful payment history, rates on subsequent loans (installment loan products) can decrease over time, and we provide a path to prime credit for struggling consumers by reporting to credit bureaus, providing free credit monitoring (for US products), and offering online financial literacy videos and tools to help build better financial management skills.

 

Ø   Industry-leading DORA risk analytics infrastructure and underwriting scores.     Traditional approaches for underwriting credit such as FICO scores are not adequate for non-prime consumers who may have significant derogatory credit history or no credit history at all. Because continued leadership in non-prime underwriting is essential to drive growth, support continued rate reductions to customers, and manage losses, we built our DORA risk analytics infrastructure to support the development and enhancement of our underwriting scores and strategies. The DORA risk analytics infrastructure utilizes a massive (greater than 40 terabyte) Hadoop database composed of more than ten thousand potential data variables related to each of the 1.6 million customers we have served and the over 5 million applications that we have processed. Our team of over 35 data scientists uses DORA to build and test scores and strategies across the entire underwriting process, including segmented credit scores, fraud scores, affordability scores and former customer scores. They use a variety of analytical techniques from traditional multivariate regression to machine learning and artificial intelligence to continue to enhance our underwriting accuracy while complying with applicable US and UK lending laws and regulations. See “Business—Advanced Analytics and Risk Management—Segmentation strategies across the entire underwriting process.” Across the portfolio of products we currently offer, we have maintained stable credit quality as evidenced by charge-off rates that are generally between 25% and 30% of the original principal loan balances. While we experience month-to-month variability in our loan losses for any variety of reasons, including due to seasonality, on an annual basis, our annual principal charge-off rates have remained consistent since the launch of our current generation of products in 2013. See “Management’s discussion and analysis of financial condition and results of operations—Key Financial and Operating Metrics—Credit quality.”

 

Ø  

Innovative and flexible IQ technology platform.    Investment in our flexible and scalable IQ technology platform has enabled us to rapidly grow and innovate new products—notably supporting the launch of our current generation of products in 2013. Our IQ technology platform provides for nimble testing and optimization of our user interface and underwriting strategies, highly automated loan originations, cost-effective servicing and robust compliance oversight. In addition, our platform is adaptable to allow us to enhance current products or launch future online products to meet evolving

 

 

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consumer preferences and respond to a dynamic regulatory environment. Further, our open architecture allows us to easily integrate with best-in-class third party providers, including strategic partners, data sources and outsourced vendors.

 

Ø   Integrated multi-channel marketing approach.    We use an integrated multi-channel marketing strategy to reach potential customers, which includes coordinated direct mail programs, TV campaigns, search engine marketing and digital campaigns, and strategic partnerships. We have created unique capabilities to effectively identify and attract qualified customers, which supports our long-term growth objectives at target customer acquisition costs. We have maintained steady customer acquisition costs over the past three years within the range of $230 to $300. Approximately 88% of our customers for the year ended December 31, 2016 were sourced from direct marketing channels. We believe this approach allows us to focus on higher quality, lower cost customer acquisition while maximizing reach and enhancing awareness of our products as trusted brands. We continue to invest in new marketing channels, including social media, which we believe will provide us with further competitive advantages and support our ongoing growth.

 

Ø   Seasoned management team with strong industry track record.    We have a seasoned team of senior executives with an average of more than 15 years of experience in online technology and financial services, led by Ken Rees, a financial services industry veteran with more than 20 years of experience, who is regarded as one of the leading advocates of responsible credit in the non-prime lending space. The team oversaw the origination of $4.0 billion in credit to more than 1.6 million consumers for the combined current and predecessor products that were contributed to Elevate in the Spin-Off. Additionally, the team has a proven track record of managing defaults through the last decade’s financial crisis. From 2006 to 2011, the principal charge-offs of Elevate’s legacy and predecessor credit products remained comparatively flat compared to credit card charge-off rates, which nearly tripled during the same period. Elevate was certified as a “Great Place To Work” in 2016 and named as one of the country’s “Best Medium Workplaces” and most recently as one of the “Best Workplaces in Texas” by consulting firm Great Place to Work and Fortune. We believe this reflects our commitment to build a strong and lasting company and corporate culture.

OUR GROWTH STRATEGY

To achieve our goal of being the preeminent online lender to the New Middle Class, we intend to execute the following strategies:

 

Ø   Continue to grow our current products into dominant brands.     Our current generation of products, Rise, Elastic and Sunny, were launched in 2013. Given strong consumer demand and organic growth potential, we believe that significant opportunities exist to expand these three products within their current markets via existing marketing channels. As non-prime consumers become increasingly familiar and comfortable with online and mobile financial services, we also plan to capture the new business generated as they migrate away from less convenient legacy brick-and-mortar lenders.

 

Ø   Widen the credit spectrum of borrowers served.    We continue to evaluate new product and market opportunities that fit into our overall strategic objective of delivering next-generation online and mobile credit products that span the non-prime credit spectrum. For example, we are evaluating products with lower rates that would be more focused on the needs of near-prime consumers. In addition, we are continually focused on improving our analytics to effectively underwrite and serve consumers within those segments of the non-prime credit spectrum that we do not currently reach.

 

Ø  

Pursue additional strategic partnerships.    Our progressive non-prime credit solutions have attracted top-tier affiliate partners as a way to serve customers they have acquired. We intend to continue growing our existing affiliate partnerships and will evaluate opportunities to enter into new

 

 

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partnerships with affiliates and retailers and potentially enable non-prime customers to purchase their goods and services on credit. We expect these partnerships to provide us with access to a broad range of potential new customers, with low customer acquisition costs. In addition, we will pursue further strategic partnerships with banks.

 

Ø   Expand our relationship with existing customers.    Customer acquisition costs represent one of the most significant expenses for online lenders. We will seek to expand our strong relationships with existing customers by providing qualified customers with new loans on improved terms or offering other products and services. We believe we can better serve our customers with improved products and services while, at the same time, achieving better operating leverage.

 

Ø   Enter new markets.    We will explore pursuing strategic opportunities to expand into additional international and domestic markets. However, we plan to take a disciplined approach to international expansion, utilizing customized products and in-market expertise. As reflected in our approach to entering the UK market, we believe that local teams with products developed for each unique local market will ultimately be the most successful. We currently do not expect to undertake any international expansion in the near term.

RISKS AFFECTING US

Our business is subject to numerous risks and uncertainties, including those highlighted in “Risk factors.” These risks include, but are not limited to, the following:

 

Ø   We have a limited operating history in an evolving industry, which makes it difficult to accurately assess our future growth prospects.

 

Ø   Our historical information does not necessarily represent the results we would have achieved as a stand-alone company and may not be a reliable indicator of our future results.

 

Ø   Our recent growth rate may not be indicative of our ability to continue to grow, if at all, in the future.

 

Ø   We have a history of losses and may not achieve consistent profitability in the future.

 

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

 

Ø   Regulators and payment processors are scrutinizing certain online lenders’ access to the Automated Clearing House system to disburse and collect loan proceeds and repayments, and any interruption or limitation on our ability to access this critical system would materially adversely affect our business.

 

Ø   If the information provided by customers or other third parties to us is incorrect or fraudulent, we may misjudge a customer’s qualification to receive a loan, and any inability to effectively identify, manage, monitor and mitigate fraud risk on a large scale could cause us to incur substantial losses, and our operating results, brand and reputation could be harmed.

 

Ø   Because of the non-prime nature of our customers, we have historically experienced a high rate of net charge-offs as a percentage of revenues, and our ability to price appropriately in response to this and other factors is essential. We rely on our proprietary credit and fraud scoring models in the forecasting of loss rates. If we are unable to effectively forecast loss rates, it may negatively impact our operating results.

 

Ø   We currently depend on debt financing to finance most of the loans we originate. Our business could be adversely affected by a lack of sufficient debt financing at acceptable prices or disruptions in the credit markets, which could reduce our access to credit.

 

 

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Ø   Risks related to our association with Think Finance, Inc., or “TFI.”

 

Ø   Other risks related to litigation, compliance, regulation and this offering.

CORPORATE INFORMATION

We were incorporated in Delaware in January 2014. Prior to May 1, 2014, we operated as a separate identifiable line of business of TFI. On May 1, 2014, we were spun off from TFI.

Our principal executive offices are located at 4150 International Plaza, Suite 300, Fort Worth, Texas 76109, and our telephone number is (817) 928-1500. Our website is www.elevate.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.

Elevate, Elastic, Rise, Sunny and other trademarks or service marks of Elevate appearing in this prospectus are the property of Elevate. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks and service marks used in this prospectus.

We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 and are therefore subject to reduced public company reporting requirements. We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; the date we qualify as a “large accelerated filer” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

 

 

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The offering

 

Common stock offered by us

12,400,000 shares

Common stock to be outstanding after this offering

39,499,745 shares

 

Option to purchase additional shares to be offered by us

1,860,000, shares

 

Use of proceeds

We will use approximately $14.9 million of the net proceeds to repay a portion of the outstanding amount under our convertible term notes, approximately $53.0 million of the net proceeds to repay a portion of the outstanding amount under our financing agreement and the remainder, if any, for general corporate purposes, including to fund a portion of the loans made to our customers. See “Use of proceeds.”

 

Directed share program

At our request, the underwriters have reserved up to 5% of the common stock being offered by this prospectus for sale at the initial public offering price to our directors, director nominees, officers, employees and other individuals associated with us and members of their families. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock. Participants in the directed share program who purchase more than $1 million of shares shall be subject to a 25-day lock-up with respect to any shares sold to them pursuant to that program. Any shares sold in the directed share program to our directors, director nominees or executive officers shall be subject to 180-day lock-ups. Any of these lock-up agreements will have similar restrictions to the lock-up agreements described herein. See “Underwriting—Directed Share Program.”

 

Exchange listing

Our common stock has been approved for listing on the New York Stock Exchange, or “NYSE,” under the symbol “ELVT”.

 

 

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The number of shares of our common stock to be outstanding after this offering is based on 27,099,745 shares of our common and convertible preferred stock outstanding as of December 31, 2016, as adjusted for the 2.5-for-1 forward stock split, which will occur in connection with the completion of this offering, and excludes 6,995,472 shares of common stock reserved and common stock available for issuance under our 2016 Omnibus Incentive Plan, or “2016 Plan,” and our 2014 Equity Incentive Plan, or “2014 Plan,” which comprises:

 

Ø   3,501,415 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2016, with a weighted average exercise price of $4.19 per share and per share exercise prices ranging from $2.12 to $8.32;

 

Ø   425,262 shares of common stock issuable upon the vesting of restricted stock units outstanding as of December 31, 2016, with a weighted average grant date fair value of $8.12 per share; and

 

Ø   3,068,795 shares of common stock issuable upon the exercise of options available for grant.

Unless otherwise noted, the information in this prospectus reflects and assumes the following:

 

Ø   the conversion of all outstanding shares of our convertible preferred stock on a one-to-one basis without additional consideration into an aggregate of 5,639,410 shares of common stock immediately prior to the 2.5-for-1 forward stock split of our common stock and immediately prior to the completion of this offering;

 

Ø   a 2.5-for-1 forward stock split of our common stock to be effected immediately prior to the completion of this offering;

 

Ø   the filing of our amended and restated certificate of incorporation in connection with the completion of this offering;

 

Ø   no exercise of the outstanding options and no vesting of the restricted stock units described above;

 

Ø   no exercise of the underwriters’ option to purchase additional shares; and

 

Ø   no conversion of the convertible term notes into shares of our common stock, which would be convertible into 1,939,467 shares of our common stock based on an assumed initial public offering price of $6.50 per share, and the reduction of indebtedness under the convertible term notes by approximately $14.9 million from the net proceeds of this offering. See “Use of proceeds” and “Description of capital stock—Convertible Term Notes.”

 

 

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Summary historical and pro forma financial data

The following tables summarize our consolidated financial data. You should read the summary consolidated financial data set forth below in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and “Management’s discussion and analysis of financial condition and results of operations” contained elsewhere in this prospectus.

The consolidated statements of operations data for the years ended December 31, 2016 and 2015 are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in any future period. The summary consolidated financial and other data in this section are not intended to replace the financial statements from which they are derived and are qualified in their entirety by the financial statements and related notes included in this prospectus.

 

 

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     For the years ended
December 31,
 

Consolidated statements of operations data

(dollars in thousands, except share and per share amounts)

   2016     2015  

Revenues

   $ 580,441     $ 434,006  

Cost of sales:

    

Provision for loan losses

     317,821       232,650  

Direct marketing costs

     65,190       61,032  

Other cost of sales

     17,433       15,197  
  

 

 

   

 

 

 

Total cost of sales

     400,444       308,879  
  

 

 

   

 

 

 

Gross profit

     179,997       125,127  
  

 

 

   

 

 

 

Operating expenses:

    

Compensation and benefits

     65,657       60,568  

Professional services

     30,659       25,134  

Selling and marketing

     9,684       7,567  

Occupancy and equipment

     11,475       9,690  

Depreciation and amortization

     10,906       8,898  

Other

     3,812       4,303  
  

 

 

   

 

 

 

Total operating expenses

     132,193       116,160  
  

 

 

   

 

 

 

Operating income

     47,804       8,967  
  

 

 

   

 

 

 

Other income (expense):

    

Net interest expense

     (64,277     (36,674

Foreign currency transaction loss

     (8,809     (2,385

Non-operating income (expense)

     (43     5,523  
  

 

 

   

 

 

 

Total other expense

     (73,129     (33,536
  

 

 

   

 

 

 

Loss before taxes

     (25,325     (24,569

Income tax benefit

     (2,952     (4,658
  

 

 

   

 

 

 

Net loss

   $ (22,373   $ (19,911
  

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (4.34   $ (3.97

Pro forma net loss per share of common stock—basic and diluted(1)

   $ (0.83   $ (0.75

As adjusted(2)

   $ (0.57  

Basic and diluted weighted average shares outstanding

     5,157,705       5,010,339  

Weighted average shares used in computing pro forma net loss per share:

    

Basic and diluted(1)

     26,992,788       26,624,373  

Basic and diluted, as adjusted(2)

     39,392,788    

 

(1)   Pro forma basic and diluted net income (loss) per share of common stock have been calculated assuming (i) the conversion of all outstanding shares of convertible preferred stock at December 31, 2016 and 2015 into an aggregate of 5,639,410 shares (prior to the 2.5-for-1 forward stock split) of common stock as of the beginning of the applicable period or at the time of issuance, if later and (ii) the application of the 2.5-for-1 forward stock split to all common stock after such conversion.
(2)   Pro forma net income (loss) per share of common stock, as adjusted, gives effect to (i) the sale by us of 12,400,000 shares of our common stock in this offering; (ii) the automatic conversion of all outstanding shares of convertible preferred stock into an aggregate of 5,639,410 shares (prior to the 2.5-for-1 forward stock split) of our common stock; (iii) the application of the 2.5-for-1 forward stock split to all common stock after such conversion and (iv) the use of proceeds from this offering to repay a portion of the amounts outstanding under the Victory Park Capital credit facility, or the “VPC Facility,” and the convertible term notes as described in “Use of proceeds,” as if the offering and those transactions had occurred on December 31, 2016. The number of shares is computed based on an assumed initial public offering price of $6.50 per share.

 

 

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     As of and for the years ended
December 31,
 

Other financial and operational data

(dollars in thousands, except as noted)

           2016                     2015          

Adjusted EBITDA(1)

   $ 60,417     $ 18,712  

Free cash flow(2)

   $ 19,246     $ (30,931

Number of new customer loans

     277,601       238,238  

Number of loans outstanding

     289,193       222,723  

Customer acquisition costs

   $ 235     $ 256  

Net charge-offs(3)

   $ 299,700     $ 214,795  

Additional provision for loan losses(3)

     18,121       17,855  
  

 

 

   

 

 

 

Provision for loan losses

   $ 317,821     $ 232,650  
  

 

 

   

 

 

 

Past due combined loans receivable – principal as a percentage of combined loans receivable – principal(4)

     14     12

Net charge-offs as a percentage of revenues

     52     49

Total provision for loan losses as a percentage of revenues

     55     54

Combined loan loss reserve(5)

   $ 82,376     $ 65,784  

Combined loan loss reserve as a percentage of combined loans

     16     17

Effective APR of combined loan portfolio

     146     173

Ending combined loans receivable – principal(4)

   $ 481,210     $ 356,069  

 

(1)   Adjusted EBITDA is not a financial measure prepared in accordance with generally accepted accounting principles in the United States, or “GAAP.” Adjusted EBITDA represents our net income (loss), adjusted to exclude: net interest expense primarily associated with notes payable under the VPC Facility and ESPV Facility used to fund or purchase loans; foreign currency gains and losses associated with our UK operations; depreciation and amortization expense on fixed assets and intangible assets; stock-based compensation; adjustments to contingent consideration payable related to companies previously acquired prior to the Spin-Off; and income taxes. See “Management’s discussion and analysis of financial condition and results of operations—Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.
(2)   Free cash flow is not a financial measure prepared in accordance with GAAP. Free cash flow represents our net cash from operating activities adjusted for the net charge-offs—combined principal loans and capital expenditures incurred during the period. See “Management’s discussion and analysis of financial condition and results of operations—Non-GAAP Financial Measures” for more information and a reconciliation of free cash flow to net cash provided by operating activities.
(3)   Net charge-offs and additional provision for loan losses are not a financial measure prepared in accordance with 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 “Management’s discussion and analysis of financial condition and results of operations—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 GAAP.
(4)   Combined loans receivable is defined as loans owned by the Company plus loans originated and owned by third-party lenders pursuant to our CSO programs. See “Management’s discussion and analysis of financial condition and results of operations—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 GAAP.
(5)   Combined loan loss reserve is defined as the loan loss reserve for loans owned by the Company plus the loan loss reserve for loans originated and owned by third-party lenders and guaranteed by the Company. See “Management’s discussion and analysis of financial condition and results of operations—Non-GAAP Financial Measures” for more information and for a reconciliation of Combined loan loss reserve to loan loss reserve, the most directly comparable financial measure calculated in accordance with GAAP.

 

 

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     As of December 31, 2016  
Selected consolidated balance sheet data (dollars in thousands)    Actual      Pro forma(1)     

Pro forma as

adjusted(2)

 

Cash and cash equivalents

   $ 53,574      $ 68,574      $ 69,935  

Loans receivable, net of allowance for loan losses of $77,451

     392,663        392,663        392,663  

Total assets

     570,181        585,181        586,542  

Total liabilities

     556,614        571,614        503,614  

Total convertible preferred stock

     6                

Total stockholders’ equity

   $ 13,567      $ 13,567      $ 82,928  

 

(1)   The pro forma column reflects (i) the conversion of all outstanding shares of convertible preferred stock at December 31, 2016 into 5,639,410 shares (prior to the 2.5-for-1 forward stock split) of common stock immediately prior to the closing of this offering, (ii) the application of the 2.5-for-1 forward stock split to all common stock after such conversion and (iii) the convertible term notes being fully drawn at the time of this offering. The outstanding shares of our preferred stock were originally distributed to stockholders of TFI in connection with the Spin-Off. Each share of preferred stock will convert into one share of common stock without the payment of additional consideration. The conversion of the convertible preferred stock reduces total convertible preferred stock by $6 thousand while increasing common stock by the same amount.
(2)   The pro forma as adjusted column reflects (i) the pro forma adjustments described in footnote (1) above, (ii) the sale by us of 12,400,000 shares of common stock in this offering at an assumed initial public offering price of $6.50 per share, after deducting the underwriting discount and commissions and estimated offering expenses payable by us and (iii) the use of proceeds from this offering to repay a portion of the amounts outstanding under our VPC Facility and the convertible term notes, as described in “Use of proceeds.” A $1.00 increase (decrease) in the assumed initial public offering price of $6.50 per share would increase (decrease) each of pro forma as adjusted cash and cash equivalents and total assets by $12.4 million and decrease (increase) pro forma as adjusted total stockholders’ equity by approximately $12.4 million, assuming the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting the underwriting discount and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of one million shares in the number of shares offered by us in this offering would increase (decrease) each of pro forma as adjusted cash and cash equivalents and total assets by $6.5 million and decrease (increase) pro forma as adjusted total stockholders’ equity by approximately $6.5 million, assuming an initial public offering price of $6.50 per share, remains the same, after deducting the underwriting discount and commissions and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price, number of shares offered and other terms of this offering determined at pricing.

 

 

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Letter from Ken Rees, CEO of Elevate

When we began our IPO process over a year ago, we told you we would grow revenue and profits throughout 2016, while continuing to provide the most responsible credit products in our space. In fact, we improved the company in almost every way.

In 2016, we grew revenue by 34%, loans outstanding by 30%, and operating income by more than 400% over the prior year. While we have not yet reached profitability, our principal charge-off rates have remained stable while our customer acquisition costs have continued to come down. Just as important, we ramped up our commitment to serve our customers and help them improve their financial wellness. We have lowered our average customer effective APRs over 40% since 2013 and we estimate that our customers have now saved more than $1 billion since 2013 over what they would have paid for payday loans. Furthermore, tens of thousands of our customers have appreciably improved their credit ratings with help from our reporting their successful payment history to a major credit bureau.

How did Elevate thrive while so many other online and marketplace lenders struggled for funding, growth and profitability? We believe it is because of our steady focus on serving the vast and underserved segment of approximately 170 million non-prime consumers in the US and UK who are seeking better financial options. We call them the “New Middle Class.” Our customer is typically deeply frustrated with traditional banks, which have ignored their need for access to credit, fair pricing, and a path to lower rates and better credit. Even though non-prime consumers now outnumber prime consumers in the US, most fintech investments and innovation have largely focused on providing credit to prime consumers who are already swimming in it.

The New Middle Class deserves better and shouldn’t be ignored. We believe we can help them—and do it responsibly—while building a strong, successful company.

Our customers include people like Sandy in Southwest Ohio. Sandy works in a pharmacy and her husband recently retired from the local police department after 20 years of service. They watched their budget, but bills from unexpected expenses had accumulated and they had gone years without credit. As Sandy says: “When you do that, no one will lend you any money. And [Elevate] lent me money.” Furthermore, with cars that were 11 and 20 years old, they also needed credit to purchase a car. Because Elevate reported their successful payment history to a major credit bureau, they saw their credit score increase over time. That improved credit score helped give them access to better financing options. “We … checked our credit … because we knew we needed a car. We walked in [to the dealer], and [because we could qualify for a loan] we walked out with a car, which would have never happened three years ago.”

With limited savings and significant income volatility, the New Middle Class needs access to convenient, responsible credit today. Yet the real-world products that are available to them, such as payday loans, title loans, pawn, and storefront installment loans have significant drawbacks, often trapping them in a cycle of debt and preventing them from improving their financial wellness over time. We set out to give them new and better options, and we are doing just that.

Our mission remains as vital as it was when we started the company. Our commitment has not wavered and we continue to invest in industry-leading data and analytics and focus on delivering a “prime” experience to non-prime consumers. And with a target market of 170 million underserved people in the US and UK, we’re just getting started.

 

 

 

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Letter from Ken Rees, CEO of Elevate

 

 

Our core beliefs have not changed, either, and they continue to drive our business:

We believe the highest cost credit is no credit at all.    We can’t ignore the real-world challenges and needs facing the New Middle Class. If a person can’t get to work because they can’t get credit to repair their car, they can face severe financial consequences. Our goal is to responsibly serve as many non-prime consumers as possible while maintaining sustainable margins and without compromising our commitment to lowering rates for our customers.

We believe non-prime credit needs to be priced to risk.    Serving non-prime customers means accepting a higher likelihood of default. However, instituting overly restrictive credit criteria or adding punitive fees and aggressive collections practices that create even more hardships for consumers is not the answer. At Elevate, we are committed to simple and transparent pricing. This means that our customers won’t face hidden or punitive fees but as a result of their risk, most of the credit we offer will be priced above rates generally available to prime consumers. Our goal is to balance the need to provide access to responsible credit with the need for sustainable profits.

We believe that further improvements in technology, analytics and scale should benefit our customers.    We are continually investing in advanced analytics that allow us to improve our underwriting capabilities. In addition, because we are a 100% online and mobile business, as we continue to grow we expect to generate economies of scale. We are committed to using these improvements to benefit our borrowers in the form of lower rates. In fact, we have already lowered the average effective APR to our customers by approximately 40% since 2013. As a result, we do not expect operating margins to grow above 20% over the long term. This is part of our commitment as a responsible lender, but also an important discipline that supports long-term growth and competitive differentiation.

We believe in “Good Today, Better Tomorrow.”    The New Middle Class deserves responsible online and mobile credit products that meet their needs today and also provide them with a path to improve their financial future. Our products are competitively priced and convenient, have flexible payment options, and don’t have hidden or punitive fees. In addition, they have rates that can go down over time, are reported to credit bureaus, offer free credit score monitoring (in the US) and provide financial wellness tools–all to help our customers build their brighter tomorrow. We believe this approach is the right thing to do and will result in a more successful long-term relationship with our customers.

We believe the need for more responsible non-prime credit is here to stay.    Ongoing changes in the regulatory environment will not eliminate the need for non-prime credit, but rather will evolve the way it is provided. We support the CFPB’s proposed new regulations for non-prime credit and other efforts by the CFPB and many consumer groups to eliminate harmful practices and stop bad actors. With or without those regulations, we are committed to responsible lending practices - even when not required by law. We have also established a research organization called the “Center for the New Middle Class” to raise the awareness of our customers’ unique needs and to guide our product development. Innovation is in our DNA, and we believe that nimble, technology-enabled lenders like Elevate will be able to adapt, thrive and continue to grow in a dynamic regulatory environment and serve our customers’ expanding expectations for credit.

Delivering on these core beliefs is powered by our people and a corporate culture driven by Elevate’s four company values: Think Big, Raise the Bar, Win Together, and Do the Right Thing. These are not just words on paper, they inspire us to innovate, adapt and always focus on improving the financial options available to the New Middle Class. The passion that our employees have for our customers is one of the reasons we were certified as a “Great Place to Work” in 2016.

 

LOGO

 

 

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Letter from Ken Rees, CEO of Elevate

 

 

Thank you for reading this letter. We are a different kind of company with a unique mission. We have consistently gone our own way and resisted trends and hype - we believe that’s one of our biggest strengths. I hope you share our excitement about the incredible opportunity we have to provide the next generation of responsible, online non-prime credit solutions and build a successful, lasting company.

 

LOGO

Ken Rees

Chief Executive Officer

 

 

 

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Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained in this prospectus, including our consolidated financial statements and the related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones we face, but include the most significant factors currently known by us that make the offering speculative or risky. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

We have a limited operating history in an evolving industry, which makes it difficult to accurately assess our future growth prospects.

We were incorporated as a wholly owned subsidiary of Think Finance, Inc., or “TFI,” our predecessor company, in January 2014 and became a stand-alone company in May 2014 following the Spin-Off and, as such, have a three year history as a stand-alone company. Although our management team has many years of experience in the non-prime lending industry, we operate in an evolving industry that may not develop as expected. Assessing the future prospects of our business is challenging in light of both known and unknown risks and difficulties we may encounter. Growth prospects in non-prime lending can be affected by a wide variety of factors including:

 

Ø   Competition from other online and traditional lenders;

 

Ø   Regulatory limitations that impact the non-prime lending products we can offer and the markets we can serve;

 

Ø   An evolving regulatory landscape;

 

Ø   Access to important marketing channels such as:

 

  ¡    Direct mail;

 

  ¡    TV and mass media;

 

  ¡    Search engine marketing; and

 

  ¡    Strategic partnerships with affiliates;

 

Ø   Changes in consumer behavior;

 

Ø   Access to adequate financing;

 

Ø   Increasingly sophisticated fraudulent borrowing and online theft;

 

Ø   Challenges with new products and new markets;

 

Ø   Dependence on our proprietary technology infrastructure and security systems;

 

Ø   Dependence on our personnel and certain third parties with whom we do business;

 

Ø   Risk to our business if our systems are hacked or otherwise compromised;

 

Ø   Evolving industry standards;

 

 

 

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Ø   Recruiting and retention of qualified personnel necessary to operate our business; and

 

Ø   Fluctuations in the credit markets and demand for credit.

We may not be able to successfully address these factors, which could negatively impact our growth, harm our business and cause our operating results to be worse than expected.

Our historical information does not necessarily represent the results we would have achieved as a stand-alone company and may not be a reliable indicator of our future results.

We have a limited operating history as a stand-alone company. See “—We have a limited operating history in an evolving industry, which makes it difficult to accurately assess our future growth prospects” above. As a result of the Spin-Off, TFI contributed the assets and liabilities associated with its direct lending and branded products business to us. The historical financial information we have included in this prospectus may not reflect what our results of operations, financial position and cash flows would have been had we been a stand-alone company during the periods presented. This is primarily because:

 

Ø   our historical financial information reflects allocations for services historically provided to us by TFI, which allocations may not reflect the costs we will incur for similar services in the future as a stand-alone company; and

 

Ø   our historical financial information does not reflect reduced economies of scale, including changes in the cost structure, personnel needs, financing and operations of our business.

Following this offering, we also will be responsible for the additional costs associated with being a public company, including costs related to corporate governance and having listed and registered securities. Therefore, our historical financial information may not be indicative of our future performance as a stand-alone public company. For additional information about our past financial performance and the basis of presentation of our financial statements, please see “Summary historical and pro forma financial data,” “Selected historical consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations” and our financial statements and the notes thereto included elsewhere in this prospectus.

Our recent growth rate may not be indicative of our ability to continue to grow, if at all, in the future.

Our revenues grew to $580.4 million in the year ended December 31, 2016 from $434.0 million in the year ended December 31, 2015. It is possible that, in the future, even if our revenues continue to increase, our rate of revenue growth could decline, either because of external factors affecting the growth of our business or because we are not able to scale effectively as we grow. If we cannot manage our growth effectively, it could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We have a history of losses and may not achieve consistent profitability in the future.

We incurred net losses of $22.4 million and $19.9 million in the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, we had an accumulated deficit of $76.4 million. We will need to generate and sustain increased revenues in future periods in order to remain profitable, and, even if we do, we may not be able to maintain or increase our level of profitability.

As we grow, we expect to continue to expend substantial financial and other resources on:

 

Ø   personnel, including significant increases to the total compensation we pay our employees as we grow our employee headcount;

 

 

 

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Ø   marketing, including expenses relating to increased direct marketing efforts;

 

Ø   product development, including the continued development of our proprietary scoring methodology;

 

Ø   diversification of our funding sources;

 

Ø   office space, as we increase the space we need for our growing employee base; and

 

Ø   general administration, including legal, accounting and other compliance expenses related to being a public company.

These expenditures are expected to increase and may adversely affect our ability to achieve and sustain profitability as we grow. In addition, we record our provision for loan losses as an expense to account for the possibility that some loans may not be repaid in full. We expect the aggregate amount of loan loss provision to grow as we increase the number and total amount of loans we make to new customers.

Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenues enough to offset our higher operating expenses. We may incur losses in the future for a number of reasons, including the other risks described in this prospectus, unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the market price of our common stock may significantly decrease.

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

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

In recent years, consumer loans, and in particular the category commonly referred to as “payday loans,” have come under increased regulatory scrutiny that has resulted in increasingly restrictive regulations and legislation that makes offering consumer loans in certain states in the US or the UK less profitable or unattractive. If the CFPB issues final rules targeting payday and other small dollar consumer credit and installment lending in the US, it may significantly impact our US consumer lending business. See “—The CFPB has proposed new rules affecting the consumer lending industry, and these or subsequent new rules and regulations, if they are finalized, may impact our US consumer lending business.”

We also expect that further new laws and regulations will be promulgated in the UK that could impact our business operations. See “—The UK has imposed, and continues to impose, increased regulation of the high-cost short-term credit industry with the stated expectation that some firms will exit the market” below for additional information.

In order to serve our non-prime customers profitably we need to sufficiently price the risk of the transaction into the annual percentage rate, or “APR,” of our loans. If individual states or the US federal

 

 

 

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government or regulators in the UK impose rate caps lower than those at which we can operate our current business profitably or otherwise impose stricter limits on non-prime lending, we would need to exit such states or dramatically reduce our rate of growth by limiting our products to customers with higher creditworthiness.

Furthermore, legislative or regulatory actions may be influenced by negative perceptions of us and our industry, even if such negative perceptions are inaccurate, attributable to conduct by third parties not affiliated with us (such as other industry members) or attributable to matters not specific to our industry.

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

Regulators and payment processors are scrutinizing certain online lenders’ access to the Automated Clearing House system to disburse and collect loan proceeds and repayments, and any interruption or limitation on our ability to access this critical system would materially adversely affect our business.

When making loans in the US, we typically use the Automated Clearing House, or “ACH,” system to deposit loan proceeds into our customers’ bank accounts. This includes loans that we originate as well as Elastic loans (originated by Republic Bank & Trust Company, or “Republic Bank”) and Rise loans made through the credit services organization, or “CSO,” programs. These products also depend on the ACH system to collect amounts due by withdrawing funds from customers’ bank accounts when the customer has provided authorization to do so. ACH transactions are processed by banks, and if these banks cease to provide ACH processing services or are not allowed to do so, we would have to materially alter, or possibly discontinue, some or all of our business if alternative ACH processors or other payment mechanisms are not available.

It has been reported that actions, referred to as Operation Choke Point, by the US Department of Justice, or the “Justice Department,” the Federal Deposit Insurance Corporation, or the “FDIC,” and certain state regulators appear to be intended to discourage banks and ACH payment processors from providing access to the ACH system for certain lenders that they believe are operating illegally, cutting off their access to the ACH system to either debit or credit customer accounts (or both).

This heightened regulatory scrutiny by the Justice Department, the FDIC and other regulators has caused some banks and ACH payment processors to cease doing business with consumer lenders who are operating legally, without regard to whether those lenders are complying with applicable laws, simply to avoid the risk of heightened scrutiny or even litigation. These actions have reduced the number of banks and payment processors who provide ACH payment processing services and could conceivably make it increasingly difficult to find banking partners and payment processors in the future and/or lead to significantly increased costs for these services. If we are unable to maintain access to needed services on favorable terms, we would have to materially alter, or possibly discontinue, some or all of our business if alternative processors are not available.

If we lost access to the ACH system because our payment processor was unable or unwilling to access the ACH system on our behalf we would experience a significant reduction in customer loan payments. Although we would notify consumers that they would need to make their loan payments via physical check, debit card or other method of payment, a large number of customers would likely go into default because they are expecting automated payment processing. Similarly, if regulatory changes limited our

 

 

 

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access to the ACH system or reduced the number of times ACH transactions could be re-presented, we would experience higher losses.

If the information provided by customers or other third parties to us is incorrect or fraudulent, we may misjudge a customer’s qualification to receive a loan, and any inability to effectively identify, manage, monitor and mitigate fraud risk on a large scale could cause us to incur substantial losses, and our operating results, brand and reputation could be harmed.

For the loans we originate through Rise and Sunny, our growth is largely predicated on effective loan underwriting resulting in acceptable customer profitability. This is equally important for the Rise loans in Texas and Ohio and the Elastic lines of credit originated by unaffiliated third parties. See “Management’s discussion and analysis of financial condition and results of operations—Components of Our Results of Operations—Revenues.” Lending decisions by such originating lenders are made using our proprietary credit and fraud scoring models, which we license to them. Lending decisions are based partly on information provided by loan applicants and partly on information provided by consumer reporting agencies, such as TransUnion, Experian or Equifax and other third-party data providers. Data provided by third-party sources is a significant component of the decision methodology, and this data may contain inaccuracies. To the extent that applicants provide inaccurate or unverifiable information, or data from third-party providers is inaccurate, the credit score delivered by our proprietary scoring methodology may not accurately reflect the associated risk. Additionally, a credit score assigned to a borrower may not reflect that borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data, and we do not verify the information obtained from the borrower’s credit report. Additionally, there is a risk that, following the date of the credit report that we obtain and review, a borrower may have:

 

Ø   become past due in the payment of an outstanding obligation;

 

Ø   defaulted on a pre-existing debt obligation;

 

Ø   taken on additional debt; or

 

Ø   sustained other adverse financial events.

Our resources, technologies and fraud prevention tools, which are used to originate loans or lines of credit, as applicable, under Rise, Sunny and Elastic, may be insufficient to accurately detect and prevent fraud. Inaccurate analysis of credit data that could result from false loan application information could harm our reputation, business and operating results.

In addition, our proprietary credit and fraud scoring models use identity and fraud checks analyzing data provided by external databases to authenticate each customer’s identity. The level of our fraud charge-offs and results of operations could be materially adversely affected if fraudulent activity were to significantly increase. Online lenders are particularly subject to fraud because of the lack of face-to-face interactions and document review. If applicants assume false identities to defraud the Company or consumers simply have no intent to repay the money they have borrowed the related portfolio of loans will exhibit higher loan losses. We have in the past and may in the future incur substantial losses and our business operations could be disrupted if we or the originating lenders are unable to effectively identify, manage, monitor and mitigate fraud risk using our proprietary credit and fraud scoring models.

Since fraud is often perpetrated by increasingly sophisticated individuals and “rings” of criminals, it is important for us to continue to update and improve the fraud detection and prevention capabilities of our proprietary credit and fraud scoring models. If these efforts are unsuccessful, then credit quality and

 

 

 

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customer profitability will erode. If credit and/or fraud losses increased significantly due to inadequacies in underwriting or new fraud trends, new customer originations may need to be reduced until credit and fraud losses returned to target levels, and business could contract.

It may be difficult or impossible to recoup funds underlying loans made in connection with inaccurate statements, omissions of fact or fraud. Loan losses are currently the largest cost as a percentage of revenues across each of Rise, Sunny and Elastic. If credit or fraud losses were to rise, this would significantly reduce our profitability. High profile fraudulent activity could also lead to regulatory intervention, negatively impact our operating results, brand and reputation and require us, and the originating lenders, to take steps to reduce fraud risk, which could increase our costs.

Any of the above risks could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Because of the non-prime nature of our customers, we have historically experienced a high rate of net charge-offs as a percentage of revenues, and our ability to price appropriately in response to this and other factors is essential. We rely on our proprietary credit and fraud scoring models in the forecasting of loss rates. If we are unable to effectively forecast loss rates, it may negatively impact our operating results.

Our net charge-offs as a percentage of revenues for the years ended December 31, 2016 and 2015 were 52% and 49%, respectively. Because of the non-prime nature of our customers, it is essential that our products are appropriately priced, taking this and all other relevant factors into account. In making a decision whether to extend credit to prospective customers, and the terms on which we or the originating lenders are willing to provide credit, including the price, we and the originating lenders rely heavily on our proprietary credit and fraud scoring models, which comprise an empirically derived suite of statistical models built using third-party data, data from customers and our credit experience gained through monitoring the performance of customers over time. Our proprietary credit and fraud scoring models are based on previous historical experience. Typically, however, our models will become less effective over time and need to be rebuilt regularly to perform optimally. This is particularly true in the context of our preapproved direct mail campaigns. If we are unable to rebuild our proprietary credit and fraud scoring models, or if they do not perform up to target standards the products will experience increasing defaults or higher customer acquisition costs.

If our proprietary credit and fraud scoring models fail to adequately predict the creditworthiness of customers, or if they fail to assess prospective customers’ financial ability to repay their loans, or any or all of the other components of the credit decision process described herein fails, higher than forecasted losses may result. Furthermore, if we are unable to access the third-party data used in our proprietary credit and fraud scoring models, or access to such data is limited, the ability to accurately evaluate potential customers using our proprietary credit and fraud scoring models will be compromised. As a result, we may be unable to effectively predict probable credit losses inherent in the resulting loan portfolio, and we, and the originating lender, may consequently experience higher defaults or customer acquisition costs, which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Additionally, if we make errors in the development and validation of any of the models or tools used to underwrite loans, such loans may result in higher delinquencies and losses. Moreover, if future performance of customer loans differs from past experience, which experience has informed the development of our proprietary credit and fraud scoring models, delinquency rates and losses could increase.

 

 

 

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If our proprietary credit and fraud scoring models were unable to effectively price credit to the risk of the customer, lower margins would result. Either our losses would be higher than anticipated due to “underpricing” products or customers may refuse to accept the loan if products are perceived as “overpriced.” Additionally, an inability to effectively forecast loss rates could also inhibit our ability to borrow from our debt facilities, which could further hinder our growth and have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We currently depend on debt financing to finance most of the loans we originate. Our business could be adversely affected by a lack of sufficient debt financing at acceptable prices or disruptions in the credit markets, which could reduce our access to credit.

We primarily rely on debt financing to support the growth of our originated portfolios, Rise and Sunny. However, we cannot guarantee that financing will continue to be available beyond the current maturity date of our debt facilities, on reasonable terms or at all. Presently our debt financing for Rise and Sunny comes from a single source, Victory Park Management, LLC, or “VPC,” an affiliate of Victory Park Capital. If VPC became unwilling or unable to provide debt financing to us at prices acceptable to us we would need to secure additional debt financing or reduce loan originations significantly. As the volume of loans that we make to customers increases, we may require the expansion of our borrowing capacity on our existing debt facilities or the addition of new sources of capital. For example, on December 16, 2015, we and VPC entered into an amendment to our debt facility to increase the maximum loan to value ratio for purposes of certain covenants and calculating the borrowing base for the December 31, 2015 testing date due to an increased volume of loans. The availability of these financing sources depends on many factors, some of which are outside of our control.

We may also experience the occurrence of events of default or breaches of financial or performance covenants under our debt agreements, which are currently secured by all our assets. Any such occurrence or breach could result in the reduction or termination of our access to institutional funding or increase our cost of funding. Certain of these covenants are tied to our customer default rates, which may be significantly affected by factors, such as economic downturns or general economic conditions beyond our control and beyond the control of individual customers. In particular, loss rates on customer loans may increase due to factors such as prevailing interest rates, the rate of unemployment, the level of consumer and business confidence, commercial real estate values, the value of the US dollar, energy prices, changes in consumer and business spending, the number of personal bankruptcies, disruptions in the credit markets and other factors. Increases in the cost of capital would reduce our net profit margins.

Similarly, the loan portfolio for Elastic, which is originated by a third-party lender, gets funding as a result of the purchase of a participation interest in the loans it originates from Elastic SPV, Ltd., or “Elastic SPV,” a Cayman Islands entity that purchases such participations. Elastic SPV has a loan facility with VPC for its funding, for which we provide credit support, and we have entered into a credit default protection agreement with Elastic SPV that provides protection for loan losses. A voluntary or involuntary halt to this program would result in the originating lender halting further loan originations until a new financing partner could be identified.

In the event of a sudden or unexpected shortage of funds in the banking system, we cannot be sure that we will be able to maintain necessary levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If our cost of borrowing goes up, our net interest expense could increase, and if we were to be unable to arrange new or alternative methods of financing on favorable terms, we may have to curtail our origination of loans or recommend that the originating lenders curtail their origination of credit, all of which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

 

 

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The interest rates we charge to our customers and pay to our lenders could each be affected by a variety of factors, including access to capital based on our business performance and the volume of loans we make to our customers. These interest rates may also be affected by a change over time in the mix of the types of products we sell to our customers and a shift among our channels of customer acquisition. Our VPC funding facilities are variable rate in nature and tied to the 3-month LIBOR rate. Thus, any increase in the 3-month LIBOR rate will result in an increase in our net interest expense. Interest rate changes may also adversely affect our business forecasts and expectations and are highly sensitive to many macroeconomic factors beyond our control, such as inflation, recession, the state of the credit markets, changes in market interest rates, global economic disruptions, unemployment, and the fiscal and monetary policies of the federal government and its agencies. Regulatory or legislative changes may reduce our ability to charge our current rates in all states and products. Also, competitive threats may cause us to reduce our rates. This would reduce profit margins unless there was a commensurate reduction in losses. Any material reduction in our interest rate spread could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows. In the event that the spread between the rate at which we lend to our customers and the rate at which we borrow from our lenders decreases, our financial results and operating performance will be harmed.

In the future, we may seek to access the debt capital markets to obtain capital to finance growth. However, our future access to the debt capital markets could be restricted due to a variety of factors, including a deterioration of our earnings, cash flows, balance sheet quality, or overall business or industry prospects, adverse regulatory changes, a disruption to or deterioration in the state of the capital markets or a negative bias toward our industry by market participants. Disruptions and volatility in the capital markets could also cause banks and other credit providers to restrict availability of new credit. Due to the negative bias toward our industry, commercial banks and other lenders have restricted access to available credit to participants in our industry, and we may have more limited access to commercial bank lending than other businesses. Our ability to obtain additional financing in the future will depend in part upon prevailing capital market conditions, and a potential disruption in the capital markets may adversely affect our efforts to arrange additional financing on terms that are satisfactory to us, if at all. If adequate funds are not available, or are not available on acceptable terms, we may not have sufficient liquidity to fund our operations, make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges and this, in turn, could adversely affect our ability to advance our strategic plans. Additionally, if the capital and credit markets experience volatility, and the availability of funds is limited, third parties with whom we do business may incur increased costs or business disruption and this could adversely affect our business relationships with such third parties, which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Any decrease in our access to preapproved marketing lists from credit bureaus or other developments impacting our use of direct mail marketing could adversely affect our ability to grow our business.

We market Rise and Sunny and provide marketing services to the originating lender in connection with Elastic. Direct mailings of preapproved loan offers to potential loan customers comprise one of the most important marketing channels for both the loans we originate, as well as those originated by third-party lenders. We estimate that approximately 58% and 100% of new Rise and Elastic loan customers, respectively, in the year ended December 31, 2016 obtained loans as a result of receiving such preapproved loan offers. Our marketing techniques identify candidates for preapproved loan mailings in part through the use of preapproved marketing lists purchased from credit bureaus. If access to such preapproved marketing lists were lost or limited due to regulatory changes prohibiting credit bureaus from sharing such information or for other reasons, our growth could be significantly adversely affected.

 

 

 

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If the cost of obtaining such lists increases significantly, it could substantially increase customer acquisition costs and decrease profitability.

Similarly, federal or state regulators or legislators could limit access to these preapproved marketing lists with the same effect.

In addition, preapproved direct mailings may become a less effective marketing tool due to over-penetration of direct mailing lists. Any of these developments could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We rely in part on relationships with marketing affiliates to originate our loans. These relationships are generally non-exclusive and subject to termination, and the growth of our customer base could be adversely affected if any of our marketing affiliate relationships are terminated or the number of referrals we receive from marketing affiliates is reduced.

We rely on strategic marketing affiliate relationships with certain companies for referrals of some of the customers to whom we issue loans, and our growth depends in part on the growth of these referrals. In 2016, loans issued to Rise customers referred to us by our strategic partners constituted 16% of total Rise loan originations. Additionally, in 2016, loans issued to Sunny customers through strategic partners constituted 19% of total Sunny loan originations. Many of our marketing affiliate relationships do not contain exclusivity provisions that would prevent such marketing affiliates from providing customer referrals to competing companies. In addition, the agreements governing these partnerships, generally, contain termination provisions, including provisions that in certain circumstances would allow our partners to terminate if convenient, that, if exercised, would terminate our relationship with these partners. These agreements also contain no requirement that a marketing affiliate refer us any minimum number of customers. There can be no assurance that these marketing affiliates will not terminate our relationship with them or continue referring business to us in the future, and a termination of any of these relationships or reduction in customer referrals to us could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our success and future growth depend significantly on our successful marketing efforts, and if such efforts are not successful, our business and financial results may be harmed.

We intend to continue to dedicate significant resources to marketing efforts, including for the Elastic product, particularly as we continue to grow, introduce new loan products and expand into new states. Our ability to attract qualified borrowers depends in large part on the success of these marketing efforts and the success of the marketing channels we use to promote our products. Our marketing channels include social media and the press, online affiliations, search engine optimization, search engine marketing, offline partnerships, preapproved direct mailings and television advertising. If any of our current marketing channels become less effective, if we are unable to continue to use any of these channels, if the cost of using these channels were to significantly increase or if we are not successful in generating new channels, we may not be able to attract new borrowers in a cost-effective manner or convert potential borrowers into active borrowers. If we are unable to recover our marketing costs through increases in website traffic and in the number of loans made by visitors to product websites, or if we discontinue our broad marketing campaigns, it could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

 

 

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We are dependent on third parties to support several key aspects of our business, and the failure of such parties to continue to provide services to us in the current manner and at the current rates would adversely affect our revenues and results of operations.

The Elastic line of credit product, which is originated by a third-party lender and contributed approximately 18% of our revenues for the year ended December 31, 2016, and the portions of the Rise installment loan product that we offer through CSO programs, which contributed approximately 13% of our revenues for the year ended December 31, 2016, depend in part on the willingness and ability of unaffiliated third-party lenders to make loans to customers. Additionally, as described above, our business, including our Elastic loans and Rise loans made through the CSO programs, depends on the ACH system, and ACH transactions are processed by third-party banks. See “—Regulators and payment processors are scrutinizing certain online lenders’ access to the Automated Clearing House system to disburse and collect loan proceeds and repayments, and any interruption or limitation on our ability to access this critical system would materially adversely affect our business.” We also utilize many other third parties to provide services to facilitate lending, loan underwriting, payment processing, customer service, collections and recoveries, as well as to support and maintain certain of our communication systems and information systems.

The loss of the relationship with any of these third-party lenders and service providers, and an inability to replace them or the failure of any of these third parties to provide its products or services, to maintain its quality and consistency or to have the ability to provide its products and services, could disrupt our operations, cause us to terminate product offerings, result in lost customers and substantially decrease the revenues and earnings of our business. Our revenues and earnings could also be adversely affected if any of those third-party providers make material changes to the products or services that we rely on or increase the price of their products or services.

Elevate uses third parties for the majority of its collections and recovery activities. If those parties were unable or unwilling to provide those services for Elevate products we would experience higher defaults until those functions could be outsourced to an alternative service provider or until we could bring those functions in-house and adequately staff and train internally.

Any of these events could result in a loss of revenues and could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

The profitability of the line of credit product, Elastic, could be adversely affected by policy or pricing decisions made by the originating lender.

We do not originate and do not ultimately control the pricing or functionality of Elastic, the line of credit product. Instead, Republic Bank, which originates the loans, has licensed our technology and underwriting services and makes all key decisions regarding Elastic marketing, underwriting, product features and pricing. We generate revenues from the Elastic product through marketing and technology licensing fees paid by Republic Bank, and through a credit default protection agreement we entered into with Elastic SPV, which purchases participations in Elastic loans from Republic Bank. If Republic Bank changes its pricing, underwriting or marketing of Elastic in a way that decreases revenues or increases losses, then the profitability of each loan could be reduced. Although this would not reduce the revenues that we receive for marketing and technology licensing services, it would reduce the revenues that we receive from our credit default protection agreement with Elastic SPV.

Any of the above changes could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

 

 

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Our ability to continue to provide Elastic would be adversely affected by a degradation in our relationship with Republic Bank.

The structure of the Elastic product exposes us to risks associated with being reliant on Republic Bank as the originating lender. If our relationship with Republic Bank were to degrade, or if Republic Bank were to terminate the various agreements associated with the Elastic product, we may not be able to find another suitable originating lender and new arrangements, if any, may result in significantly increased costs to us. Because line of credit products are relatively more difficult to establish under state law, any inability to find another originating lender would adversely affect our ability to continue to provide Elastic, which in turn could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Decreased demand for non-prime loans as a result of increased savings or income could result in a loss of revenues or decline in profitability if we are unable to successfully adapt to such changes.

The demand for non-prime loan products in the markets we serve could decline due to a variety of factors, such as regulatory restrictions that reduce customer access to particular products, the availability of competing or alternative products or changes in customers’ financial conditions, particularly increases in income or savings. For instance, an increase in state or federal minimum wage requirements could decrease demand for non-prime loans. Additionally, a change in focus from borrowing to saving (such as has happened in some countries) would reduce demand. Should we fail to adapt to a significant change in our customers’ demand for, or access to, our products, our revenues could decrease significantly. Even if we make adaptations or introduce new products to fulfill customer demand, customers may resist or may reject products whose adaptations make them less attractive or less available. Such decreased demand could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

A decline in economic conditions could result in decreased demand for our loans or cause our customers’ default rates to increase, harming our operating results.

Uncertainty and negative trends in general economic conditions in the US and abroad, including significant tightening of credit markets and a general decline in the value of real property, historically have created a difficult environment for companies in the lending industry. Many factors, including factors that are beyond our control, may impact our consolidated results of operations or financial condition or affect our borrowers’ willingness or capacity to make payments on their loans. These factors include: unemployment levels, housing markets, rising living expenses, energy costs and interest rates, as well as major medical expenses, divorce or death that affect our borrowers. If we experience an economic downturn or if the US economy is unable to sustain its recovery from the most recent financial crisis, or if we become affected by other events beyond our control, we may experience a significant reduction in revenues, earnings and cash flows, difficulties accessing capital and a deterioration in the value of our investments.

Credit quality is driven by the ability and willingness of customers to make their loan payments. If customers face rising unemployment or reduced wages, defaults may increase. Similarly, if customers experience rising living expenses (for instance due to rising gas, energy, or food costs) they may be unable to make loan payments. An economic slowdown could also result in a decreased number of loans being made to customers due to higher unemployment or an increase in loan defaults in our loan products. The underwriting standards used for our products may need to be tightened in response to such conditions, which could reduce loan balances, and collecting defaulted loans could become more difficult, which could lead to an increase in loan losses. If a customer defaults on a loan, the loan enters a collections

 

 

 

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process where, including as a result of contractual agreements with the originating lenders, our systems and collections teams initiate contact with the customer for payments owed. If a loan is subsequently charged off, the loan is generally sold to a third party collection agency and the resulting proceeds from such sales comprise only a small fraction of the remaining amount payable on the loan.

There can be no assurance that economic conditions will remain favorable for our business or that demand for loans or default rates by customers will remain at current levels. Reduced demand for loans would negatively impact our growth and revenues, while increased default rates by customers may inhibit our access to capital, hinder the growth of the loan portfolio attributable to our products and negatively impact our profitability. Either such result could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We are operating in a highly competitive environment and face increasing competition from a variety of traditional and new lending institutions, including other online lending companies. This competition could adversely affect our business, prospects, results of operations, financial condition or cash flows.

We have many competitors. Our principal competitors are consumer loan companies, CSOs, online lenders, credit card companies, consumer finance companies, pawnshops and other financial institutions that offer similar financial services. Other financial institutions or other businesses that do not now offer products or services directed toward our traditional customer base could begin doing so. Significant increases in the number and size of competitors for our business could result in a decrease in the number of loans that we fund, resulting in lower levels of revenues and earnings in these categories. Many of these competitors are larger than us, have significantly more resources and greater brand recognition than we do, and may be able to attract customers more effectively than we do.

Competitors of our business may operate, or begin to operate, under business models less focused on legal and regulatory compliance, which could put us at a competitive disadvantage. Additionally, negative perceptions about these models could cause legislators or regulators to pursue additional industry restrictions that could affect the business model under which we operate. To the extent that these models gain acceptance among consumers, small businesses and investors or face less onerous regulatory restrictions than we do, we may be unable to replicate their business practices or otherwise compete with them effectively, which could cause demand for the products we currently offer to decline substantially.

When new competitors seek to enter one of our markets, or when existing market participants seek to increase their market share, they sometimes undercut the pricing and/or credit terms prevalent in that market, which could adversely affect our market share or ability to exploit new market opportunities. Elevate products compete at least partly based on rate comparison with other credit products used by non-prime consumers. However, non-prime consumers by definition have a higher propensity for default and as a result need to be charged higher rates of interest to generate adequate profit margins. If existing competitors significantly reduced their rates or lower priced competitors enter the market and offer credit to customers at a lower rates, the pricing and credit terms we or the originating lenders offer could deteriorate if we or the originating lenders act to meet these competitive challenges. Any such action may result in lower customer acquisition volumes and higher costs per new customer.

We may be unable to compete successfully against any or all of our current or future competitors. As a result, our products could lose market share and our revenues could decline, thereby affecting our ability to generate sufficient cash flow to service our indebtedness and fund our operations. Any such changes in our competition could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

 

 

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Customer complaints or negative public perception of our business could result in a decline in our customer growth and our business could suffer.

Our reputation is very important to attracting new customers to our platform as well as securing repeat lending to existing customers. While we believe that we have a good reputation and that we provide customers with a superior experience, there can be no assurance that we will continue to maintain a good relationship with customers or avoid negative publicity.

In recent years, consumer advocacy groups and some media reports have advocated governmental action to prohibit or place severe restrictions on non-bank consumer loans. Such consumer advocacy groups and media reports generally focus on the annual percentage rate for this type of consumer loan, which is compared unfavorably to the interest typically charged by banks to consumers with top-tier credit histories. The finance charges assessed by us, the originating lenders and others in the industry can attract media publicity about the industry and be perceived as controversial. If the negative characterization of the types of loans we offer, including those originated through third-party lenders, becomes increasingly accepted by consumers, demand for any or all of our consumer loan products could significantly decrease, which could materially affect our business, prospects, results of operations, financial condition or cash flows. Additionally, if the negative characterization of these types of loans is accepted by legislators and regulators, we could become subject to more restrictive laws and regulations applicable to consumer loan products that could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

In addition, our ability to attract and retain customers is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices, financial condition and other subjective qualities. Negative perceptions or publicity regarding these matters—even if related to seemingly isolated incidents, or even if related to practices not specific to short-term loans, such as debt collection—could erode trust and confidence and damage our reputation among existing and potential customers, which would make it difficult to attract new customers and retain existing customers, significantly decrease the demand for our products, result in increased regulatory scrutiny, and have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our business depends on the uninterrupted operation of our systems and business functions, including our information technology and other business systems, as well as the ability of such systems to support compliance with applicable legal and regulatory requirements.

Our business is highly dependent upon customers’ ability to access our website and the ability of our employees and those of the originating lenders, as well as third party service providers, to perform, in an efficient and uninterrupted fashion, necessary business functions, such as internet support, call center activities and processing and servicing of loans. Problems with the IQ technology platform running our systems, or a shut-down of or inability to access the facilities in which our internet operations and other technology infrastructure are based, such as a power outage, a failure of one or more of our information technology, telecommunications or other systems, cyber-attacks on, or sustained or repeated disruptions of, such systems could significantly impair our ability to perform such functions on a timely basis and could result in a deterioration of our ability to underwrite, approve and process loans (or support such functions with regard to Elastic lines of credit), provide customer service, perform collections activities, or perform other necessary business functions. Any such interruption could reduce new customer acquisition and negatively impact growth, which would have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

 

 

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In addition, our systems and those of third parties on whom we rely must consistently be capable of compliance with applicable legal and regulatory requirements and timely modification to comply with new or amended requirements. Any systems problems going forward could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We are subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents, and we may experience harm to our reputation and liability exposure from security breaches.

Our business involves the storage and transmission of consumers’ proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. We are entirely dependent on the secure operation of our websites and systems as well as the operation of the internet generally. While we have incurred no material cyber-attacks or security breaches to date, a number of other companies have disclosed cyber-attacks and security breaches, some of which have involved intentional attacks. Attacks may be targeted at us, our customers, or both. Although we devote significant resources to maintain and regularly upgrade our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to us and our customers, our security measures may not provide absolute security. Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including third parties outside the Company such as persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. These risks may increase in the future as we continue to increase our mobile and other internet-based product offerings and expand our internal usage of web-based products and applications or expand into new countries. If an actual or perceived breach of security occurs, customer and/or supplier perception of the effectiveness of our security measures could be harmed and could result in the loss of customers, suppliers or both. Actual or anticipated attacks and risks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants.

A successful penetration or circumvention of the security of our systems could cause serious negative consequences, including significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage to our computers or systems or those of our customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. In addition, our applicants provide personal information, including bank account information when applying for loans. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including customer bank account and other personal information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Data breaches can also occur as a result of non-technical issues.

Our servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, including “denial-of-service” type attacks. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach of our systems or by persons with whom we have commercial relationships that result in the

 

 

 

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unauthorized release of consumers’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. In addition, many of the third parties who provide products, services or support to us could also experience any of the above cyber risks or security breaches, which could impact our customers and our business and could result in a loss of customers, suppliers or revenues.

In addition, federal and some state regulators are considering promulgating rules and standards to address cybersecurity risks and many US states and the UK have already enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and may lead to widespread negative publicity, which may cause customers to lose confidence in the effectiveness of our data security measures.

Any of these events could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our ability to collect payment on loans and maintain accurate accounts may be adversely affected by computer viruses, physical or electronic break-ins, technical errors and similar disruptions.

The automated nature of our platform may make it an attractive target for hacking and potentially vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Despite efforts to ensure the integrity of our platform, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, in which case there would be an increased risk of fraud or identity theft, and we may experience losses on, or delays in the collection of amounts owed on, a fraudulently induced loan. In addition, the software that we have developed to use in our daily operations is highly complex and may contain undetected technical errors that could cause our computer systems to fail. Because each loan made involves our proprietary credit and fraud scoring models, and over 95% of loan applications are fully automated with no manual review required, any failure of our computer systems involving our proprietary credit and fraud scoring models and any technical or other errors contained in the software pertaining to our proprietary credit and fraud scoring models could compromise the ability to accurately evaluate potential customers, which would negatively impact our results of operations. Furthermore, any failure of our computer systems could cause an interruption in operations and result in disruptions in, or reductions in the amount of, collections from the loans we made to customers. If any of these risks were to materialize, it could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our platform and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.

Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for borrowers, delay introductions of new features or enhancements, result in errors or compromise our ability to protect borrower data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of borrowers, loss of revenues or liability for damages, any of which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

 

 

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To date, we have derived our revenues from a limited number of products and markets. Our efforts to expand our market reach and product portfolio may not succeed or may put pressure on our margins.

In the future, we may elect to pursue new products, channels, or markets. However, there is always risk that these new products, channels, or markets will be unprofitable, will increase costs, decrease company margins, or take longer to generate target margins than anticipated. Additional costs could include those related to the need to hire more staff, invest in technology or other costs which would increase operating expenses. In particular, growth may require additional technology staff, analysts in risk management, compliance personnel and customer support and collections staff. Although the Company outsources most of its customer support and collections staff, additional volumes would lead to increased costs in these areas.

When new customers are acquired, from an accounting point of view, we must recognize marketing costs and loan origination and data costs, and we incur a provision for loan losses, including with regard to Elastic loan participations that are purchased from the originating lender by a third party, which we protect from loan losses pursuant to a credit default protection arrangement. Because of this, new customer acquisition does not typically yield positive margins for at least six months. As a result, rapid growth tends to compress margins in the near-term until growth rates slow down.

Rise, a state-licensed product, offers different rates and terms based on state law. In states with lower maximum rates, we have more stringent credit criteria and generally lower initial customer profitability due to higher customer acquisition costs and higher losses as a percentage of revenues. While these states can have significant growth potential, they typically deliver lower profit margins.

We may elect to pursue aggressive growth over margin expansion in order to increase market share and long-term revenue opportunities.

There also can be no guarantee that we will be successful with respect to any new product initiatives or any further expansion beyond the US and the UK, if we decide to attempt such expansion, which may inhibit the growth of our business and have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

 

Our allowance for loan losses is determined based upon both objective and subjective factors and may not be adequate to absorb loan losses. If we experience rising credit or fraud losses, our results of operations would be adversely affected.

We face the risk that customers will fail to repay their loans in full. We reserve for such losses by establishing an allowance for loan losses, the increase of which results in a charge to our earnings as a provision for loan losses. We have established a methodology designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the forecasts and establishment of loan losses are also dependent on our subjective assessment based upon our experience and judgment. Actual losses are difficult to forecast, especially if such losses stem from factors beyond our historical experience. As a result, there can be no assurance that our allowance for loan losses will be sufficient to absorb losses or prevent a material adverse effect on our business, financial condition and results of operations. Losses are the largest cost as a percentage of revenues across all of our products. Fraud and customers not being able to repay their loans are both significant drivers of loss rates. If we experienced rising credit or fraud losses this would significantly reduce our earnings and profit margins and could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

 

 

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Increased customer acquisition costs and/or data costs would reduce our margins.

Although losses are our largest cost, if customer acquisition costs or other servicing costs increased this would reduce our profit margins. Marketing costs would be negatively affected by increased competition or stricter credit standards that would reduce customer fund rates. We could also experience increased marketing costs due to higher fees from credit bureaus for preapproved direct mail lists, search engines for search engine marketing, or fees for affiliates, and these increased costs would reduce our profit margins.

We purchase significant amounts of data to facilitate our proprietary credit and fraud scoring models. If there was an increase in the cost of data or if the Company elected to purchase from new data providers there would be a reduction in our profit margins.

Any such reduction in our profit margins could result in a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our success is dependent, in part, upon our officers and key employees, and if we are not able to attract and retain qualified officers and key employees, or if one of our officers or key employees is temporarily unable to fully contribute to our operations, our business could be materially adversely affected.

Our success depends, in part, on our officers, which comprise a relatively small group of individuals. Many members of the senior management team have significant industry experience, and we believe that our senior management would be difficult to replace, if necessary. Because the market for qualified individuals is highly competitive, we may not be able to attract and retain qualified officers or candidates. In addition, increasing regulations on, and negative publicity about, the consumer financial services industry could affect our ability to attract and retain qualified officers. Kenneth E. Rees, our Chief Executive Officer, is a competitive cyclist. Although we maintain key-man life insurance, such insurance may not be sufficient to compensate us for losses if Mr. Rees were injured in a cycling accident, or otherwise, and unable to be fully active in the business while recuperating, and, additionally, in the event we lose Mr. Rees’ services, we could face an event of default under the VPC Facility, any of which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our future success also depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The loss of any of our senior management or key employees could materially adversely affect our ability to execute our business plan and strategy, and we may not be able to find adequate replacements on a timely basis, or at all. We cannot ensure that we will be able retain the services of any members of our senior management or other key employees. Our officers and key employees may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. While all key employees have signed non-disclosure, non-solicitation and non-compete agreements, they may still elect to leave the Company or even retire any time. Loss of key employees could result in delays to critical initiatives and the loss of certain capabilities and poorly documented intellectual property.

If we do not succeed in attracting and retaining our officers and key employees, our business could be materially and adversely affected.

 

 

 

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Our US loan business is seasonal in nature, which causes our revenues and earnings to fluctuate.

Our US loan business is affected by fluctuating demand for the products and services we offer and fluctuating collection rates throughout the year. Demand for our consumer loan products in the US has historically been highest in the third and fourth quarters of each year, corresponding to the holiday season, and lowest in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds. This results in significant increases and decreases in portfolio sizes and profit margins from quarter to quarter. In particular, we typically experience a reduction in our credit portfolios and an increase in profit margins in the first quarter of the year. When we experience higher growth in the second quarter through fourth quarters, portfolio balances tend to grow and profit margins are compressed. Our cost of sales for the non-prime loan products we offer in the US, which represents our provision for loan losses, is lowest as a percentage of revenues in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds, and increases as a percentage of revenues for the remainder of each year. This seasonality requires us to manage our cash flows over the course of the year. If our revenues or collections were to fall substantially below what we would normally expect during certain periods, our ability to service debt and meet our other liquidity requirements may be adversely affected, which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

If internet search engine providers change their methodologies for organic rankings or paid search results, or our organic rankings or paid search results decline for other reasons, our new customer growth or volume from returning customers could decline.

Our new customer acquisition marketing and our returning customer relationship management is partly dependent on search engines such as Google, Bing and Yahoo! to direct a significant amount of traffic to our desktop and mobile websites via organic ranking and paid search advertising. We bid on certain keywords from search engines as well as use their algorithms to place our listings ahead of other lenders.

Our paid search activities may not produce (and in the past have not always produced) the desired results. Internet search engines often revise their methodologies. The volume of customers we receive through organic ranking and paid search could be adversely affected by any such changes in methodologies or policies by search engine providers, by:

 

Ø   decreasing our organic rankings or paid search results;

 

Ø   creating difficulty for our customers in using our web and mobile sites;

 

Ø   producing more successful organic rankings, paid search results or tactical execution efforts for our competitors than for us; and

 

Ø   resulting in higher costs for acquiring new or returning customers.

In addition, search engines could implement policies that restrict the ability of companies such as us to advertise their services and products, which could prevent us from appearing in a favorable location or any location in the organic rankings or paid search results when certain search terms are used by the consumer. Our online marketing efforts are also susceptible to actions by third parties that negatively impact our search results such as spam link attacks, which are often referred to as “black hat” tactics. Our sites have experienced meaningful fluctuations in organic rankings and paid search results in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of consumers directed to our web and mobile sites could harm our business and operating results.

Finally, our competitors’ paid search, pay per click or search engine marketing activities may result in their sites receiving higher paid search results than ours and significantly increasing the cost of such

 

 

 

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advertising for us. We have little to no control over these potential changes in policy and methodologies relating to search engine results, and any of the changes described above could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Failure to keep up with the rapid technological changes in financial services and e-commerce, or changes in the uses and regulation of the internet could harm our business.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial and lending institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services as quickly as some of our competitors or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could harm our ability to compete with our competitors.

Additionally, the business of providing products and services such as ours over the internet is dynamic and relatively new. We must keep pace with rapid technological change, consumer use habits, internet security risks, risks of system failure or inadequacy, and governmental regulation and taxation, and each of these factors could adversely impact our business. In addition, concerns about fraud, computer security and privacy and/or other problems may discourage additional consumers from adopting or continuing to use the internet as a medium of commerce. Also, to expand our customer base, we may elect to appeal to and acquire consumers who prove to be less profitable than our previous customers, and as a result we may be unable to gain efficiencies in our operating costs, including our cost of acquiring new customers, and our business could be adversely impacted.

Any such failure to adapt to changes could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our ability to conduct our business and demand for our loans could be disrupted by natural or man-made catastrophes.

Catastrophes, such as fires, hurricanes and tornadoes, floods, earthquakes, or other natural disasters, terrorist attacks, computer viruses and telecommunications failures, could adversely affect our ability to market or service loans. Natural disasters and acts of terrorism, war, civil unrest, violence or human error could also cause disruptions to our business or the economy as a whole, which could negatively affect customers’ demand for our loans. Despite any precautions we may take, system interruptions and delays could occur if there is a natural disaster that affects our offices or one of the data center facilities we lease. As we rely heavily on our servers, computer and communications systems and the internet to conduct our business and provide high-quality customer service, such disruptions could harm our ability to market our products, accept and underwrite applications, provide customer service and undertake collections activities and cause lengthy delays which could harm our business, results of operations and financial condition. We have implemented a disaster recovery program that allows us to move production to a backup data center in the event of a catastrophe. Although this program is functional, we do not currently serve network traffic equally from each backup data center, and are not able to switch instantly to our backup center in the event of failure of the main server site. If our primary data center shuts down, there will be a period of time that our loan products or services, or certain of such loan products or services, will remain inaccessible to our users or our users may experience severe issues

 

 

 

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accessing such loan products and services. Our business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.

Any of these events could also cause consumer confidence to decrease in one or more of the markets we serve, which could result in a decreased number of loans being made to customers. As a result of these issues, any of these occurrences could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We may be unable to protect our proprietary technology and analytics or keep up with that of our competitors.

The success of our business depends to a significant degree upon the protection of our proprietary technology, including our proprietary credit and fraud scoring models, which we use for pricing loans. We seek to protect our intellectual property with non-disclosure agreements and through standard measures to protect trade secrets. However, we may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. If competitors learn our trade secrets (especially with regard to marketing and risk management capabilities) it could be difficult to successfully prosecute to recover damages. A third party may attempt to reverse engineer or otherwise obtain and use our proprietary technology without our consent. The pursuit of a claim against a third party for infringement of our intellectual property could be costly, and there can be no guarantee that any such efforts would be successful. Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as our competitors’ could put us at a disadvantage relative to our competitors. Any such failures could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We are subject to intellectual property disputes from time to time, and such disputes may be costly to defend and could harm our business and operating results.

We have faced and may continue to face allegations that we have infringed the trademarks, copyrights, patents or other intellectual property rights of third parties, including from our competitors or non-practicing entities. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop offering certain products or product features, acquire licenses, which may not be available at a commercially reasonable price or at all, or modify such products, product features, processes or websites while we develop non-infringing substitutes.

In addition, we use open source software in our technology platform and plan to use open source software in the future. From time to time, we may face claims from parties claiming ownership of, or demanding release of, the source code, potentially including our valuable proprietary code, or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our platform, any of which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Current and future litigation or regulatory proceedings could cause management distraction, harm our reputation and have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We, our officers and certain of our subsidiaries have been and may become subject to lawsuits that could cause us to incur substantial expenditures, generate adverse publicity and could significantly impair our

 

 

 

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business, force us to cease doing business in one or more jurisdictions or cause us to cease offering or alter one or more products. Additionally, our Chief Executive Officer is party to civil suits in Pennsylvania and Vermont alleging violations of several statutes, including the Consumer Financial Protection Act of 2010, Federal Trade Commission Act, Electronic Funds Transfer Act, Racketeer Influenced and Corrupt Organizations Act and others.

We may also be subject to litigation in the future and an adverse ruling in or a settlement of any such future litigation against us, our executive officers or another lender, or against our Chief Executive Officer in connection with either current litigation, could harm our reputation, cause us to have to refund fees and/or interest collected, forego collection of the principal amount of loans, pay treble or other multiple damages, pay monetary penalties and/or modify or terminate our operations in particular jurisdictions.

Defense of any lawsuit, even if successful, could require substantial time and attention of our management and could require the expenditure of significant amounts for legal fees and other related costs. We and others are also subject to regulatory proceedings, and we could suffer losses as a result of interpretations of applicable laws, rules and regulations in those regulatory proceedings, even if we are not a party to those proceedings. Any of these events could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We may be unable to use some or all of our net operating loss carryforwards, which could materially and adversely affect our reported financial condition and results of operations.

At December 31, 2016, we had US and UK net operating loss carryforwards, or “NOLs,” of $28.6 million and $31.5 million, respectively, available to offset future taxable income, due to prior period losses. If not utilized, the US NOLs will begin to expire in 2034. The UK NOLs can be carried forward indefinitely. Realization of these NOLs depends on future income, and there is a risk that our existing US NOLs could expire unused and be unavailable to offset future income tax liabilities, which could materially and adversely affect our results of operations.

Under Section 382 of the Internal Revenue Code of 1986, as amended, or the “Code,” our ability to utilize NOLs or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders, who own at least 5% of our stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. We have not completed a Section 382 analysis through December 31, 2016. If we have previously had, or have in the future, one or more Section 382 “ownership changes,” including in connection with this offering, or if we do not generate sufficient taxable income, we may not be able to utilize a material portion of our NOLs, even if we achieve profitability. If we are limited in our ability to use our NOLs in future years in which we have taxable income, we will pay more taxes than if we were able to fully utilize our NOLs. This could materially and adversely affect our results of operations.

RISKS RELATED TO OUR ASSOCIATION WITH TFI

Third parties may seek to hold us responsible for liabilities of TFI that we did not assume in our agreements.

In connection with our separation from TFI, TFI has generally agreed to retain all liabilities that did not historically arise from our business. Third parties may seek to hold us responsible for TFI’s retained

 

 

 

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liabilities, including third-party claims arising from TFI’s business and retained assets. For instance, the Pennsylvania civil suit described in “Business—Legal Proceedings” originally included Elevate as a named party, even though the purported claim is based on TFI’s retained business. Under the separation and distribution agreement, we are responsible for the debts, liabilities and other obligations related to the business or businesses that we own and operate. See “Certain relationships and related party transactions—Spin-Off Agreements with TFI—Separation and distribution agreement.” Under our agreements with TFI, TFI has agreed to indemnify us for claims and losses relating to its retained liabilities. However, if any of those liabilities are significant and we are ultimately held liable for such liabilities, we cannot assure you that we will be able to recover the full amount of our losses from TFI.

Although we do not anticipate liability for any obligations not expressly assumed by us pursuant to the separation and distribution agreement, it is possible that we could be required to assume responsibility for certain obligations retained by TFI should TFI fail to pay or perform its retained obligations. For instance, the Spin-Off could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor or an entity vested with the power of such creditor (such as a trustee or debtor-in-possession in a bankruptcy) could claim that the distribution left TFI insolvent or with unreasonably small capital or that TFI intended or believed it would incur debts beyond its ability to pay such debts as they mature and that TFI did not receive fair consideration or reasonably equivalent value in the Spin-Off. The measure of insolvency for purposes of such fraudulent conveyance laws will vary depending on which jurisdiction’s law is applied. Generally, however, an entity would be considered insolvent if either the fair saleable value of its assets is less than the amount of its liabilities (including the probable amount of contingent liabilities), or it is unlikely to be able to pay its liabilities as they become due. We do not know what standard a court would apply to determine insolvency; however, if a court were to conclude that the Spin-Off constituted a fraudulent conveyance, then such court could void the distribution as a fraudulent transfer and could impose a number of different remedies, including without limitation, returning our assets or your shares in our company to TFI, voiding our liens and claims (if any) against TFI, or providing TFI with a claim for money damages against us in an amount equal to the difference between the consideration received by TFI and the fair market value of our company at the time of the distribution.

Certain members of management, directors and stockholders may face actual or potential conflicts of interest as a result of owning shares of, or having positions as directors of TFI.

Some of our officers and directors own both TFI common stock and our common stock. This ownership overlap could create, or appear to create, potential conflicts of interest when our officers and directors face decisions that could have different implications for us and TFI. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between us and TFI regarding the terms of the agreements governing the Spin-Off and our relationship with TFI thereafter or in the strategy for defending or resolving any litigation in which both TFI and Elevate are involved. Existing and past agreements between TFI and Elevate include, but are not limited to, the separation and distribution agreement, amended and restated intellectual property assignment agreement, data sharing and support agreement, tax sharing agreement and sublease agreements. Potential conflicts of interest may also arise because one of our directors, Stephen J. Shaper, is currently a member of the board of directors of TFI. See “Certain relationships and related party transactions.”

The CFPB has authority to investigate and issue Civil Investigative Demands to consumer lending businesses, and may issue fines or corrective orders.

The Consumer Financial Protection Bureau, or “CFPB,” has authority to investigate and issue Civil Investigative Demands, or “CIDs,” to consumer lending businesses, including us. In June 2012, prior to

 

 

 

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the Spin-Off, and in February 2016, after the Spin-Off, TFI received CIDs from the CFPB. The purpose of the CIDs was to determine whether TFI engaged in unlawful acts or practices relating to the advertising, marketing, provision, or collection of small-dollar loan products, in violation of parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the “Dodd-Frank Act,” the Truth in Lending Act, the Electronic Funds Transfer Act, the Gramm-Leach-Bliley Act, or any other federal consumer financial law and to determine whether CFPB action to obtain legal or equitable relief would be in the public interest. While TFI’s business is distinct from our business, we cannot predict the final outcome of these CIDs or to what extent any obligations arising out of such final outcome will be applicable to our company, business or officers, if at all.

OTHER RISKS RELATED TO COMPLIANCE AND REGULATION

We, our marketing affiliates, our third-party service providers and Republic Bank, which originates Elastic, the line of credit product, are subject to complex federal, state and local lending and consumer protection laws, and if we fail to comply with applicable laws, regulations, rules and guidance, our business could be adversely affected.

We, our marketing affiliates, our third-party service providers and Republic Bank, which originates Elastic, the line of credit product, must comply with US federal, state and local regulatory regimes, including those applicable to consumer credit transactions. Certain US federal and state laws generally regulate interest rates and other charges and require certain disclosures. In particular, we may be subject to laws such as:

 

Ø   local regulations and ordinances that impose requirements or restrictions related to certain loan product offerings and collection practices;

 

Ø   state laws and regulations that impose requirements related to loan or credit service disclosures and terms, credit discrimination, credit reporting, debt servicing and collection;

 

Ø   the Truth in Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms and conditions of their loans and credit transactions;

 

Ø   Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, Section 1031 of the Dodd-Frank Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service, and similar state laws that prohibit unfair and deceptive acts or practices;

 

Ø   the Equal Credit Opportunity Act and Regulation B promulgated thereunder and state non-discrimination laws, which generally prohibit creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act;

 

Ø   the Fair Credit Reporting Act, or the “FCRA,” as amended by the Fair and Accurate Credit Transactions Act, and similar state laws, which promote the accuracy, fairness and privacy of information in the files of consumer reporting agencies;

 

Ø   the Fair Debt Collection Practices Act, or the “FDCPA,” and similar state and local debt collection laws, which provide guidelines and limitations on the conduct of third-party debt collectors and creditors in connection with the collection of consumer debts;

 

 

 

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Ø   the Gramm-Leach-Bliley Act and Regulation P promulgated thereunder and similar state privacy laws, which include limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances require financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and require financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;

 

Ø   the Bankruptcy Code and similar state insolvency laws, which limit the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;

 

Ø   the Servicemembers Civil Relief Act and similar state laws, which allow military members and certain dependents to suspend or postpone certain civil obligations, as well as limit applicable rates, so that the military member can devote his or her full attention to military duties;

 

Ø   the Military Lending Act, which limits the interest rate and fees that may be charged to military members and their dependents, requires certain disclosures and prohibits certain mandatory clauses among other restrictions;

 

Ø   the Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers’ asset accounts;

 

Ø   the Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures and, with consumer consent, permits required disclosures to be provided electronically;

 

Ø   the Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures; and

 

Ø   the Telephone Consumer Protection Act, or the “TCPA,” and the regulations of the Federal Communications Commission, or the “FCC,” which regulations include limitations on telemarketing calls, auto-dialed calls, prerecorded calls, text messages and unsolicited faxes.

While it is our intention to always be in compliance with these laws, it is possible that we may currently be, or at some time have been, inadvertently out of compliance with some or any such laws. Further, all applicable laws are subject to evolving regulatory and judicial interpretations, which further complicate real-time compliance. Lastly, compliance with these laws is costly, time-consuming and limits our operational flexibility.

Failure to comply with these laws and regulatory requirements applicable to our business may, among other things, limit our or a collection agency’s ability to collect all or part of the principal of or interest on loans. As a result, we may not be able to collect on unpaid principal or interest. In addition, non-compliance could subject us to damages, revocation of required licenses, class action lawsuits, administrative enforcement actions, rescission rights held by investors in securities offerings and civil and criminal liability, which may harm our business and may result in borrowers rescinding their loans.

Where applicable, we seek to comply with state installment, CSO, servicing and similar statutes. In all US jurisdictions with licensing or other requirements that we believe may be applicable to us, we comply with the relevant requirements by acquiring the necessary licenses or authorization and submitting appropriate registrations in connection therewith. Nevertheless, if we are found to not have complied with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions

 

 

 

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or penalties or be required to obtain other licenses or authorizations in such jurisdiction, which may have an adverse effect on our ability to perform our servicing obligations or make products or services available to borrowers in particular states, which may harm our business.

Our products currently have usage caps and limitations on lending based on internally developed “responsible lending guidelines.” If those policies become more restrictive due to legislative or regulatory changes at either the local, state, US federal, or UK regulatory level these products would experience declining revenues per customer.

The CFPB may have examination authority over our US consumer lending business that could have a significant impact on our US business.

In July 2010, the US Congress passed the Dodd-Frank Act. Title X of the Dodd-Frank Act created the CFPB, which regulates US consumer financial products and services, and gave it regulatory, supervisory and enforcement powers over certain providers of consumer financial products and services, including authority to examine such providers.

The CFPB has begun exercising supervisory review over and examining certain non-bank providers of consumer financial products and services, including providers of consumer loans similar to us. The CFPB has not examined our lending products, or our services and practices. The CFPB’s examination authority permits CFPB examiners to inspect the books and records of providers, and ask questions about their business practices. The examination procedures include specific modules for examining marketing activities, loan application and origination activities, payment processing activities and sustained use by consumers, collections, accounts in default, consumer reporting activities and third-party relationships. As a result of these examinations, we could be required to change our products, our services or our practices, whether as a result of another party being examined or as a result of an examination of us, or we could be subject to monetary penalties, which could materially adversely affect us.

Furthermore, because the CFPB is a relatively new entity, its practices and procedures regarding civil investigations, examination, enforcement and other matters relevant to us and other CFPB-regulated entities are subject to further development and change. Where the CFPB holds powers previously assigned to other regulators or may interpret laws previously interpreted by other regulators, the CFPB may not continue to apply such powers or interpret relevant concepts consistent with previous regulators’ practice. This may adversely affect our ability to anticipate the CFPB’s expectations or interpretations in our interaction with the CFPB.

The CFPB also has broad authority to prohibit unfair, deceptive and abusive acts and practices and to investigate and penalize financial institutions that violate this prohibition. In addition to having the authority to obtain monetary penalties for violations of applicable federal consumer financial laws (including the CFPB’s own rules), the CFPB can require remediation of practices, pursue administrative proceedings or litigation and obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief). Also, where a company is believed to have violated Title X of the Dodd-Frank Act or CFPB regulations implemented thereunder, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy such violations after consulting with the CFPB. If the CFPB or one or more state attorneys general or state regulators believe that we have violated any of the applicable laws or regulations, they could exercise their enforcement powers in ways that could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

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examinations, we have not been examined by the CFPB. An examination could result in fines or changes to business practices that would reduce profit margins for the Company.

The CFPB has proposed new rules affecting the consumer lending industry, and these or subsequent new rules and regulations, if they are finalized, may impact our US consumer lending business.

On January 20, 2017, President Donald Trump issued a memorandum to the heads of the executive departments and agencies instructing them to (i) send no new regulation to the Federal Register until a presidentially appointed or presidentially designated agency head has had an opportunity to review the regulation; (ii) immediately withdraw any regulation already sent to the Federal Register but not yet published; and (iii) postpone for 60 days any regulations that have been published in the Federal Register but have not yet taken effect.

On January 30, 2017, President Trump issued Executive Order 13771 (Reducing Regulation and Controlling Regulatory Costs), regarding offsetting the number and cost of new regulations by eliminating the number and cost of existing regulations, and on February 24, 2017, President Trump issued an Executive Order directing each agency to designate a Regulatory Reform Officer to implement the regulatory reform agenda previously set forth requiring certain agencies to create a Regulatory Reform Task Force to evaluate existing regulations and make recommendations to repeal, replace or modify existing regulations that eliminate or inhibit job creation, that are outdated, unnecessary or ineffective, that have costs that outweigh the benefits, that are inconsistent with the Trump Administration’s regulatory agenda, that rely on non-public information or that derive from or implement rescinded or substantially modified Executive Orders of other Presidents.

This memorandum and the aforementioned Executive Orders may not apply to the CFPB as an independent agency, but it is unclear what impact the Trump Administration will have on the CFPB proposed rules. Furthermore, it is possible that the Trump Administration will issue other Executive Orders that may impact financial services oversight and regulation. Additionally, if new rules are promulgated and finalized by the CFPB, it is possible that Congress will overturn them under Congressional Review Act powers.

The CFPB proposed a “small dollar rule” on June 2, 2016 that addresses practices of certain providers of payday loans, vehicle title loans and certain installment lenders. The comment period closed on October 7, 2016 with a reported 1.6 million comments being issued about the rule. If the rules were adopted as proposed, we could be required to modify the manner in which we make a reasonable determination of a customer’s ability to repay and provide customers notice at least three days before a payment withdrawal attempt, as well as obtain a new ACH authorization from a customer following two failed ACH attempts and report certain information regarding covered loans, among other requirements.

On May 5, 2016, the CFPB released a proposed rule to prohibit certain providers of consumer financial products and services from including clauses in new arbitration agreements that bar a consumer from filing or participating in a class action with respect to the covered consumer financial product or service, and that would require such providers to include specific disclosure to that effect in any covered pre-dispute arbitration agreement. The proposal also requires a covered provider that uses pre-dispute arbitration agreements to submit certain arbitral records to the CFPB. The CFPB’s proposed rule to prohibit pre-dispute arbitration clauses, if finalized, is likely to increase class action exposure and litigation.

On July 28, 2016, the CFPB issued its outline of proposals under consideration for the regulation of debt collection by third-party debt collectors. If a final rule is promulgated, Elevate intends to take the

 

 

 

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necessary steps to ensure that its management and oversight of third-party debt collectors is consistent with the rule to the extent that third-party debt collectors are used. The CFPB has indicated that it will issue a debt collection proposal in the future for other parties engaged in debt collection but not covered by the July 28th proposal, including creditors.

Lastly, a recent ruling by the US Court of Appeals for the DC circuit has held that the single-director structure of the CFPB is not constitutional. The CFPB has been granted an en banc hearing on this case. It is not clear what impact this case will have on the power and structure of the CFPB and the oversight of Elevate’s business.

The FDIC has issued examination guidance affecting banks, such as Republic Bank, which originates the Elastic product, and these or subsequent new rules and regulations could have a significant impact on the Elastic product.

The Elastic line of credit product is offered by Republic Bank using technology, underwriting and marketing services provided by Elevate. Republic Bank is supervised and examined by the FDIC. If the FDIC considers any aspect of the Elastic product to be inconsistent with its guidance, Republic Bank may be required to alter the product.

On July 29, 2016, the board of directors of the FDIC released examination guidance relating to third-party lending as part of a package of materials designed to “improve the transparency and clarity of the FDIC’s supervisory policies and practices” and consumer compliance measures that FDIC-supervised institutions should follow when lending through a business relationship with a third party. The proposed guidance, if finalized, would apply to all FDIC-supervised institutions that engage in third-party lending programs, such as Elastic.

The proposed guidance elaborates on previously issued agency guidance on managing third-party risks and specifically addresses third-party lending arrangements where an FDIC-supervised institution relies on a third party to perform a significant aspect of the lending process. The types of relationships that would be covered by the guidance include (but are not limited to) relationships for originating loans on behalf of, through or jointly with third parties, or using platforms developed by third parties. If adopted as proposed, the guidance would result in increased supervisory attention of institutions that engage in significant lending activities through third parties, including at least one examination every 12 months, as well as supervisory expectations for a third-party lending risk management program and third-party lending policies that contain certain minimum requirements, such as self-imposed limits as a percentage of total capital for each third-party lending relationship and for the overall loan program, relative to origination volumes, credit exposures (including pipeline risk), growth, loan types, and acceptable credit quality. Comments on the guidance were due October 27, 2016.

At this time, it is unclear what impact the Trump Administration will have on the policies of the FDIC and the FDIC’s ability to issue rules applicable to Elastic.

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

In the UK, we are subject to regulation by the Financial Conduct Authority, or the “FCA,” pursuant to the Financial Services and Markets Act 2000, or the “FSMA,” the Consumer Credit Act 1974, as amended, or the “CCA,” and secondary legislation passed under such statutes, among other rules and regulations including the FCA Handbook, which collectively serve to transpose the obligations under the European Consumer Credit Directive into UK law.

 

 

 

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The FSMA gives the FCA the power to authorize, supervise, examine, bring enforcement actions and impose fines and disciplinary sanctions against providers of consumer credit, as well as to make rules for the regulation of consumer credit. The Consumer Credit Sourcebook, or the “CONC,” incorporates prescriptive regulations for consumer loans such as those that we offer, including mandatory affordability checks on borrowers, limiting the number of refinances, or “rollovers,” to two, restricting how lenders can advertise, banning advertisements that the FCA deems misleading, and introducing a limit of two unsuccessful attempts on the use of continuous payment authority, or “CPA” (which provides a creditor the ability to directly debit a customer’s account for payment using their bank card details when authorized by the customer to do so) to pay off a loan. The UK also has strict regulations regarding advertising (including websites) and the presentation, form and content of loan agreements, including statutory warnings, the layout of prescribed financial information, as well as in relation to defaulted loans and collections activities.

In the period since the FCA acquired responsibility for the regulation of consumer credit in the UK in place of the Office of Fair Trading, or the “OFT,” in April 2014, there have been a large number of new regulations affecting our UK product offerings. These include the introduction of a rate cap, a prohibition on certain types of line of credit products, the establishment of a price comparison website, and restrictions on payment processing activities, among other changes. The rate cap imposes a maximum interest rate of 0.8% per day and maximum late payment fee of £15; the total amount charged for the loan, including all default charges, must not exceed 100% of the capital sum originally borrowed. This rule translates to a maximum rate of £24 for every £100 borrowed for a 30 day period, or 0.8% per day. The maximum fees that can be earned on the loan (through interest, default fees, and late interest) ensure that a consumer cannot pay back more than twice the amount of principal borrowed. The FCA has further indicated that it intends to review the price cap on high-cost short-term credit in the first part of 2017. In the meantime, the FCA is monitoring whether there are any unintended consequences of the price cap emerging for firms or consumers, including the impact on people no longer able to access high-cost short-term credit.

During the years ended December 31, 2016 and 2015, our UK operations represented 17% and 19%, respectively, of our consolidated total revenues. The results for the year ended December 31, 2016 do not include the full impact of the regulatory changes described above. The results for each of these periods are not indicative of our future results of operations and cash flows from our operations in the UK.

The changes that we have implemented or any changes we may be required to implement in the future as a result of such legislative and regulatory activities could have a material adverse effect on our UK business.

Additionally, in June 2013, the OFT referred the payday lending industry in the UK to the Competition Commission, which is now the Competition & Markets Authority, or the “CMA,” for a market investigation. The CMA gathered data from industry participants, including us, in connection with its review of the UK payday lending industry to determine whether certain features of the payday lending industry prevent, restrict or distort competition (which is also referred to as having an adverse effect on competition) and, if so, what remedial action should be taken. The CMA published its final report in February 2015; its recommendations were implemented under the Payday Lending Market Investigation Order 2015, under which:

 

Ø   online lenders must provide details of their products on at least one FCA authorized price comparison website, or “PCW,” and include a hyperlink from their website to the relevant PCW; and

 

Ø   payday lenders must provide existing customers with a summary of their cost of borrowing.

 

 

 

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These changes, which are reflected in FCA rules, came into effect on December 1, 2016.

If the FCA adopts rules that significantly restrict the conduct of our business, any such rules could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows or could make the continuance of all or part of our UK business impractical or unprofitable. Any new rules adopted by the FCA could also result in significant compliance costs.

In February 2016, the FCA issued full authorization to Elevate for our UK business. Similar to US federal and state regulatory regimes, the FCA has the power to revoke, suspend or impose conditions upon our authorization to conduct a consumer credit business if it determines we are out of compliance with applicable UK laws, high-cost short-term rules or other legal requirements ensuring fair treatment of consumers.

Our advertising and marketing materials and disclosures have been and continue to be subject to regulatory scrutiny, particularly in the UK.

In the jurisdictions where we operate, our advertising and marketing activities and disclosures are subject to regulation under various industry standards, consumer protection laws, and other applicable laws and regulations. Consistent with the consumer lending industry as a whole (see “—The consumer lending industry continues to be subjected to new laws and regulations in many jurisdictions that could restrict the consumer lending products and services we offer, impose additional compliance costs on us, render our current operations unprofitable or even prohibit our current operations” above), our advertising and marketing materials have come under increased scrutiny. In the UK, for example, consumer credit firms are subject to the financial promotions regime set out in the FSMA (Financial Promotions) Order 2005 and specific rules in the CONC, part 3, such as the inclusion of a risk warning on all advertising materials. The FCA has also decided to adopt certain elements of industry codes as FCA rules on a case by case basis. Our advertising and marketing materials in the UK are subject to review and regulation both by the FCA and the Advertising Standards Authority. We have in some cases been required to withdraw, amend or add disclosures to such materials, or have done so voluntarily in response to inquiries or complaints. Going forward, there can be no guarantee that we will be able to advertise and market our business in the UK or elsewhere in a manner we consider effective. Any inability to do so could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

The regulatory landscape in which we operate is continually changing due to new CFPB rules, regulations and interpretations, as well as various legal actions that have been brought against others in marketplace lending, including several lawsuits that have sought to re-characterize certain loans made by federally insured banks as loans made by third parties. If litigation on similar theories were brought against us when we work with a federally insured bank that makes loans, rather than making loans ourselves and were such an action to be successful, we could be subject to state usury limits and/or state licensing requirements, in addition to the state consumer protection laws to which we are already subject, in a greater number of states, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.

The case law involving whether an originating lender, on the one hand, or third parties on the other hand, are the “true lenders” of a loan is still developing and courts have come to different conclusions and applied different analyses. The determination of whether a third-party service provider is the “true lender” is significant because third parties risk having the loans they service becoming subject to a

 

 

 

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consumer’s state usury limits. A number of federal courts that have opined on the “true lender” issue have looked to who is the lender identified on the borrower’s loan documents. A number of state courts and at least one federal district court have considered a number of other factors when analyzing whether the originating lender or a third party is the “true lender,” including looking at the economics of the transaction to determine, among other things, who has the predominant economic interest in the loan being made. If we were re-characterized as a “true lender” with respect to Elastic, or Rise in Ohio or Texas, loans could be deemed to be void and unenforceable in some states, the right to collect finance charges could be affected, and we could be subject to fines and penalties from state and federal regulatory agencies as well as claims by borrowers, including class actions by private plaintiffs. Even if we were not required to change our business practices to comply with applicable state laws and regulations or cease doing business in some states, we could be required to register or obtain lending licenses or other regulatory approvals that could impose a substantial cost on us. If Republic Bank or the CSO lenders in Ohio or Texas were subject to such a lawsuit, they may elect to terminate their relationship with us voluntarily or at the direction of their regulators, and if they lost the lawsuit, they could be forced to modify or terminate the programs.

On August 31, 2016, the United States District Court for the Central District of California ruled in CFPB v. CashCall, Inc. et. al that CashCall was the “true lender” and consequently was engaged in deceptive practices by servicing and collecting on payday loans in certain states where the interest rate on the loans exceeded the state usury limit and/or where CashCall was not a licensed lender. The CashCall case is related to a tribally related lending program. In reaching its decision, the court adopted a “totality of the circumstances” test to determine which party to the transaction had the “predominant economic interest” in the transaction. Given the fact-intensive nature of a “totality of the circumstances” assessment, the particular and varied details of marketplace lending and other bank partner programs may lead to different outcomes to those reached in CashCall, even in those jurisdictions where courts adopt the “totality of the circumstances” approach. Notably, CashCall did not address the federal preemption of state law under the National Bank Act or any other federal statute. CashCall is appealing the decision in the Ninth Circuit.

On September 20, 2016, in Beechum v. Navient Solutions, Inc., the United States District Court for the Central District of California dismissed a class action suit alleging usurious interest rates on private student loans in violation of California law. In doing so, the court rejected the plaintiff’s arguments that the defendants were the de facto “true lenders” of loans made by a national bank under a bank partnership arrangement with a non-bank partner. Consistent with the controlling judicial authority for challenges to the applicability of statutory or constitutional exemptions to California’s usury prohibition, the court determined that “it must look solely to the face of the transaction” in determining whether an exemption applies and did not apply the “totality of the circumstances” test.

In addition to true lender challenges, a question regarding the applicability of state usury rates may arise when a loan is sold from a bank to a non-bank entity. In Madden v. Midland Funding, LLC, the Court of Appeals for the Second Circuit held that the federal preemption of state usury laws did not extend to the purchaser of a loan issued by a national bank. In its brief urging the US Supreme Court to deny certiorari, the US Solicitor General, joined by the OCC, noted that the Second Circuit (Connecticut, New York and Vermont) analysis was incorrect. On remand, the United States District Court for the Southern District of New York concluded on February 27, 2017 that New York’s state usury law, not Delaware’s state usury law, was applicable and that the plaintiff’s claims under the FDCPA and state unfair and deceptive acts and practices could proceed. To that end, the court granted Madden’s motion for class certification. At this time, it is unknown whether Madden will be applied outside of the defaulted debt context in which it arose.

 

 

 

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The facts in CashCall, Navient and Madden are not directly applicable to Elevate’s business, as Elevate does not engage in practices similar to those at issue in CashCall, Navient or Madden, and Elevate does not purchase whole loans or engage in business in states within the Second Circuit. However, to the extent that either the holdings in CashCall or Madden were broadened to cover circumstances applicable to Elevate’s business, or if other litigation on related theories were brought against us and were successful, or we were otherwise found to be the “true lender,” we could become subject to state usury limits and state licensing laws, in addition to the state consumer protection laws to which we are already subject, in a greater number of states, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.

We use third-party collection agencies to assist us with debt collection. Their failure to comply with debt collection regulations could subject us to fines and other liabilities, which could harm our reputation and business.

The FDCPA regulates persons who regularly collect or attempt to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. Many states impose additional requirements on debt collection communications, and some of those requirements may be more stringent than the federal requirements. Moreover, regulations governing debt collection are subject to changing interpretations that differ from jurisdiction to jurisdiction. We use third-party collections agencies to collect on debts incurred by consumers of our credit products. Regulatory changes could make it more difficult for collections agencies to effectively collect on the loans we originate.

Non-US jurisdictions also regulate debt collection. For example, in the UK, due to new rules under the CONC we have made adjustments to some of our business practices, including our collections processes, which could possibly result in lower collections on loans made by us and has resulted in a decrease in the number of new customers that we are able to approve. In addition, the concerns expressed to us by the OFT and the FCA relate in part to debt collection. We could be subject to fines, written orders or other penalties if we, or parties working on our behalf, are determined to have violated the FDCPA, the CONC or analogous state or international laws, which could have a material adverse effect on our reputation, business, prospects, results of operations, financial condition or cash flows.

Our business is subject to complex and evolving US and international laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.

We receive, transmit and store a large volume of personally identifiable information and other sensitive data from customers and potential customers. Our business is subject to a variety of laws and regulations in the US and the UK that involve user privacy issues, data protection, advertising, marketing, disclosures, distribution, electronic contracts and other communications, consumer protection and online payment services. The introduction of new products or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations. In addition, international data protection, privacy, and other laws and regulations can be more restrictive than those in the US. US federal and state and international laws and regulations, which can be enforced by private parties or government entities, are constantly evolving and can be subject to significant change.

A number of proposals are pending before federal, state, and international legislative and regulatory bodies that could impose new obligations in areas such as privacy. For example the European Union’s new General Data Protection Regulation, or “GDPR,” will replace the existing Data Protection Directive

 

 

 

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(95/46/EC) and will be implemented in the UK in June 2018. The GDPR is more prescriptive than the existing regime and includes new obligations on businesses, including the requirement to appoint a data protection officer, self-report breaches, obtain express consent to data processing and provide more rights to individuals whose data they process, including the “right to be forgotten,” by having their records erased. Penalties for non-compliance are also significantly higher than the current maximum fine of £500,000. Under the GDPR, the maximum fine will be the higher of €20 million or 4% of global turnover for the preceding year.

In addition, the 4th European Union’s anti-money laundering directive (2015/849/EC) will come into effect in June 2018 and require changes to customer due diligence assessments and greater focus on a risk based approach.

Some countries are also considering or have enacted legislation requiring local storage and processing of data that, if applicable to the markets in which we operate, would increase the cost and complexity of delivering our services. These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new products, the expansion into new markets, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to inquiries or investigations, claims or other liabilities, including demands that we modify or cease existing business practices or pay fines, penalties or other damages.

It is difficult to assess the likelihood of the enactment of any future legislation or the impact that such rules and regulations could have on our business. We are operating on the basis, confirmed by the UK government and the FCA, that the decision of the UK to leave the European Union will not affect the implementation of the new European Union directives on data protection and anti-money laundering as outlined above.

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

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

In the UK, we are subject to the requirements of the Data Protection Act 1998, or the “DPA,” and are required to be fully registered as a data-controller under the DPA and comply with industry guidance published by the regulator, the Information Commissioner. There are also strict rules on the use of credit reference data under the CCA regulations and the CONC. We are also subject to laws limiting the transfer of personal data from the European Economic Area to non-European Economic Area countries or territories. There are also strict rules on the instigation of electronic communications such as email,

 

 

 

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text message and telephone calls under the Privacy and Electronic Communications (EC Directive) Regulations 2003, which prohibit unsolicited direct marketing by electronic means without express consent, as well as the monitoring of devices.

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

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

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

In addition, the US Congress has considered legislation that would generally limit or prohibit mandatory arbitration agreements in consumer contracts and has enacted legislation with such a prohibition with respect to certain mortgage loan agreements and also certain consumer loan agreements to members of the military on active duty and their dependents. Further, the CFPB’s proposed rule to prohibit pre-dispute arbitration clauses, if finalized, is likely to increase class action exposure and litigation expense. See “—The CFPB has proposed new rules affecting the consumer lending industry, and these or subsequent new rules and regulations, if they are finalized, may impact our US consumer lending business.”

Any judicial decisions, legislation or other rules or regulations that impair our or Republic Bank’s ability to enter into and enforce consumer arbitration agreements and class action waivers could significantly increase our exposure to class action litigation as well as litigation in plaintiff-friendly jurisdictions, which would be costly and could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We use marketing affiliates to assist us and the originating lender in obtaining new customers, and if such marketing affiliates do not comply with an increasing number of applicable laws and regulations, or if our ability to use such marketing affiliates is otherwise impaired, it could adversely affect our business.

We depend in part on marketing affiliates as a source of new customers for us and, with respect to the Elastic product, for the originating lender. Our marketing affiliates place our advertisements on their websites that direct potential customers to our websites. As a result, the success of our business depends in part on the willingness and ability of marketing affiliates to provide us customer referrals at acceptable prices.

If regulatory oversight of marketing affiliates relationships is increased, through the implementation of new laws or regulations or the interpretation of existing laws or regulations, our ability to use marketing affiliates could be restricted or eliminated.

 

 

 

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Marketing affiliates’ failure to comply with applicable laws or regulations, or any changes in laws or regulations applicable to marketing affiliates relationships or changes in the interpretation or implementation of such laws or regulations, could have an adverse effect on our business and could increase negative perceptions of our business and industry. Additionally, the use of marketing affiliates could subject us to additional regulatory cost and expense. If our ability to use marketing affiliates were to be impaired, our business, prospects, results of operations, financial condition or cash flows could be materially adversely affected.

RISKS RELATED TO THIS OFFERING, THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK

The price of our common stock may be volatile and the value of your investment could decline.

Technology stocks have historically experienced high levels of volatility. The trading price of our common stock following this offering may fluctuate substantially. Following the completion of this offering, the market price of our common stock may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

Ø   announcements of new products, services or technologies, relationships with strategic partners, acquisitions or of the termination of, or material changes to, material agreements or of other events by us or our competitors;

 

Ø   changes in economic conditions;

 

Ø   changes in prevailing interest rates;

 

Ø   price and volume fluctuations in the overall stock market from time to time;

 

Ø   significant volatility in the market price and trading volume of technology companies in general and of companies in the financial services industry;

 

Ø   fluctuations in the trading volume of our shares or the size of our public float;

 

Ø   actual or anticipated changes in our operating results or fluctuations in our operating results;

 

Ø   quarterly fluctuations in demand for our loans;

 

Ø   whether our operating results meet the expectations of securities analysts or investors;

 

Ø   actual or anticipated changes in the expectations of investors or securities analysts;

 

Ø   regulatory developments in the US, foreign countries or both and our ability to comply with applicable regulations;

 

Ø   material litigation, including class action law suits;

 

Ø   major catastrophic events;

 

Ø   sales of large blocks of our stock;

 

Ø   entry into, modification of or termination of a material agreement; or

 

Ø   departures of key personnel or directors.

 

 

 

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In addition, if the market for technology and financial services stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, operating results and financial condition.

Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could reduce the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. Based on the total number of outstanding shares of our common stock as of December 31, 2016, upon completion of this offering, we will have 39,499,745 shares of common stock outstanding, assuming no exercise of the underwriters’ option to purchase additional shares, no exercise of outstanding options, no vesting of outstanding restricted stock units, and no conversion of the convertible term notes into shares of our common stock. See “Description of capital stock—Convertible Term Notes.” All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, or the “Securities Act,” except for any shares held by our affiliates as defined in Rule 144 under the Securities Act.

Subject to certain exceptions described under “Underwriting,” we and all of our directors and officers and substantially all of our equity holders have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of common stock without the permission of UBS Securities LLC, Credit Suisse Securities (USA) LLC and Jefferies LLC for a period of 180 days from the date of this prospectus. When the lock-up period expires, we and our locked-up security holders will be able to sell our shares in the public market. In addition, the underwriters may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. See “Shares eligible for future sale” for more information. Sales of a substantial number of such shares upon expiration, or the perception that such sales may occur, or early release of the lock-up, could cause our share price to fall or make it more difficult for you to sell your common stock at a time and price that you deem appropriate.

Upon completion of this offering, the holders of an aggregate of 14,098,525 shares of our common stock associated with the conversion of preferred shares, or their permitted transferees, will have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders assuming no conversion of the convertible term notes. See “Description of capital stock—Convertible Term Notes.” We also intend to register the offer and sale of all shares of common stock that we may issue under our equity compensation plans.

We may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

 

 

 

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We cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.

Although our common stock has been approved for listing on the New York Stock Exchange, we cannot assure you that an active trading market for our common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. We cannot predict the prices at which our common stock will trade. The initial public offering price of our common stock was determined by negotiations with the underwriters and may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business.

We have broad discretion in the use of the net proceeds that we receive in this offering.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and thereby enable access to the public equity markets by our employees and stockholders, obtain additional capital and increase our visibility in the marketplace. We will use approximately $14.9 million of the net proceeds to repay a portion of the outstanding amount under our convertible term notes, approximately $53.0 million of the net proceeds to pay down or pay off the ELCS Sub-debt Term Note, the 4th Tranche Term Note and the UK Term Note outstanding under the VPC Facility and the remainder, if any, for general corporate purposes, including to fund a portion of the loans made to our customers. Accordingly, our management will have broad discretion over the specific use of the net proceeds that we receive in this offering that we do not use to repay indebtedness and might not be able to obtain a significant return, if any, on investment of such net proceeds. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds. If we do not use the net proceeds that we receive in this offering effectively, then our business, operating results and financial condition could be harmed.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the “Exchange Act,” the listing standards of the New York Stock Exchange and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the “JOBS Act.” Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with

 

 

 

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evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenues-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

However, for so long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth companies,” including not being required to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions until we are no longer an “emerging growth company.”

We would cease to be an “emerging growth company” upon the earliest of: (i) the first fiscal year following the fifth anniversary of the completion of this offering, (ii) the first fiscal year after our annual gross revenues are $1 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, and (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board of Directors and board committees and qualified executive officers.

If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research reports about our business, our share price and trading volume could decline.

The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us should downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts should cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any dividends on our common stock. We intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. In addition, pursuant to our financing agreement, we are prohibited from paying cash dividends without the prior consent of VPC. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution of $4.86 per share, or $4.66 per share if the underwriters exercise their option to

 

 

 

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purchase additional shares in full, based on the initial public offering price of $6.50 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of capital stock. You will experience additional dilution upon exercise of options to purchase common stock under our equity incentive plans or if we otherwise issue additional shares of our common stock. See “Dilution.”

Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.

Our amended and restated certificate of incorporation and amended and restated bylaws, as we expect they will be in effect upon the completion of this offering, contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. The provisions, among other things:

 

Ø   establish a classified Board of Directors so that not all members of our Board of Directors are elected at one time;

 

Ø   permit only our Board of Directors to establish the number of directors and fill vacancies on the Board;

 

Ø   provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders;

 

Ø   require two-thirds approval to amend some provisions in our restated certificate of incorporation and restated bylaws;

 

Ø   authorize the issuance of “blank check” preferred stock that our Board of Directors could use to implement a stockholder rights plan, or a “poison pill;”

 

Ø   eliminate the ability of our stockholders to call special meetings of stockholders;

 

Ø   prohibit stockholder action by written consent, which will require that all stockholder actions must be taken at a stockholder meeting;

 

Ø   do not provide for cumulative voting; and

 

Ø   establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or the “DGCL,” which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.

Any provision of our amended and restated certificate of incorporation or amended and restated bylaws, as we expect they will be in effect upon the completion of this offering, or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

 

 

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Our amended and restated certificate of incorporation that will be in effect upon the completion of the IPO designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our amended and restated certificate of incorporation, as we expect it will be in effect upon the completion of this offering provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers, employees or agents, (iii) any action asserting a claim against us arising under the DGCL or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. By becoming a stockholder in our company, you will be deemed to have notice of and have consented to the provisions of our amended and restated certificate of incorporation related to choice of forum. The choice of forum provision in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

If we fail to maintain an effective system of disclosure controls and procedures and internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

Ensuring that we have adequate disclosure controls and procedures, including internal controls over financial reporting, in place so that we can produce accurate financial statements on a timely basis is costly and time-consuming and needs to be reevaluated frequently. We are in the process of documenting, reviewing and, if appropriate, improving our internal controls and procedures in anticipation of becoming a public company and being subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act,” which will require annual management assessments of the effectiveness of our internal controls over financial reporting and, when we cease to be an emerging growth company under the JOBS Act, a report by our independent auditors addressing these assessments. Our management may conclude that our internal controls over financial reporting are not effective if we fail to cure any identified material weakness or otherwise. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may conclude that our internal controls over financial reporting are not effective. In the future, our independent registered public accounting firm may not be satisfied with our internal controls over financial reporting or the level at which our controls are documented, designed, operated or reviewed, or it may interpret the relevant requirements differently from us. In addition, during the course of the evaluation, documentation and testing of our internal controls over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Securities and Exchange Commission, or the “SEC,” for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. Any such deficiencies may also subject us to adverse regulatory consequences. If we fail to achieve and maintain the adequacy of our internal controls over financial reporting, as these standards may be modified, supplemented or amended from time to time, we may be unable to report our financial information on a timely basis, may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, and may suffer adverse regulatory consequences or violations of listing standards. Any of the above could also result in a negative reaction in the financial markets due to a loss of investor confidence in the reliability of our financial statements.

 

 

 

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Forward-looking statements

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in “Prospectus summary,” “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Business.” Forward-looking statements include information concerning our strategy, future operations, future financial position, future revenues, projected expenses, margins, prospects and plans and objectives of management. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “seek,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

Ø   our future financial performance, including our expectations regarding our revenue, cost of revenue, growth rate of revenue, cost of borrowing, credit losses, marketing costs, net charge-offs, gross profit or gross margin, operating expenses, operating margins, ability to generate cash flow and ability to achieve and maintain future profitability;

 

Ø   our use of the proceeds of this offering;

 

Ø   the availability of debt financing, funding sources and disruptions in credit markets;

 

Ø   our ability to meet anticipated cash operating expenses and capital expenditure requirements;

 

Ø   anticipated trends, growth rates, seasonal fluctuations and challenges in our business and in the markets in which we operate;

 

Ø   our ability to anticipate market needs and develop new and enhanced or differentiated products, services and mobile apps to meet those needs, and our ability to successfully monetize them;

 

Ø   our expectations with respect to trends in our average portfolio effective APR;

 

Ø   our anticipated growth and growth strategies and our ability to effectively manage that growth;

 

Ø   our anticipated expansion of relationships with strategic partners; customer demand for our product and our ability to rapidly scale our business in response to fluctuations in demand;

 

Ø   our ability to attract potential customers and retain existing customers and our cost of customer acquisition;

 

Ø   the ability of customers to repay loans;

 

Ø   interest rates and origination fees on loans;

 

Ø   the impact of competition in our industry and innovation by our competitors;

 

Ø   our ability to attract and retain necessary qualified directors, officers and employees to expand our operations;

 

Ø   our reliance on third-party service providers;

 

Ø   our access to the automated clearinghouse system;

 

Ø   the efficacy of our marketing efforts and relationships with marketing affiliates;

 

Ø   our anticipated direct marketing costs and spending;

 

Ø   the evolution of technology affecting our products, services and markets;

 

Ø   continued innovation of our analytics platform;

 

 

 

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Ø   our ability to prevent security breaches, disruption in service and comparable events that could compromise the personal and confidential information held in our data systems, reduce the attractiveness of the platform or adversely impact our ability to service loans;

 

Ø   our ability to detect and filter fraudulent or incorrect information provided to us by our customers or by third parties;

 

Ø   our ability to adequately protect our intellectual property;

 

Ø   our compliance with applicable local, state, federal and foreign laws;

 

Ø   our compliance with current or future applicable regulatory developments and regulations, including developments or changes from the CFPB;

 

Ø   regulatory developments or scrutiny by agencies regulating our business or the businesses of our third-party partners;

 

Ø   public perception of our business and industry;

 

Ø   the anticipated effect on our business of litigation or regulatory proceedings to which we or our officers are a party;

 

Ø   the anticipated effect on our business of natural or man-made catastrophes;

 

Ø   the increased expenses and administrative workload associated with being a public company;

 

Ø   failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;

 

Ø   our liquidity and working capital requirements;

 

Ø   the estimates and estimate methodologies used in preparing our consolidated financial statements;

 

Ø   the utility of non-GAAP financial measures;

 

Ø   the future trading prices of our common stock and the impact of securities analysts’ reports on these prices;

 

Ø   our anticipated development and release of certain products and applications and changes to certain products;

 

Ø   our anticipated investing activity;

 

Ø   our assumptions with respect to our convertible term notes, including with respect to draw downs and conversions; and

 

Ø   trends anticipated to continue as our portfolio of loans matures.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

We believe that these statements constitute “forward-looking statements” within the meaning of Rule 175 under the Securities Act of 1933, as amended, and Rule 3b-6 under the Securities Exchange Act of 1934, as amended. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk factors” and elsewhere in this prospectus. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the

 

 

 

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date of this prospectus. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

 

 

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Industry and market data

This prospectus contains estimates, statistical data, and other information concerning our industry, including market size and growth rates, that are based on industry publications, surveys and forecasts, including those by the CFPB, Friends Provident Foundation, CFI Group and other publicly available sources. The industry and market information included in this prospectus involves a number of assumptions and limitations.

The sources of industry and market data contained in this prospectus are listed below:

 

Ø   Board of Governors of the Federal Reserve System, Report on the Economic Well-Being of U.S. Households in 2015, May 2016.

 

Ø   CFPB, Payday Loans and Deposit Advance Products: A White Paper of Initial Findings, April 2013.

 

Ø   CFPB, Arbitration Study, Report to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act §1028(a), March 2015.

 

Ø   Centre for Economics and Business Research, Future Trends in UK Banking, February 2015.

 

Ø   CFI Group, Bank Satisfaction Barometer 2015, October 2015.

 

Ø   Competition & Markets Authority, Market Investigation into Payday Lending, Notice of Possible Remedies Under Rule 11 of the CMA Rules of Procedure, June 11, 2014.

 

Ø   Competition & Markets Authority, Payday Lending Investigation, Summary of Provisional Findings Report, June 11, 2014.

 

Ø   Competition & Markets Authority, Payday Lending Market Investigation Final Report, February 24, 2015.

 

Ø   Corporation for Enterprise Development, Excluded from the Financial Mainstream: How the Economic Recovering is bypassing Millions of Americans. Findings from 2015 Assets & Opportunity Scorecard, January 2015.

 

Ø   FDIC, Study of Bank Overdraft Programs, November 2008.

 

Ø   FICO, Expanding Credit Opportunities, July 2015.

 

Ø   Financial Inclusion Commission, Improving the Financial Health of the Nation, March 2015.

 

Ø   Friends Provident Foundation, Credit and Low-Income Consumers, November 2011.

 

Ø   House of Commons Welsh Affairs Committee, The Impact of Changes Benefit in Wales, October 2013.

 

Ø   J.P. Morgan Chase & Co., Weathering Volatility: Big Data on the Financial Ups and Downs of U.S. Individuals, May 2015.

 

Ø   U.S. Census Bureau, Income and Poverty in the United States: 2015, September 2016.

The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk factors” and elsewhere in this prospectus. These and other factors could cause our actual results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

 

 

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Use of proceeds

We estimate that the net proceeds from our sale of 12,400,000 shares of common stock in this offering at an assumed initial public offering price of $6.50 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $69 million, or $81 million if the underwriters’ option to purchase additional shares is exercised in full. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by $12.4 million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, an increase (decrease) of one million shares in the number of shares offered by us in this offering would increase (decrease) the net proceeds to us from this offering by $6.5 million, assuming the initial public offering price of $6.50 per share remains the same, after deducting the underwriting discount and commissions and estimated offering expenses payable by us. We do not expect that a change in the initial public offering price or the number of shares by these amounts would have a material effect on our expected uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

We will use approximately $14.9 million of the net proceeds to repay a portion of the outstanding amount under our convertible term notes, approximately $53.0 million of the net proceeds to pay down or pay off the ELCS Sub-debt Term Note, the 4th Tranche Term Note and the UK Term Note outstanding under the VPC Facility and the remainder, if any, for general corporate purposes, including to fund a portion of the loans made to our customers. VPC has indicated their intent to purchase 2.3 million shares in the offering at the assumed initial public offering price, and we intend to use the proceeds from that purchase, approximately $14.9 million, to reduce an equivalent amount of indebtedness under the convertible term notes. Pursuant to our financing agreement, the outstanding borrowings under the notes under the VPC Facility were used to finance customer loan growth for our Rise and Sunny products and for working capital. The convertible term notes will mature on January 30, 2018 and generally bear interest at the greater of 10% or a base rate (defined as the 3-month LIBOR rate, with a 1% floor) plus 9%. We were required to draw-down the maximum borrowing amount of $25 million prior to January 5, 2017, and we made an initial draw in October 2016 of $10 million and a subsequent draw in January 2017 of $15 million, bringing the total amount drawn-down on the convertible term notes to $25 million. The ELCS Sub-debt Term Note will mature on January 30, 2018, and the $45 million outstanding under the ELCS Sub-debt Term Note as of December 31, 2016 generally bears interest at the 3-month LIBOR rate plus 18%. The 4th Tranche Term Note will mature on January 30, 2018, and the $25 million outstanding on the 4th Tranche Term Note as of December 31, 2016 generally bears interest at the 3-month LIBOR plus 17%. The UK Term Note will mature on January 30, 2018, and the $47.8 million outstanding under the UK Term Note as of December 31, 2016 generally bears interest at the 3-month LIBOR rate plus 16%. To the extent that the initial public offering price is lower than the assumed public offering price of $6.50 per share, and the net proceeds are lower than we have estimated, or our offering expenses are greater than we have estimated, the amount of the indebtedness that we will repay will be reduced. To the extent that the initial public offering price is higher than the assumed public offering price of $6.50 per share, and the net proceeds are higher than we have estimated, or our offering expenses are less than we have estimated, the amount of the indebtedness that we will repay will be increased. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and Capital Resources—Debt facilities—VPC Facility.”

We will have broad discretion over the uses of the net proceeds in this offering that we do not use to repay indebtedness. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the US government.

 

 

 

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Dividend policy

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. In addition, pursuant to our financing agreement, we are prohibited from paying cash dividends without the prior consent of VPC. Any future determination to declare dividends will be made at the discretion of our Board of Directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our Board of Directors may deem relevant.

 

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Capitalization

The following table sets forth our consolidated cash and cash equivalents and capitalization as of December 31, 2016 on:

 

Ø   an actual basis;

 

Ø   a pro forma basis to give effect to: (i) the automatic conversion of all outstanding shares of our convertible preferred stock into 5,639,410 shares of our common stock immediately prior to the 2.5-for-1 forward stock split of our common stock and immediately prior to the completion of this offering, (ii) the application of the 2.5-for-1 forward stock split to all common stock after such conversion, (iii) the convertible term notes being fully drawn at the time of this offering and (iv) the filing of our amended and restated certificate of incorporation; and

 

Ø   a pro forma as adjusted basis to reflect: (i) the pro forma adjustments set forth above, (ii) our receipt of the net proceeds from our sale of 12,400,000 shares of common stock in this offering at an assumed initial public offering price of $6.50 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (iii) the use of proceeds from this offering to repay a portion of the amounts outstanding under our VPC Facility and the convertible term notes as described in “Use of proceeds.”
(dollars in thousands)    Actual     Pro
forma
    Pro forma as
adjusted(1)(2)
 

Cash and cash equivalents

   $ 53,574     $ 68,574     $ 69,935  
      

Financing agreement (excluding convertible term notes)

   $ 485,300     $ 485,300       432,250  

Convertible term notes(3)

     10,000       25,000       10,050  

Convertible preferred stock:

      

Series A preferred stock, $0.0001 par value, 2,957,059 shares authorized, issued and outstanding, no shares authorized, issued and outstanding pro forma and pro forma as adjusted

     3              

Series B preferred stock, $0.0001 par value, 2,682,351 shares authorized, issued and outstanding, no shares authorized, issued and outstanding pro forma and pro forma as adjusted

     3              
  

 

 

   

 

 

   

 

 

 

Total convertible preferred stock

     6              

Stockholders’ equity:

      

Preferred stock, $0.0004 par value, no shares authorized, issued and outstanding, actual; 24,500,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted

                  

Common stock; $0.0004 par value; 41,676,750 shares authorized; 13,001,220 share issued and outstanding, actual; 300,000,000 shares authorized and 27,099,745 shares issued and outstanding, pro forma; and 300,000,000 shares authorized and 39,499,745 shares issued and outstanding, pro forma as adjusted

     5       11       16  

Additional paid-in capital

     88,854       88,854       158,210  

Accumulated other comprehensive income, net of taxes

     1,087       1,087       1,087  

Accumulated deficit

     (76,385     (76,385     (76,385
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     13,567       13,567       82,928  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 508,867     $ 523,867     $ 525,228  
  

 

 

   

 

 

   

 

 

 

 

(1)  

Each $1.00 increase (decrease) in the assumed initial public offering price of $6.50 per share, would increase (decrease) each of cash and cash equivalents, additional paid-in-capital, total stockholders’ equity and total capitalization by approximately $12.4 million, assuming all other adjustments detailed above remain the same. Similarly, an increase (decrease) of one million

 

(footnotes continued on following page)

 

 

 

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Capitalization

 

 

  shares in the number of shares offered by us in this offering would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $6.5 million, assuming all other adjustments detailed above remain the same.
(2)   The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.
(3)   Pursuant to the terms of the convertible term notes, VPC has the option to convert the notes into equity prior to the effectiveness of the registration statement of which this prospectus forms a part. In the event of such conversion, based on an assumed initial public offering price of $6.50 per share, and the reduction of indebtedness under the convertible term notes by approximately $14.9 million from the net proceeds of this offering, the notes would be convertible into 1,939,467 shares of our common stock. See “Use of proceeds.” The convertible term notes were fully drawn as of January 2017. See “Description of capital stock—Convertible Term Notes.”

The number of shares of our common stock set forth in the table above excludes 6,995,472 shares of common stock reserved and common stock available for issuance under our 2016 Plan and our 2014 Plan, which comprises:

 

Ø   3,501,415 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2016, with a weighted average exercise price of $4.19 per share and per share exercise prices ranging from $2.12 to $8.32;

 

Ø   425,262 shares of common stock issuable upon the vesting of restricted stock units outstanding as of December 31, 2016, with a weighted average grant date fair value of $8.12 per share;

 

Ø   3,068,795 shares of common stock issuable upon the exercise of options available for grant.

The information above is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s discussion and analysis of financial condition and results of operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

 

 

 

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Dilution

If you invest in our common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of common stock in this initial public offering and the pro forma as adjusted net tangible book value per share of common stock immediately after this offering.

As of December 31, 2016, our pro forma net tangible book value was approximately $(4.8) million, or $(0.17) per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the shares of common stock outstanding at December 31, 2016 assuming the conversion of all outstanding shares of our convertible preferred stock into common stock and the application of the 2.5-for-1 forward stock split to all common stock after such conversion.

After giving effect to (i) our sale of 12,400,000 shares of common stock in this offering at an assumed initial public offering price of $6.50 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the use of proceeds from this offering to repay a portion of the amounts outstanding under our VPC Facility as described in “Use of proceeds,” our pro forma as adjusted net tangible book value at December 31, 2016 would have been approximately $64.6 million, or $1.64 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $1.81 per share to existing stockholders and an immediate dilution of $4.86 per share to new investors purchasing shares in this offering.

The following table illustrates this dilution at December 31, 2016:

 

Assumed initial public offering price per share

   $ 6.50     

Pro forma net tangible book value per share

      $ (0.17

Increase per share attributable to this offering

        1.81  
     

 

 

 

Pro forma as adjusted net tangible book value per share after this offering

     1.64     
  

 

 

    

Net tangible book value dilution per share to new investors in this offering

   $ 4.86     
  

 

 

    

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed initial public offering price of $6.50 per share, would increase (decrease) our pro forma net tangible book value, as adjusted to give effect to this offering, by $0.29 per share and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $0.71 per share, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and after repayment of a portion of the amounts outstanding under our VPC Facility. Similarly, an increase (decrease) of one million shares in the number of shares offered by us in this offering would increase (decrease) our pro forma net tangible book value, as adjusted to give effect to this offering by $0.11 per share and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $0.11 per share, assuming an initial public offering price of $6.50 per share, remains the same, after deducting the underwriting discount and commissions and estimated offering expenses payable by us and after repayment of a portion of the amounts outstanding under our VPC Facility.

 

 

 

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Dilution

 

 

If the underwriters exercise their option to purchase additional shares in full, the following will occur:

 

Ø   the pro forma as adjusted net tangible book value per share of our common stock after giving effect to this offering would be $1.84 per share;

 

Ø   the pro forma as adjusted percentage of shares of our common stock held by existing stockholders will decrease to approximately 60% of the total number of pro forma as adjusted shares of our common stock outstanding after this offering;

 

Ø   the pro forma as adjusted number of shares of our common stock held by investors participating in this offering will increase to 14,260,000, or approximately 31% of the total pro forma as adjusted number of shares of our common stock outstanding after this offering; and

 

Ø   the dilution in net tangible book value per share to new investors in this offering would be $4.66 per share.

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2016, assuming the conversion of all outstanding shares of our convertible preferred stock into common stock and the application of the 2.5-for-1 forward stock split to all common stock after such conversion, the total number of shares of common stock purchased from us, the total consideration paid to us, and the weighted average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering at the initial public offering price of $6.50 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

       Shares purchased      Total consideration     

Weighted

average

price

per share

 

 
        Number        Percent      Amount        Percent     

Existing stockholders(1)

       27,099,745          62.4    $ 89,518,732          48.4    $ 3.30  

Exercised options(2)

       3,501,415          8.1        14,670,929          8.0        4.19  

Restricted stock units(3)

       425,262          1.0                 0.0         

New investors(4)

       12,400,000          28.5        80,600,000          43.6        6.50  
    

 

 

      

 

 

    

 

 

      

 

 

    

Total

       43,426,422          100.0    $ 184,789,661          100.0   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

(1)   Number includes (i) 25,706,357 shares contributed by TFI in connection with the Spin-Off pursuant to the separation and distribution agreement and (ii) 1,393,388 shares issued upon the exercise of stock options.
(2)   Shares of common stock issuable upon the exercise of options outstanding.
(3)   Shares of common stock issuable upon the vesting of restricted stock units.
(4)   May include purchases, if any, of the shares in this offering by the existing stockholders through a directed share program, as described in this prospectus, or otherwise, at the initial public offering price.

Each $1.00 increase (decrease) in the assumed public offering price of $6.50 per share, would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $12.4 million, $12.4 million and $0.29, respectively, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same. Similarly, an increase (decrease) of one million shares in the number of shares offered by us in this offering would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $6.5 million, $6.5 million and $0.10, respectively, assuming an initial public offering price of $6.50 per share, remains the same.

 

 

 

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Dilution

 

 

The foregoing discussion and tables exclude:

 

Ø   3,068,795 shares of common stock reserved for issuance pursuant to the exercise of options available for grant under our 2016 Plan and our 2014 Plan as of December 31, 2016.

The foregoing discussion and table assume the following:

 

Ø   the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 5,639,410 shares of common stock immediately prior to the 2.5-for-1 forward stock split of our common stock and immediately prior to the completion of this offering;

 

Ø   a 2.5-for-1 forward stock split of our common stock to be effected immediately prior to the completion of this offering;

 

Ø   the filing of our amended and restated certificate of incorporation in connection with the completion of this offering;

 

Ø   an IPO price per share in excess of our highest option exercise prices;

 

Ø   the issuance of 3,501,415 shares of common stock upon the exercise of options outstanding as of December 31, 2016, with a weighted average exercise price of $4.19 per share and per share exercise prices ranging from $2.12 to $8.32;

 

Ø   the issuance of 425,262 shares of common stock upon the vesting of restricted stock units outstanding as of December 31, 2016 with a weighted average grant date fair value of $8.12;

 

Ø   no exercise of the underwriters’ option to purchase additional shares; and

 

Ø   no conversion of the convertible term notes into shares of our common stock, which would be convertible into 1,939,467 shares of our common stock based on an assumed initial public offering price of $6.50 per share, and the reduction of indebtedness under the convertible term notes by approximately $14.9 million from the net proceeds of this offering. See “Use of proceeds” and “Description of capital stock—Convertible Term Notes.”

To the extent that additional options become exercisable and are exercised or restricted stock units vest, or if new options, restricted stock units or other securities are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

 

 

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Selected historical consolidated financial data

You should read the following selected consolidated financial data below in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and the audited consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in any future period.

 

 

 

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Selected historical consolidated financial data

 

 

Consolidated statements of operations data (dollars in thousands, except share and
per share amounts)
   For the years ended
December 31,
 
   2016     2015  

Revenues

   $ 580,441     $ 434,006  

Cost of sales:

    

Provision for loan losses

     317,821       232,650  

Direct marketing costs

     65,190       61,032  

Other cost of sales

     17,433       15,197  
  

 

 

   

 

 

 

Total cost of sales

     400,444       308,879  
  

 

 

   

 

 

 

Gross profit

     179,997       125,127  
  

 

 

   

 

 

 

Operating expenses:

    

Compensation and benefits

     65,657       60,568  

Professional services

     30,659       25,134  

Selling and marketing

     9,684       7,567  

Occupancy and equipment

     11,475       9,690  

Depreciation and amortization

     10,906       8,898  

Other

     3,812       4,303  
  

 

 

   

 

 

 

Total operating expenses

     132,193       116,160  
  

 

 

   

 

 

 

Operating income

     47,804       8,967  
  

 

 

   

 

 

 

Other income (expense):

    

Net interest expense

     (64,277     (36,674

Foreign currency transaction loss

     (8,809     (2,385

Non-operating income (expense)

     (43     5,523  
  

 

 

   

 

 

 

Total other expense

     (73,129     (33,536
  

 

 

   

 

 

 

Loss before taxes

     (25,325     (24,569

Income tax benefit

     (2,952     (4,658
  

 

 

   

 

 

 

Net loss

   $ (22,373   $ (19,911
  

 

 

   

 

 

 

Basic and diluted loss per share

   $ (4.34   $ (3.97

Pro forma net loss per share of common stock — basic and diluted(1)

   $ (0.83   $ (0.75

As adjusted(2)

   $ (0.57  

Basic and diluted weighted average shares outstanding

     5,157,705       5,010,339  

Weighted average shares used in computing pro forma net loss per share:

    

Basic and diluted(1)

     26,992,788       26,624,373  

Basic and diluted, as adjusted(2)

     39,392,788    

 

(1)   Pro forma basic and diluted net income (loss) per share of common stock have been calculated assuming (i) the conversion of all outstanding shares of convertible preferred stock at December 31, 2016 and 2015 into an aggregate of 5,639,410 shares (prior to the 2.5-for-1 forward stock split) of common stock as of the beginning of the applicable period or at the time of issuance, if later and (ii) the application of the 2.5-for-1 forward stock split to all common stock after such conversion.
(2)   Pro forma net income (loss) per share of common stock, as adjusted, gives effect to (i) the sale by us of 12,400,000 shares of our common stock in this offering; (ii) the automatic conversion of all outstanding shares of convertible preferred stock into an aggregate of 5,639,410 shares (prior to the 2.5-for-1 forward stock split) of our common stock; (iii) the application of the 2.5-for-1 forward stock split to all common stock after such conversion and (iv) the use of proceeds from this offering to repay a portion of the amounts outstanding under the Victory Park Capital credit facility, or the “VPC Facility,” and the convertible term notes as described in “Use of proceeds,” as if the offering and those transactions had occurred on December 31, 2016. The number of shares is computed based on an assumed initial public offering price of $6.50 per share.

 

 

 

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Selected historical consolidated financial data

 

 

 

     As of and for the years
ended December 31,
 
Other financial and operational data (dollars in thousands, except as noted)    2016     2015  

Adjusted EBITDA(1)

   $ 60,417     $ 18,712  

Free cash flow(2)

   $ 19,246     $ (30,931

Number of new customer loans

     277,601       238,238  

Number of loans outstanding

     289,193       222,723  

Customer acquisition costs

   $ 235     $ 256  

Net charge-offs(3)

   $ 299,700     $ 214,795  

Additional provision for loan losses(3)

     18,121       17,855  
  

 

 

   

 

 

 

Provision for loan losses

   $ 317,821     $ 232,650  
  

 

 

   

 

 

 

Past due combined loans receivable – principal as a percentage of combined loans receivable – principal(4)

     14     12

Net charge-offs as a percentage of revenues

     52     49

Total provision for loan losses as a percentage of revenues

     55     54

Combined loan loss reserve(5)

   $ 82,376     $ 65,784  

Combined loan loss reserve as a percentage of combined loans receivable(5)

     16     17

Effective APR of combined loan portfolio

     146     173

Ending combined loans receivable – principal(4)

   $ 481,210     $ 356,069  

 

(1)   Adjusted EBITDA is not a financial measure prepared in accordance with GAAP. Adjusted EBITDA represents our net income (loss), adjusted to exclude: net interest expense primarily associated with notes payable under the VPC Facility and ESPV Facility used to fund or purchase loans; foreign currency gains and losses associated with our UK operations; depreciation and amortization expense on fixed assets and intangible assets; stock-based compensation; adjustments to contingent consideration payable related to companies previously acquired prior to the Spin-Off; and income taxes. See “Management’s discussion and analysis of financial condition and results of operations—Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.
(2)   Free cash flow is not a financial measure prepared in accordance with GAAP. Free cash flow represents our net cash from operating activities adjusted for the net charge-offs—combined principal loans and capital expenditures incurred during the period. See “Management’s discussion and analysis of financial condition and results of operations—Non-GAAP Financial Measures” for more information and a reconciliation of free cash flow to net cash provided by operating activities.
(3)   Net charge-offs and additional provision for loan losses are not a financial measure prepared in accordance with 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 “Management’s discussion and analysis of financial condition and results of operations—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 GAAP.
(4)   Combined loans receivable is defined as loans owned by the Company plus loans originated and owned by third-party lenders pursuant to our CSO programs. See “Management’s discussion and analysis of financial condition and results of operations—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 GAAP.
(5)   Combined loan loss reserve is defined as the loan loss reserve for loans owned by the Company plus the loan loss reserve for loans originated and owned by third-party lenders and guaranteed by the Company. See “Management’s discussion and analysis of financial condition and results of operations—Non-GAAP Financial Measures” for more information and for a reconciliation of Combined loan loss reserve to loan loss reserve, the most directly comparable financial measure calculated in accordance with GAAP.

 

 

 

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Selected historical consolidated financial data

 

 

     As of December 31, 2016  
Selected consolidated balance sheet data (dollars in thousands)    Actual      Pro forma(1)      Pro forma as
adjusted(2)
 

Cash and cash equivalents

   $ 53,574      $ 68,574      $ 69,935  

Loans receivable, net of allowance for loan losses of $77,451

     392,663        392,663        392,663  

Total assets

     570,181        585,181        586,542  

Total liabilities

     556,614        571,614        503,614  

Total convertible preferred stock

     6                

Total stockholders’ equity

   $ 13,567      $ 13,567      $ 82,928  

 

(1)   The pro forma column reflects (i) the conversion of all outstanding shares of convertible preferred stock at December 31, 2016 into 5,639,410 shares (prior to the 2.5-for-1 forward stock split) of common stock immediately prior to the closing of this offering, (ii) the application of the 2.5-for-1 forward stock split to all common stock after such conversion and (iii) the convertible term notes being fully drawn at the time of this offering. The outstanding shares of our preferred stock were originally distributed to stockholders of TFI in connection with the Spin-Off. Each share of preferred stock will convert into one share of common stock without the payment of additional consideration. The conversion of the convertible preferred stock reduces total convertible preferred stock by $6 thousand while increasing common stock by the same amount.
(2)   The pro forma as adjusted column reflects (i) the pro forma adjustments described in footnote (1) above, (ii) the sale by us of 12,400,000 shares of common stock in this offering at an assumed initial public offering price of $6.50 per share, after deducting the underwriting discount and commissions and estimated offering expenses payable by us and (iii) the use of proceeds from this offering to repay a portion of the amounts outstanding under our VPC Facility and the convertible term notes as described in “Use of proceeds.” A $1.00 increase (decrease) in the assumed initial public offering price of $6.50 per share would increase (decrease) each of pro forma as adjusted cash and cash equivalents and total assets by $12.4 million and decrease (increase) pro forma as adjusted total stockholders’ equity by approximately $12.4 million, assuming the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting the underwriting discount and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of one million shares in the number of shares offered by us in this offering would increase (decrease) each of pro forma as adjusted cash and cash equivalents and total assets by $6.5 million and decrease (increase) pro forma as adjusted total stockholders’ equity by approximately $6.5 million, assuming an initial public offering price of $6.50 per share, remains the same, after deducting the underwriting discount and commissions and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price, number of shares offered and other terms of this offering determined at pricing.

Quarterly Results of Operations

The following tables show our unaudited consolidated quarterly statement of operations data, as well as the percentage of revenue for each line item shown, for each of the eight quarters preceding and including the period ended December 31, 2016. This information has been derived from our unaudited consolidated financial statements, which, in the opinion of management have been prepared on the same basis as our audited consolidated financial statements and include all adjustments necessary for the fair presentation of the financial information for the quarters presented. Historical results are not necessarily indicative of the results to be expected in future periods, and operating results for a quarterly period are not necessarily indicative of the operating results for a full year. The information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

 

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73

Selected historical consolidated financial data

 

 

 

    Three months ended  
(dollars in thousands, except as noted)   March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
   

March 31,

2016

    June 30,
2016
    September 30,
2016
    December 31,
2016
 

Revenues

  $ 89,506     $ 91,368     $ 119,432     $ 133,700     $ 130,722     $ 126,780     $ 153,920     $ 169,019  

Cost of sales:

               

Provision for loan losses

    39,284       50,210       71,519       71,637       59,089       67,134       91,282       100,316  

Direct marketing costs

    9,866       17,151       20,790       13,225       9,606       17,683       22,912       14,989  

Other cost of sales

    2,606       3,791       4,297       4,503       3,583       4,323       4,958       4,569  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

    51,756       71,152       96,606       89,365       72,278       89,140       119,152       119,874  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    37,750       20,216       22,826       44,335       58,444       37,640       34,768       49,145  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

               

Compensation and benefits

    13,921       15,014       15,594       16,039       16,100       16,584       17,496       15,477  

Professional services

    4,747       6,107       7,145       7,135       7,249       7,415       8,434       7,561  

Selling and marketing

    2,490       1,890       1,498       1,689       2,505       2,887       2,418       1,874  

Occupancy and equipment

    2,333       2,265       2,490       2,602       2,735       2,818       2,928       2,994  

Depreciation and amortization

    2,068       2,142       2,266       2,422       2,633       2,873       2,777       2,623  

Other

    569       1,030       1,043       1,661       706       844       916       1,346  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    26,128       28,448       30,036       31,548       31,928       33,421       34,969       31,875  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    11,622       (8,232     (7,210     12,787       26,516       4,219       (201     17,270  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest expense

    (6,755     (7,172     (10,278     (12,469     (13,500     (14,208     (17,090     (19,479

Foreign currency transaction gain (loss)

    (1,459     1,950       (1,731     (1,145     (1,358     (3,373     (1,543     (2,535

Non-operating income (expense)

          5,529       2       (8                       (43
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (8,214     307       (12,007     (13,622     (14,858     (17,581     (18,633     (22,057
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

    3,408       (7,925     (19,217     (835     11,658       (13,362     (18,834     (4,787

Income tax provision (benefit)

    2,509       (1,932     (4,156     (1,079     5,866       (5,866     (2,587     (365
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 899     $ (5,993   $ (15,061   $ 244     $ 5,792     $ (7,496   $ (16,247   $ (4,422
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to arrive at Adjusted EBITDA:

               

Net income (loss)

  $ 899     $ (5,993   $ (15,061   $ 244     $ 5,792     $ (7,496   $ (16,247   $ (4,422

Net interest expense

    6,755       7,172       10,278       12,469       13,500       14,208       17,090       19,479  

Foreign currency loss (gain)

    1,459       (1,950     1,731       1,145       1,358       3,373       1,543       2,535  

Depreciation and amortization expense

    2,068       2,142       2,266       2,422       2,633       2,873       2,777       2,623  

Stock-based compensation

    260       134       250       203       166       247       616       678  

Non-operating expense (income)

          (5,529     (2     8                         43  

Income tax provision (benefit)

    2,509       (1,932     (4,156     (1,079     5,866       (5,866     (2,587     (365
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 13,950     $ (5,956   $ (4,694   $ 15,412     $ 29,315     $ 7,339     $ 3,192     $ 20,571  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


Table of Contents

Selected historical consolidated financial data

 

 

    Three months ended  
(dollars in thousands, except as noted)   March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
 

Number of new customer loans

    29,944       62,548       84,333       61,413       40,717       68,494       98,070       70,320  

Number of loans outstanding

    131,577       163,736       206,934       222,723       201,076       231,120       289,193       289,193  

Customer acquisition costs

  $ 329     $ 274     $ 247     $ 215     $ 236     $ 258     $ 234     $ 213  

Net charge-offs

  $ 45,694     $ 38,180     $ 59,287     $ 71,634     $ 69,010     $ 60,153     $ 74,125     $ 96,412  

Additional provision for loan losses

    (6,410     12,030       12,232       3       (9,921     6,981       17,157       3,904  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

  $ 39,284     $ 50,210     $ 71,519     $ 71,637     $ 59,089     $ 67,134     $ 91,282     $ 100,316  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Past due combined loans receivable – principal as a percentage of combined loans receivable – principal

    14     12     14     12     12     12     14     14

Net charge-offs as a percentage of revenue

    51     42     50     54     53     47     48     57

Effective APR of combined loan portfolio

    189     189     169     158     153     148     146     141

 

 

 

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Selected historical consolidated financial data

 

 

    Three months ended  
(as a percentage of revenues)   March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
 

Revenues

    100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Cost of sales:

               

Provision for loan losses

    43.9       55.0       59.9       53.6       45.2       53.0       59.3       59.4  

Direct marketing costs

    11.0       18.8       17.4       9.9       7.3       13.9       14.9       8.9  

Other cost of sales

    2.9       4.1       3.6       3.4       2.7       3.4       3.2       2.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

    57.8       77.9       80.9       66.8       55.3       70.3       77.4       70.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    42.2       22.1       19.1       33.2       44.7       29.7       22.6       29.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

               

Compensation and benefits

    15.6       16.4       13.1       12.0       12.3       13.1       11.4       9.2  

Professional services

    5.3       6.7       6.0       5.3       5.5       5.8       5.5       4.5  

Selling and marketing

    2.8       2.1       1.3       1.3       1.9       2.3       1.6       1.1  

Occupancy and equipment

    2.6       2.5       2.1       1.9       2.1       2.2       1.9       1.8  

Depreciation and amortization

    2.3       2.3       1.9       1.8       2.0       2.3       1.8       1.6  

Other

    0.6       1.1       0.9       1.2       0.5       0.7       0.6       0.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    29.2       31.1       25.1       23.6       24.4       26.4       22.7       18.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    13.0       (9.0     (6.0     9.6       20.3       3.3       (0.1     10.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest expense

    (7.5     (7.8     (8.6     (9.3     (10.3     (11.2     (11.1     (11.5

Foreign currency transaction gain (loss)

    (1.6     2.1       (1.4     (0.9     (1.0     (2.7     (1.0     (1.5

Non-operating income

    0.0       6.1       0.0       0.0       0.0       0.0       0.0       0.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (9.2     0.3       (10.1     (10.2     (11.4     (13.9     (12.1     (13.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

    3.8       (8.7     (16.1     (0.6     8.9       (10.5     (12.2     (2.8

Income tax provision (benefit)

    2.8       (2.1     (3.5     (0.8     4.5       (4.6     (1.7     (0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    1.0     (6.6 )%      (12.6 )%      0.2     4.4     (5.9 )%      (10.6 )%      (2.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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Selected historical consolidated financial data

 

 

Quarterly Trends

Our gross revenue has generally increased over the eight quarters ended December 31, 2016. This growth has been primarily attributable to an increase in the finance charges, driven by increases in combined loans receivable – principal balances during the respective quarters. As expected, total cost of sales has generally increased quarter-to-quarter in absolute dollars as our loan originations and combined loans receivable – principal balances have increased. The decrease in revenue and total cost of sales from December 31, 2015 to June 30, 2016 was due to the seasonality of our business as both originations and combined loans receivable – principal balances typically decrease during the first quarter of the next year.

Generally, our total operating expenses have increased quarter-to-quarter over the eight quarters ended December 31, 2016, primarily due to increased personnel-related costs reflecting the increase in our headcount to support our growth. Despite the increases in absolute dollar amounts, total operating expenses as a percentage of revenue has generally decreased over the eight quarters ended December 31, 2016 as we have achieved greater economies of scale.

Lastly, we believe it is important to note that the average effective APR of our combined loan portfolio has decreased from 158% for the three months ended December 31, 2015 to 141% for the three months ended December 31, 2016. This reflects the improvements made in underwriting, the impact of the lower priced Elastic product as well as the maturing of the combined loan portfolio.

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. 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 “Risk factors” and “Forward-looking statements” sections of this prospectus 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 Rise, Elastic and Sunny 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. See “Certain Conventions Governing Information in this Prospectus—Presentation of information related to our products” for detailed information.

OVERVIEW

We provide online credit solutions to consumers in the US and the UK 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 difficult 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 1.6 million customers with $4.0 billion in credit. Our current online credit products, Rise, Elastic and Sunny, 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 and on the Elastic lines of credit. For all three products, our revenues, which primarily consist of finance charges, are driven by our average loan balances outstanding and by the average annual percentage rate, or “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. We present certain key metrics and other information on a “combined” basis to reflect information related to loans originated by us and loans originated by Republic 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 GAAP. See “—Key Financial and Operating Metrics” and “—Non-GAAP Financial Measures.”

We have experienced rapid growth and improving operating margins since launching our current generation of product offerings in 2013. Since their introduction through December 31, 2016, Rise, Elastic and Sunny, together, have provided approximately $2.5 billion in credit to approximately 785,000 customers and generated strong growth in revenues and loans outstanding. Our revenues for the year ended December 31, 2016 grew 34% compared to revenues for 2015. Our net losses for the years ended December 31, 2016 and 2015 were $22.4 million and $19.9 million, respectively. Our combined loan principal balances grew 35% in 2016, from $356.1 million as of December 31, 2015 to $481.2 million as of December 31, 2016. For additional information about our combined loan balances please see “—Non-GAAP Financial Measures—Combined loan information.”

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

 

 

We use our working capital, funds provided by third-party lenders pursuant to CSO programs and our credit facilities with Victory Park Management, LLC, or “VPC,” to fund the loans we make to our customers. Prior to January 2014, we funded all of our loans to customers out of our existing cash flows. On January 30, 2014, we entered into an agreement with VPC to provide a credit facility, or the “VPC Facility,” in order to fund our Rise and Sunny products 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. On August 15, 2014, the original amount of $250 million for the VPC Facility was amended, providing a credit facility with a maximum total borrowing amount of $315 million and further amended on May 20, 2015 to $335 million, on February 11, 2016 to $345 million, on June 30, 2016 to $395 million and on February 1, 2017 to $495 million. See “—Liquidity and Capital Resources—Debt facilities.”

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. We purchased these loan participations ourselves through June 30, 2015 and thus earned 90% of the revenues and incurred 90% of the losses associated with the Elastic product through that date. Due to the significant growth in Elastic, commencing July 1, 2015, a new structure was implemented such that the loan participations are sold by Republic Bank to Elastic SPV, Ltd., or “Elastic SPV.” Elastic SPV receives its funding from VPC in a separate $50 million financing facility, the “ESPV Facility,” which was finalized on July 13, 2015.

This facility was further increased to $100 million on October 21, 2015 and to $150 million on July 14, 2016. We do not own Elastic SPV but, effective July 1, 2015, we entered into a credit default protection agreement with Elastic SPV whereby we agreed to 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 GAAP, the Company is the primary beneficiary of Elastic SPV and is required to consolidate the financial results of Elastic SPV as a variable interest entity in its consolidated financial results beginning July 1, 2015. The consolidation of Elastic SPV did not change the presentation of the Company’s consolidated financial statements, as the Company’s consolidated financial statements continued to present revenue and losses on 90% of the Elastic lines of credit originated by Republic Bank and sold to Elastic SPV.

Our management assesses our financial performance and future strategic goals through key metrics based primarily on the following three themes:

 

Ø   Revenue growth.    For the year ended December 31, 2016, our total revenues were $580.4 million, which represented a 34% increase over the prior year total revenues of $434.0 million. 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, or “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) as we do not intend to lower our CAC over future periods. Instead, as we improve customer acquisition efficiency, we intend to increase spending on direct marketing to acquire a broader customer base to drive further revenue growth.

 

Ø  

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, including during the recent financial crisis. See “Business—Advanced Analytics and Risk Management—History of stable credit quality through the economic downturn.” Additionally, in the periods covered in this MD&A, we have continued to maintain stable credit quality. The credit quality metrics we monitor

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

 

 

  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.

 

Ø   Margin expansion.    We expect that our operating margins will continue to expand over the near term as we lower our direct marketing costs and operating expense as a percentage of revenues while continuing to maintain our stable credit quality levels. 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.

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 GAAP. See “—Non-GAAP Financial Measures” for a reconciliation of our non-GAAP metrics to GAAP.

Revenue growth

 

     As of and for the years
ended December 31,
 
Revenue growth metrics (dollars in thousands, except as noted)    2016     2015  

Revenues

   $ 580,441     $ 434,006  

Period-over-period revenue growth

     34     59

Ending combined loans receivable – principal(1)

     481,210       356,069  

Average combined loans receivable – principal(1)(2)

     395,216       250,058  

Total combined loans originated – principal

     1,078,180       783,627  

Average customer loan balance (in dollars)(3)

     1,664       1,598  

Number of new customer loans

     277,601       238,238  

Number of loans outstanding

     289,193       222,723  

Customer acquisition costs (in dollars)

     235       256  

Effective APR of combined loan portfolio

     146     173

 

(1)   Combined loans receivable is defined as loans owned by the Company 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 GAAP.
(2)   Average combined loans receivable – principal is calculated using an average of daily principal balances.
(3)   Average customer loan balance is a weighted average of all three 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 finance charges, CSO acquisition fees (which are fees we receive from customers who obtain a loan through the CSO program for the credit services, including the

 

 

 

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loan guaranty, we provide) and non-sufficient funds fees (which were discontinued at the beginning of the fourth quarter of 2015) on Rise installment loans, finance charges on Sunny installment loans and revenues earned on the Elastic lines of credit. 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), but include the full loan balances on CSO loans, which are not presented on our 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:

 

($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

 

 

 

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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.

Recent trends.    Our revenues for the year ended December 31, 2016 totaled $580.4 million, up 34% from the year ended December 31, 2015. The growth in revenues during 2016 as compared with the growth experienced in 2015 was driven by a 58% increase in our average combined loan balance as we continued to expand our customer base. The number of customer loans outstanding at December 31, 2016 increased 30% over the prior year amount. We were able to continue to grow our customer base while maintaining a CAC that was at the low end of our historical range of $230 to $300. Additionally, the average customer loan balance increased 4% from the prior period, totaling approximately $1,664. We expect this trend in average customer loan balance to continue as our loan portfolio continues to grow and mature with more existing and repeat customers. The growth in loan balances drove the increase in revenues for the year ended December 31, 2016, offset in part by a decrease in the average APR on the loan portfolio, which declined to 146% during the year ended December 31, 2016 from 173% during the year ended December 31, 2015. This decrease in the average APR resulted primarily from a shift in the mix of our loan portfolio. Elastic, which has grown significantly in volume and as a proportion of our portfolio since 2015, has an average effective APR of approximately 91% during the year ended December 31, 2016 compared to Rise, which has an average APR of approximately 156% during the same period, contributing to the overall reduction in the consolidated APR. Additionally, as the loan portfolios for Rise and Sunny installment loans continue to mature, their respective average APR will also continue to drop. See “Risk factors—Risks Related to Our Business and Industry—Our recent growth rate may not be indicative of our ability to continue to grow, if at all, in the future.”

 

 

 

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Credit quality

 

     As of and for the years
ended December 31,
 
Credit quality metrics (dollars in thousands)    2016     2015  

Net charge-offs(1)

   $ 299,700     $ 214,795  

Additional provision for loan losses(1)

     18,121       17,855  
  

 

 

   

 

 

 

Provision for loan losses

   $ 317,821     $ 232,650  
  

 

 

   

 

 

 

Past due combined loans receivable – principal as a percentage of combined loans receivable – principal(2)

     14     12

Net charge-offs as a percentage of revenues(1)

     52     49

Total provision for loan losses as a percentage of revenues

     55     54

Combined loan loss reserve(3)

   $ 82,376     $ 65,784  

Combined loan loss reserve as a percentage of combined loans receivable(3)

     16     17

 

(1)   Net charge-offs and additional provision for loan losses are not financial measures prepared in accordance with 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 GAAP.
(2)   Combined loans receivable is defined as loans owned by the Company plus loans originated and owned by third-party lenders. 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 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 GAAP.

In reviewing the credit quality of our loan portfolio, we break out our total provision for loan losses that is presented on our income statement under 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 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 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. Historically, we have generally incurred net charge-offs as a percentage of revenues of between 42% and 52% over the past four years.

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.

 

 

 

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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.

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 (for non-CSO and 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

 

 

 

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successfully made ten payments on an existing loan with us. Based on this methodology, we have historically seen our combined loan loss reserve as a percentage of combined loans receivable fluctuate between approximately 16% and 24% depending on the overall mix of new, former and past due customer loans.

Recent trends.    For the year ended December 31, 2016, net charge-offs as a percentage of revenues was 52%. In balancing the growth, mix and credit quality of our loan portfolio, we aim to manage this ratio between 45% and 55% on an annual basis. Our historical annual range of net charge-offs as a percentage of revenues is from 42% to 52% over the past four years. Additional provision for loan losses for the year ended December 31, 2016 totaled $18.1 million, remaining relatively flat compared to $17.9 million during the year ended December 31, 2015.

The combined loan loss reserve as a percentage of combined loans receivable totaled 16% as of December 31, 2016. The loan loss reserve as a percentage of combined loans receivable was down from 17% for the year ended December 31, 2015 due to continued growth in the balance of Elastic lines of credit receivable during 2016, which has a lower loan loss reserve percentage compared to our other two products as well as improvements in credit quality and the maturation of our loan portfolio.

 

 

 

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Additionally, we also look at principal loan charge-offs (including both credit and fraud losses) by vintage as a percentage of combined principal-originated. As the below table shows, our cumulative principal loan charge-offs for each annual vintage since the 2013 vintage are generally under 30% and continue to generally trend within our 25% to 30% targeted range.

 

LOGO

 

*   The 2016 vintage is not yet fully mature from a loss perspective — we expect cumulative losses to perform in the historical 25-30% range.

 

 

 

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Margins

 

     For the years ended
December 31,
 
Margin metrics (dollars in thousands)   

2016

   

2015

 

Revenues

   $ 580,441     $ 434,006  

Net charge-offs(1)

     (299,700     (214,795

Additional provision for loan losses(1)

     (18,121     (17,855

Direct marketing costs

     (65,190     (61,032 )  

Other cost of sales

     (17,433     (15,197 )  
  

 

 

   

 

 

 

Gross profit

     179,997       125,127  

Operating expenses

     (132,193     (116,160
  

 

 

   

 

 

 

Operating income (loss)

   $ 47,804     $ 8,967  
  

 

 

   

 

 

 

As a percentage of revenues:

    

Net charge-offs

     52     49

Additional provision for loan losses

     3        4   

Direct marketing costs

     11        14   

Other cost of sales

     3        4   
  

 

 

   

 

 

 

Gross margin

     31       29   

Operating expenses

     23        27   
  

 

 

   

 

 

 

Operating margin

     8     2
  

 

 

   

 

 

 

 

(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 (loss) expressed as a percentage of revenues. We expect our margins to increase as we continue to scale our business, with direct marketing costs and operating expenses decreasing to approximately 10% and 20% of revenues, respectively.

Recent operating margin trends.    For the year ended December 31, 2016 our operating margin was 8%, which was higher than the 2% for the full year 2015. This improvement was due to a decline in both direct marketing costs and operating expenses as a percentage of revenues. Direct marketing costs declined to 11% of revenues for the year ended December 31, 2016 compared to 14% of revenues for the year ended December 31, 2015 due to continued scaling of the business. Direct marketing expense increased slightly year-over-year as the number of new customer loans was up 17% for 2016 compared to 2015, partially offset by the CAC decreasing from $256 to $235 for the year ended December 31, 2016. Additionally, although operating expenses were up $16.0 million for 2016 as compared to the prior year, operating expenses as a percentage of revenue declined to 23%, down from 27%. As we continue to further scale our business, we believe our direct marketing costs as a percentage of revenues will continue to decrease to approximately 10% of revenues and operating expenses as a percentage of revenues should continue to decline to approximately 20% of revenues.

NON-GAAP FINANCIAL MEASURES

We believe that the inclusion of the following non-GAAP financial measures in this prospectus can provide a useful measure for period-to-period comparisons of our core business and useful information

 

 

 

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to investors and others in understanding and evaluating our operating results. However, non-GAAP financial measures are not a measure calculated in accordance with United States generally accepted accounting principles, or GAAP, and should not be considered an alternative to any measures of financial performance calculated and presented in accordance with GAAP. Other companies may calculate these non-GAAP financial measures differently than we do.

Adjusted EBITDA

Adjusted EBITDA represents our net income (loss), adjusted to exclude:

 

Ø   Net interest expense, primarily associated with notes payable under the VPC Facility and ESPV Facility used to fund our loans;

 

Ø   Foreign currency gains and losses associated with our UK operations;

 

Ø   Depreciation and amortization expense on fixed assets and intangible assets;

 

Ø   Stock-based compensation;

 

Ø   Adjustments to contingent considerations payable related to companies previously acquired prior to the Spin-Off; and

 

Ø   Income taxes.

Management believes that Adjusted EBITDA is a useful supplemental measure in analyzing the operating performance of the business and provides greater transparency into the results of operations of our core business.

Our use of Adjusted EBITDA 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 GAAP. Some of these limitations are:

 

Ø   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 expenditure requirements;

 

Ø   Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and

 

Ø   Adjusted EBITDA does not reflect interest associated with notes payable used for funding our customer loans, for other corporate purposes or tax payments that may represent a reduction in cash available to us.

 

 

 

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The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:

 

     For the years ended
December 31,
 
(dollars in thousands)    2016     2015  

Net loss

   $ (22,373   $ (19,911

Adjustments:

    

Net interest expense

     64,277       36,674  

Foreign currency transaction losses

     8,809       2,385  

Depreciation and amortization

     10,906       8,898  

Stock-based compensation

     1,707       847  

Non-operating expense (income)

     43       (5,523

Income tax benefit

     (2,952     (4,658
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 60,417     $ 18,712  
  

 

 

   

 

 

 

Free cash flow

Free cash flow, or “FCF,” represents our net cash from operating activities, adjusted to include:

 

Ø   Net charge-offs – combined principal loans; and

 

Ø   Capital expenditures.

The following table presents a reconciliation of net cash provided by operating activities to FCF for each of the periods indicated:

 

     For the years ended
December 31,
 
(dollars in thousands)    2016     2015  

Net cash provided by operating activities(1)

   $ 247,949     $ 128,432  

Adjustments:

    

Net charge-offs – combined principal loans

     (220,390     (150,091

Capital expenditures

     (8,313     (9,272
  

 

 

   

 

 

 

FCF

   $ 19,246     $ (30,931
  

 

 

   

 

 

 

 

(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 amount of gross charge-offs.

 

 

 

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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.

 

     For the years ended
December 31,
 
(dollars in thousands)    2016     

2015

 

Net charge-offs

   $ 299,700      $ 214,795  

Additional provision for loan losses

     18,121        17,855  
  

 

 

    

 

 

 

Provision for loan losses

   $ 317,821      $ 232,650  
  

 

 

    

 

 

 

Combined loan information

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 GAAP. Some of these limitations are:

 

Ø   Rise CSO loans are originated and owned by a third party lender; and

 

Ø   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:

 

Ø   Loans receivable, net, Company owned (which reconciles to our consolidated balance sheets included elsewhere in this prospectus);

 

Ø   Loans receivable, net, guaranteed by the Company (as disclosed in Note 1 of our consolidated financial statements included elsewhere in this prospectus);

 

Ø   Combined loans receivable (which we use as a non-GAAP measure); and

 

Ø   Combined loan loss reserve (which we use as a non-GAAP measure).

 

 

 

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    2015     2016  
(dollars in thousands)   March 31     June 30     September 30     December 31     March 31     June 30     September 30     December 31  

Company Owned Loans:

               

Loans receivable – principal, current, company owned

  $ 131,238     $ 182,007     $ 232,445     $ 271,415     $ 254,607     $ 293,375     $ 349,989     $ 381,120  

Loans receivable – principal, past due, company owned

    23,285       26,250       39,317       40,695       35,407       42,659       60,417       63,364  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable – principal, total, company owned

    154,523       208,257       271,762       312,110       290,014       336,034       410,406       444,484  

Loans receivable – finance charges, company owned

    11,925       13,830       18,932       21,869       19,045       20,093       22,745       25,629  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable – company owned

    166,448       222,087       290,694       333,979       309,059       356,127       433,151       470,114  

Allowance for loan losses on loans receivable, company owned

    (38,747     (49,307     (60,409     (59,771     (51,296     (54,873     (73,019     (77,451
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable, net, company owned

  $ 127,701     $ 172,780     $ 230,285     $ 274,208     $ 257,763     $ 301,254     $ 360,132     $ 392,663  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Third Party Loans Guaranteed by the Company:

               

Loans receivable – principal, current, guaranteed by company

  $ 20,555     $ 23,769     $ 29,193     $ 40,696     $ 28,556     $ 34,748     $ 35,173     $ 33,637  

Loans receivable – principal, past due, guaranteed by company

    1,580       2,230       3,131       3,263       2,112       2,911       2,680       3,089  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable – principal, total, guaranteed by company(1)

    22,135       25,999       32,324       43,959       30,668       37,659       37,853       36,726  

Loans receivable – finance charges, guaranteed by company(2)

    30       110       147       128       1,541       1,626       3,129       3,772  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable – guaranteed by company

    22,165       26,109       32,471       44,087       32,209       39,285       40,982       40,498  

Liability for losses on loans receivable, guaranteed by company

    (2,971     (4,783     (5,602     (6,013     (4,296     (7,124     (5,866     (4,925
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable, net, guaranteed by company(3)

  $ 19,194     $ 21,326     $ 26,869     $ 38,074     $ 27,913     $ 32,161     $ 35,116     $ 35,573  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined Loans Receivable(3):

               

Combined loans receivable – principal, current

  $ 151,793     $ 205,776     $ 261,638     $ 312,111     $ 283,163     $ 328,123     $ 385,162     $ 414,757  

Combined loans receivable – principal, past due

    24,865       28,480       42,448       43,958       37,519       45,570       63,097       66,453  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined loans receivable – principal

    176,658       234,256       304,086       356,069       320,682       373,693       448,259       481,210  

Combined loans receivable – finance charges

    11,955       13,940       19,079       21,997       20,586       21,719       25,874       29,401  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined loans receivable

  $ 188,613     $ 248,196     $ 323,165     $ 378,066     $ 341,268     $ 395,412     $ 474,133     $ 510,611  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined Loan Loss Reserve(3):

               

Allowance for loan losses on loans receivable, company owned

  $ (38,747   $ (49,307   $ (60,409   $ (59,771   $ (51,296   $ (54,873   $ (73,019   $ (77,451

Liability for losses on loans receivable, guaranteed by company

    (2,971     (4,783     (5,602     (6,013     (4,296     (7,124     (5,866     (4,925
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined loan loss reserve

  $ (41,718   $ (54,090   $ (66,011   $ (65,784   $ (55,592   $ (61,997   $ (78,885   $ (82,376
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined loans receivable – principal, past due(3)

  $ 24,865     $ 28,480     $ 42,448     $ 43,958     $ 37,519     $ 44,736     $ 61,451     $ 63,893  

Combined loans receivable – principal(3)

    176,658       234,256       304,086       356,069       320,682       373,693       448,259       481,210  

Percentage past due

    14     12     14     12     12     12     14     14

Combined loan loss reserve(3)

  $ (41,718   $ (54,090   $ (66,011   $ (65,784   $ (55,592   $ (61,997   $ (78,885   $ (82,376

Combined loans receivable(3)

    188,613       248,196       323,165       378,066       341,268       395,412       474,133       510,611  

Combined loan loss reserve as a percentage of combined loans receivable(3)(4)

    22     22     20     17     16     16     17     16

Allowance for loan losses as a percentage of loans receivable – company owned

    23     22     21     18     17     15     17     16

 

 

 

 

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(1)   Represents loans originated by third-party lenders through the CSO programs, which are not included in our financial statements.
(2)   Represents finance charges earned by third-party lenders through the CSO programs, which are not included in our financial statements.
(3)   Non-GAAP measure.
(4)   Combined loan loss reserve as a percentage of combined loans receivable is determined using period-end balances.

COMPONENTS OF OUR RESULTS OF OPERATIONS

Revenues

Our revenues are composed of finance charges, CSO acquisition fees and non-sufficient funds fees on Rise installment loans (which were discontinued in the fourth quarter of 2015), 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 the originating lender related to the Elastic product. See “—Overview” above for further information on the structure of Elastic.

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 and automated clearinghouse, or “ACH,” transaction costs associated with customer loan funding and payments.

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. For 2015 and 2016, all operating expenses are based on actual operating expenses incurred by us.

Compensation and benefits.    Salaries and personnel-related costs, including benefits, bonuses and stock-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.

 

 

 

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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.

Other income (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, and after July 1, 2015, the interest expense associated with the ESPV Facility related to the Elastic lines of credit and related Elastic SPV entity.

Foreign currency transaction gain (loss).    We incur foreign currency transaction gains and losses related to activities associated with our UK entity, Elevate Credit International, Ltd., primarily with regard to the VPC Facility used to fund Sunny installment loans.

Non-operating income.    Non-operating income primarily includes gains and losses on adjustments to contingent consideration liabilities related to acquisitions associated with the Elastic product.

 

 

 

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RESULTS OF OPERATIONS

The following table sets forth our consolidated statements of operations data for each of the periods indicated.

 

     For the years ended
December 31,
 
Consolidated statements of operations data (dollars in thousands)    2016     2015  

Revenues

   $ 580,441     $ 434,006  

Cost of sales:

    

Provision for loan losses

     317,821       232,650  

Direct marketing costs

     65,190       61,032  

Other cost of sales

     17,433       15,197  
  

 

 

   

 

 

 

Total cost of sales

     400,444       308,879  
  

 

 

   

 

 

 

Gross profit

     179,997       125,127  
  

 

 

   

 

 

 

Operating expenses:

    

Compensation and benefits

     65,657       60,568  

Professional services

     30,659       25,134  

Selling and marketing

     9,684       7,567  

Occupancy and equipment

     11,475       9,690  

Depreciation and amortization

     10,906       8,898  

Other

     3,812       4,303  
  

 

 

   

 

 

 

Total operating expenses

     132,193       116,160  
  

 

 

   

 

 

 

Operating income

     47,804       8,967  
  

 

 

   

 

 

 

Other income (expense):

    

Net interest expense

     (64,277     (36,674

Foreign currency transaction loss

     (8,809     (2,385

Non-operating income (expense)

     (43     5,523  
  

 

 

   

 

 

 

Total other expense

     (73,129     (33,536
  

 

 

   

 

 

 

Loss before taxes

     (25,325     (24,569

Income tax benefit

     (2,952     (4,658
  

 

 

   

 

 

 

Net loss

   $ (22,373   $ (19,911
  

 

 

   

 

 

 

 

 

 

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     For the years ended
December 31,
 
As a percentage of revenues    2016     2015  

Cost of sales:

    

Provision for loan losses

     55     54

Direct marketing costs

     11       14  

Other cost of sales

     3       4  
  

 

 

   

 

 

 

Total cost of sales

     69       71  
  

 

 

   

 

 

 

Gross profit

     31       29  
  

 

 

   

 

 

 

Operating expenses:

    

Compensation and benefits

     11       14  

Professional services

     5       6  

Selling and marketing

     2       2  

Occupancy and equipment

     2       2  

Depreciation and amortization

     2       2  

Other

     1       1  
  

 

 

   

 

 

 

Total operating expenses

     23       27  
  

 

 

   

 

 

 

Operating income

     8       2  
  

 

 

   

 

 

 

Other income (expense):

    

Net interest expense

     (11     (8

Foreign currency transaction loss

     (2     (1

Non-operating income (expense)

           1  
  

 

 

   

 

 

 

Total other expense

     (13     (8
  

 

 

   

 

 

 

Loss before taxes

     (4     (6

Income tax benefit

     (1     (1
  

 

 

   

 

 

 

Net loss

     (4 )%      (5 )% 
  

 

 

   

 

 

 

Comparison of years ended December 31, 2016 and 2015

Revenues

 

     Years ended December 31,     Period-to-period
change
 
     2016     2015    
(dollars in thousands)    Amount      Percentage of
revenues
    Amount      Percentage of
revenues
    Amount      Percentage  

Finance charges

   $ 578,417