10-Q 1 elevate10-qxq22017.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission file number 001-37680

elevatelogoa04.jpg
 ELEVATE CREDIT, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
 
 
46-4714474
State or Other Jurisdiction of
Incorporation or Organization
 
 
 
I.R.S. Employer Identification Number
 
 
 
 
 
4150 International Plaza, Suite 300
Fort Worth, Texas 76109
 
 
 
76109
Address of Principal Executive Offices
 
 
 
Zip Code
 
 
(817) 928-1500
 
 
Registrant’s Telephone Number, Including Area Code
 
 
 
 
 
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes
x
No
o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Non-accelerated filer
x
Accelerated filer
o
Smaller reporting company
o
Emerging growth company
x
 
 




1



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Outstanding at August 9, 2017
Common Shares, $0.0004 par value
 
41,693,473





2



TABLE OF CONTENTS
 
Note About Forward-Looking Statements
Part I - Financial Information
 
Item 1.
Financial Statements
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016
 
 
Unaudited Condensed Consolidated Income Statements for the three and six months ended June 30, 2017 and 2016
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2017 and 2016
 
 
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2017 and 2016
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
Part II - Other Information
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 6.
Exhibits
SIGNATURES





3



NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained throughout this Quarterly Report on Form 10-Q, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” 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 Quarterly Report on Form 10-Q 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
the availability of debt financing, funding sources and disruptions in credit markets;
Ø
the intention to create an additional special purpose vehicle ("SPV") as another funding source for the Elastic line of credit product;
Ø
the expectation that this additional SPV for Elastic would provide additional funding, diversified funding sources and further lower the cost of funds;
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 annual percentage rate;
Ø
our anticipated growth and growth strategies and our ability to effectively manage that growth;
Ø
our anticipated expansion of relationships with strategic partners;
Ø
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;
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;

4



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 Consumer Financial Protection Bureau;
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
trends anticipated to continue as our portfolio of loans matures; and
Ø
expectations regarding our debt facilities, including:
our expectation that the $49 million currently outstanding under the ESPV Facility which has an August 13, 2018 maturity date will be extended to a July 1, 2021 maturity date;
our expectation that the $75 million currently outstanding under the US Term Note which has an August 13, 2018 maturity date will be extended to a February 1, 2021 maturity date; and
our expectation that our UK Term Note will be amended during the third quarter of 2017 to reduce the cost of funds from 16% to 14% effective January 1, 2018, extend the maturity to February 1, 2021 and denominate at least two-thirds of this UK Term Note in British pounds by January 1, 2018, thus minimizing the amount of foreign exchange translation exposure related to this debt facility.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
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 Quarterly Report on Form 10-Q. 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 date of this Quarterly Report on Form 10-Q. 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.

5

Elevate Credit, Inc. and Subsidiaries


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and per share amounts)
 
June 30,
2017
 
December 31, 2016
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Cash and cash equivalents*
 
$
81,195

 
$
53,574

Restricted cash
 
2,188

 
1,785

Loans receivable, net of allowance for loan losses of $66,030 and $77,451, respectively*
 
405,619

 
392,663

Prepaid expenses and other assets*
 
8,048

 
11,314

Receivable from CSO lenders
 
24,270

 
26,053

Receivable from payment processors*
 
20,184

 
19,105

Deferred tax assets, net
 
33,542

 
31,197

Property and equipment, net
 
19,759

 
16,159

Goodwill
 
16,027

 
16,027

Intangible assets, net
 
2,213

 
2,304

Total assets
 
$
613,045

 
$
570,181

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Accounts payable and accrued liabilities ($70 and $21 payable to Think Finance at June 30, 2017 and December 31, 2016, respectively)*
 
$
33,624

 
$
31,390

State and other taxes payable
 
823

 
1,026

Deferred revenue
 
25,090

 
28,970

Notes payable, net*
 
448,935

 
493,478

Derivative liability
 
1,754

 
1,750

Total liabilities
 
510,226

 
556,614

COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 10)
 

 

STOCKHOLDERS’ EQUITY
 
 
 
 
Preferred stock; $0.0004 par value; 24,500,000 and 0 authorized shares, respectively; None issued and outstanding at June 30, 2017 and December 31, 2016.
 

 

Common stock; $0.0004 par value; 300,000,000 and 41,676,750 authorized shares, respectively; 41,693,473 and 13,001,216 issued and outstanding, respectively
 
17

 
5

Convertible preferred stock; Series A, $0.001 par value; 0 and 2,957,059 shares authorized, issued and outstanding, respectively; liquidation preference of $0 and $22,850, respectively
 

 
3

Convertible preferred stock; Series B, $0.001 par value; 0 and 2,682,351 shares authorized, issued and outstanding, respectively; liquidation preference of $0 and $40,000, respectively
 

 
3

Accumulated other comprehensive income, net of tax benefit of $2,347 for both periods
 
1,181

 
1,087

Additional paid-in capital
 
169,954

 
88,854

Accumulated deficit
 
(68,333
)
 
(76,385
)
Total stockholders’ equity
 
102,819

 
13,567

Total liabilities and stockholders’ equity
 
$
613,045

 
$
570,181

* These balances include certain assets and liabilities of a variable interest entity (“VIE”) that can only be used to settle the liabilities of that VIE. All assets of the Company are pledged as security for the Company’s outstanding debt, including debt held by the VIE. For further information regarding the assets and liabilities included in our consolidated accounts, see Note 4—Variable Interest Entity.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
6


Elevate Credit, Inc. and Subsidiaries


CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars in thousands, except share and per share amounts)
2017
 
2016
 
2017
 
2016
Revenues
 
$
150,471

 
$
126,780

 
$
306,838

 
$
257,502

Cost of sales:
 
 
 
 
 
 
 
 
      Provision for loan losses
 
72,297

 
67,134

 
155,090

 
126,223

      Direct marketing costs
 
19,592

 
17,683

 
30,080

 
27,289

      Other cost of sales
 
4,425

 
4,323

 
8,533

 
7,906

Total cost of sales
 
96,314

 
89,140

 
193,703

 
161,418

Gross profit
 
54,157

 
37,640

 
113,135

 
96,084

Operating expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
20,824

 
16,584

 
41,352

 
32,684

Professional services
 
8,851

 
7,415

 
16,427

 
14,664

Selling and marketing
 
2,142

 
2,887

 
4,620

 
5,392

Occupancy and equipment
 
3,519

 
2,818

 
6,776

 
5,553

Depreciation and amortization
 
2,393

 
2,873

 
5,001

 
5,506

Other
 
1,095

 
844

 
2,010

 
1,550

Total operating expenses
 
38,824

 
33,421

 
76,186

 
65,349

Operating income
 
15,333

 
4,219

 
36,949

 
30,735

Other income (expense):
 
 
 
 
 
 
 
 
      Net interest expense
 
(18,095
)
 
(14,208
)
 
(37,341
)
 
(27,708
)
      Foreign currency transaction gain (loss)
 
1,716

 
(3,373
)
 
2,284

 
(4,731
)
      Non-operating income
 
2,646

 

 
2,513

 

Total other expense
 
(13,733
)
 
(17,581
)
 
(32,544
)
 
(32,439
)
Income (loss) before taxes
 
1,600

 
(13,362
)
 
4,405

 
(1,704
)
Income tax benefit
 
(1,420
)
 
(5,866
)
 
(283
)
 

Net income (loss)
 
$
3,020

 
$
(7,496
)
 
$
4,688

 
$
(1,704
)
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.08

 
$
(0.59
)
 
$
0.18

 
$
(0.13
)
Diluted earnings (loss) per share
 
$
0.08

 
$
(0.59
)
 
$
0.17

 
$
(0.13
)
Basic weighted average shares outstanding
 
38,541,965

 
12,800,795

 
25,841,408

 
12,798,957

Diluted weighted average shares outstanding
 
39,950,760

 
12,800,795

 
27,294,945

 
12,798,957




The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
7

Elevate Credit, Inc. and Subsidiaries


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2017
 
2016
 
2017
 
2016
Net income (loss)
 
$
3,020

 
$
(7,496
)
 
$
4,688

 
$
(1,704
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax
 
171

 
414

 
94

 
539

Total other comprehensive income, net of tax
 
171

 
414

 
94

 
539

Total comprehensive income (loss)
 
$
3,191

 
$
(7,082
)
 
$
4,782

 
$
(1,165
)


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
8

Elevate Credit, Inc. and Subsidiaries


CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
For the periods ended June 30, 2017 and 2016
(Dollars in thousands except share amounts)
 
 
 
Common Stock
 
 
Series A
Convertible
Preferred
 
 
Series B
Convertible
Preferred
 
Additional
paid-in
capital
 
Accumu-lated
deficit
 
Accumulated
other
comprehensive
income
 
Total
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances at December 31, 2015
 
12,796,856

 
5

 
2,957,059

 
$
3

 
2,682,351

 
3

 
87,090

 
(54,012
)
 
286

 
33,375

Stock-based compensation
 

 

 

 

 

 

 
413

 

 

 
413

Exercise of stock options
 
62,572

 

 

 

 

 

 
(408
)
 

 

 
(408
)
Tax benefit of equity issuance costs
 

 

 

 

 

 

 

 

 

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Foreign currency translation adjustment net of tax expense of $0
 

 

 

 

 

 

 

 

 
539

 
539

Net loss
 

 

 

 

 

 

 

 
(1,704
)
 

 
(1,704
)
Balances at June 30, 2016
 
12,859,428

 
$
5

 
2,957,059

 
$
3

 
2,682,351

 
$
3

 
$
87,095

 
$
(55,716
)
 
$
825

 
$
32,215

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2016
 
13,001,216

 
5

 
2,957,059

 
3

 
2,682,351

 
3

 
88,854

 
(76,385
)
 
1,087

 
13,567

Stock-based compensation
 

 

 

 

 

 

 
2,787

 

 

 
2,787

Exercise of stock options
 
308,738

 

 

 

 

 

 
(2
)
 

 

 
(2
)
Tax benefit of equity issuance costs
 

 

 

 

 

 

 
(1,873
)
 

 

 
(1,873
)
Issuance of common stock
 
14,285,000

 
6

 

 

 

 

 
80,188

 

 

 
80,194

Conversion of preferred shares
 
5,639,410

 
6

 
(2,957,059
)
 
(3
)
 
(2,682,351
)
 
(3
)
 

 

 

 

2.5-for-1 common stock split
 
8,459,109

 

 

 

 

 

 

 

 

 

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Foreign currency translation adjustment net of tax expense of $0
 

 

 

 

 

 

 

 

 
94

 
94

Cumulative effect of change in accounting
 

 
 
 
 
 
 
 
 
 
 
 

 
3,364

 

 
3,364

Net income
 

 

 

 

 

 

 

 
4,688

 

 
4,688

Balances at June 30, 2017
 
41,693,473

 
$
17

 

 
$

 

 
$

 
$
169,954

 
$
(68,333
)
 
$
1,181

 
$
102,819

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
9

Elevate Credit, Inc. and Subsidiaries


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended June 30,
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
4,688

 
$
(1,704
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
5,001

 
5,506

Provision for loan losses
155,090

 
126,223

Stock-based compensation
2,787

 
413

Amortization of debt issuance costs
284

 
146

Amortization of loan premium
2,534

 
991

Amortization of convertible note discount
2,871

 

Deferred income tax expense, net
(854
)
 
(279
)
Unrealized (gain) loss from foreign currency transactions
(2,284
)
 
4,731

Non-operating income
(2,513
)
 

Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other assets
(1,891
)
 
(4,689
)
Reserve deposits

 
9,287

Receivables from payment processors
(799
)
 
2,399

Receivables from CSO lenders
1,783

 
(5,657
)
Interest receivable
(36,195
)
 
(34,462
)
State and other taxes payable
29

 
(377
)
Deferred revenue
1,633

 
14,683

Accounts payable and accrued liabilities
2,939

 
1,151

Net cash provided by operating activities
135,103

 
118,362

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Loans receivable originated or participations purchased
(508,514
)
 
(391,604
)
Principal collections and recoveries on loans receivable
371,806

 
270,167

Participation premium paid
(2,558
)
 
(1,069
)
Change in restricted cash
(405
)
 
200

Purchases of property and equipment
(8,376
)
 
(3,897
)
Net cash used in investing activities
(148,047
)
 
(126,203
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
10

Elevate Credit, Inc. and Subsidiaries


 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from notes payable
 
$
40,500

 
$
65,000

Payments of notes payable
 
(84,950
)
 

Payment of capital lease obligations
 
(21
)
 
(119
)
Debt issuance costs paid
 
(730
)
 
(140
)
Equity issuance costs paid
 
(1,731
)
 
(858
)
Proceeds from issuance of stock
 
86,699

 

Proceeds from stock option exercises
 
765

 
16

Taxes paid related to net share settlement of equity awards
 
(422
)
 

Net cash provided by financing activities
 
40,110

 
63,899

Effect of exchange rates on cash
 
455

 
(810
)
Net increase in cash and cash equivalents
 
27,621

 
55,248

Cash and cash equivalents, beginning of period
 
53,574

 
29,050

Cash and cash equivalents, end of period
 
$
81,195

 
84,298

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
35,000

 
$
27,120

Taxes paid
 
$
382

 
$
516

 
 
 
 
 
Non-cash activities:
 
 
 
 
CSO fees charged-off included in Deferred revenues and Loans receivable
 
$
5,513

 
$
728

Derivative debt discount on convertible term notes
 
$
2,517

 
$

Impact on deferred tax assets of adoption of ASU 2016-09
 
$
3,364

 
$

Deferred IPO costs included in Additional paid-in capital
 
$
6,708

 
$

Tax benefit of equity issuance costs included in Additional paid-in capital
 
$
1,873

 
$




The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
11

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three and six months ended June 30, 2017 and 2016


NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING CHANGES

Business Operations
Elevate Credit, Inc. (the “Company”) is a Delaware corporation. The Company provides technology-driven, progressive online credit solutions to non-prime consumers. The Company uses advanced technology and proprietary risk analytics to provide more convenient and more responsible financial options to its customers, who are not well-served by either banks or legacy non-prime lenders. The Company currently offers unsecured online installment loans and lines of credit in the United States (the “US”) and the United Kingdom (the “UK”). The Company’s products, Rise, Elastic and Sunny, reflect its mission of “Good Today, Better Tomorrow” and 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. In the UK, the Company directly offers unsecured installment loans via the internet through its wholly owned subsidiary, Elevate Credit International (UK), Limited, (“ECI”) under the brand name of Sunny.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of June 30, 2017 and for the three and six month periods ended June 30, 2017 and 2016 include the accounts of the Company, its wholly owned subsidiaries and a variable interest entity ("VIE") where the Company is the primary beneficiary. All significant intercompany transactions and accounts have been eliminated.
The unaudited condensed consolidated financial information included in this report has been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of Regulation S-X and conform, as applicable, to general practices within the finance company industry. The principles for interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2016 included in the Company’s registration statement on Form S-1 (File No. 333-207888), as amended (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission ("SEC") on April 6, 2017. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full year.
Initial Public Offering and Stock-Based Compensation
On April 11, 2017, the Company completed its initial public offering (“IPO”) in which it issued and sold 12,400,000 shares of common stock at a price of $6.50 per share to the public. In connection with the closing, the underwriters exercised their option to purchase in full for an additional 1,860,000 shares. On April 6, 2017, the Company's stock began trading on the New York Stock Exchange ("NYSE") under the symbol “ELVT.” The aggregate net proceeds received by the Company from the IPO, net of underwriting discounts and commissions and estimated offering expenses, were approximately $80.2 million.
Immediately prior to the closing of the IPO, all then outstanding shares of the Company's convertible preferred stock, were converted into 5,639,410 shares of common stock (or 14,098,519 shares of common stock after the 2.5 to 1 stock split described below). The related carrying value of shares of preferred stock, in the aggregate amount of approximately $6 thousand, was reclassified as common stock. Additionally, the Company amended and restated its certificate of incorporation, effective April 11, 2017 to, among other things, change the authorized number of shares of common stock to 300,000,000 and the authorized number of shares of preferred stock to 24,500,000, each with a par value of $0.0004 per share.




12

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


Stock options granted to certain employees vest upon the satisfaction of the earlier of either a service condition or a liquidity condition. The service condition for these awards is generally satisfied over four years. The liquidity condition is satisfied upon the occurrence of a qualifying event, defined as the completion of the IPO, which occurred on April 11, 2017. The satisfaction of this vesting condition accelerated the expense attribution period for those stock options, and the Company recognized a cumulative share-based compensation expense for the portion of those stock options that met the liquidity condition of $0.8 million.
Stock Split
On December 11, 2015, the Board of Directors approved the ratio to effect a 2.5-for-1 forward stock split of the Company's common stock. The stock split became effective in connection with the completion of the Company’s IPO. The Company's IPO and resulting stock split had the following effect on the Company's equity as of June 30, 2017:
Convertible Preferred Stock: In April 2017 as a result of the IPO, all then outstanding shares of the Company's convertible preferred stock (5,639,410) were converted on a one-to-one basis without additional consideration into an aggregate of 5,639,410 shares of common stock and, thereafter, into 14,098,519 shares of common stock after the application of the 2.5-for-1 forward stock split.
Common Stock: The IPO and resulting stock split caused an adjustment to the par value for the common stock, from $0.001 per share to $0.0004 per share, and caused a two-and-a-half times increase in the number of authorized and outstanding shares of common stock. The number of shares of common stock and per share common stock data in the accompanying unaudited condensed consolidated financial statements and related notes have been retroactively adjusted to reflect a 2.5-for-1 forward stock split for all periods presented.
Stock-Based Compensation: The IPO and resulting stock split decreased the exercise price for stock options by two-and-a-half times per share, and reflected a two-and-a-half times increase in the number of stock options and restricted stock units ("RSUs") outstanding. The number of stock options and RSUs and per share common stock data in the accompanying unaudited condensed consolidated financial statements and related notes have been adjusted to reflect a 2.5-for-1 forward stock split for all periods presented.

Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant items subject to such estimates and assumptions include the valuation of the allowance for loan losses, goodwill, long-lived and intangible assets, deferred revenues, contingencies, the fair value of derivatives, the income tax provision, valuation of stock-based compensation and the valuation allowance against deferred tax assets. The Company bases its estimates on historical experience, current data and assumptions that are believed to be reasonable. Actual results in future periods could differ from those estimates.
Equity Issuance Costs
Costs incurred related to the Company's IPO were deferred and included in Prepaid expenses and other assets in the unaudited condensed consolidated financial statements, and were charged against the gross proceeds of the IPO (i.e., charged against additional paid-in capital in the accompanying unaudited condensed consolidated financial statements) as of the closing of the IPO on April 11, 2017. The balance of these equity issuance costs that were recorded against Additional paid-in capital in the unaudited Condensed Consolidated Balance Sheet at June 30, 2017 was approximately $6.7 million.





13

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 is intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted all amendments of ASU 2016-09 on a prospective basis, except as noted below, as of January 1, 2017 which had the following effects on the Company's financial condition, results of operations and cash flows:
Recognized a cumulative effect adjustment to accumulated deficit of approximately $3.4 million for the deferred tax asset attributable to excess tax benefits on stock compensation.
Recognized excess tax benefits of $690 thousand in earnings for the six months ended June 30, 2017. The Company discontinued recording excess tax benefits within additional paid-in capital.
Modified its computation of potentially dilutive shares for earnings per share using the treasury stock method by excluding excess tax benefits (deficiencies) as a component of assumed proceeds; as excess tax benefits are no longer recognized within additional paid-in capital.
Included excess tax benefits for stock-based compensation in cash flows from operating activities rather than cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.
Prior periods have not been adjusted.
Accounting Standards to be Adopted in Future Periods
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). The purpose of ASU 2017-09 is to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award. Under this new guidance, an entity should account for the effects of a modification unless all of the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not currently expect that the adoption of ASU 2017-09 will have a material effect on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). The purpose of ASU 2017-04 is to simplify the subsequent measurement of goodwill. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This guidance is effective for public companies for goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is still assessing the potential impact of ASU 2017-04 on the Company's condensed consolidated financial statements.




14

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash a consensus of the FASB Emerging Issues Task Force ("ASU 2016-18"). The purpose of ASU 2016-18 is to reduce diversity in practice related to the classification and presentation of changes in restricted cash on the statement of cash flows. Under this new guidance, the statement of cash flows during the reporting period must explain the change in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for public entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. For all other entities, ASU 2016-18 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is still assessing the potential impact of ASU 2016-18 on the Company's condensed consolidated financial statements; however, the Company's preliminary assessment of the impact of the adoption of ASU 2016-18 is that, upon adoption, the Company will include any restricted cash balances as part of cash and cash equivalents in its condensed statements of cash flows and not present the change in restricted cash balances as a separate line item under investing activities as it currently presented.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 is intended to reduce diversity in practice for certain cash receipts and cash payments that are presented and classified in the statement of cash flows. For public entities, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is still assessing the potential impact of ASU 2016-15 on the Company's condensed consolidated financial statements. The Company does not currently expect that the adoption of ASU 2016-15 will have a material effect on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 is intended to replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates to improve the quality of information available to financial statement users about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is still assessing the potential impact of ASU 2016-13 on the Company's condensed consolidated financial statements. The Company expects to complete its analysis of the impact in 2017.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. ASU 2016-02 will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is still assessing the potential impact of ASU 2016-02 on the Company's condensed consolidated financial statements. The Company expects to complete its analysis of the impact in 2017.




15

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date ("ASU 2015-14"), which defers the effective date of this guidance by one year, to the annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. A reporting entity may choose to early adopt the guidance as of the original effective date. In April 2016, the FASB issued ASU 2016-09, Revenues from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ("ASU 2016-10"), which clarifies the guidance related to identifying performance obligations and licensing implementation. Upon adoption of the new revenue recognition guidance, the Company anticipates using the alternative transition method that requires the application of the guidance only to contracts that are uncompleted on the date of initial application. The Company completed its initial assessment in evaluating the potential impact on its condensed consolidated financial statements and based on its initial assessment determined that its financial contracts are excluded from the scope of ASU 2014-09. As a result of the scope exception for financial contracts, the Company's management has determined that there will be no material changes to the recognition timing and classification of revenues and expenses; additionally, the Company's management does not expect the adoption of ASU 2014-09 to have a significant impact to pretax income upon adoption. The Company will continue to evaluate the impacts of ASU 2014-09 through the date of adoption to ensure that its initial assessment continues to remain accurate. Additionally, the Company is continuing its assessment of ASU 2014-09’s impact on its condensed financial statement disclosures.
NOTE 2 - EARNINGS PER SHARE

In April 2017, the Company effected a 2.5-for-1 forward stock split of its common stock in connection with the completion of the IPO, which has been retroactively applied to previously reported share and earnings per share amounts. 
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding ("WASO") during each period. Also, basic EPS includes any fully vested stock and unit awards that have not yet been issued as common stock. There are no unissued fully vested stock and unit awards at June 30, 2017 and 2016.

Diluted EPS is computed by dividing net income by the WASO during each period plus any unvested stock option awards granted and vested unexercised stock options using the treasury stock method but only to the extent that these instruments dilute earnings per share.




16

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


The computation of earnings (loss) per share was as follows for three and six months ended June 30, 2017 and 2016:
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars in thousands except share and per share amounts)
 
2017
 
2016
 
2017
 
2016
Numerator (basic):
 
 
 
 
 
 
 
 
Net income (loss)
 
$
3,020

 
$
(7,496
)
 
$
4,688

 
$
(1,704
)
 
 
 
 
 
 
 
 
 
Numerator (diluted):
 
 
 
 
 
 
 
 
Net income (loss)
 
$
3,020

 
$
(7,496
)
 
$
4,688

 
$
(1,704
)
Tax-effected interest expense attributable to Convertible Term Notes
 

 

 

 

Net income (loss) assuming dilution
 
$
3,020

 
$
(7,496
)
 
$
4,688

 
$
(1,704
)
 
 
 
 
 
 
 
 
 
Denominator (basic):
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
38,541,965

 
12,800,795

 
25,841,408

 
12,798,957

 
 
 
 
 
 
 
 
 
Denominator (diluted):
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
38,541,965

 
12,800,795

 
25,841,408

 
12,798,957

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
 
Convertible Preferred Stock
 

 

 

 

Employee stock plans (options and RSUs)
 
1,408,795

 

 
1,453,537

 

Convertible Term Notes
 

 

 

 

Diluted weighted average number of shares outstanding
 
39,950,760

 
12,800,795

 
27,294,945

 
12,798,957

 
 
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.08

 
$
(0.59
)
 
$
0.18

 
$
(0.13
)
Diluted earnings (loss) per share
 
$
0.08

 
$
(0.59
)
 
$
0.17

 
$
(0.13
)

For the three months ended June 30, 2017 and 2016, the Company excluded 1.6 million and 3.9 million common shares issuable upon exercise of the Company's stock options and vesting of its RSUs, respectively, from its diluted earnings (loss) per share calculation because including these shares would be anti-dilutive. For the six months ended June 30, 2017 and 2016, the Company excluded 1.0 million and 3.9 million common shares issuable upon exercise of the Company's stock options and vesting of its RSUs, respectively, from its diluted earnings (loss) per share calculation because including these shares would be anti-dilutive.

ASC Topic 260, “Earnings Per Share” (“ASC Topic 260”) requires companies with participating securities to utilize a two-class method for the computation of net income per share attributable to the Company. The two-class method requires a portion of net income attributable to the Company to be allocated to participating securities. Net losses are not allocated to participating securities unless those securities are obligated to participate in losses. The Company did not have any participating securities for the three and six month periods ended June 30, 2017 and 2016.




17

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


NOTE 3 - LOANS RECEIVABLE AND REVENUE
Revenues generated from the Company’s consumer loans for the three and six months ended June 30, 2017 and 2016 were as follows:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
Finance charges
 
$
91,870

 
$
91,374

CSO fees
 
12,854

 
16,698

Lines of credit fees
 
43,808

 
18,302

Other
 
1,939

 
406

Total revenues
 
$
150,471

 
$
126,780


 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
Finance charges
 
$
189,941

 
$
187,617

CSO fees
 
28,864

 
35,169

Lines of credit fees
 
85,580

 
34,140

Other
 
2,453

 
576

Total revenues
 
$
306,838

 
$
257,502

The Company's portfolio consists of both installment loans and lines of credit, which are considered the portfolio segments at June 30, 2017 and December 31, 2016. The following reflects the credit quality of the Company’s loans receivable as of June 30, 2017 and December 31, 2016 as delinquency status has been identified as the primary credit quality indicator. Loans are determined to be past due when they are one day past due without a payment. All impaired loans as of June 30, 2017 and December 31, 2016 have been charged off.
 
 
June 30, 2017
(Dollars in thousands)
 
Installment
 
Line of Credit
 
Total
Current loans
 
$
224,624

 
$
185,701

 
$
410,325

Past due loans
 
42,917

 
16,414

 
59,331

Total loans receivable
 
267,541

 
202,115

 
469,656

Net unamortized loan premium
 

 
1,993

 
1,993

Less: Allowance for loan losses
 
(45,344
)
 
(20,686
)
 
(66,030
)
Loans receivable, net
 
$
222,197

 
$
183,422

 
$
405,619

 
 
December 31, 2016
(Dollars in thousands)
 
Installment
 
Line of Credit
 
Total
Current loans1   
 
$
235,794

 
$
156,717

 
$
392,511

Past due loans1   
 
57,822

 
17,857

 
75,679

Total loans receivable
 
293,616

 
174,574

 
468,190

Net unamortized loan premium
 

 
1,924

 
1,924

Less: Allowance for loan losses
 
(58,062
)
 
(19,389
)
 
(77,451
)
Loans receivable, net
 
$
235,554

 
$
157,109

 
$
392,663

1.
A reclassification of approximately $1.0 million from Current loans to Past due loans within Installment was made in order to conform to the current period presentation. This reclassification had no effect on previously reported total loans receivable balances in the consolidated balance sheet at December 31, 2016.




18

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


Total loans receivable includes approximately $21.9 million and $25.6 million of interest receivable at June 30, 2017 and December 31, 2016, respectively. The carrying value for Loans receivable, net of the allowance for loan losses approximates the fair value due to the short-term nature of the loans receivable.
The changes in the allowance for loan losses for the three and six months ended June 30, 2017 and 2016 are as follows:
 
 
 
Three Months Ended June 30, 2017
(Dollars in thousands)
 
Installment
 
Line of Credit
 
Total
Balance beginning of period
 
$
53,276

 
$
20,087

 
$
73,363

Provision for loan losses
 
49,134

 
23,163

 
72,297

Charge-offs
 
(59,420
)
 
(24,301
)
 
(83,721
)
Recoveries of prior charge-offs
 
5,752

 
1,737

 
7,489

Effect of changes in foreign currency rates
 
412

 

 
412

Total
 
49,154

 
20,686

 
69,840

Accrual for CSO lender owned loans
 
(3,810
)
 

 
(3,810
)
Balance end of period
 
$
45,344

 
$
20,686

 
$
66,030


 
 
Three Months Ended June 30, 2016
(Dollars in thousands)
 
Installment
 
Line of Credit
 
Total
Balance beginning of period
 
$
46,531

 
$
9,061

 
$
55,592

Provision for loan losses
 
56,543

 
10,591

 
67,134

Charge-offs
 
(55,931
)
 
(9,681
)
 
(65,612
)
Recoveries of prior charge-offs
 
3,872

 
1,587

 
5,459

Effect of changes in foreign currency rates
 
(576
)
 

 
(576
)
Total
 
50,439

 
11,558

 
61,997

Accrual for CSO lender owned loans
 
(7,124
)
 

 
(7,124
)
Balance end of period
 
$
43,315

 
$
11,558

 
$
54,873


 
 
Six Months Ended June 30, 2017
(Dollars in thousands)
 
Installment
 
Line of Credit
 
Total
Balance beginning of period
 
$
62,987

 
$
19,389

 
$
82,376

Provision for loan losses
 
109,854

 
45,236

 
155,090

Charge-offs
 
(135,682
)
 
(47,295
)
 
(182,977
)
Recoveries of prior charge-offs
 
11,461

 
3,356

 
14,817

Effect of changes in foreign currency rates
 
534

 

 
534

Total
 
49,154

 
20,686

 
69,840

Accrual for CSO lender owned loans
 
(3,810
)
 

 
(3,810
)
Balance end of period
 
$
45,344

 
$
20,686

 
$
66,030






19

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


 
 
Six Months Ended June 30, 2016
(Dollars in thousands)
 
Installment
 
Line of Credit
 
Total
Balance beginning of period
 
$
55,768

 
$
10,016

 
$
65,784

Provision for loan losses
 
108,487

 
17,736

 
126,223

Charge-offs
 
(122,512
)
 
(17,781
)
 
(140,293
)
Recoveries of prior charge-offs
 
9,543

 
1,587

 
11,130

Effect of changes in foreign currency rates
 
(847
)
 

 
(847
)
Total
 
50,439

 
11,558

 
61,997

Accrual for CSO lender owned loans
 
(7,124
)
 

 
(7,124
)
Balance end of period
 
$
43,315

 
$
11,558

 
$
54,873



As of June 30, 2017 and December 31, 2016, respectively, estimated losses of approximately $3.8 million and $4.9 million for the CSO owned loans receivable guaranteed by the Company of approximately $33.6 million and $40.5 million, respectively, are initially recorded at fair value and are included in Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets.

NOTE 4—VARIABLE INTEREST ENTITY

The Company is involved with three entities that are deemed to be a VIE Elastic SPV, Ltd. and two CSO lenders. Under ASC 810-10-15, Variable Interest Entities, a VIE is an entity that: (1) has an insufficient amount of equity investment at risk to permit the entity to finance its activities without additional subordinated financial support by other parties; (2) the equity investors are unable to make significant decisions about the entity’s activities through voting rights or similar rights; or (3) the equity investors do not have the obligation to absorb expected losses or the right to receive residual returns of the entity. The Company is required to consolidate a VIE if it is determined to be the primary beneficiary, that is, the enterprise has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the VIE. The Company evaluates its relationships with VIEs to determine whether it is the primary beneficiary of a VIE at the time it becomes involved with the entity and it re-evaluates that conclusion each reporting period.
Elastic SPV, Ltd.
On July 1, 2015, the Company entered into several agreements with a third-party lender and Elastic SPV, Ltd. (“ESPV”), an entity formed by third party investors for the purpose of purchasing loan participations from the third-party lender. On that date, approximately $20.2 million of loan participations in the Elastic lines of credit outstanding held by the Company were transferred to ESPV for no gain or loss. Per the terms of the agreements, the Company provides customer acquisition services to drive the volume of loan applications submitted to the third-party lender. In addition, the Company provides loan underwriting software and services to evaluate the credit quality of those loan applications in accordance with the third-party lender’s credit policies. ESPV accounts for the loan participations acquired in accordance with ASC 860-10-40, Transfers and Services, Derecognition, as the lines of credit acquired meet the criteria of a participation interest.
Once the third-party lender originates the loan, ESPV has the right, but not the obligation, to purchase a 90% interest in each Elastic line of credit. Victory Park Management, LLC (“VPC”) entered into an agreement (the "ESPV Facility") under which it loans ESPV all funds necessary up to a maximum borrowing amount to purchase such participation interests in exchange for a fixed return (see Note 5—Notes Payable—ESPV Facility). The Company entered into a separate credit default protection agreement with ESPV whereby the Company agreed to provide credit protection to the investors in ESPV against Elastic loan losses in return for a credit premium. The Company does not hold a direct ownership interest in ESPV, however, as a result of the credit default protection agreement, ESPV was determined to be a VIE and the Company qualifies as the primary beneficiary.




20

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


The following table summarizes the assets and liabilities of the VIE that are included within the Company’s Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016:
 
(Dollars in thousands)
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Cash and cash equivalents
$
20,909

 
$
15,096

Loans receivable, net of allowance for loan losses of $20,686 and $19,389, respectively
183,422

 
157,109

Prepaid expenses and other assets ($0 and $52, respectively, eliminates upon consolidation)

 
52

Receivable from payment processors
8,307

 
7,351

Total assets
$
212,638

 
$
179,608

LIABILITIES AND MEMBERS’ EQUITY
 
 
 
Accounts payable and accrued liabilities ($5,179 and $4,856, respectively, eliminates upon consolidation)1
$
16,307

 
$
12,580

Reserve deposit liability ($25,650 and $21,825, respectively, eliminates upon consolidation)
25,650

 
21,825

Notes payable, net
170,681

 
145,203

Members' equity

 

Total liabilities and members’ equity
$
212,638

 
$
179,608

1.
As previously discussed in the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2017, in the course of preparing its condensed consolidated financial statements as of and for the three months ended March 31, 2017, the Company identified a disclosure error related to the amount of accounts payable and accrued liabilities that was eliminated upon consolidation at December 31, 2016 associated with credit default premiums. The actual amount eliminated at December 31, 2016 was $4.9 million as opposed to $1.1 million that was previously disclosed in the consolidated financial statements of the Company included in the Registration Statement. The Company has determined that the error was not material to its consolidated financial statements and the correction of this error resulted in a revision to the amount disclosed only and had no impact on accounts payable and accrued liabilities in the Company's Consolidated Balance Sheet at December 31, 2016.
CSO Lenders
The two CSO lenders are considered VIE's of the Company; however, the Company does not have any ownership interest in the CSO lenders, does not exercise control over them, and is not the primary beneficiary, and therefore, does not consolidate the CSO lenders’ results with its results.




21

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016



NOTE 5—NOTES PAYABLE
The Company has two debt facilities with VPC. The Rise SPV, LLC ("RSPV," a subsidiary of the Company) credit facility (the "VPC Facility") and the ESPV Facility.
VPC Facility
On January 30, 2014, RSPV entered into an agreement with VPC providing a credit facility with a maximum borrowing amount of $250 million. On May 20, 2015, the VPC Facility was amended, providing a credit facility with a maximum total borrowing amount of $335 million to RSPV, ECI and Elevate Credit Service, LLC ("ELCS"), all subsidiaries of the Company. On February 11, 2016, the VPC Facility was amended, providing a credit facility with a maximum total borrowing amount of $345 million to RSPV, ECI and ELCS. On June 30, 2016, the VPC Facility was amended, providing a credit facility with a maximum total borrowing amount of $395 million to RSPV, ECI and ELCS. On January 5, 2017, the VPC Facility was amended to extend the required draw-down date of the $15 million remaining undrawn principal on the Convertible Term Notes from December 31, 2016 to January 5, 2017. On February 1, 2017, the VPC Facility was amended to increase the maximum borrowing on the US Term Note from $250 million to $350 million, lower the interest rate on the US Term Note to a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 11%, extend the maturity date for the US Term Note to February 1, 2021, excluding $75 million currently outstanding under the note which is subject to an August 13, 2018 maturity date, and permanently reduce the book value of equity covenant from $10 million to $5 million.
This facility provides the following term notes at June 30, 2017:
A maximum borrowing amount of $350 million at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 11% used to fund the Rise loan portfolio (“US Term Note”). The blended interest rate on the outstanding balance at June 30, 2017 and December 31, 2016 was 12.30% and 14.94%, respectively.
A maximum borrowing amount of $25 million and $50 million at a base rate (defined as the 3-month LIBOR rate) plus 16% used to fund the UK Sunny loan portfolio (“UK Term Note”) as of June 30, 2017 and December 31, 2016. The blended interest rate at June 30, 2017 and December 31, 2016 was 17.30% and 16.93%, respectively.
A maximum borrowing amount of $0 million and $45 million at a base rate (defined as the 3-month LIBOR rate) plus 18% used to fund working capital (“ELCS Sub-debt Term Note”) as of June 30, 2017 and December 31, 2016, respectively. In April 2017, the Company paid down the entire $45 million using proceeds from the IPO. The blended interest rate at December 31, 2016 was 18.93%. The outstanding balance of this note was $0 million as of June 30, 2017.
A maximum borrowing amount of $25 million bearing interest at the greater of 18% or a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 17% (“4th Tranche Term Note”). The blended interest rate at June 30, 2017 and December 31, 2016 was 18.30% and 18.00%, respectively.
A maximum borrowing amount of $10 million and $25 million as of June 30, 2017 and December 31, 2016, respectively, bearing interest at the greater of 10% or a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 9% (“Convertible Term Notes”). The blended interest rate at June 30, 2017 and December 31, 2016 was 10.30% and 10.00%, respectively.

The US Term Note has a maturity date of February 1, 2021, excluding $75 million currently outstanding under the US Term Note which has an August 13, 2018 maturity date. The Company expects the $75 million will not be repaid in 2018 but will instead be extended to a February 1, 2021 maturity date as well. All other notes have a maturity date of January 30, 2018. There are no principal payments due or scheduled until the respective maturity dates. All assets of the Company are pledged as collateral to secure the VPC Facility. The VPC Facility contains certain financial covenants that require, among other things, maintenance of minimum amounts and ratios of working capital; minimum amounts of tangible net worth; maximum ratio of indebtedness; and maximum ratios of charge-offs. The Company was in compliance with all covenants related to the VPC Facility as of June 30, 2017 and December 31, 2016.





22

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


The Convertible Term Notes were convertible, at the lender's option, into common stock upon the completion of specific defined liquidity events, including certain equity financings, certain mergers and acquisitions or the sale of substantially all of the Company's assets, or during the period from the receipt of notice of the anticipated commencement of a roadshow in connection with the Company's IPO until immediately prior to the effectiveness of the Registration Statement in connection with such IPO. The Convertible Term Notes were convertible into common stock at the market value (or a set discount to market value) of the shares on the date of conversion and since the Convertible Term Notes included a conversion option that continuously reset as the underlying stock price increased or decreased and provided a fixed value of common stock to the lender, it was considered share-settled debt. The Company did not elect and was not required to measure the Convertible Term Notes at fair value; as such, the Company measured the Convertible Term Notes at the accreted value, determined using the effective interest method.

Share-settled debt may settle by providing the holder with a variable number of shares with an aggregate fair value equaling the debt principal outstanding. Share-settled debt may use a discount to the fair value of the share price to determine the number of shares to be delivered, resulting in settlement at a premium, and is analyzed to determine whether the share settled debt contains a beneficial conversion feature or contingent beneficial conversion feature. Share-settled debt may be measured at fair value or at its accreted value depending on the specific terms of the settlement provisions of the debt instrument. The Company evaluates the embedded features within debt instruments to determine if embedded features are required to be bifurcated and recognized as a derivative instrument. If more than one feature is required to be bifurcated, the features are accounted for as a single compound derivative. The fair value of a single compound derivative is recognized as a derivative liability and a debt discount. The derivative liability is measured at fair value on a recurring basis with changes reported in other income (expense). The debt discount is amortized to non-cash interest expense using the effective interest method over the life of the associated debt. In connection with the conversion (i.e.: settlement) of share-settled debt into common stock, the Company will recognize a gain or loss for the change in fair value of the associated derivative liabilities on conversion and a loss on extinguishment of debt from the acceleration of the unamortized balance of the debt discount and issuance costs. See Note 8—Fair Value Measurements for additional information.

The Company took an initial draw on the Convertible Term Notes of $10 million in October 2016 and a subsequent draw of $15 million in January 2017. A debt discount and derivative liability of $4.2 million was recognized upon the respective draws on the Convertible Term Notes. The weighted average effective interest rate associated with the debt discount was approximately 27%.

The Convertible Term Notes contained embedded features that were required to be assessed as derivatives. The Company determined that two of the features it assessed were required to be bifurcated and accounted for under derivative accounting as follows: (i) An embedded redemption feature upon conversion into common shares of the Company's stock ("Share-Settlement Feature") that includes a provision for the adjustment to the conversion price to a price less than the transaction-date fair value price per share if the Company is a party to certain qualifying liquidity or equity financing transactions. The incremental undiscounted present value of the embedded redemption feature is $6.25 million. (ii) An embedded redemption feature that requires the Company to pay an amount up to $5 million ("Redemption Premium Feature") upon a cash redemption at maturity or upon a redemption caused by certain events of default.

These two embedded features have been accounted for together as a single compound derivative. The Company estimated the fair value of the compound derivative using a probability-weighted valuation scenario model. The assumptions included in the calculations are highly subjective and subject to interpretation. The fair value of the single compound derivative was recognized as principal draw-downs were made and in proportion to the amount of principal draw-downs to the maximum borrowing amount. The initial fair value of the single compound derivative is recognized and presented as a debt discount and a derivative liability. The debt discount is amortized using the effective interest method from the principal draw-down date(s) through the maturity date. The derivative liability is accounted for in the same manner as a freestanding derivative pursuant to Accounting Standards Codification 815—Derivatives and Hedging ("ASC 815"), with subsequent changes in fair value recorded in earnings each period.





23

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


During the period from the receipt of notice from the Company to VPC of the anticipated commencement of the roadshow in connection with its IPO until immediately prior to the effectiveness of the Registration Statement, VPC had the option to convert the Convertible Term Notes, in whole or in part, into that number of shares of the Company's common stock determined by the outstanding principal balance of and accrued, but unpaid, interest on the Convertible Term Notes divided by the product of (a) 0.8 multiplied by (b) the IPO price per share. VPC did not elect to exercise its right to convert; however, VPC purchased 2.3 million shares in the offering at the IPO price, and the Company used the proceeds from that purchase, approximately $14.9 million, to reduce an equivalent amount of indebtedness under the Convertible Term Notes. Accordingly, the Company released $2.0 million of the debt discount associated with this repayment into Net interest expense on the Condensed Consolidated Income Statement.

Additionally, upon the effectiveness of the Registration Statement, VPC's option to convert was terminated, and the Convertible Term Notes are no longer convertible in whole or in part into shares of the Company's common stock. Furthermore, VPC agreed to waive approximately $3 million of the Redemption Premium Feature associated with the $14.9 million of Convertible Term Notes the Company repaid. The remaining fair value of the derivative recognized by the Company relates to the Redemption Premium Feature. See Note 8—Fair Value Measurements for additional information.

ESPV Facility

On July 13, 2015, ESPV entered into an agreement with VPC, providing a credit facility with a maximum borrowing amount of $50 million (the “ESPV Facility”). On October 21, 2015, the ESPV Facility was amended, providing a credit facility with a maximum borrowing amount of $100 million. On July 14, 2016, the ESPV Facility was further amended, increasing the credit facility to a maximum borrowing amount of $150 million. Interest is charged at a base rate (defined as the greater of the 3-month LIBOR rate or 1% per annum) plus 13% for the outstanding balance up to $50 million, plus 12% for the outstanding balance greater than $50 million and plus 13.5% for any amounts in excess of $100 million.

On April 27, 2017, the ESPV Facility was further amended to increase the borrowing base to $250 million, decrease each of the interest rates by 1.0% effective July 1, 2019, and add a base rate (defined as the greater of the 3-month LIBOR or 1% per annum) plus 12.75% for borrowing amounts greater than $150 million, which will decrease to the base rate plus 11.75% effective July 1, 2019. The amendment also extended the maturity date for a portion of the ESPV Facility to July 1, 2021, excluding $49 million currently outstanding under the ESPV Facility which has an August 13, 2018 maturity date. The Company expects this amount will not be repaid on its original maturity date but will instead be extended to a July 1, 2021 maturity date as well. The ESPV Facility is used to purchase loan participations from the third party bank partner. The blended interest rate at June 30, 2017 and December 31, 2016 was 14.12% and 13.81%, respectively.
There are no principal payments due or scheduled until the respective maturity dates. All assets of the Company and ESPV are pledged as collateral to secure the ESPV Facility. The ESPV Facility contains financial covenants, including a borrowing base calculation and certain financial ratios. ESPV was in compliance with all covenants related to the ESPV Facility as of June 30, 2017 and December 31, 2016.





24

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


VPC and ESPV Facilities:
The outstanding balance of Notes payable, net of debt issuance costs, are as follows:
(Dollars in thousands)
 
June 30,
2017
 
December 31,
2016
US Term Note bearing interest at 3-month LIBOR +11% (2017) + 13-15% (2016)
 
$
222,000

 
$
222,000

UK Term Note bearing interest at 3-month LIBOR + 16%
 
22,800

 
47,800

ELCS Sub-debt Term Note bearing interest at 3-month LIBOR + 18%
 

 
45,000

4th Tranche Term Note bearing interest at 3-month LIBOR + 17%
 
25,000

 
25,000

Convertible Term Notes bearing interest at 3-month LIBOR + 9%
 
10,050

 
10,000

ESPV Term Note bearing interest at 3-month LIBOR + 12-13.5%
 
171,000

 
145,500

Debt discount and issuance costs
 
(1,915
)
 
(1,822
)
Total
 
$
448,935

 
$
493,478


The Company has evaluated the interest rates for its debt and believes they represent market rates based on the Company’s size, industry, operations and recent amendments. As a result, the carrying value for the debt approximates the fair value.
Future debt maturities as of June 30, 2017 are as follows:
Year (dollars in thousands)
June 30, 2017
Remainder of 2017
$

2018
181,850

2019

2020

2021
269,000

Total
$
450,850


NOTE 6—GOODWILL AND INTANGIBLE ASSETS
The carrying value of goodwill at June 30, 2017 and December 31, 2016 was approximately $16 million. There were no changes to goodwill during the six months ended June 30, 2017. Goodwill represents the excess purchase price over the estimated fair market value of the net assets acquired by the predecessor parent company, Think Finance, Inc. ("Think Finance") related to the Elastic and UK reporting units. Of the total goodwill balance, approximately $0.6 million is deductible for tax purposes.
The carrying value of acquired intangible assets as of June 30, 2017, is presented in the table below:
(Dollars in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Assets subject to amortization:
 
 
 
 
 
 
Acquired technology
 
$
946

 
$
(946
)
 
$

Non-compete
 
3,404

 
(1,871
)
 
1,533

Customers
 
126

 
(126
)
 

Assets not subject to amortization:
 
 
 
 
 
 
Domain names
 
680

 

 
680

Total
 
$
5,156

 
$
(2,943
)
 
$
2,213





25

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


The carrying value of acquired intangible assets as of December 31, 2016, is presented in the table below:
(Dollars in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Assets subject to amortization:
 
 
 
 
 
 
Acquired technology
 
$
946

 
$
(946
)
 
$

Non-compete
 
3,404

 
(1,780
)
 
1,624

Customers
 
126

 
(126
)
 

Assets not subject to amortization:
 
 
 
 
 
 
Domain names
 
680

 

 
680

Total
 
$
5,156

 
$
(2,852
)
 
$
2,304

Total amortization expense recognized for the three and six months ended June 30, 2017 and 2016 was approximately $46 thousand and $91 thousand for both periods, respectively. The weighted average remaining amortization period for the intangible assets was 8.5 years at June 30, 2017.
Estimated amortization expense relating to intangible assets subject to amortization for each of the five succeeding fiscal years is as follows:
Year (Dollars in thousands)
Amount
2018
$
180

2019
180

2020
180

2021
180

2022
180


NOTE 7—STOCK-BASED COMPENSATION

In April 2017, the Company effected a 2.5-for-1 forward stock split of its common stock in connection with the completion of the IPO. Reported share amounts have been retroactively restated for the forward stock split. 
Stock-based compensation expense recognized for the three months ended June 30, 2017 and 2016 totaled approximately $2.1 million and $0.2 million, respectively. Stock-based compensation expense recognized for the six months ended June 30, 2017 and 2016 totaled approximately $2.8 million and $0.4 million, respectively.
2016 Omnibus Incentive Plan
The 2016 Omnibus Incentive Plan (“2016 Plan”) was adopted by the Company’s Board of Directors on January 5, 2016 and approved by the Company’s stockholders thereafter. The 2016 Plan became effective on June 23, 2016. The 2016 Plan provides for the grant of incentive stock options to the Company’s employees, and for the grant of non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards (including annual cash incentives and long-term cash incentives), and any combination thereof to the Company’s employees, directors and consultants. In connection with the 2016 Plan, the Company has reserved for issuance under the 2016 Plan 6,312,184 shares of common stock, which includes shares that would otherwise return to the 2014 Equity Incentive Plan (the "2014 Plan") as a result of forfeiture, termination, or expiration of awards previously granted under the 2014 Plan and outstanding when the 2016 Plan became effective.
The 2016 Plan will automatically terminate 10 years following the date it becomes effective, unless the Company terminates it sooner. In addition, the Company’s Board of Directors has the authority to amend, suspend or terminate the 2016 Plan provided such action does not impair the rights under any outstanding award.
As of June 30, 2017, the total number of shares available for future grants under the 2016 Plan was 369,427 shares.




26

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


2014 Equity Incentive Plan
The Company adopted the 2014 Plan on May 1, 2014. The 2014 Plan permitted the grant of incentive stock options, nonstatutory stock options, and restricted stock. On April 27, 2017 the Company's Board of Directors terminated the 2014 Plan as to future awards and confirmed that underlying shares corresponding to awards under the 2014 Plan that were outstanding at the time the 2016 Plan became effective, that are forfeited, terminated or expire, will become available for issuance under the 2016 Plan.
In conjunction with the 2016 and 2014 Plans, as of June 30, 2017, the Company had granted stock options and RSUs which are described in more detail below.
Stock Options
Stock options are awarded to encourage ownership of the Company's common stock by key employees and to provide increased incentive for key employees to render services and to exert maximum effort for the success of the Company. Certain of the Company's stock options permit net-share settlement upon exercise. The option exercise price, vesting schedule and exercise period are determined for each grant by the Compensation Committee. The Company's stock options generally have a 10-year contractual term and vest over a 4-year period from the grant date.
During the six months ended June 30, 2017, the Company granted 111,177 incentive stock options with a weighted average exercise price of $8.08 per share and a weighted average fair value of $2.88 per share. These options have a contractual term of 10 years and vest 25% on the first anniversary of the effective date and 2.083% each month thereafter until full vesting on the fourth anniversary of the effective date, with vesting accelerated upon the completion of the IPO for certain grants (see Note 1 Basis of Presentation and Accounting Changes Initial Public Offering and Stock-Based Compensation).
A summary of stock option activity as of and for the six months ended June 30, 2017 is presented below:
Stock Options
 
Shares
 
Weighted Average
Exercise Price
 
Weighted Average Remaining Contractual Life (in years)
Outstanding at December 31, 2016
 
3,501,412

 
$
4.18

 
 
Granted
 
111,177

 
8.08

 
 
Exercised(1)   
 
(419,915
)
 
2.14

 
 
Forfeited
 
(67,002
)
 
5.89

 
 
Outstanding at June 30, 2017
 
3,125,672

 
4.57

 
5.92
Options exercisable at June 30, 2017
 
2,742,174

 
$
4.21

 
5.60
(1)
During the six months ended June 30, 2017, certain exercised options were net share-settled to cover the required exercise price and withholding tax and the remaining amounts were converted into an equivalent number of shares of the Company's common stock. The Company withheld 111,177 shares which had a value equivalent to the aggregate exercise price of approximately $476 thousand plus the employees' minimum statutory obligation of approximately $422 thousand for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld was based on the fair market value of our common stock on their exercise date as determined by the Company. These net-share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise have been issued.
At June 30, 2017, there was approximately $0.8 million of unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted average period of 2.1 years. The total intrinsic value of options exercised for the six months ended June 30, 2017 was $2.5 million.
Restricted Stock Units
RSUs are awarded to serve as a key retention tool for the Company to retain its executives and key employees. RSUs will transfer value to the holder even if the Company’s stock price falls below the price on the date of grant, provided that the recipient provides the requisite service during the period required for the award to “vest.”




27

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


The weighted-average grant-date fair value for RSUs granted during the six months ended June 30, 2017 was $7.49. These RSUs have a contractual term of 10 years and vest 25% on the first anniversary of the effective date, and 25% each year thereafter, until full vesting on the fourth anniversary of the effective date.
A summary of RSU activity as of and for the six months ended June 30, 2017 is presented below:
RSUs
Shares
 
Weighted Average
Grant-Date Fair Value
Nonvested at December 31, 2016
425,260

 
$
8.12

Granted
2,404,709

 
7.49

Vested

 

Forfeited
(12,884
)
 
7.76

Nonvested at June 30, 2017
2,817,085

 
$
7.58

At June 30, 2017, there was approximately $14.0 million of unrecognized compensation cost related to non-vested RSUs which is expected to be recognized over a weighted average period of 3.5 years. No RSUs vested during the six months ended June 30, 2017, and, as such, the total vest-date fair value of RSUs vested for the six months ended June 30, 2017 was $0.
NOTE 8—FAIR VALUE MEASUREMENTS
The accounting guidance on fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

The Company groups its assets and liabilities measured at fair value in three levels of the fair value hierarchy, based on the fair value measurement technique, as described below:
Level 1—Valuation is based upon quoted prices (unadjusted) for identical assets and liabilities in active exchange markets that the Company has the ability to access at the measurement date.
Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques with significant assumptions and inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3—Valuation is derived from model-based techniques that use inputs and significant assumptions that are supported by little or no observable market data. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.

The Company monitors the market conditions and evaluates the fair value hierarchy levels at least quarterly. For any transfers in and out of the levels of the fair value hierarchy, the Company discloses the fair value measurement at the beginning of the reporting period during which the transfer occurred. For the six month periods ended June 30, 2017 and 2016, there were no significant transfers between levels.




28

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


The level of fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is most significant to the fair value measurement in its entirety. In the determination of the classification of assets and liabilities in Level 2 or Level 3 of the fair value hierarchy, the Company considers all available information, including observable market data, indications of market conditions, and its understanding of the valuation techniques and significant inputs used. Based upon the specific facts and circumstances, judgments are made regarding the significance of the Level 3 inputs to the fair value measurements of the respective assets and liabilities in their entirety. If the valuation techniques that are most significant to the fair value measurements are principally derived from assumptions and inputs that are corroborated by little or no observable market data, the asset or liability is classified as Level 3.
Financial Assets and Liabilities Not Measured at Fair Value
The Company has evaluated Loans receivable, net of allowance for loan losses, Receivable from CSO lenders, Receivable from payment processors and Accounts payable and accrued expenses, and believes the carrying value approximates the fair value due to the short-term nature of these balances. The Company has also evaluated the interest rates for Notes payable and believes they represent market rates based on the Company’s size, industry, operations and recent amendments. As a result, the carrying value for Notes payable approximates the fair value. The Company classifies its fair value measurement techniques for the fair value disclosures associated with Loans receivable, net of allowance for loan losses, Receivable from CSO lenders, Receivable from payment processors, Accounts payable and accrued liabilities and Notes payable, net as Level 3 in accordance with ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”).
Fair Value Measurements on a Recurring Basis

Upon the initial $10 million draw on the Convertible Term Notes in October 2016, a derivative liability of approximately $1.7 million was recorded at fair value and was included as debt discount in Notes Payable and as a Derivative Liability on the Condensed Consolidated Balance Sheets at December 31, 2016. Upon the $15 million draw on the Convertible Term Notes in January 2017, an additional derivative liability of approximately $2.5 million was recorded at fair value and was included as a debt discount in Notes Payable and as a Derivative Liability. This liability is considered to be Level 3 in accordance with ASC 820-10 and is measured at fair value on a recurring basis. See Note 5 - Notes Payable for additional information.

During the period from the receipt of notice from the Company to VPC of the anticipated commencement of the roadshow in connection with its IPO until immediately prior to the effectiveness of the Registration Statement, VPC had the option to convert the Convertible Term Notes, in whole or in part, into a number of shares of the Company's common stock determined by the outstanding principal balance of, and accrued, but unpaid interest on, the Convertible Term Notes divided by the product of (a) 0.8 multiplied by (b) the IPO price per share. VPC did not elect to exercise its right to convert, and an unpaid balance on the Convertible Term Notes remained outstanding after the IPO. Upon the effectiveness of the Registration Statement, VPC's option to convert was terminated, and the Convertible Term Notes are no longer convertible in whole or part into shares of the Company's common stock; as a result, the share-settlement ceased to be an embedded derivative feature requiring separate recognition and disclosure. However, a pro-rata portion of the Redemption Premium Feature to be paid upon the cash redemption at maturity, or upon a redemption caused by certain events of default, remains an embedded derivative feature that the Company will be required to assess and recognize as a derivative liability. See Note 5—Notes Payable for additional information.

The Company has no derivative amounts subject to enforceable master netting arrangements that are offset on the Condensed Consolidated Balance Sheets. The Derivative liability related to the Convertible Term Notes is measured at fair value on a recurring basis. The change in the Derivative liability for the three and six months ended June 30, 2017 are shown in the following table:





29

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


(Dollars in thousands)
 
Embedded Derivative Liability in Convertible Term Notes
Balance, December 31, 2016
 
$
1,750

Additional derivative recognized upon $15.0 million draw on the underlying Convertible Term Note
 
2,517

Fair value adjustment (Non-Operating expense in the Condensed Consolidated Income Statements)
 
133

Balance, March 31, 2017
 
$
4,400

 
 
 
Reduction of derivative due to $14.9 million repayment of the underlying Convertible Term Note (Non-Operating expense in the Condensed Consolidated Income Statements)
 
(2,746
)
Fair value adjustment (Non-Operating expense in the Condensed Consolidated Income Statements)
 
100

Balance, June 30, 2017
 
$
1,754


The Convertible Term Notes and the Derivative liability were not outstanding at June 30, 2016.

The Company’s derivative liability associated with its Convertible Term Notes is measured at fair value using a probability-weighted valuation scenario model based on the likelihood of the Company successfully completing an IPO or other qualified financing. The inputs and assumptions included in the calculations are highly subjective and subject to interpretation and include inputs and assumptions including estimates of redemption and conversion behaviors. Significant unobservable estimates of redemption and conversion behaviors prior to the IPO include (i) the 75% cumulative probability for the Company’s successful achievement of an IPO or other qualified financing prior to January 31, 2018 and (ii) the 90% probability that the Convertible Term Notes will be required to be redeemed at their maturation on January 31, 2018 (i.e., the holder will opt-out of converting the Convertible Term Notes into shares of the Company's common stock). The floating rate is based on the three-month LIBOR rate. The risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues over the expected life of the Convertible Term Notes. The expected life is impacted by all of the underlying assumptions and calibration of the Company’s model. Significant increases or decreases in inputs could result in significantly lower or higher fair value measurements. The ranges of significant inputs and assumptions used in measuring the fair value of the embedded derivative liability in the Convertible Term Notes are as follows: 
 
 
June 30, 2017
 
December 31, 2016
Expected life (months)
 
7

 
6-13

Conversion discount percentage
 
N/A

 
20
%
Floating rate
 
10.30% - 10.49%

 
10.00% - 10.62%

Risk-free rate
 
1.20
%
 
0.92
%
Market yield
 
23.64
%
 
23.86
%
Non-marketability discount
 
N/A

 
9
%
Non-marketability discount volatility
 
N/A

 
53.9
%





30

Elevate Credit, Inc. and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2017 and 2016


NOTE 9—INCOME TAXES
Income tax expense for the three and six months ended June 30, 2017 and 2016 consists of the following:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Current income tax expense:
 
 
 
 
 
 
 
 
Federal
 
$
12

 
$
(7
)
 
$
155

 
$
122

State
 
181

 
32

 
416

 
157

Total current income tax expense
 
193

 
25

 
571

 
279

 
 
 
 
 
 
 
 
 
Deferred income tax expense (benefit):
 
 
 
 
 
 
 
 
Federal
 
(711
)
 
(5,424
)
 
565

 
(255
)
State
 
(98
)
 
(467
)
 
75

 
(24
)
Stock options
 

 

 
(690
)
 

Deductible IPO costs