S-1/A 1 d418937ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on November 28, 2017.

Registration No. 333-221081

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CURO GROUP HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

6199

(Primary Standard Industrial

Classification Code Number)

 

90-0934597

(I.R.S. Employer

Identification Number)

 

 

3527 North Ridge Road

Wichita, Kansas 67205

(316) 425-1410

(Address, including Zip Code, and Telephone Number, including Area Code, of registrant’s principal executive offices)

Vin Thomas

Chief Legal Officer

3527 North Ridge Road

Wichita, Kansas 67205

(316) 425-1410

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

 

 

Copies to:

 

Cristopher Greer

Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, NY 10019
(212) 728-8000

 

F. Holt Goddard

Jonathan Michels

White & Case LLP

1221 Avenue of the Americas

New York, NY 10020

(212) 819-8200

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date hereof.

 

 

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):

 

Large accelerated filer ☐   Accelerated filer ☐  

Non-accelerated filer ☒

(Do not check if a

smaller reporting company)

  Smaller reporting company ☐   Emerging growth company ☒

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

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of Securities
to Be Registered

 

Amount to be
Registered(1)

 

Proposed Maximum

Offering Price

Per Share

  Proposed Maximum
Aggregate Offering
Price(2)
  Amount of
Registration Fee(3)

Common Stock, $0.001 par value per share

 

7,666,667

 

$16.00

  $122,666,672   $15,272.00

 

 

(1)   Includes an additional 1,000,000 shares that the underwriters have the option to purchase.
(2)   Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3)   The Registrant previously paid a registration fee of $12,450.00 in connection with the initial filing of this Registration Statement.

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

 

 

 


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

 

SUBJECT TO COMPLETION, DATED NOVEMBER 28, 2017

6,666,667 Shares

 

 

LOGO

CURO Group Holdings Corp.

Common Stock

 

 

We are selling 6,666,667 shares of our common stock.

This is the initial public offering of shares of common stock of CURO Group Holdings Corp. Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price will be between $14.00 and $16.00 per share. Our common stock has been authorized for listing on The New York Stock Exchange under the symbol “CURO.”

We have granted the underwriters a 30-day option to purchase up to 1,000,000 shares from us at the initial public offering price, less the underwriting discounts and commissions.

We are an “emerging growth company” as the term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements. See “Summary—Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risks. See “Risk Factors” on page 18.

 

       Price to
Public
       Underwriting
Discounts and
Commissions
       Proceeds to
CURO Group
Holdings
Corp. (before
expenses)(1)
 

Per Share

       $                        $                        $                

Total

       $                          $                          $                  

 

(1) See “Underwriting” for information relating to underwriting compensation, including certain expenses of the underwriters to be reimbursed by the Company.

Neither the Securities and Exchange Commission, any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                     , 2017.

 

Credit Suisse    Jefferies    Stephens Inc.
   William Blair   
   Janney Montgomery Scott   

The date of this prospectus is                     , 2017.


Table of Contents

 

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1  

RISK FACTORS

     18  

SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS

     41  

USE OF PROCEEDS

     44  

DIVIDEND POLICY

     45  

CAPITALIZATION

     46  

DILUTION

     47  

SELECTED CONSOLIDATED FINANCIAL DATA

     49  

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     51  

BUSINESS

     102  

REGULATORY ENVIRONMENT AND COMPLIANCE

     117  

MANAGEMENT

     132  

EXECUTIVE COMPENSATION

     139  

CERTAIN RELATIONSHIPS AND RELATED - PARTY TRANSACTIONS

     158  

PRINCIPAL STOCKHOLDERS

     161  

DESCRIPTION OF CAPITAL STOCK

     163  

SHARES ELIGIBLE FOR FUTURE SALE

     168  

MATERIAL TAX CONSEQUENCES TO NON-U.S. HOLDERS

     170  

UNDERWRITING

     174  

LEGAL MATTERS

     180  

EXPERTS

     180  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     180  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

You should rely only on the information contained in this document or to which we have referred you. Neither we nor the underwriters have authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities under applicable law. The information in this document may only be accurate on the date of this document regardless of the time of delivery of this prospectus or of any sale of shares of our common stock, and the information in any free writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus. Our business, financial condition, results of operations and future growth prospects may have changed since those dates. This prospectus is not an offer to sell or the solicitation of an offer to buy shares of our common stock in any circumstances under which such offer or solicitation is unlawful.

 

Dealer Prospectus Delivery Obligation

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

 

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This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

We do not intend our use or display of other companies’ tradenames, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other company. Each trademark, tradename or service mark of any other company appearing in this prospectus is the property of its respective holder.

We or one of our subsidiaries own or have applied for ownership of the marks “CURO,” “CURO Financial Technologies Corp.,” “Speedy Cash®,” “RC Rapid CashSM,” “OPT+SM,” “Rapid Cash,” “Avio Credit,” “LendDirect” and “Wage Day Advance.” All other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.

In this prospectus, when we refer to

 

    “CURO,” we are referring to CURO Group Holdings Corp. and its subsidiaries, including CURO Financial Technologies Corp.;

 

    “CFTC,” we are referring to CURO Financial Technologies Corp.;

 

    “CURO Intermediate,” we are referring to CURO Intermediate Holdings Corp.;

 

    the “FFL Holders,” we are referring to Friedman Fleischer & Lowe Capital Partners II, L.P., FFL Executive Partners II, L.P. and FFL Parallel Fund II, L.P.; and

 

    the “Founder Holders,” we are referring to Doug Rippel, Chad Faulkner and Mike McKnight and certain of their family trusts and affiliated entities.

Unless otherwise specified herein or the context otherwise requires, all references to “$,” “U.S.$,” “USD” or “dollars” in this prospectus refer to U.S. dollars, all references to “C$” refer to Canadian dollars, and all references to “£,” “pound sterling” or “GBP” refer to British pounds sterling. The C$ and GBP are the functional currency of our Canadian and U.K. operations, respectively.

For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

Industry and Market Data

This prospectus includes statistical data, market data and other industry data and forecasts, which we obtained from market research, publicly available information and independent industry publications and reports, including those by the Pew Research Center, CFI Group and FactorTrust. We have supplemented these data and forecasts where necessary with information from publicly available sources and our own internal estimates. We use these sources and estimates and believe them to be reliable, but they involve a number of assumptions and limitations.

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

 

    ACORN Canada, It’s Expensive to be Poor: How Canadian Banks are Failing Low Income Communities; May 2016.

 

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

 

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    Center for Financial Services Innovation, or CFSI, 2016 Financially Underserved Market Size Study; November 2016.

 

    CFI Group, Bank Satisfaction Barometer; 2016.

 

    FactorTrust, The FactorTrust Underbanked Index; May 2017.

 

    FICO, US Average FICO Score Hits 700: A Milestone for Consumers; July 2017.

 

    Financial Credit Authority, High-cost credit; July 2017.

 

    JPMorgan Chase & Co., Weathering Volatility: Big Data on the Financial Ups and Downs of U.S. Individuals, 2015.

 

    L.E.K. Consulting, Consumer Specialist Lending – Newly Sustainable or Another Boom-and-Bust; Volume XVIII, Issue 10.

 

    Pew Research Center, Smartphone Ownership and Internet Usage Continues to Climb in Emerging Economies; February 2016.

 

    Pricewaterhouse Coopers LLP, or PWC, Banking the Under-Banked: The Growing Demand for Near Prime Credit, 2016.

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

 

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SUMMARY

The following summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to those statements before making an investment decision. The terms “we,” “our,” “us,” “CURO” and the “Company,” as used in this prospectus, refer to CURO Group Holdings Corp. and its consolidated subsidiaries, except where otherwise stated or where it is clear that the terms mean only CURO Group Holdings Corp. exclusive of its subsidiaries. Unless the context otherwise indicates or requires, the term “Curo Platform” and “platform,” as used in this prospectus, refer to our Company’s proprietary IT systems and operating platform.

Company Overview

We are a growth-oriented, technology-enabled, highly-diversified consumer finance company serving a wide range of underbanked consumers in the United States, Canada and the United Kingdom and are a market leader in our industry based on revenues. We believe that we have the only true omni-channel customer acquisition, onboarding and servicing platform that is integrated across store, online, mobile and contact center touchpoints. Our IT platform, which we refer to as the “Curo Platform,” seamlessly integrates loan underwriting, scoring, servicing, collections, regulatory compliance and reporting activities into a single, centralized system. We use advanced risk analytics powered by proprietary algorithms and over 15 years of loan performance data to efficiently and effectively score our customers’ loan applications. Since 2010, we have extended $13.9 billion in total credit across approximately 36.5 million total loans, and our revenue of $828.6 million in 2016 represents a 26.3% compound annual growth rate, or CAGR, over the same time period.

We operate in the United States under two principal brands, “Speedy Cash” and “Rapid Cash,” and launched our new brand “Avio Credit” in the United States in the second quarter of 2017. In the United Kingdom, we operate online as “Wage Day Advance” and, prior to their closure in the third quarter of 2017, our stores were branded “Speedy Cash.” In Canada our stores are branded “Cash Money” and, we offer “LendDirect” installment loans online. As of September 30, 2017 our store network consisted of 405 locations across 14 U.S. states and seven Canadian provinces. As of September 30, 2017, we offered our online services in 26 U.S. states, five Canadian provinces and the United Kingdom.

We offer a broad range of consumer finance products including Unsecured Installment Loans, Secured Installment Loans, Open-End Loans and Single-Pay Loans. We have tailored our products to fit our customers’ particular needs as they access and build credit. Our product suite allows us to serve a broader group of potential borrowers than most of our competitors. The flexibility of our products, particularly our installment and open-end products, allows us to continue serving customers as their credit needs evolve and mature. Our broad product suite creates a diversified revenue stream and our omni-channel platform seamlessly delivers our products across all contact points—we refer to it as “Call, Click or Come In.” We believe these complementary channels drive brand awareness, increase approval rates, lower our customer acquisition costs and improve customer satisfaction levels and customer retention.

We serve the large and growing market of individuals who have limited access to traditional sources of consumer credit and financial services. We define our addressable market as underbanked consumers in the United States, Canada and the United Kingdom. According to a study by CFSI, there are as many as 121 million Americans who are currently underserved by financial services companies. According to studies by ACORN Canada and PWC, the statistics in Canada and the United Kingdom are similar, with an estimated 15% of Canadian residents (approximately 5 million individuals) and an estimated 20% to 25% of United Kingdom

 

 

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residents (approximately 10 to 14 million individuals) classified as underbanked. Given our international footprint, this translates into an addressable market of approximately 140 million individuals. We believe that with our scalable omni-channel platform and diverse product offerings, we are well positioned to gain market share as sub-scale players struggle to keep pace with the technological evolution taking place in the industry.

Our customers require essential financial services and value timely, transparent, affordable and convenient alternatives to banks, credit card companies and other traditional financial services companies. According to a recent study by FactorTrust, underbanked customers in the United States tend to have the following characteristics:

 

    average age of 39 for applicants and 41 for borrowers;

 

    applicants are 47% male and 53% female;

 

    41% are homeowners;

 

    45% have a bachelor’s degree or higher; and

 

    the top five employment segments are Retail, Food Service, Government, Banking/Finance and Business Services.

In the United States, our customers generally earn between $25,000 and $75,000 annually. In Canada, our customers generally earn between C$25,000 and C$60,000 annually. In the United Kingdom, our customers generally earn between £18,000 and £31,000 annually.

Products and Services

We provide Unsecured Installment Loans, Secured Installment Loans, Open-End Loans, Single-Pay Loans and a number of ancillary financial products including check cashing, proprietary reloadable prepaid debit cards (Opt+), credit protection insurance in the Canadian market, gold buying, retail installment sales and money transfer services. We have designed our products and customer journey to be consumer-friendly, accessible and easy to understand. Our platform and product suite enable us to provide several key benefits that appeal to our customers:

 

    transparent approval process;

 

    flexible loan structure, providing greater ability to manage monthly payments;

 

    simple, clearly communicated pricing structure; and

 

    full account management online and via mobile devices.

Our centralized underwriting platform and its proprietary algorithms are used for every aspect of underwriting and scoring of our loan products. The customer application, approval, origination and funding processes differ by state, country and by channel. Our customers typically have an active phone number, open checking account, recurring income and a valid government-issued form of identification. For in-store loans, the customer presents required documentation, including a recent pay stub or support for underlying bank account activity for in-person verification. For online loans, application data is verified with third-party data vendors, our proprietary algorithms and/or tech-enabled account verification. Our proprietary, highly scalable, scoring system employs a champion/challenger process whereby models compete to produce the most successful customer outcomes and profitable cohorts. Our algorithms use data relevancy and machine learning techniques to identify approximately 60 variables from a universe of approximately 11,600 that are the most predictive in terms of credit outcomes. The algorithms are continuously reviewed and refreshed and are focused on a number of factors related to disposable income, expense trends and cash flows, among other factors, for a given loan applicant. The

 

 

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predictability of our scoring models is driven by the combination of application data, purchased third-party data and our robust internal database of over 71 million records (as of September 30, 2017) associated with loan information. These variables are then combined in a series of algorithms to create a score that allows us to scale lending decisions.

Geography and Channel Mix

For the nine months ended September 30, 2017, our revenue distribution in the United States, Canada and United Kingdom was 76.4%, 19.5% and 4.1%, respectively.

Stores: As of September 30, 2017, we had 405 stores in 14 U.S. states and seven provinces in Canada, which included the following:

 

    215 United States locations: Texas (92), California (36), Nevada (18), Arizona (13), Tennessee (11), Kansas (10), Illinois (8), Alabama (7), Missouri (5), Louisiana (5), Colorado (3), Oregon (3), Washington (2) and Mississippi (2); and

 

    190 Canadian locations: Ontario (121), Alberta (27), British Columbia (26), Saskatchewan (6), Nova Scotia (5), Manitoba (4) and New Brunswick (1).

Online: We lend online in 26 U.S. states, five provinces in Canada and in England, Wales, Scotland and Northern Ireland in the United Kingdom. During the third quarter of 2017, we began offering loans online in Virginia.

The following charts reflect the revenue contribution, including CSO fees, of the products and services that we currently offer in the regions in which we operate.

 

Year Ended December 31, 2016

$829 million

 

Nine Months Ended September 30, 2017

$697 million

 

 

LOGO

 

 

LOGO

For the year ended December 31, 2016 and the period ending September 30, 2017, revenue generated through our online channel was 33% and 37%, respectively.

 

 

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Overview of Loan Products

Below is an outline of the primary products we offered as of September 30, 2017.

 

     Installment          
      Unsecured    Secured    Open-End    Single-Pay

Channel

   Online and in-store:
15 U.S. states,
Canada and the
United Kingdom(1)
   Online and in-store:
7 U.S. states
   Online: KS, TN, ID, UT,
VA, DE and RI

In-store: KS and TN

   Online and in-store:
12 U.S. states, Canada
and the United
Kingdom(1)

Approximate Average Loan Size(2)

   $636    $1,299    $463    $335

Duration

   Up to 48 months    Up to 42 months    Revolving / Open-ended    Up to 62 days

Pricing

   13.2% average
monthly interest
rate(3)
   10.6% average
monthly interest
rate(3)
   Daily interest rates
ranging from 0.74% to
0.99%
   Fees ranging from $13
to $25 per $100
borrowed

 

(1) Online only in the United Kingdom.
(2) Includes CSO loans.
(3) Weighted average of the contractual interest rates for the portfolio as of September 30, 2017. Excludes CSO fees.

Unsecured Installment Loans

Unsecured Installment Loans are fixed-term, fully-amortizing loans with a fixed payment amount due each period during the term of the loan. These loans are originated and owned by us or by third-party lenders pursuant to credit services organization and credit access business statutes, which we refer to as our CSO programs. For CSO programs, we arrange, service and guarantee the loans. Payments are due bi-weekly or monthly to match the customer’s pay cycle. Customers may prepay without penalty or fees. Unsecured Installment Loan terms are governed by enabling state legislation in the United States, provincial and federal legislation in Canada and national regulations in the United Kingdom. Unsecured Installment Loans comprised 49.3%, and 40.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. We believe that the flexible terms and lower payments associated with Installment Loans significantly expands our addressable market by allowing us to serve a broader range of customers with a variety of credit needs.

Secured Installment Loans

Secured Installment Loans are similar to Unsecured Installment Loans but are also secured by a vehicle title. These loans are originated and owned by us or by third-party lenders through our CSO programs. For these loans the customer provides clear title or security interest in the vehicle as collateral. The customer receives the benefit of immediate cash but retains possession of the vehicle while the loan is outstanding. The loan requires periodic payments of principal and interest with a fixed payment amount due each period during the term of the loan. Payments are due bi-weekly or monthly to match the customer’s pay cycle. Customers may prepay without penalty or fees. Secured Installment Loan terms are governed by enabling state legislation in the United States. Secured Installment Loans comprised 10.5% and 9.8% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

Open-End Loans

Open-End Loans are a line of credit for the customer without a specified maturity date. Customers may draw against their line of credit, repay with minimum, partial or full payments and redraw as needed. We report

 

 

% ancillary revenue 7% 5% 5% % ancillary revenue 5% 4% 4% % online revenue 28% 30% 33% % online revenue 30% 35% 39%

 

 

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and earn interest on the outstanding loan balances drawn by the customer against their approved credit limit. Typically, customers do not draw the full amount of their credit limit. Customers may prepay without penalty or fees. Loan terms are governed by enabling state legislation in the United States. Unsecured Open-End Loans comprised 6.6% and 7.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. Secured Open-End Loans are offered as part of our product mix in states with enabling legislation and accounted for approximately 0.9% and 1.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

Single-Pay Loans

Single-Pay Loans are generally unsecured short-term, small-denomination loans whereby a customer receives cash in exchange for a post-dated personal check or a pre-authorized debit from the customer’s bank account. These loans are originated and owned by us or by third-party lenders through our CSO programs. We agree to defer deposit of the check or debiting of the customer’s bank account until the loan due date which typically falls on the customer’s next pay date. Single-Pay Loans are governed by enabling state legislation in the United States, federal and provincial regulations in Canada and national regulation in the United Kingdom. Single-Pay Loans comprised 28.4% and 37.8% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

Ancillary products

We also provide a number of ancillary financial products including check cashing, proprietary reloadable prepaid debit cards (Opt+), credit protection insurance in the Canadian market, gold buying, retail installment sales and money transfer services. We had 112,607 active Opt+ cards as of September 30, 2017, which includes any card with a positive balance or transaction in the past 90 days. Opt+ customers have loaded over $1.5 billion to their cards since we started offering this product.

CSO Programs

Through our CSO programs, we act as a credit services organization/credit access business on behalf of customers in accordance with applicable state laws. We currently offer loans through CSO programs in stores and online in the state of Texas and online in the state of Ohio. In Texas we offer Unsecured Installment Loans and Secured Installment Loans with a maximum term of 180 days. In Ohio we offer an Unsecured Installment Loan product with a maximum term of 18 months. As a CSO we earn revenue by charging the customer a fee, or the CSO fee, for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with us under our CSO programs, we agree, for a CSO fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customer’s obligation to repay the loan the customer receives from the third-party lender. CSO fees are calculated based on the amount of the customer’s outstanding loan. For CSO loans, each lender is responsible for providing the criteria by which the customer’s application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go into default.

As of September 30, 2017, the maximum amount payable under all such guarantees was $59.1 million, compared to $59.6 million at December 31, 2016. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover the amount we pay from the customers. We hold no collateral in respect of the guarantees. Our guarantee liability was $16.9 million and $17.1 million at September 30, 2017 and December 31, 2016, respectively.

Since CSO loans are made by a third party lender, we do not include them in our Consolidated Balance Sheets as loans receivable. CSO fees receivable are included in “Prepaid expense and other” in our Consolidated

 

 

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Balance Sheets. We receive payments from customers for these fees on their scheduled loan repayment due dates.

The majority of revenue generated through our CSO programs was for Unsecured Installment Loans, which comprised 96.2% and 91.6% of total CSO revenue for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

Total revenue generated through our CSO programs comprised 26.5% and 26.1% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

Industry Overview

We operate in a segment of the financial services industry that provides lending products to underbanked consumers in need of convenient and flexible access to credit and other financial products. Up to 140 million individuals fall within the definition of our target market. In the United States alone, according to a study by CFSI, these underserved consumers spent an estimated $126.5 billion on fees and interest related to credit products similar to those we offer.

We believe our target consumers have a need for tailored financing products to cover essential expenses. According to a study by the Federal Reserve, 44% of American adults could not cover an emergency expense costing $400, or would cover it by selling an asset or borrowing money. Additionally, a study conducted by JPMorgan Chase & Co., which analyzed the transaction information of 2.5 million of its account holders, found that 41% of those sampled experienced month-to-month income swings of more than 30%.

We compete against a wide variety of consumer finance providers including online and branch-based consumer lenders, credit card companies, pawnshops, rent-to-own and other financial institutions that offer similar financial services. A study by CFSI has estimated that spending on credit products offered by our industry exhibited a 10.0% CAGR from 2010 to 2015. This growth has been accompanied by shrinking access to credit for our customer base as evidenced by an estimated $142 billion reduction in the availability of non-prime consumer credit from the 2008 to 2009 credit crisis to 2015 (based on analysis of master pool trust data of securitizations for major credit card issuers).

In addition to the beneficial secular trends broadly impacting the consumer finance landscape, we believe we are well positioned to grow our market share as a result of several changes we have observed related to consumer preferences within alternative financial services. Specifically, we believe that a combination of evolving consumer preferences, increasing use of mobile devices and overall adoption rates for technology are driving significant change in our industry.

 

    Shifting preference towards installment loans—We believe from our experience in offering installment loan products since 2008 that single-pay loans are becoming less popular or less suitable for a growing portion of our customers. Customers generally have shown a preference for our Installment Loan products, which typically have longer terms, lower periodic payments and a lower relative cost. Offering more flexible terms and lower payments also significantly expands our addressable market by broadening our products’ appeal to a larger proportion of consumers in the market.

 

    Increasing adoption of online channels—Our experience is that customers prefer service across multiple channels or touch points. Approximately 63% of respondents in a recent study by CFI Group said they conducted more than half of their banking activities electronically. That same group of respondents reported an overall level of satisfaction that met or exceeded the average. In 2017, our online revenue of $257 million represented 37% of our 2017 consolidated revenues through September 30, 2017.

 

 

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    Increasing adoption of mobile apps and devices—With the proliferation of pay-as-you-go and other smartphone plans, many of our underbanked customers have moved directly to mobile devices for loan origination and servicing. According to a 2016 study by the Pew Research Center involving the United States, the United Kingdom and Canada, smartphone penetration is 72%, 68% and 67%, respectively. Additionally, 43% of respondents to a study by CFI Group said they conduct transactions using a mobile banking app. Five years ago, less than 30% of our U.S. customers reached us via a mobile device. In the third quarter of 2017, that percentage was over 80%.

Our Strengths

We believe the following competitive strengths differentiate us and serve as barriers for others seeking to enter our market.

 

    Unique omni-channel platform / site-to-store capabilityWe believe we have the only fully-integrated store, online, mobile and contact center platform to support omni-channel customer engagement. We offer a seamless “Call, Click or Come In” capability for customers to apply for loans, receive loan proceeds, make loan payments and otherwise manage their accounts in store, online or over the phone. Customers can utilize any of our three channels at any time and in any combination to obtain a loan, make a payment or manage their account. In addition, we have our “Site-to-Store” capability in which online customers that do not qualify for a loan online are referred to a store to complete a loan transaction with one of our associates. These aspects of our platform enable us to source a larger number of customers, serve a broader range of customers and continue serving these customers for longer periods of time while lowering cost per funded loan.

 

    Industry leading product and geographic diversification—In addition to channel diversification, we have increased our diversification by product and geography allowing us to serve a broader range of customers with a flexible product offering. As part of this effort, we have also developed and launched new brands and will continue to develop new brands with differentiated marketing messages. These initiatives have helped diversify our revenue streams, enabling us to appeal to a wider array of borrowers.

 

    Leading analytics and information technology drives strong credit risk management—We have developed a bespoke, proprietary IT platform, referred to as the Curo Platform, which is a unified, centralized platform that seamlessly integrates activities related to customer acquisition, underwriting, scoring, servicing, collections, compliance and reporting. Our IT platform is built upon over 15 years of continually updated customer data comprising over 71 million loan records (as of September 30, 2017) used to formulate our robust, proprietary underwriting algorithms. This platform then automatically applies multi-algorithmic analysis to a customer’s loan application to produce a “Curo Score,” which drives our underwriting decision. Globally, as of September 30, 2017 we had 183 employees who write code and manage our networks and infrastructure for our IT platform. This fully-integrated IT platform enables us to make real-time, data-driven changes, to our acquisition and risk models, which yield significant benefits in terms of customer acquisition costs and credit performance.

 

    Multi-faceted marketing strategy drives low customer acquisition costs—Our marketing strategy includes a combination of strategic direct mail, television advertisements and online and mobile-based digital campaigns, as well as strategic partnerships. Our global Marketing, Risk and Credit Analytics team, consisting of 72 professionals as of September 30, 2017, uses our integrated IT platform to cross reference marketing spend, new customer account data and granular credit metrics to optimize our marketing budget across these channels in real time to produce higher quality new loans. Besides these diversified marketing programs, our stores play a critical role in creating brand awareness and driving new customer acquisition. From January 2015 through the end of September 2017, we acquired nearly 1.9 million new customers in North America. For the first nine months of 2017 compared to the first nine months of 2015, our average first-pay defaults in the United States improved by 203 bps, while our average cost per funded loan decreased from $72.90 to $63.30.

 

 

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    Focus on customer experience—We focus on customer service and experience and have designed our stores, website and mobile application interfaces to appeal to our customers’ needs. We continue to augment our web and mobile app interfaces to enhance our “Call, Click or Come In” strategy, with a focus on adding functionality across all our channels. Our stores are branded with distinctive and recognizable signage, conveniently located and typically open seven days a week. Furthermore, we have highly experienced managers in our stores, which we believe is a critical component to driving customer retention, lowering acquisition costs and driving store-level margins. For example as of September 30, 2017, the average tenure for our U.S. store managers was over nine years and over 11 years for regional directors.

 

    Strong compliance culture with centralized collections operations—We seek to consistently engage in proactive and constructive dialogue with regulators in each of our jurisdictions and have made significant investments in best-practice automated tools for monitoring, training and compliance management. As of September 30, 2017, our compliance group consisted of 28 individuals based in all three countries in which we operate and our compliance management systems are integrated into our proprietary IT platform. Additionally, our in-house centralized collections strategy, supported by our proprietary back-end customer database and analytics team, drives an effective, compliant and highly-scalable model.

 

    Demonstrated access to capital markets and diversified funding sources—We have raised over $1.1 billion of debt financing in six separate offerings since 2008, most recently in October 2017. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments” We also closed a $150 million nonrecourse installment loan financing facility in 2016 and have routinely accessed banks and other lenders for revolving credit capacity. We believe this is a significant differentiator from our peers who may have trouble accessing capital markets to fund their business models if credit markets tighten. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

    Experienced and innovative management team and sponsor—Our senior leadership team is among the most experienced in the industry with over a century of collective experience and an average tenure at CURO of over eight years. We also have deep bench strength across key functional areas including accounting, compliance, IT and legal. Our equity sponsor, FFL Partners, LLC, or FFL Partners, has been our partner since 2008 and has contributed significant resources to helping define our growth strategy.

 

    History of growth and profitability—Throughout our operating history we have maintained strong profitability and growth. Between 2010 and 2016 we grew revenue, Adjusted EBITDA, net income and Adjusted Earnings at a CAGR of 26.3%, 25.4%, 21.9% and 19.9%, respectively. At the same time, we have grown our product offerings to better serve our growing and expanding customer base.

Growth Strategy

 

    Leverage our capabilities to continue growing installment and open-end products—Installment and open-end products accounted for 58% of our consolidated revenue for the year ended December 31, 2016, up from 19% in 2010, and we believe that our customers greatly prefer these products. We believe that these products will continue to account for a greater share of our revenue and provide us a competitive advantage versus other consumer lenders with narrower product focus. We believe that our ability to continue to be successful in developing and managing new products is based upon our capabilities in three key areas.

 

    Underwriting: Installment and open-end products generally have lower yields than single-pay products, which necessitates more stringent credit criteria supported by more sophisticated credit analytics. Our industry leading analytics platform combines data from over 71 million records associated with loan information from third-party reporting agencies and has helped to reduce average first-pay defaults in the United States by approximately 203 bps for the first nine months of 2017 compared to the first nine months of 2016.

 

 

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    Collections and Customer Service: Installment and open-end products have longer terms than single-pay loans, in some cases up to 48 months. These longer terms drive the need for a more comprehensive collection and default servicing strategy that emphasizes curing a default and putting the customer back on a track to repay the loan. We utilize a centralized collection model that prevents our store management personnel from ever having to contact customers to resolve a delinquency. We have also invested in building new contact centers in all three of the countries in which we operate, each of which utilizes sophisticated dialer technologies to help us contact our customers in a scalable, efficient manner.

 

    Funding: The shift to larger balance installment loans with extended terms and open-end loans with revolving terms requires more substantial and more diversified funding sources. Given our deep and successful track record in accessing diverse sources of capital, we believe that we are well-positioned to support future new product transition.

 

    Serve additional types of borrowersIn addition to growing our existing suite of installment and open-end lending products, we are focused on expanding the total number of customers that we are able to serve through product, geographic and channel expansion. This includes expansion of our online channel, particularly in the United Kingdom, as well as continued targeted additions to our physical store footprint. We also continue to introduce additional products to address our customers’ preference for longer term products that allow for greater flexibility in managing their monthly payments.

 

    In the second quarter of 2017, we launched Avio Credit, a new online product branded in the United States targeting individuals in the 600-675 FICO band. This product is structured as an Unsecured Installment Loan with varying principal amounts and loan terms up to 48 months. As of April 2017, 10% of U.S. consumers had FICO scores between 600 and 649. A further 13.2% of U.S. consumers had FICO scores between 650 and 699, a portion of whom would fall into the credit profile targeted by our Avio Credit product.

 

    We expect to expand our LendDirect brand in Canada to include additional provinces and increase acquisition efforts in existing markets. We also plan to open LendDirect stores in Canada during the fourth quarter of 2017. Seven million Canadians have a FICO score below 700. We estimate that the consumer credit opportunity for this customer segment exceeds C$165 billion. We believe these customers represent a highly-fragmented market with low penetration.

 

    In the United Kingdom, we expect to launch online longer-term loans, some supported by a guarantor. According to a study by the Financial Conduct Authority, in 2016, the U.K. guarantor market alone comprised approximately £300 million in loans outstanding and had annual originations of approximately £200 million in 2016. A report by L.E.K. Consulting found that this market experienced double digit percentage growth from 2008 to 2017. We believe it is currently dominated by one lender but otherwise largely made up of smaller participants with growth challenges.

 

    Continue to bolster our core business through enhancement of our proprietary risk scoring models—We continuously refine and update our credit models to drive additional improvements in our performance metrics. By regularly updating our credit underwriting algorithms we can continue to expand the value of each of our customer relationships through improved credit performance. By combining these underwriting improvements with data driven marketing spend, we believe our optimization efforts will produce margin expansion and earnings growth.

 

    Expand credit for our borrowers—Through extensive testing and our proprietary underwriting, we have successfully increased credit limits for customers, enabling us to offer “the right loan to the right customer.” The favorable take rates and successful credit performance have improved overall vintage and portfolio performance. For the first nine months of 2017, our average loan amount for Unsecured and Secured Installment Loans rose by $128 (a 26% increase) and $247 (a 24% increase), respectively, versus the same period in 2016.

 

 

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    Continue to improve the customer journey and experience—We have projects in our development pipeline to enhance our “Call, Click or Come In” customer experience and execution, ranging from redesign of web and app interfaces to enhanced service features to payments optimization.

 

    Enhance our network of strategic partnerships—Our strategic partnership network generates applicants that we then close through our diverse array of marketing channels. By further leveraging these existing networks and expanding the reach of our partnership platform to include new relationships, we can increase the number of overall leads we receive.

Corporate and Other Information

The CURO business was founded in 1997. CURO Financial Technologies Corp., or CFTC (then known as Speedy Cash Holdings Corp.), was incorporated in Delaware on July 16, 2008. On September 10, 2008, our founders sold or otherwise contributed all of the outstanding equity of the various operating entities that comprised the CURO business to a wholly-owned subsidiary of CFTC in connection with an investment in CFTC by Friedman Fleischer & Lowe Capital Partners II, L.P. and its affiliated funds, or FFL Partners. CURO Group Holdings Corp. (then known as Speedy Group Holdings Corp.) was incorporated in Delaware on February 7, 2013 as the parent company of CFTC. On May 11, 2016, we changed the name of Speedy Group Holdings Corp. to CURO Group Holdings Corp. We similarly changed the names of some of its subsidiaries.

Our directors, including the Founder Holders, executive officers and the FFL Holders, currently collectively own approximately 89.36% of our common stock. Following the completion of this offering, our directors, including the Founder Holders, executive officers and the FFL Holders will beneficially own approximately 76.05% of our outstanding common stock. For additional information on the beneficial ownership of our common stock prior to and immediately after the completion of this offering, see “Principal Stockholders.”

Our principal business office is located at 3527 North Ridge Road, Wichita, Kansas 67205. Our website address is www.curo.com. We do not incorporate the information contained on, or accessible through, our corporate website into this prospectus, and you should not consider it to be part of this prospectus.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise generally applicable to public companies. As an emerging growth company:

 

    we are required to have only two years of audited financial statements, two years of selected financial data and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

    we are not required to engage an auditor to report on the effectiveness of our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act;

 

    we are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

    we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes”;

 

 

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    we are not required to disclose certain executive compensation-related items, such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation, or to include a compensation committee report, provided we comply with the scaled compensation disclosure rules applicable to smaller reporting companies; and

 

    we may take advantage of an extended transition period for complying with new or revised accounting standards, allowing us to delay the adoption of some accounting standards until those standards would otherwise apply to private companies.

We have elected to take advantage of these reduced reporting and other requirements available to us as an emerging growth company. As a result of these elections, the information that we provide in this prospectus may be different from the information you may receive from other public companies. In addition, it is possible that certain investors will find our common stock less attractive as a result of our elections, which may result in a less active trading market for our shares and more volatility in our stock price.

We may take advantage of these provisions until we are no longer an emerging growth company. We could remain an emerging growth company until the last day of the fifth fiscal year after this offering, or until the earliest of the following: (i) the last day of the first fiscal year in which our total annual gross revenues are at least $1.07 billion; (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur as of the end of the fiscal year in which, among other things, the market value of our voting and non-voting common equity securities held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter; or (iii) the date on which we have issued more than $1 billion in nonconvertible debt securities during the preceding three-year period.

Summary Risk Factors

Investing in our common stock involves substantial risk. The risks described under the heading “Risk Factors” immediately following this summary may cause us to not realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the more significant challenges include the following:

 

    the recently adopted CFPB rule on payday, vehicle title, and certain high-cost installment loans could, if enacted, have a material adverse effect on our business and results of operations;

 

    the extent to which federal, state, local and foreign governmental regulation of consumer lending and related financial products and services limits or prohibits the operation of our business;

 

    our failure to comply with applicable laws and regulations, and resulting fines, penalties or other sanctions that could adversely affect our business and results of operations;

 

    the impact of proposed rules and regulations that, if enacted, could have a material adverse effect on our business and results of operations;

 

    future changes to regulations to which we are subject could restrict us in ways that adversely affect our business and results of operations;

 

    the adverse impact of existing or new local regulation of our industry;

 

    the impact of the complex regulatory environment in which we operate, which increase our costs of compliance and the risk that we may fail to comply;

 

    the risk that our interpretation and application of laws and regulations related to consumer lending activities differs from the interpretations applied by federal, state, local and foreign regulatory bodies;

 

 

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    the effect of judicial decisions, agency rulemaking, or amendments to law on the legality or enforceability of our agreements;

 

    current and future litigation and regulatory proceedings against us may impact our results of operations, cash flow and financial condition;

 

    risks associated with negative public perception of our products and services;

 

    the adverse impact of material modifications of U.S. laws and regulations and existing trade agreements by the new U.S. presidential administration on our business, financial condition, and results of operations;

 

    our substantial indebtedness may expose us to material risks, and could adversely affect our business, results of operations and financial condition, as we currently depend in large part on debt financing to provide the cash needed to fund the loans we originate;

 

    our business could be adversely affected by a lack of sufficient debt financing at acceptable prices or disruptions in the credit markets, which could reduce our access to credit and our ability to fund loans;

 

    risks associated with our ability to refinance our substantial indebtedness;

 

    risks associated with a lack of sufficient debt financing made to our business on acceptable terms;

 

    our ability to protect our proprietary technology and analytics or keep up with that of our competitors;

 

    risks associated with disruption in the availability of our information systems;

 

    risks associated with information provided by customers or third parties being inaccurate, and causing us to misjudge a customer’s qualification to receive a loan;

 

    because of the non-prime nature of our customers, our business has much higher rates of charge-offs than traditional lenders, and if we are unable to price our loan products to take into account the credit risks of our customers, our operating results and financial condition could be adversely affected.

 

    risks associated with the failure of our proprietary credit and fraud scoring system to effectively price the credit risk of our prospective or existing customers;

 

    risks associated with the handling of customer personal data and cyber-attacks that could result in liability or harm to our reputation;

 

    risks associated with failure of third parties who provide us products, services or support, including our ability to maintain relationships with banks and other third-party electronic payment solutions providers;

 

    our ability to maintain relationships with third-party service providers to offer credit services organizations, or CSO, loans in Texas and Ohio;

 

    the adverse impact of employee and third-party theft and errors as well as liability resulting from crimes at our stores;

 

    the adequacy of our allowance for loan losses, accrual for third-party loan losses and estimates of losses;

 

    changes in demand for our products and services;

 

    risks associated with effectively managing our growth;

 

    our ability to integrate acquisitions into our existing business operations;

 

    the sufficiency of indemnifications associated with assumed liabilities of acquired entities to cover our exposures to litigation and settlement costs;

 

    our ability to attract and retain qualified management and employees;

 

    the possible impairment of goodwill;

 

 

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    the seasonality of our lending business;

 

    our ability to find suitable real estate to support future new store development;

 

    our ability to keep up with rapid changes in e-commerce and the uses of the Internet;

 

    the fragmentation of our industry and competition from various other sources providing similar financial products, or other alternative sources of credit, to consumers;

 

    risks related to the international scope of our business and operations;

 

    the adverse impact of natural disasters and other business disruptions on our future revenue and financial condition; and

 

    the FFL Holders and the Founder Holders will together have a controlling interest following this offering, and their interests may conflict with ours or yours in the future.

You should carefully consider all of the information included in this prospectus, including matters set forth under the headings “Risk Factors” and “Special Note Regarding Forward-Looking Statements,” before deciding to invest in our common stock.

 

 

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The Offering

 

Issuer

CURO Group Holdings Corp.

 

Offering price per share

$            

 

Common stock offered by us

6,666,667 shares (7,666,667 shares if the underwriters fully exercise their option to purchase additional shares).

 

Common stock to be outstanding immediately after completion of this offering

44,561,419 shares (45,561,419 shares if the underwriters fully exercise their option to purchase additional shares).

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $88.5 million (or $102.5 million if the underwriters fully exercise their option to purchase additional shares), based on an assumed price to the public in this offering of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses. We plan to use our net proceeds from this offering to purchase, redeem, defease or otherwise repay portions of the 12.00% Senior Secured Notes due 2022, or the 12.00% Senior Secured Notes, issued by CFTC and pay fees, expenses, premiums and accrued interest in connection therewith. See “Use of Proceeds.”

 

Dividend policy

See “Dividend Policy” for a discussion of our policy on paying dividends.

 

Directed share program

The underwriters have reserved for sale at the initial public offering price up to 5% of the common stock in this offering for employees, directors and other persons associated with us who have expressed an interest in purchasing our common stock in the offering. If purchased by certain of these persons, these shares will be subject to a 180-day lock-up restriction. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares they do not purchase will be offered by the underwriters to the general public on the same terms as the other shares in this offering. See “Underwriting.”

 

Proposed listing symbol

Our common stock has been authorized for listing on The New York Stock Exchange under the symbol “CURO.”

 

Risk factors

Investing in our common stock involves substantial risks. You should carefully read and consider the information set forth under the heading “Risk Factors” and all other information set forth in this prospectus before deciding to invest in our common stock.

 

 

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The number of shares of our common stock to be outstanding after this offering is based on 37,894,752 shares outstanding as of September 30, 2017 and excludes:

 

    1,977,480 shares of our common stock issuable upon the exercise of options outstanding as of November 27, 2017 at a weighted average price of $3.04 per share;

 

    5,000,000 shares of our common stock reserved for issuance pursuant to our 2017 Incentive Plan as of November 27, 2017; and

 

    2,500,000 shares of our common stock reserved for issuance pursuant to our Employee Stock Purchase Plan as of November 27, 2017.

Unless we specifically state otherwise, the information in this prospectus assumes:

 

    that the price to the public of our common stock in this offering will be $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus;

 

    that holders will not exercise options issued under our equity incentive plans;

 

    the application of a 36-for-1 split of our common stock to occur immediately prior to the completion of this offering;

 

    the filing of our amended and restated certificate of incorporation to occur immediately prior to the completion of this offering; and

 

    the underwriters do not exercise their option to purchase additional shares of common stock from us in this offering.

 

 

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Summary Consolidated Financial And Other Data

Set forth below is our summary consolidated financial and other data as of and for the periods indicated. We have derived the summary consolidated financial and other data as of and for the years ended December 31, 2016 and 2015 from our audited consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus. We have derived the summary consolidated financial and other data as of and for the nine month periods ended September 30, 2017 and 2016 from our unaudited consolidated financial statements that are included elsewhere in this prospectus and that, in our opinion, include all adjustments, consisting of normal, recurring adjustments, necessary for the fair presentation of such information. Our historical results for any prior period are not necessarily indicative of results we may expect or achieve in any future period. Our results for any interim period are not necessarily indicative of results we may achieve during a full year.

The following information is only a summary and may not be complete. Accordingly, you should read these summary consolidated financial data in conjunction with the sections entitled “Use of Proceeds,” “Capitalization,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and the notes thereto contained elsewhere in this prospectus.

 

(in thousands, except per share data)

   Nine Months Ended
September 30,

(unaudited)
    Year Ended
December 31,
 
     2017      2016     2016     2015  

Consolidated Statements of Income Data:

         

Revenue

   $ 696,643      $ 609,692     $ 828,596     $ 813,131  

Provision for losses

     226,523        177,756       258,289       281,210  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net revenue

     470,120        431,936       570,307       531,921  

Cost of providing services

         

Salaries and benefits

     79,554        79,359       104,541       107,059  

Occupancy

     41,421        40,368       54,509       53,288  

Office

     15,519        14,294       20,463       19,929  

Other costs of providing services

     40,954        39,385       53,617       47,380  

Advertising

     35,599        28,925       43,921       65,664  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total cost of providing services

     213,047        202,331       277,051       293,320  
  

 

 

    

 

 

   

 

 

   

 

 

 

Gross margin

     257,073        229,605       293,256       238,601  

Operating (income) expense

         

Corporate and district

     103,605        95,109       125,119       129,046  

Interest expense

     60,694        48,179       64,334       65,020  

Loss (gain) on extinguishment of debt

     12,458        (6,991     (6,991     —    

Restructuring

     7,393        2,967       3,618       4,291  

Goodwill and intangible asset impairment charges

     —          —         —         2,882  

Other (income) expense

     192        (559     (845     1,488  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expense

     184,342        138,705       185,235       202,727  

Net income before taxes

     72,731        90,900       108,021       35,874  

Provision for income tax expense

     29,988        35,041       42,577       18,105  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 42,743      $ 55,859     $ 65,444     $ 17,769  
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share(1)

   $ 1.13      $ 1.47     $ 1.73     $ 0.47  

Diluted earnings per share(1)

   $ 1.10      $ 1.44     $ 1.69     $ 0.46  

 

(1) The per share information has been adjusted to give effect to the 36-for-1 stock split approved by our board of directors on November 8, 2017 that will occur prior to the effectiveness of the registration statement of which this prospectus is a part, or the Registration Statement.

 

 

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(in thousands, except per share data)

   Nine Months Ended
September 30,

(unaudited)
    Year Ended
December 31,
 
     2017     2016     2016     2015  

Non-GAAP Statement of Operations Data and Other Operating Data (unaudited):

        

Adjusted Earnings(2)

   $ 59,372     $ 55,688     $ 66,411     $ 24,656  

EBITDA(3)

   $ 147,545     $ 153,323     $ 191,260     $ 120,006  

Adjusted EBITDA(4)

   $ 173,257     $ 150,260     $ 189,361     $ 130,876  

Adjusted EBITDA Margin(5)

     24.9     24.6     22.9     16.1

Gross Margin Percentage(6)

     36.9     37.7     35.4     29.3

Number of stores (at period end)

     405       420       420       420  

Selected Balance Sheet Data (at period end):

        

Cash

   $ 95,545     $ 175,418     $ 193,525     $ 100,561  

Gross loans receivable

   $ 393,423     $ 244,602     $ 286,196     $ 252,180  

Less: allowance for loan losses

     (71,271     (33,302     (39,192     (32,948
  

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable, net

   $ 322,152     $ 211,300     $ 247,004     $ 219,232  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 762,139     $ 721,119     $ 780,798     $ 666,017  

Total liabilities (including debt)

   $ 696,249     $ 682,716     $ 739,943     $ 685,399  

Total stockholders’ equity (deficit)

   $ 65,890     $ 38,403     $ 40,855     $ (19,382

 

(2) We define Adjusted Earnings as net income plus or minus certain non-cash or other adjusting items. We provide Adjusted Earnings in this prospectus because our management finds its useful in evaluating the performance and underlying operations of our business. We provide a detailed description of Adjusted Earnings and how we use it, including a reconciliation of Adjusted Earnings to net income, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Non-GAAP Financial Information.”
(3) We define EBITDA as earnings before interest, income taxes, depreciation and amortization. We provide EBITDA in this prospectus because our management finds it useful in evaluating the performance and underlying operations of our business. We provide a detailed description of EBITDA and how we use it, along with a reconciliation of EBITDA to net income, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Non-GAAP Financial Information.”
(4) We define Adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization, plus or minus certain non-cash or other adjusting items. We provide Adjusted EBITDA in this prospectus because our management finds it useful in evaluating the performance and underlying operations of our business. We provide a detailed description of Adjusted EBITDA and how we use it, along with a reconciliation of Adjusted EBITDA to net income, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Non-GAAP Financial Information.”
(5) Calculated as Adjusted EBITDA as a percentage of revenue.
(6) Calculated as Gross Margin as a percentage of revenue.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this prospectus, including our consolidated financial statements and related notes appearing at the end of this prospectus, before making an investment decision. The risks described below are not the only ones we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your original investment. This prospectus also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below.

Risks Relating to the Regulation of Our Industry

The CFPB promulgated new rules applicable to our loans that could have a material adverse effect on our business and results of operations.

The CFPB adopted a new rule applicable to payday vehicle title, and certain high-cost installment loans in October 2017, which we refer to as the CFPB Rule, with most provisions becoming effective in August 2019. See “Regulatory Environment and Compliance—U.S. Regulations—U.S. Federal Regulations—CFPB Rule.” This CFPB Rule establishes ability-to-repay, or ATR, requirements for “covered short-term loans,” such as our single-payment loans, and for “covered longer-term balloon-payment loans,” such as our revolving lines of credit, as currently structured. It establishes “penalty fee prevention” provisions that will apply to all of our loans, including our covered short-term loans, covered longer-term balloon-payment loans and our installment loans, which are “covered longer-term loans” under the CFPB Rule.

Covered short-term loans are consumer loans with a term of 45 days or less. Covered longer-term balloon payment loans include consumer loans with a term of more than 45 days where (i) the loan is payable in a single payment, (ii) any payment is more than twice any other payment, or (iii) the loan is a multiple advance loan that may not fully amortize by a specified date and the final payment could be more than twice the amount of other minimum payments. Covered longer-term loans are consumer loans with a term of more than 45 days where (i) the total cost of credit exceeds an annual rate of 36%, and (ii) the lender obtains a form of “leveraged payment mechanism” giving the lender a right to initiate transfers from the consumer’s account. Post-dated checks, authorizations to initiate ACH payments and authorizations to initiate prepaid or debit card payments are all leveraged payment mechanisms under the CFPB Rule. While there are certain coverage exceptions—for example, an exception for typical pawn loans—they do not apply to our loans.

The ATR provisions of the CFPB Rule apply to covered short-term loans and covered longer-term balloon-payment loans but not to covered longer term loans. Under these provisions, to make a covered short-term loan or a covered longer-term balloon-payment loan, a lender has two options.

 

    A “full payment test,” under which the lender must make a reasonable determination of the consumer’s ability to repay the loan in full and cover major financial obligations and living expenses over the term of the loan and the succeeding 30 days. Under this test, the lender must take account of the consumer’s basic living expenses and obtain and generally verify evidence of the consumer’s income and major financial obligations.

 

   

A “principal-payoff option,” under which the lender may make up to three sequential loans, without engaging in an ATR analysis. The first of these so-called Section 1041.6 Loans in any sequence of Section 1041.6 Loans without a 30-day cooling off period between them is limited to $500, the second is limited to two-thirds of the first and the third is limited to one-third of the first. A lender may not use this

 

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option if (1) the consumer had in the past 30 days an outstanding covered short-term loan or an outstanding longer-term balloon-payment loan that is not a Section 1041.6 Loan, or (2) the new Section 1041.6 Loan would result in the consumer having more than six covered short-term loans (including Section 1041.6 Loans) during a consecutive 12-month period or being in debt for more than 90 days on such loans during a consecutive 12-month period. For Section 1041.6 Loans, the lender cannot take vehicle security or structure the loan as open-end credit.

We believe that conducting a comprehensive ATR analysis will be costly and that many of our short-term borrowers will not be able to pass a full payment test. Accordingly, we expect that the full payment test option will have little if any utility for us. The option to make Section 1041.6 Loans using the principal-payoff option may be more viable but the restrictions on these loans under the CFPB Rule will significantly reduce the permitted borrowings by individual consumers. Although we hope that the CFPB Rule will produce offsetting industry consolidation to our benefit, there can be no assurance that any positive effects from such a consolidation will be sufficient to compensate for the adverse impact the ATR provisions will have on individual borrowings.

The CFPB Rule’s penalty fee prevention provisions, which will apply to all covered loans, may have a greater impact on our operations than the ATR provisions of the CFPB Rule. Under these provisions, if two consecutive attempts to collect money from a particular account of the borrower are unsuccessful due to insufficient funds, the lender cannot make any further attempts to collect from such account unless and until it provides notice of the unsuccessful attempts to the borrower and obtains from the borrower a new and specific authorization for additional payment transfers. Obtaining such authorization will be costly and in many cases not possible.

Additionally, the penalty fee prevention provisions will require the lender generally to give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumer’s checking, savings, or prepaid account. These requirements will necessitate revisions to our payment, customer notification, and compliance systems and create delays in initiating automated collection attempts where payments we initiate are initially unsuccessful.

In short, if and when the CFPB Rule goes into effect, the penalty fee prevention provisions will require substantial modifications in our current practices. These modifications would increase costs and reduce revenues. Accordingly, this aspect of the CFPB Rule could have a substantial adverse impact on our results of operations. However, as of the date hereof, these provisions will not become effective before July 2019, at the earliest, and the CFPB Rule remains subject to potential override by disapproval under the Congressional Review Act. Moreover, the current CFPB Director announced his resignation, effective as of November 24, 2017. His successor could suspend, delay, modify or withdraw the CFPB Rule. Further, we expect that important elements of the CFPB Rule will be subject to legal attack, including application of the penalty fee provisions to card payments (where issuing banks do not charge penalty fees on declined transactions). Thus, it is impossible to predict whether and when the CFPB Rule (and the penalty fee provisions) will go into effect and, if so, whether and how it (and they) might be modified. While we will make every effort to be in compliance with the new CFPB Rule by July 2019, we make no assurances that we will be fully compliant by the time the rule becomes effective. For a further discussion of the CFPB Rule and the impact it may have on our operations, see “Regulatory Environment and Compliance — U.S. Regulations — U.S. Federal Regulations — CFPB Rule” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Potential Future Impact of CFPB Rule.”

Our industry is strictly regulated everywhere we operate, and these regulations could have an adverse effect on our business and results of operations.

We are subject to substantial regulation everywhere we operate. In the United States and Canada, our business is subject to a variety of statutes and regulations enacted by government entities at the federal, state or provincial, and municipal levels. In the United Kingdom, we are subject to statutes and regulations enacted by

 

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the U.K. government, as well as directly applicable European Union legislation. These regulations affect our business in many ways, and include regulations relating to:

 

    the amount we may charge in interest rates and fees;

 

    the terms of our loans (such as maximum and minimum durations), repayment requirements and limitations, number and frequency of loans, maximum loan amounts, renewals and extensions, required repayment plans and reporting and use of state-wide databases;

 

    underwriting requirements;

 

    collection and servicing activity, including initiation of payments from consumer accounts;

 

    the establishment and operation of credit services organizations or credit access businesses, which we refer to as CSOs and CABs in this prospectus;

 

    licensing, reporting and document retention;

 

    unfair, deceptive and abusive acts and practices;

 

    non-discrimination requirements;

 

    disclosures, notices, advertising and marketing;

 

    loans to members of the military and their dependents;

 

    requirements governing electronic payments, transactions, signatures and disclosures;

 

    check cashing;

 

    money transmission;

 

    currency and suspicious activity recording and reporting;

 

    privacy and use of personally identifiable information and consumer data, including credit reports;

 

    anti-money laundering and counter-terrorist financing requirements, including currency and suspicious transaction recording and reporting;

 

    posting of fees and charges; and

 

    repossession practices in certain jurisdictions where we operate as a title lender, including requirements regarding notices and prompt remittance of excess proceeds for the sale of repossessed automobiles.

We provide a more detailed description of the regulations to which we are subject and the regulatory environment in the jurisdictions in which we operate under “Regulatory Environment and Compliance” elsewhere in this prospectus.

These regulations affect our business in many ways, including affecting the loans and other products we can offer, the prices we can charge, the other terms of our loans and other products, the customers to whom we are allowed to lend, how we obtain our customers, how we communicate with our customers, how we pursue repayment of our loans, and many others. Consequently, these restrictions adversely affect our loan volume, revenues, delinquencies and other aspects of our business, including our results of operations.

If we fail to adhere to applicable laws and regulations, we could be subject to fines, civil penalties and other relief that could adversely affect our business and results of operations.

The governmental entities that regulate our business have the ability to sanction us and obtain redress for violations of these regulations, either directly or through civil actions, in a variety of different ways, including:

 

    ordering remedial or corrective actions, including changes to compliance systems, product terms, and other business operations;

 

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    imposing fines or other monetary penalties, including for substantial amounts;

 

    ordering the payment of restitution, damages or other amounts to customers, including multiples of the amounts charged;

 

    disgorgement of revenue or profit from certain activities;

 

    imposing cease and desist orders, including orders requiring affirmative relief, targeting specific business activities;

 

    subjecting our operations to additional regulatory examinations during a remediation period;

 

    changes to our U.K. business practices in response to the requirements of the Financial Conduct Authority;

 

    revocation of licenses to operate in a particular jurisdiction;

 

    ordering the closure of one or more stores; and

 

    other consequences.

We provide a more detailed description of the potential consequences we face for non-compliance with laws and regulations under “Regulatory Environment and Compliance” elsewhere in this prospectus.

Many of the government entities that regulate us have the authority to examine us on a regular basis to determine whether we are complying with applicable laws and regulations and to identify and sanction non-compliance. In the United States, the Consumer Financial Protection Bureau, or CFPB, conducts examinations of our business, which include inspecting our books and records and inquiring about our business practices and policies, such as our marketing practices, loan application and origination practices, electronic payment practices, collection practices, and our supervision of our third-party service providers. The CFPB commenced its first examination of us in 2014 and issued its final report of examination in September 2015. The 2014 examination had no material impact on our financial condition or results of operations. The CFPB commenced its second examination of us in February 2017, and completed the related field work in June 2017. The scope of the 2017 examination included a review of our Compliance Management System, our customer account agreements and disclosures, our substantive compliance with applicable federal laws and certain select matters requiring attention. The CFPB completed the field work for this examination in June 2017 but has not yet provided us with its final report of examination. We cannot predict any potential impact until the CFPB provides us with its final report of examination, although we do not currently have any reason to expect any material impact of the examination on our results of operations or financial condition.

During 2017, it was determined that a limited universe of borrowers may have incurred bank overdraft or non-sufficient funds fees because of possible borrower confusion about certain electronic payments we initiated on their loans. As a result, we have decided to reimburse those fees through payments or credits against outstanding loan balances, subject to per-customer dollar limitations, upon receipt of (i) claims from potentially affected borrowers stating that they were in fact confused by our practices and (ii) bank statements from such borrowers showing they incurred these fees at a time that they might reasonably have been confused about our practices. Based on the terms of the reimbursement offer we are currently considering, we do not expect our financial cost under the offer to exceed $4 million. However, if we decide or are forced to modify the terms of the offer—for example, to eliminate or modify caps on per-borrower refunds or to make refunds to a larger universe of borrowers—the refund offer could have a greater impact than we currently anticipate.

We are subject to these types of examinations and audits on an ongoing basis from federal, state and provincial regulators. These examinations and audits increase the likelihood that any failure to comply (or perceived failure to comply) with applicable laws and regulations will be identified and sanctioned.

If we fail to comply with federal, state, provincial or local laws and regulations, or if supervisory or enforcement authorities believe we have failed to comply, we could suffer any of the actions listed above,

 

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including fines, penalties, consumer redress, disgorgement of profits, adverse changes to our business and being forced to cease operations in applicable jurisdictions. Any of these could have a material adverse effect on our business and results of operations. Our compliance with applicable laws and regulations could also be challenged in class action lawsuits that could adversely affect our business and results of operations.

In addition to the anticipated refund offer, at least in part to meet CFPB expectations, we have made in recent years, and are continuing to make, certain enhancements to our compliance procedures and consumer disclosures. For example, we are in the process of evaluating our payment practices. Even in advance of the effective date of the CFPB Rule (and even if the CFPB Rule does not become effective), it is possible that we will make changes to these practices in a manner that will increase costs and/or reduce revenues.

The regulations to which we are subject change from time to time, and future changes, including some that have been proposed, could restrict us in ways that adversely affect our business and results of operations.

The laws and regulations to which we are subject change from time to time, and there has been a general increase in the volume and burden of laws and regulations that apply to us in the jurisdictions in which we operate, at the federal, state, provincial and municipal levels. We describe certain proposed laws and regulations that could apply to our business in greater detail under “Regulatory Environment and Compliance” elsewhere in this prospectus.

At the U.S. federal level for example, in 2017 the CFPB adopted the CFPB Rule and a final rule prohibiting the use of mandatory arbitration clauses with class action waivers in consumer financial services contracts, or the CFPB Anti-Arbitration Rule. On November 1, 2017, the President approved a congressional resolution under the Congressional Review Act overturning the CFPB Anti-Arbitration Rule. Accordingly, the rule will not become effective, and, pursuant to the Congressional Review Act, substantially similar rules may only be reissued with specific legislative authorization. Additionally, the CFPB has announced tentative plans to propose rules affecting debt collection, debt accuracy and verification. Also, during the past few years, legislation, ballot initiatives and regulations have been proposed or adopted in various states that would prohibit or severely restrict our short-term consumer lending. We, along with others in the short-term consumer loan industry, intend to continue to inform and educate federal, state and local legislators and regulators and to oppose legislative or regulatory actions and ballot initiatives that would prohibit or severely restrict short-term consumer loans. Nevertheless, if changes in law with that effect were taken nationwide or in states in which we have a significant number of stores, such changes could have a material adverse effect on our loan-related activities and revenues.

In Canada, most of the provinces have proposed or enacted legislation or regulations that limit the amount that lenders offering single-pay loans may charge or that limit certain business practices of single-pay lenders. Some provinces have also proposed or enacted legislation or regulations that impose a higher regulatory burden on installment loans or open-end loans that are determined to be “high cost.” In the United Kingdom, Parliament and the applicable regulatory bodies have been expanding laws and regulations applicable to our industry, including proposals that would expand rules of conduct and similar duties of responsibility to certain senior managers and other employees of our businesses and that could change the price cap applicable to certain consumer loans, including the scope of loans subject to the cap. There are also forthcoming regulatory changes due to come into force in 2017 and 2018 relating to the implementation of new EU data protection and anti-money laundering laws in the United Kingdom, to replace or supplement U.K. legislation in these areas. Compliance with the new regulations is expected to be more onerous than the existing regime.

We expect that the interest in increasing the regulation of our industry will continue. It is possible that the laws and regulations currently proposed, or other future laws and regulations, will be enacted and will adversely affect our pricing, product mix, compliance costs, or other business activities in a way that is detrimental to our results of operations.

 

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Existing or new local regulation of our industry could adversely affect our business and results of operations.

In recent years, a number of local laws have been passed by municipalities that regulate aspects of our business. For example, a number of municipalities have sought to use zoning and occupancy regulations to limit consumer lending storefronts. If additional local laws are passed that affect our business, this could materially restrict our business operations, increase our compliance costs or exacerbate the risks associated with the complexity of our regulatory environment.

Approximately 45 different Texas municipalities have enacted ordinances that regulate aspects of products offered under our credit access business or CAB programs, including loan sizes and repayment terms. The Texas ordinances have forced us to make substantial changes to the loan products we offer and have resulted in litigation initiated by the City of Austin challenging the terms of our modified loan products. We believe that: (i) the Austin ordinance (like its counterparts elsewhere in the state) conflicts with Texas state law and (ii) our product in any event complies with the ordinance, when it is properly construed. An Austin trial court agreed with our position that the ordinance conflicts with Texas law and, accordingly, did not address our second argument. In August 2017, an Austin appellate court reversed this decision and remanded the case to the trial court for further proceedings consistent with its opinion (including, presumably, a decision on our second argument). However, in October 2017 we appealed this appellate decision. Accordingly, we will not have a final determination of the lawfulness of our CAB program under the Austin ordinance (and similar ordinances in other Texas cities) for some time. A final adverse decision could potentially result in material monetary liability in Austin and elsewhere and would force us to restructure the loans we arrange in Texas.

The regulatory environment in which we operate is very complex, which increases our costs of compliance and the risk that we may fail to comply in ways that adversely affect our business.

The regulatory environment in which we operate is very complex, with applicable regulations being enacted by multiple agencies at each level of government. Accordingly, our regulatory requirements, and consequently, the actions we must take to comply with regulations, vary considerably among the many jurisdictions where we operate. Managing this complex regulatory environment is difficult and requires considerable compliance efforts. It is costly to operate in this environment, and it is possible that our costs of compliance will increase materially over time. This complexity also increases the risks that we will fail to comply with regulations in a way that could have a material adverse effect on our business and results of operations.

Judicial decisions could potentially render our arbitration agreements unenforceable.

We include pre-dispute arbitration provisions in our loan agreements. These provisions are designed to allow us to resolve any customer disputes through individual arbitration rather than in court. Our arbitration provisions explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, our arbitration agreements, if enforced, have the effect of shielding us from class action liability.

In July 2017, the CFPB issued the CFPB Anti-Arbitration Rule, designed to prohibit the use of mandatory arbitration clauses with class action waivers in agreements for consumer financial services products. However, on November 1, 2017, the President approved a congressional resolution under the Congressional Review Act overturning the CFPB Anti-Arbitration Rule. Accordingly, the rule will not become effective, and, pursuant to the Congressional Review Act, substantially similar rules may only be reissued with specific legislative authorization.

Our use of pre-dispute arbitration provisions will remain dependent on whether courts continue to enforce these provisions. We take the position that the Federal Arbitration Act, or the FAA, requires that arbitration agreements containing class action waivers of the type we use be enforced in accordance with their terms. In the

 

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past, a number of courts, including the California and Nevada Supreme Courts, have concluded that arbitration agreements with class action waivers are “unconscionable” and hence unenforceable, particularly where a small dollar amount is in controversy on an individual basis. However, in April 2011, the U.S. Supreme Court in a 5-4 decision in AT&T Mobility v. Concepcion held that the FAA preempts state laws that would otherwise invalidate consumer arbitration agreements with class action waivers. Our arbitration agreements differ in some respects from the agreement at issue in Concepcion, and some courts have continued since Concepcion to find reasons to find arbitration agreements unenforceable. Thus, it is possible that one or more courts could use the differences between our arbitration agreements and the agreement at issue in Concepcion as a basis for a refusal to enforce our arbitration agreements, particularly if such courts are hostile to our kind of lending or to pre-dispute mandatory consumer arbitration agreements. Further, it is possible that a change in composition at the U.S. Supreme Court, including the replacement of Justice Scalia by Justice Gorsuch, could result in a change in the U.S. Supreme Court’s treatment of arbitration agreements under the FAA. If our arbitration agreements were to become unenforceable for some reason, we could experience an increase to our costs to litigate and settle customer disputes and exposure to potentially damaging class action lawsuits, with a potential material adverse effect on our business and results of operations.

Current and future legal, class action and administrative proceedings directed towards our industry or us may have a material adverse impact on our results of operations, cash flows and financial condition.

We have been the subject of administrative proceedings and lawsuits in the past, and may be involved in future proceedings, lawsuits or other claims. Other companies in our industry have also been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of consumer loans. We could be adversely affected by interpretations of state, federal, foreign and provincial laws in those legal and regulatory proceedings, even if we are not a party to those proceedings. We anticipate that lawsuits and enforcement proceedings involving our industry, and potentially involving us, will continue to be brought in the future.

We may incur significant expenses associated with the defense or settlement of current or future lawsuits, the potential exposure for which is uncertain. The adverse resolution of legal or regulatory proceedings, whether by judgment or settlement, could force us to refund fees and interest collected, refund the principal amount of advances, pay damages or other monetary penalties or modify or terminate our operations in particular local, state, provincial or federal jurisdictions. The defense of such legal proceedings, even if successful, requires significant time and attention from our senior officers and other management personnel that would otherwise be spent on other aspects of our business, and requires the expenditure of substantial amounts for legal fees and other related costs. Settlement of proceedings may also result in significant cash payouts, foregoing future revenues and modifications to our operations. Additionally, an adverse judgment or settlement in a lawsuit or regulatory proceeding could in certain circumstances provide a basis for the termination, non-renewal, suspension or denial of a license required for us to do business in a particular jurisdiction (or multiple jurisdictions). A sufficiently serious violation of law in one jurisdiction or with respect to one product could have adverse licensing consequences in other jurisdictions and/or with respect to other products. Thus, legal and enforcement proceedings could have a material adverse effect on our business, future results of operations, financial condition and our ability to service our debt obligations.

Public perception of our business and products as being predatory or abusive could negatively affect our business, results of operations and financial condition.

Certain consumer advocacy groups, politicians, government officials and media organizations promote the view that short-term single-payment loans and other alternative financial services like those we offer are predatory or abusive toward consumers. Widespread adoption of this opinion could potentially have negative consequences for our business, including lawsuits, adverse legislative or regulatory changes, difficulty attracting and retaining qualified employees, decreased demand for our products and services and reluctance or refusal of other parties, such as banks or other electronic payment processors, to transact business with us. These consequences could have a material adverse impact on our business and results of operations.

 

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Material modifications of U.S. laws and regulations and existing trade agreements by the new U.S. presidential administration could adversely affect our business, financial condition and results of operations.

The new U.S. presidential administration may initiate significant changes in U.S. laws and regulations and existing international trade agreements, including the North American Free Trade Agreement, and these changes could affect a wide variety of industries and businesses, including those businesses we own and operate. It remains unclear what the new U.S. presidential administration will do, if anything, with respect to existing laws, regulations or trade agreements. If the new presidential administration materially modifies U.S. laws and regulations and international trade agreements this could adversely affect our business and results of operations.

Risks Relating to Our Business

Our substantial indebtedness could adversely affect our business, results of operations and financial condition.

As of September 30, 2017, we had approximately $589.0 million of total gross debt outstanding. This amount does not reflect the issuance of $135 million aggregate principal amount of 12.00% Senior Secured Notes due 2022 by CFTC on November 2, 2017. Our high level of indebtedness could have significant effects on our business, including the following:

 

    it may be more difficult for us to satisfy our financial obligations;

 

    our ability to obtain additional financing for working capital, capital expenditures, strategic acquisitions or general corporate purposes may be impaired;

 

    we must use a substantial portion of our cash flow from operations to pay interest on our debt, which reduces funds available to use for operations, invest in our business, pay dividends to our shareholders and use for other purposes;

 

    we could be at a competitive disadvantage compared to those of our competitors that may have proportionately less debt;

 

    the terms of our debt restricts our ability to pay dividends; and

 

    our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited.

For instance, as described above, if future changes in regulations affecting our products or services are enacted, they could adversely impact current product offerings or alter the economic performance of our existing products and services. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives.

If our cash flows and capital resources are insufficient to fund our debt service obligations, or if we confront regulatory uncertainty in our industry or challenges in debt capital markets, we may not be able to refinance our indebtedness prior to maturity on favorable terms, or at all. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest or other debt capital expense. A refinancing of our indebtedness could also require us to comply with more onerous covenants and restrictions on our business operations. If we are unable to refinance our indebtedness prior to maturity we will be required to pursue alternative measures that could include restructuring our current indebtedness, selling all or a portion of our business or assets, seeking additional capital, reducing or delaying capital expenditures or taking other steps to address obligations under the terms of our indebtedness.

Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic, regulatory and other factors, many of which we cannot control. Our business may

 

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not generate sufficient cash flow from operations in the future and our currently anticipated growth in revenue and cash flow may not be realized, either or both of which could result in our being unable to repay indebtedness, or to fund other liquidity needs. If we do not have enough funds, we may be required to refinance all or part of our then existing debt, sell assets or borrow more funds, which we may not be able to accomplish on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from pursuing any of these alternatives.

Because we depend in large part on third-party lenders to provide the cash needed to fund our loans, an inability to affordably access third-party financing could adversely affect our business.

Our principal sources of liquidity to fund the loans we make to our customers are cash provided by operations, funds from third-party lenders under our CSO programs and our Non-Recourse U.S. SPV Facility, which finances the origination of eligible U.S. Unsecured and Secured Installment Loans. However, we cannot guarantee we will be able to secure additional operating capital from third-party lenders or refinance our existing revolving credit facilities on reasonable terms or at all. As the volume of loans that we make to customers increases, or if provision for losses or expenses rise due to various factors, we may have to expand our borrowing capacity on our existing Non-Recourse U.S. SPV Facility (as discussed below) or add new sources of capital. The availability of these financing sources depends on many factors, some of which lie outside of our control. In the event of a sudden or unexpected shortage of funds in the banking system or capital markets, we may not be able to maintain necessary levels of funding without incurring high funding costs, suffering a reduction in the term of funding instruments or having to liquidate certain assets. If our cost of borrowing increases or we are unable to arrange new or alternative methods of financing on favorable terms, we may have to curtail our origination of loans, which could adversely affect our business and results of operations.

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

The success of our business depends to a significant degree upon the protection of our proprietary technology, including our proprietary credit and fraud scoring models, which we use for pricing loans. We seek to protect our intellectual property with non-disclosure agreements we sign with third parties and employees and through standard measures to protect trade secrets. We also implement cybersecurity policies and procedures to prevent unauthorized access to our systems and technology. However, we may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. Our employees, including those working on our Curo Platform, have not been required to execute agreements assigning us proprietary rights to technology developed in the scope of their employment, although we intend to have employees sign such agreements in the future. Additionally, while we currently have a number of registered trademarks and pending applications for trademark registration, we do not own any patents or copyrights with respect to our intellectual property.

If competitors learn our trade secrets (especially with regard to our marketing and risk management capabilities), others attempt to acquire patent protection of algorithms similar to ours, or our employees attempt to make commercial use of the technology they develop for us, it could be difficult to successfully prosecute to recover damages. Additionally, a third-party may attempt to reverse engineer or otherwise obtain and use our proprietary technology without our consent. The pursuit of a claim against a third-party or employee for infringement of our intellectual property could be costly, and there can be no guarantee that any such efforts would be successful. If we are unable to protect our software and other proprietary intellectual property rights, or to develop technologies that are as adaptive to changing consumer trends or appealing to consumers as the technologies of our competitors, we could face a disadvantage relative to our competitors.

 

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Any disruption in the availability of our information technology systems could adversely affect our business operations.

We rely heavily upon our Curo Platform in almost every aspect of our business, including to process customer transactions, provide customer service, determine loan amounts, manage collections, account for our business activities, support regulatory compliance and to generate the reporting used by management for analytical, loss management and decision-making purposes. Our store and online platform is part of an integrated data network designed to manage cash levels, facilitate underwriting decisions, reconcile cash balances and report revenue and expense transaction data. Our Curo Platform could be disrupted and become unavailable due to a number of factors, including power outages, a failure of one or more of our information technology, telecommunications or other systems, and cyber-attacks on or sustained disruptions of these systems. Our back-up systems and security measures could fail to prevent a disruption in the availability of our information technology systems. A disruption in our Curo platform could prevent us from performing fundamental aspects of our business, including loan underwriting, customer service, payments and collections, internal reporting, and regulatory compliance.

If we do not effectively price the credit risk of our prospective or existing customers, our operating results and financial condition could be materially and adversely impacted.

Our business has much higher rates of charge-offs than traditional lenders. Accordingly, we must price our loan products to take into account the credit risks of our customers. In deciding whether to extend credit to prospective customers and the terms on which to provide that credit, including the price, we rely heavily on the credit models in our proprietary Curo Platform. These models take into account, among other things, information from customers, third parties and an internal database of loan records gathered through monitoring the performance of our customers over time. Any failure of our Curo Platform to effectively price credit risk could lead to higher-than-anticipated customer defaults, which could lead to higher charge-offs and losses for us, or overpricing, which could lead us to lose customers. Our models could become less effective over time, receive inaccurate information or otherwise fail to accurately estimate customer losses in certain circumstances. If we are unable to maintain and improve the credit models in our proprietary Curo Platform, or if they do not perform up to target standards, they may fail to adequately predict the creditworthiness of customers or to assess prospective customers’ financial ability to repay their loans. This could further hinder our growth and have an adverse effect on our business and results of operations.

If the information provided by customers or third parties to us is inaccurate, we may misjudge a customer’s qualification to receive a loan, and our operating results may be harmed.

Our lending decisions are based partly on information provided to us by loan applicants. To the extent that these applicants provide information to us in a manner that we are unable to verify, our scoring may not accurately reflect the associated risk. In addition, data provided by third-party sources is a significant component of our scoring of loan applications and this data may contain inaccuracies. Inaccurate analysis of credit data that could result from false loan application information could harm our reputation, business and operating results.

In addition, we use identity and fraud check analyzing data provided by external databases to authenticate each customer’s identity. There is a risk, however, that these checks could fail, and fraud may occur. We may not be able to recoup funds underlying loans made in connection with inaccurate statements, omissions of fact or fraud, in which case our revenue, operating results and profitability will be harmed. Fraudulent activity or significant increases in fraudulent activity could also lead to regulatory intervention, negatively impact our operating results, brand and reputation and require us to take steps to reduce fraud risk, which could increase our costs.

 

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Improper disclosure of customer personal data, including by means of a cyber-attack, could result in liability and harm our reputation. Cybersecurity risks and security breaches, in general, could result in increasing costs in an effort to minimize those risks and to respond to cyber incidents.

We store and process large amounts of personally identifiable information, including data that is considered sensitive customer information. We believe that we maintain adequate policies and procedures, including anti-virus and malware software and access controls, and use appropriate safeguards to protect against attacks. It is possible that our security controls over personal data, our training of employees and other practices we follow may not prevent the improper disclosure of personally identifiable information. Such disclosure could harm our reputation and subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue.

In addition, we are subject to cybersecurity risks and security breaches, which could result in the unauthorized disclosure or appropriation of customer data. To date none of these actual or attempted cyber-attacks has had a material effect on our operations or financial condition. However, we may not be able to anticipate or implement effective preventive measures against these types of security breaches, especially because the techniques change frequently or are not recognized until launched. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Actual or anticipated attacks and risks may cause us to incur increasing expenses, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. It is also possible that our protective measures would fail prevent a cyber-attack and the resulting disclosure or appropriation of customer data. A significant data breach could harm our reputation, diminish our customer confidence and subject us to significant legal claims, any of which may contribute to a loss of customers and have a material adverse effect on us.

In addition, federal and some state regulators are considering promulgating rules and standards to address cybersecurity risks and many U.S. states have already enacted laws requiring companies to notify individuals of data security breaches involving their personal data. In the United Kingdom, U.K. businesses are presently subject to the Data Protection Act 1998, which requires that appropriate technical and organizational measures shall be taken against unauthorized or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data. As a result of its membership of the EU, U.K. businesses are subject to directly applicable European Regulation in respect of personal data, U.K. businesses will be required to comply with new obligations from May 25, 2018, which will impose greater responsibility, and the U.K. government have indicated that they are to enact direct U.K. laws applicable after Brexit to similar effect, which will require companies to notify individuals of most data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and may lead to widespread negative publicity, which may cause customers to lose confidence in the effectiveness of our data security measures.

The failure of third parties who provide products, services or support to us could disrupt our operations or result in a loss of revenue.

Some of our lending activity depends in part on support we receive from unaffiliated third parties. This includes third-party lenders who make loans to our customers under our CSO programs as well as other third-parties that provide services to facilitate lending, loan underwriting and payment processing in our online lending consumer loan channels. The loss of our relationship with any of these third-parties and an inability to replace them or the failure of these third parties to maintain quality and consistency in their programs or services or to have the ability to provide their products and services, could cause us to lose customers and substantially decrease the revenue and earnings of our business. Our revenue and earnings could also be adversely affected if any of those third-party providers make material changes to the products or services that we rely on. We also use third parties to support and maintain certain of our communication systems and information systems. If a third-party provider fails to provide its products or services, makes material changes to such products and services, does not maintain its quality and consistency or fails to have the ability to provide its products and services, our operations could be disrupted.

 

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In Texas and Ohio, we rely on third-party lenders to conduct business.

In Texas and Ohio we operate as a CSO, also known as a credit services organization, or a credit access business, also known as a CAB, arranging for unrelated third-parties to make loans to our customers. During 2016, our CSO programs in Texas and Ohio generated revenues of $205.7 million and $9.2 million, respectively. During the nine months ended September 30, 2017, our CSO programs in Texas and Ohio generated revenues of $172.4 million and $12.6 million, respectively. There are a limited number of third-party lenders that make these types of loans and there is significant demand and competition for the business of these companies. These third parties rely on borrowed funds in order to make consumer loans. If these third-parties lose their ability to make loans or become unwilling to make loans to us and we are unable to find another third-party lender, we would be unable to continue offering loans in Texas and Ohio as a CSO, which would prevent us from receiving revenue from these activities. This would adversely affect our revenue and results of operations.

Our core operations are dependent upon maintaining relationships with banks and other third-party electronic payment solutions providers. Any inability to manage cash movements through the banking system or the Automated Clearing House, or ACH, system would materially impact our business.

We maintain relationships with commercial banks and third-party payment processors. These entities provide a variety of treasury management services including providing depository accounts, transaction processing, merchant card processing, cash management, and ACH processing. We rely on commercial banks to receive and clear deposits, provide cash for our store locations, perform wire transfers and ACH transactions and process debit card transactions. We rely on the ACH system to deposit loan proceeds into customer bank accounts and to electronically withdraw authorized payments from those accounts. It has been reported that the U.S. Department of Justice and the Federal Deposit Insurance Corporation, as well as other federal regulators, have taken or threatened actions, commonly referred to as “Operation Choke Point,” intended to discourage banks and other financial services providers from providing access to banking and third-party payment processing services to lenders in our industry. We can give no assurances that actions akin to Operation Choke Point will not intensify or resume, or that the effect of such actions against banks and/or third-party payment processors will not pose a future threat to our ability to maintain relationships with commercial banks and third-party payment processors. The failure or inability of retail banks and/or third-party payment providers to continue to provide services to us could adversely affect our operations if we are unable or unsuccessful in replacing those providers with comparable service providers.

Because we maintain a significant supply of cash in our stores, we may be subject to cash shortages due to employee and third-party theft and errors. We also may be subject to liability as a result of crimes at our stores.

Our business requires us to maintain a significant supply of cash in each of our stores. As a result, we are subject to the risk of cash shortages resulting from theft and errors by employees and third-parties. Although we have implemented various programs in an effort to reduce these risks, maintain insurance coverage for theft and utilize various security measures at our facilities, it is possible that employee and third-party theft and errors will occur in material amounts. Cash shortages from employee and third-party theft and errors were $0.2 million (0.03% of consolidated revenue) and $0.3 million (0.05% of consolidated revenue) in the nine months ended September 30, 2017 and 2016, respectively. The extent of our cash shortages could increase as we expand the nature and scope of our products and services. Although we have experienced break-ins by third parties at our stores in the past, none of these has had, either individually or in the aggregate, a material adverse impact on our operations. Going forward, theft and errors could lead to cash shortages and could adversely affect our business, prospects, results of operations and financial condition. It is also possible that violent crimes such as armed robberies may be committed at our stores. We could experience liability or adverse publicity arising from such crimes. For example, we may be liable if an employee, customer or bystander suffers bodily injury or other harm. Any such event may have a material adverse effect on our business, prospects, results of operations and financial condition.

 

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If our allowance for loan losses is not adequate to absorb our actual losses, our results of operations and financial condition may be adversely affected.

We face the risk that our customers will fail to repay their loans in full. We maintain an allowance for loan losses for estimated probable losses on company-funded loans and loans in default. See Note 1, “Summary of Significant Accounting Policies and Nature of Operations” of our Notes to Consolidated Financial Statements included elsewhere in this prospectus for factors considered by management in estimating the allowance for loan losses. We also maintain a credit services guarantee liability for estimated probable losses on loans funded by unrelated third-party lenders under our CSO programs, but for which we are responsible. As of September 30, 2017, the sum of our aggregate reserve and allowance for losses on loans and guarantee liability not in default (including loans funded by unrelated third-party lenders under our CSO programs) was $88.2 million. This reserve, however, is an estimate. Actual losses are difficult to forecast, especially if such losses stem from factors beyond our historical experience, and unlike traditional banks, we are not subject to periodic review by bank regulatory agencies of our allowance for loan losses. As a result, our allowance for loan losses may not be comparable to that of traditional banks subject to regulatory oversight or sufficient to cover actual losses. If actual losses are greater than our reserve and allowance, our results of operations and financial condition could be adversely affected.

Adverse economic conditions could cause demand for our loan products to decline or make it more difficult for our customers to make payments on our loans and increase our default rates.

We derive the majority of our revenue from consumer lending. Factors that may influence demand for our products and services include macroeconomic conditions, such as employment, personal income and consumer sentiment. Our underwriting standards require, among other things, our customers to have a steady source of income as a prerequisite for making a loan. Therefore, if unemployment increases among our customer base, the number of loans we originate will likely decline and the number of loan defaults could increase. Additionally, if consumers become more pessimistic regarding the outlook for the economy and therefore spend less and save more, demand for consumer loans in general may decline. Accordingly, poor economic conditions could adversely affect our business and results of operations.

If negative assertions regarding businesses like ours become widespread, they could reduce demand for our loan products.

Negative press coverage and efforts of special interest groups to persuade customers that the consumer loans and other alternative financial services provided by us are predatory and abusive could also negatively affect demand for our products and services. If consumers accept this negative characterization of our business or our products on a widespread basis, demand for our loans could significantly decline, which would negatively affect our revenues and results of operations. Should we fail to adapt to significant changes in our customers’ demand for our products or services, our revenues could decrease significantly and our results of operations could be harmed. Even if we do make changes to existing products or services or introduce new products or services to fulfill changing customer demands, our customers may resist or reject such products or services.

Our business and results of operations may be adversely affected if we are unable to manage our growth effectively.

There can be no assurance that we will be able to successfully grow our business or that our current business, results of operations and financial condition will not suffer if we fail to prudently manage our growth. Failure to grow the business and generate estimated future levels of cash flow could inhibit our ability to service our debt obligations. Our expansion strategy, which contemplates disciplined growth in Canada and the United States, increasing the market share of our online operations, selectively expanding our offering of installment loans and potential expansion in other international markets, is subject to significant risks. The profitability of our current operations and any future growth is dependent upon a number of factors, including the ability to

 

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obtain and maintain financing to support these opportunities, the ability to hire, train and retain an adequate number of qualified employees, the ability to obtain and maintain any required regulatory permits and licenses and other factors, some of which are beyond our control, such as the continuation of favorable regulatory and legislative environments. Imprudent or poor investments could drain our capital resources and negatively impact our liquidity. As a result, the profitability of our current operations could suffer if our growth strategy is not successfully implemented.

The failure to successfully integrate newly acquired businesses into our operations could negatively impact our profitability.

From time to time, we may consider opportunities to acquire other products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base, or advance our business strategies. The success of the acquisitions we have completed, as well as future acquisitions is, and will continue to be, dependent upon our ability to effectively integrate the management, operations and technology of acquired businesses into our existing management, operations and technology platforms. Integration can be complex, expensive and time-consuming. The failure to successfully integrate acquired businesses into our organization in a timely and cost-effective manner could materially adversely affect our business, prospects, results of operations and financial condition. It is also possible that the integration process could result in the loss of key employees, the disruption of ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, employees or other third-parties or our ability to achieve the anticipated benefits of such acquisitions and could harm our financial performance. We do not know if we will be able to identify acquisitions we deem suitable, whether we will be able to successfully complete any such acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any acquired products or technologies. Additionally, an additional risk inherent in any acquisition is that we fail to realize a positive return on our investment.

Indemnifications associated with assumed liabilities of acquired entities may be insufficient to cover our exposures to litigation and settlement costs.

In 2011, we completed the acquisition of Cash Money Group, Inc., or Cash Money. While the agreement governing our Cash Money acquisition provides us with limited indemnification for litigation and settlement costs for activities related to Cash Money’s operations prior to the acquisition of Cash Money, our recourse with respect to those matters is limited to set-off against a C$7.5 million escrow note. Through September 30, 2017, we have set off approximately C$4.2 million of class action settlement costs and related expenses, and C$0.3 million of tax indemnification amounts against the escrow note. The balance of this escrow note is included in the Consolidated Balance Sheets as Subordinated Shareholder Debt.

In August 2012, we completed the acquisition of The Money Store, L.P., which operated under the name The Money Box® Check Cashing, or The Money Box. The Money Box acquisition agreement provides us with limited indemnification for certain matters related to The Money Box’s operations prior to the date of the acquisition of The Money Box; however, our recovery is limited in most cases to an aggregate amount of $2.4 million and our ability to make claims is subject to certain time limitations. To date, no indemnification payments have been made or claimed under The Money Box acquisition agreement.

In 2013, we completed the acquisition of Wage Day Advance Limited, or Wage Day. The Wage Day acquisition agreement provides us with limited indemnification for certain matters related to Wage Day’s operations prior to the date of the Wage Day acquisition. To date, no indemnification payments or claims have been made under this provision.

These indemnifications provide us with only limited recourse against the sellers of these businesses in the event we incur substantial costs in connection with actions occurring prior to our acquisition of the businesses.

 

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The agreements limit the amount we can recover, limit the causes of action for which we can pursue recovery, and place other restrictions on our ability to recover for such losses. Accordingly, if we incur substantial costs for issues arising prior to our acquisitions of these businesses, our financial position and results of operations may be adversely affected.

If we lose key management or are unable to attract and retain the talent required to operate and grow our business or if we are required to substantially increase our labor costs to attract and retain qualified employees, our business and results of operations could be adversely affected.

Our continued growth and future success will depend on our ability to retain the members of our senior management team, who possess valuable knowledge of, and experience with, the legal and regulatory environment of our industry, who have experience operating in our international markets and who have been instrumental in developing our strategic plans and procuring capital to enable the pursuit of those plans. The loss of the services of one or more members of senior management and our inability to attract new skilled management could harm our business and future development. We do not maintain any key man insurance policies with respect to any senior management or employees.

Labor costs represent a significant portion of our total expenses. If we are required to substantially increase our labor costs in order to attract or retain a sufficient number of qualified employees for our current operations, we may not be able to operate our business in a cost-effective manner. We also believe having experienced employees and staff continuity in our stores is an important contributor to the success of our business. If we were unable to retain our experienced managers and staff, it could adversely affect our customer service and our loan volume could suffer.

Goodwill comprises a significant portion of our total assets. We assess goodwill for impairment at least annually, which could result in a material, non-cash write-down, which would have a material adverse effect on our results of operations and financial condition.

The carrying value of our goodwill was $145.7 million, or approximately 19.1% of our total assets, as of September 30, 2017. We assess goodwill for impairment on an annual basis at a reporting unit level. Goodwill is assessed between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. During the third quarter of 2015, due to the decline in our overall financial performance in the United Kingdom, we determined that a triggering event had occurred requiring an impairment evaluation of our goodwill and other intangible assets in the United Kingdom. As a result, during the third quarter of 2015, we recorded non-cash impairment charges of $2.9 million, which comprised a $1.8 million charge related to the Wage Day trade name, a $0.2 million charge related to the customer relationships acquired as part of the Wage Day acquisition, and a $0.9 million non-cash goodwill impairment charge in our United Kingdom reporting segment.

Our impairment reviews require extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different results. We may be required to recognize impairment of goodwill based on future events or circumstances which could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in the estimated future discounted cash flows of our reporting units. Impairment of goodwill could result in material charges that could, in the future, result in a material, non-cash write-down of goodwill, which could have an adverse effect on our results of operations and financial condition.

Due to the current economic environment and the uncertainties regarding the impact that future economic consequences will have on our reporting units, there can be no assurance that our estimates and assumptions made for purposes of our annual goodwill impairment test will prove to be accurate predictions of the future. If

 

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our assumptions regarding forecasted revenues or margins for certain of our reporting units are not achieved, we may be required to record goodwill impairment losses in future periods. It is not possible at this time to determine if any such future impairment will occur, and if it does occur, whether such charge would be material.

Our lending business is somewhat seasonal, which causes our revenues to fluctuate and may adversely affect our ability to service our debt obligations.

Our U.S. lending business typically experiences reduced demand in the first quarter as a result of our customers’ receipt of tax refund checks. Demand for our U.S. lending services is generally greatest during the fourth quarter. This seasonality requires us to manage our cash flows over the course of the year. If a governmental authority were to pursue economic stimulus actions or issue additional tax refunds or tax credits at other times during the year, such actions could have a material adverse effect on our business, prospects, results of operations and financial condition during those periods.

Our lending businesses in Canada and the United Kingdom are somewhat seasonal, although to a lesser extent than our U.S. lending business. We typically experience our highest demand in Canada in the third and fourth calendar quarters with lower demand in the first quarter; however, the reduction in volume relating to tax refunds is not as prevalent as in the United States. If our consolidated revenues were to fall substantially below what we would normally expect during certain periods, our annual financial results and our ability to service our debt obligations could be adversely affected.

Adverse real estate market conditions or zoning restrictions may result in increased operating costs or a reduction in new store development, which could impact our profitability and growth plans.

We lease all of our store locations. An increase in lease costs, property taxes or maintenance costs for lease renewals or new store locations could result in increased operating costs for these locations, thereby negatively impacting the stores’ operating margins.

A recent trend among some municipalities in the United States and in Canada has been to enact zoning restrictions in certain markets. These zoning restrictions may limit the number of payday lending stores that can operate in an area or require certain distance requirements between competitors, residential areas or highways. These restrictions may make it more difficult to find suitable location for future expansion, thereby negatively impacting our growth plans.

Failure to keep up with the rapid changes in e-commerce and the uses and regulation of the Internet could harm our business.

The business of providing products and services such as ours over the Internet is dynamic and relatively new. We must keep pace with rapid technological change, consumer use habits, Internet security risks, risks of system failure or inadequacy and governmental regulation and taxation, and each of these factors could adversely impact our business. In addition, concerns about fraud, computer security and privacy and/or other problems may discourage additional consumers from adopting or continuing to use the Internet as a medium of commerce. In countries such as the United States and the United Kingdom, where e-commerce generally has been available for some time and the level of market penetration of our online financial services is relatively high, acquiring new customers for our services may be more difficult and costly than it has been in the past. In order to expand our customer base, we must appeal to and acquire consumers who historically have used traditional means of commerce to conduct their financial services transactions. If these consumers prove to be less profitable than our previous customers, and we are unable to gain efficiencies in our operating costs, including our cost of acquiring new customers, our business could be adversely impacted.

Competition in the financial services industry could cause us to lose market share and revenues.

The industry in which we operate is highly fragmented. While we believe the market for U.S. storefronts is mature, it is likely that competition for market share will intensify. We believe the Canadian market is less

 

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saturated, but still experiences significant competition by both large, well-financed operators as well as significant numbers of smaller competitors. We believe that online lending in the United Kingdom is more widely accepted among consumers than in either the United States or in Canada, and that customers are more likely to transact business via the internet and using mobile phones. Across all geographies, we see a growing number of sophisticated online-based lenders. Increased competition in any of the geographies in which we operate could lead to consolidation in our industry. If our competitors get stronger through consolidation, and we are unable to identify attractive consolidation opportunities, we could be at a competitive disadvantage and could experience declining market share and revenue. If these events materialize, they could negatively affect our ability to generate sufficient cash flow to fund our operations and service our debt obligations.

In addition to increasing competition among companies that offer traditional consumer loan products, there is a risk of losing market share to new market entrants. Increased competition from secured title loan lenders, pawn lenders and unsecured installment loan lenders could also adversely affect our revenues.

Our growth strategy calls for opening additional stores in the United States and Canada, and to expand our online presence in each of those geographies. If our competitors aggressively pursue store expansion, competition for store sites could result in our failing to open our planned number of stores, or increase our costs to secure additional sites, both of which could result in slower growth and diminished operating performance. Increased competition in our online business could result in higher advertising and marketing costs to attract and retain customers, leading to lower margins.

The international scope of our operations leads to increased cost and complexity, which could negatively impact our operations.

The international nature of our operations has increased the complexity of managing our business. This has led to enhanced administrative burdens related to regulatory compliance, tax compliance, labor controls and other federal, state, provincial and local requirements. Additional resources, both internal and external, have been added to comply with these increasing requirements, resulting in an increase in our corporate costs. In addition, it remains to be seen what impact the recent vote by the United Kingdom to leave the European Union will have on the U.K. economy and our U.K. operations. Future changes to laws or regulations may result in further cost increases, thereby negatively impacting our profitability.

Our operations could be subject to natural disasters and other business disruptions, which could adversely impact our future revenue and financial condition and increase our costs and expenses.

Our services and operations are vulnerable to damage or interruption from tornadoes, hurricanes, earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors and similar events. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest, violence or human error could cause disruptions to our business or the economy as a whole. Any of these events could cause consumer confidence to decrease, which could result in a decreased number of loans being made to customers.

We rely on trademark protection to distinguish our products from the products of our competitors.

We rely on trademark protection to distinguish our products from the products of our competitors. We have registered various trademarks, including “The Money Box,” “Speedy Cash®,” “OPT+SM” and “Rapid Cash,” in the United States and/or Canada, and are in the process of registering other trademarks in those jurisdictions. We have not registered any trademarks in the United Kingdom. For trademarks we use that are not registered, and as permitted by applicable local law, we rely on common law trademark protection. Third parties may oppose our trademark applications, or otherwise challenge our use of the trademarks, and may be able to use our trademarks in jurisdictions where they are not registered or otherwise protected by law. If our trademarks are successfully

 

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challenged or if a third party is using confusingly similar or identical trademarks in particular jurisdictions before we do, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote additional resources to marketing new brands. If others are able to use our trademarks, our ability to distinguish our products may be impaired, which could adversely affect our business.

We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of our employees were previously employed at other financial technology companies, including our competitors or potential competitors, and we may hire employees in the future that are so employed. We could in the future be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. If any of these technologies or features are important to our products, this could prevent us from selling those products and could have a material adverse effect on our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and divert the attention of management.

Risks Relating to this Offering and Owning Our Common Stock

An active trading market for our common stock may not develop and the market price for our common stock may decline below the initial public offering price.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market, or how liquid that market may become. An active trading market for our common stock may never develop or be sustained, which could adversely impact your ability to sell your shares and could depress the market price of your shares. In addition, the public offering price for our common stock has been determined through negotiations among us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market upon the completion of this offering. Consequently, you may be unable to sell your shares of our common stock at prices equal to or greater than the price you paid for them. We cannot predict the prices at which our common stock will trade. The initial public offering price may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business.

The market price of our common stock is likely to be volatile and could decline following this offering, resulting in a substantial loss of your investment.

The stock market in general has been highly volatile. As a result, the market price and trading volume for our common stock may also be highly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. Factors that could cause the market price of our common stock to fluctuate significantly include:

 

    our operating and financial performance and prospects and the performance of other similar companies;

 

    our quarterly or annual earnings or those of other companies in our industry;

 

    conditions that impact demand for our products and services;

 

    the public’s reaction to our press releases, financial guidance and other public announcements, and filings with the SEC;

 

    changes in earnings estimates or recommendations by securities or research analysts who track our common stock;

 

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    market and industry perception of our level of success in pursuing our growth strategy;

 

    strategic actions by us or our competitors, such as acquisitions or restructurings;

 

    changes in government and other regulations;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    arrival or departure of members of senior management or other key personnel;

 

    the number of shares to be publicly traded after this offering;

 

    sales of common stock by us, our investors or members of our management team;

 

    factors affecting the industry in which we operate, including competition, innovation, regulation, the economy and other factors; and

 

    changes in general market, economic and political conditions in the U.S. and global economies or financial markets, including those resulting from natural disasters, telecommunications failures, cyber-attacks, civil unrest in various parts of the world, acts of war, terrorist attacks or other catastrophic events.

Any of these factors may result in large and sudden changes in the trading volume and market price of our common stock and may prevent you from being able to sell your shares at or above the price you paid for them.

Following periods of volatility in the market price of a company’s securities, stockholders often file securities class action lawsuits against such company. Our involvement in a class action lawsuit could be costly to defend and divert our senior management’s attention and, if adversely determined, could involve substantial damages.

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

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Our common stock does not currently have and may never obtain research coverage by securities and industry analysts. If there is no coverage of us by securities or industry analysts, the trading price for our shares could be negatively impacted. In the event we obtain securities or industry analyst coverage and one or more of these analysts downgrades our shares or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our shares could decrease, which could cause our stock price or trading volume to decline.

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, enacted in April 2012, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies, including, but not limited to, reduced disclosure obligations regarding executive compensation (including Chief Executive Officer pay ratio disclosure) in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Additionally, until we cease to be an emerging growth company, we are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. As an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our

 

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consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

We may take advantage of these exemptions until such time that we are no longer an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock. We could remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues are at least $1.07 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if, among other things, the market value of our common equity securities held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in nonconvertible debt securities during the preceding three-year period.

We cannot predict whether investors will find our common stock less attractive if we choose to rely on one or more of the exemptions described above. If investors find our common stock less attractive as a result of any decisions to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”

We have historically operated as a private company and have not been subject to the same financial and other reporting and corporate governance requirements as a public company. After this offering, we will be required to file annual, quarterly and other reports with the SEC. We will need to prepare and timely file financial statements that comply with SEC reporting requirements. We will also be subject to other reporting and corporate governance requirements under the listing standards of The New York Stock Exchange, or NYSE, and the Sarbanes-Oxley Act, which will impose significant compliance costs and obligations upon us. The changes necessitated by becoming a public company will require a significant commitment of additional resources and management oversight, which will increase our operating costs. These changes will also place significant additional demands on our finance and accounting staff, which may not have prior public company experience or experience working for a newly public company, and on our financial accounting and information systems, and we may need to, in the future, hire additional accounting and financial staff with appropriate public company reporting experience and technical accounting knowledge. Other expenses associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses. As a public company, we will be required, among other things, to:

 

    prepare and file periodic reports, and distribute other stockholder communications, in compliance with the federal securities laws and the NYSE rules;

 

    define and expand the roles and the duties of our board of directors and its committees and adopt a set of corporate governance guidelines;

 

    maintain a majority independent board of directors and fully independent audit, compensation and nominating and corporate governance committees, in compliance with the federal securities laws and the NYSE rules;

 

    institute more comprehensive compliance, investor relations and internal audit functions; and

 

    evaluate and maintain our system of internal control over financial reporting, and report on management’s assessment thereof, in compliance with rules and regulations of the SEC and PCAOB.

In particular, upon the completion of this offering, the Sarbanes-Oxley Act will require us to maintain disclosure controls and procedures and report on their effectiveness, and to maintain and document our internal

 

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control over financial reporting document and test their effectiveness in accordance with an established internal control framework, and, after our first annual report, to report on our conclusions as to the effectiveness of our internal controls. Likewise, once we are no longer an emerging growth company, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. As described in the previous risk factor, we expect to qualify as an emerging growth company upon the completion of this offering and could potentially qualify as an emerging growth company until December 31, 2022. Any failure to implement required new or improved controls, or difficulties encountered in their implementation or in remediating any weaknesses discovered in the internal controls, could harm our operating results, cause us to fail to meet our reporting obligations, or require us to restate our financial statements from prior periods. Any of these could lead investors to lose confidence in the reliability of our financial statements. This could result in a decrease in the value of our common stock. Failure to comply with the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities.

We may not pay regular cash dividends on our common stock and, consequently, your ability to achieve a return on your investment may depend on appreciation in the price of our common stock.

Any decision to declare and pay dividends will be dependent on a variety of factors, including earnings, cash flow generation, financial position, results of operations, the terms of our indebtedness and other contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. The terms of our indebtedness limit the ability of CFTC to pay dividends to CURO Group Holdings Corp., which would be necessary for us to pay dividends on our common stock. For more information, see “Dividend Policy.” As a result, you should not rely on an investment in our common stock to provide dividend income and the success of an investment in our common stock may depend upon an appreciation in its value.

Future offerings of debt or equity securities may rank senior to our common stock and may result in dilution of your investment.

If we decide to issue debt securities in the future, which would rank senior to shares of our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. We and, indirectly, our stockholders will bear the cost of issuing and servicing such securities. We may also issue preferred equity, which will have superior rights relative to our common stock, including with respect to voting and liquidation.

Furthermore, if we raise additional capital by issuing new convertible or equity securities at a lower price than the initial public offering price, your interest will be diluted. This may result in the loss of all or a portion of your investment. If our future access to public markets is limited or our performance decreases, we may need to carry out a private placement or public offering of our common stock at a lower price than the initial public offering price.

Because our decision to issue debt, preferred or other equity or equity-linked securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their shareholdings in us.

The market price of our common stock could be negatively affected by future sales of our common stock.

If we or our existing stockholders, our directors, their affiliates, or our executive officers, sell, or are perceived as intending to sell, a substantial number of our common stock in the public market, the market price of our common stock could decrease significantly.

We, our executive officers and directors and certain of our significant stockholders have agreed with the underwriters not to dispose of or hedge any of the shares of our common stock or securities convertible into or

 

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exchangeable for shares of our common stock during the period from the date of this prospectus continuing through the date that is 180 days after the date of this prospectus, except with the prior written consent of Credit Suisse Securities (USA) LLC and Jefferies LLC.

These shares of common stock will be freely tradable (subject to certain current public information requirements) after the expiration date of the lock-up agreements, excluding any acquired or held by persons who may be deemed to be our “affiliates” as defined in Rule 144 under the Securities Act, which will continue to be subject to the volume and other restrictions of Rule 144 under the Securities Act. At any time following the closing of this offering, subject, however, to the 180-day lock-up agreement entered into with the underwriters, the holders of 33,862,572 shares of our common stock are entitled to require that we register their shares under the Securities Act for resale into the public markets. All shares sold pursuant to an offering covered by such registration statement would be freely transferable.

In addition, on or as soon as practicable after, the effective date of this prospectus, we intend to file a registration statement on Form S-8 under the Securities Act registering 9,477,480 shares of our common stock reserved for future issuance under our equity incentive plans. See the information under the heading “Shares Eligible for Future Sale” for a more detailed description of the shares that will be available for future sales upon completion of this offering.

Purchasing our common stock through this offering will result in an immediate and substantial dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase our common stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. See “Dilution.”

Provisions in our charter documents could discourage a takeover that stockholders may consider favorable.

Certain provisions in our governing documents could make a merger, tender offer or proxy contest involving us difficult, even if such events would be beneficial to the interests of our stockholders. Among other things, these provisions:

 

    permit our board of directors to establish the number of directors and fill any vacancies and newly created directorships;

 

    authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

    provide that our board of directors is expressly authorized to amend or repeal any provision of our bylaws;

 

    restrict the forum for certain litigation against us to Delaware;

 

    establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings;

 

    establish a classified board of directors with three staggered classes of directors, where directors may only be removed for cause (unless we de-classify our board of directors);

 

    require that actions to be taken by our stockholders be taken only at an annual or special meeting of our stockholders, and not by written consent; and

 

    establish certain limitations on convening special stockholder meetings.

 

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These provisions may delay or prevent attempts by our stockholders to replace members of our management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers or investors aiming to effect changes in management to negotiate with our board of directors and by providing our board of directors with more time to assess any proposal. However, such anti-takeover provisions could also depress the price of our common stock by acting to delay or prevent a change in control of us.

For information regarding these and other provisions, see “Description of Capital Stock.”

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the General Corporation Law of the State of Delaware, our amended and restated certificate of incorporation or our amended and restated bylaws or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits.

The FFL Holders and Founder Holders will together own more than 50% of our common stock, and their interests may conflict with ours or yours in the future.

Immediately following this offering, investment funds associated with the FFL Holders and the Founder Holders will beneficially own approximately 28.67% and 44.81% of our common stock, respectively, or approximately 28.06% and 43.86%, respectively, if the underwriters exercise in full their option to purchase additional shares. As a result, the FFL Holders and the Founder Holders will collectively have the ability to elect all of the members of our board of directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence or modification of debt by us, certain amendments to our amended and restated certificate of incorporation and amended and restated bylaws, and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with your interests. In addition, the FFL Holders together with Founder Holders may have an interest in pursuing acquisitions, divestitures and other transactions that, in their respective judgment, could enhance their investment, even though such transactions might involve risks to you. For example, the FFL Holders together with the Founder Holders could cause us to make acquisitions that increase our indebtedness or cause us to sell revenue-generating assets.

Prior to the completion of this offering, we, the FFL Holders and the Founder Holders expect to enter into the Amended and Restated Investor Rights Agreement. See “Certain Relationships and Related-Party Transactions—Related-Party Transactions—Amended and Restated Investor Rights Agreement.”

The FFL Holders and their affiliated funds are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements in addition to historical information. These forward-looking statements are included throughout this prospectus, including in the sections entitled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. Words such as “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “objective,” “outlook,” “plan,” “potential,” “predict,” “project,” “should,” “will” and variations of these words and the negative of these or similar words or expressions generally indicate a forward-looking statement in this prospectus.

Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.

Our forward-looking statements are not guarantees of future performance, and actual events, results and outcomes may differ materially from our expectations suggested in any forward-looking statements due to a variety of factors, including, among others, those set forth in the section entitled “Risk Factors.” Although it is not possible to identify all of these factors, they include, among others, the following:

 

    the recently adopted CFPB rule on payday, vehicle title, and certain high-cost installment loans could, if enacted, have a material adverse effect on our business and results of operations;

 

    the extent to which federal, state, local and foreign governmental regulation of consumer lending and related financial products and services limits or prohibits the operation of our business;

 

    our failure to comply with applicable laws and regulations, and resulting fines, penalties or other sanctions that could adversely affect our business and results of operations;

 

    the impact of proposed rules and regulations that, if enacted, could have a material adverse effect on our business and results of operations;

 

    future changes to regulations to which we are subject could restrict us in ways that adversely affect our business and results of operations;

 

    the adverse impact of existing or new local regulation of our industry;

 

    the impact of the complex regulatory environment in which we operate, which increase our costs of compliance and the risk that we may fail to comply;

 

    the risk that our interpretation and application of laws and regulations related to consumer lending activities differs from the interpretations applied by federal, state, local and foreign regulatory bodies;

 

    the effect of judicial decisions, agency rulemaking, or amendments to law on the legality or enforceability of our agreements;

 

    current and future litigation and regulatory proceedings against us may impact our results of operations, cash flow and financial condition;

 

    risks associated with negative public perception of our products and services;

 

    the adverse impact of material modifications of U.S. laws and regulations and existing trade agreements by the new U.S. presidential administration on our business, financial condition, and results of operations;

 

    our substantial indebtedness may expose us to material risks, and could adversely affect our business, results of operations and financial condition, as we currently depend in large part on debt financing to provide the cash needed to fund the loans we originate;

 

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    our business could be adversely affected by a lack of sufficient debt financing at acceptable prices or disruptions in the credit markets, which could reduce our access to credit and our ability to fund loans;

 

    risks associated with our ability to refinance our substantial indebtedness;

 

    risks associated with a lack of sufficient debt financing made to our business on acceptable terms;

 

    our ability to protect our proprietary technology and analytics or keep up with that of our competitors;

 

    risks associated with disruption in the availability of our information systems;

 

    risks associated with information provided by customers or third parties being inaccurate, and causing us to misjudge a customer’s qualification to receive a loan;

 

    because of the non-prime nature of our customers, our business has much higher rates of charge-offs than traditional lenders, and if we are unable to price our loan products to take into account the credit risks of our customers, our operating results and financial condition could be adversely affected.

 

    risks associated with the failure of our proprietary credit and fraud scoring system to effectively price the credit risk of our prospective or existing customers;

 

    risks associated with the handling of customer personal data and cyber-attacks that could result in liability or harm to our reputation;

 

    risks associated with failure of third parties who provide us products, services or support, including our ability to maintain relationships with banks and other third-party electronic payment solutions providers;

 

    our ability to maintain relationships with third-party service providers to offer credit services organizations, or CSO, loans in Texas and Ohio;

 

    the adverse impact of employee and third-party theft and errors as well as liability resulting from crimes at our stores;

 

    the adequacy of our allowance for loan losses, accrual for third-party loan losses and estimates of losses;

 

    changes in demand for our products and services;

 

    risks associated with effectively managing our growth;

 

    our ability to integrate acquisitions into our existing business operations;

 

    the sufficiency of indemnifications associated with assumed liabilities of acquired entities to cover our exposures to litigation and settlement costs;

 

    our ability to attract and retain qualified management and employees;

 

    the possible impairment of goodwill;

 

    the seasonality of our lending business;

 

    our ability to find suitable real estate to support future new store development;

 

    our ability to keep up with rapid changes in e-commerce and the uses of the Internet;

 

    the fragmentation of our industry and competition from various other sources providing similar financial products, or other alternative sources of credit, to consumers;

 

    risks related to the international scope of our business and operations;

 

    the adverse impact of natural disasters and other business disruptions on our future revenue and financial condition; and

 

    the FFL Holders and the Founder Holders will together have a controlling interest following this offering, and their interests may conflict with ours or yours in the future.

 

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Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements speak only as of the date hereof and are not guarantees of future performance. Actual results and future performance may differ materially from those suggested in any forward-looking statements. We undertake no obligation to update these statements unless we are required to do so under applicable laws.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of 6,666,667 shares of common stock that we are offering will be approximately $88.5 million, at an assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and offering expenses. If the underwriters fully exercise their option to purchase additional shares, we estimate that our net proceeds will be approximately $102.5 million.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us from this offering by $6.2 million, assuming the underwriters do not exercise their option to purchase additional shares and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

We intend to use the net proceeds from this offering to purchase, redeem, defease or otherwise repay portions of the 12.00% Senior Secured Notes issued by CFTC and pay fees, expenses, premiums and accrued interest in connection therewith. CFTC issued $470 million aggregate principal amount of the 12.00% Senior Secured Notes on February 15, 2017 in a private offering exempt from the registration requirements of the Securities Act and used the proceeds of that offering, together with available cash, to redeem Curo Intermediate’s outstanding 10.75% Senior Secured Notes due 2018, redeem our 12.00% Senior Cash Pay Notes due 2017 and pay fees, expenses, premiums and accrued interest in connection therewith. On November 2, 2017, CFTC issued $135 million aggregate principal amount of additional 12.00% Senior Secured Notes in a private offering exempt from the registration requirements of the Securities Act and used the proceeds from that offering, together with available cash, to pay a cash dividend to our stockholders and pay fees and expenses in connection therewith. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments.”

Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds we receive in this offering in short-term and intermediate term interest-bearing obligations, investment grade investments, certificates of deposit or direct or guaranteed U.S. government obligations.

 

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DIVIDEND POLICY

On May 12, 2017, we declared a dividend of $28.0 million, which was paid to our stockholders on May 15, 2017, on August 2, 2017, we declared a dividend of $8.5 million, which was paid to our stockholders on August 11, 2017 and on October 16, 2017, we declared a dividend of $5.5 million, which was paid to our stockholders on October 16, 2017. In connection with issuance of the additional 12.00% Senior Secured Notes on November 2, 2017, we declared a dividend of $140 million on November 2, 2017, which was paid to our stockholders on November 2, 2017. We have otherwise not paid regular or special dividends since our inception in 2013. The terms of our indebtedness limit the ability of CFTC to pay dividends to CURO Group Holdings Corp., which would be necessary for us to pay dividends on our common stock.

Any future determinations relating to our dividends and earning retention policies will be made at the discretion of our board of directors, who will review such policies from time to time in light of the Company’s earnings, cash flow generation, financial position, results of operations, the terms of our indebtedness and other contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2017:

 

    on an actual basis;

 

    on an as adjusted basis to give effect to (1) the issuance of $135 million aggregate principal amount of additional 12.00% Senior Secured Notes by CFTC and (2) our declaration and payment of a $140 million dividend, all of which occurred on November 2, 2017, collectively referred to as the Offering Adjustments; and

 

    on a pro forma basis to give effect to the Offering Adjustments, the issuance and sale by us of 6,666,667 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus), and our receipt and application of the net proceeds therefrom as described in “Use of Proceeds.”

The information below is illustrative only, and our cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this table together with “Summary,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Underwriting” and our unaudited interim and audited annual consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    As of September 30, 2017  

(in thousands, except share data)

  Actual     As
Adjusted
    Pro
Forma(2)
 

Cash and cash equivalents(1)

  $ 95,545     $ 90,545     $ 90,545  
 

 

 

   

 

 

   

 

 

 

Debt

     

Non-Recourse U.S. SPV Facility

  $ 116,590     $ 116,590     $ 116,590  

12.00% Senior Secured Notes(3)

    470,000       605,000       526,000  

Subordinated shareholder debt

    2,401       2,401       2,401  
 

 

 

   

 

 

   

 

 

 

Total debt

    588,991       723,991       644,991  

Equity

     

Common Stock, $0.001 par value; 72,000,000 shares authorized and 37,894,752 shares issued and outstanding, actual; and 225,000,000 shares authorized and 37,894,752 shares issued and outstanding, pro forma(4)

  $ 1     $ 1     $ 1  

(Dividends in excess of paid-in capital)/Paid-in capital

    (35,686     (35,686     52,814  

Retained earnings

    143,079       3,079       (6,421

Accumulated other comprehensive loss

    (41,504     (41,504     (41,504
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity(5)

    65,890       (74,110     4,890  
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 654,881     $ 649,881     $ 649,881  
 

 

 

   

 

 

   

 

 

 

 

(1) As Adjusted amount does not reflect the payment of fees and expenses related to the Additional Notes Offering or any issue premium associated with the 12.00% Senior Secured Notes.
(2) Each $1.00 of increase (decrease) in the public offering price per share would increase (decrease) our total stockholders’ equity by $5.6 million (assuming the underwriters do not exercise their option to purchase additional shares).
(3) As Adjusted amount does not reflect any issue premium associated with the 12.00% Senior Secured Notes.
(4) The information regarding our common stock takes into account a 36-for-1 split of our common stock approved by our board of directors on November 8, 2017 that will occur prior to the effectiveness of the Registration Statement and the pro forma information regarding our common stock also takes into account the filing of our amended and restated certificate of incorporation that will occur immediately prior to the closing of this offering.
(5) Pro Forma amount includes the payment of a 12.00% premium in connection with the redemption of the 12.00% Senior Secured Notes as described in “Use of Proceeds.”

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share is determined by dividing our total tangible assets less total liabilities by the total number of shares of common stock outstanding as of September 30, 2017.

Our net tangible book value as of September 30, 2017 was a deficit of $112.8 million, or $2.98 per share of common stock. After giving effect to the Offering Adjustments, our tangible net book value as of September 30, 2017 would have been a deficit of $252.8 million, or approximately $6.67 per share. After giving effect to the Offering Adjustments, the issuance and sale by us of 6,666,667 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and the deduction of estimated underwriting discounts and estimated offering expenses, our net tangible book value as of September 30, 2017 would have been a deficit of $164.3 million, or approximately $3.69 per share. This amount represents an immediate increase in net tangible book value of $2.98 per share to our existing stockholders and an immediate dilution in net tangible book value of approximately $18.69 per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $ 15.00  

Net tangible book value (deficit) per share as of September 30, 2017 (after giving effect to the Offering Adjustments)

   $ (6.67  

Increase in net tangible book value per share attributable to new investors in this offering

   $ 2.98    

Net tangible book value (deficit) per share after this offering

     $ (3.69
    

 

 

 

Dilution per share to new investors

     $ 18.69  
    

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share would increase or decrease our net tangible book value after the offering by approximately $6.2 million, or approximately $0.14 per share, and the dilution per share to investors participating in this offering by approximately $0.86 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

If the underwriters exercise their option in full to purchase 1,000,000 additional shares of common stock from us in this offering, the net tangible book value per share after the offering would be a deficit of $3.30 per share, the increase in the net tangible book value per share to existing stockholders would be $3.37 per share and the dilution to new investors purchasing common stock in this offering would be $18.30 per share.

We have not issued any shares of common stock in the last five years.

Following this offering, our existing stockholders will hold 85.04% of our common stock, and new investors will hold 14.96% of our common stock (excluding options and restricted stock unit awards granted to existing stockholders). If the underwriters fully exercise their option to purchase additional shares, our existing stockholders would hold 83.17% of our common stock, and new investors would hold 16.83% of our common stock.

The above discussion is based on 37,894,752 shares of common stock outstanding as of September 30, 2017 after giving effect to a 36-for-1 split of our common stock approved by our board of directors on November 8, 2017 that will occur prior to the effectiveness of the Registration Statement, and excludes:

 

    1,977,480 shares of our common stock issuable upon the exercise of options outstanding as of November 27, 2017 at a weighted average price of $3.04 per share;

 

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    5,000,000 shares of our common stock reserved for issuance pursuant to our 2017 Incentive Plan as of November 27, 2017; and

 

    2,500,000 shares of our common stock reserved for issuance pursuant to our Employee Stock Purchase Plan as of November 27, 2017.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

Set forth below is our selected consolidated financial data as of and for the periods indicated. We have derived the selected consolidated financial data as of and for the years ended December 31, 2016 and 2015 from our audited consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus. We have derived the selected consolidated financial data as of and for the nine month periods ended September 30, 2017 and 2016 from our unaudited consolidated financial statements that are included elsewhere in this prospectus and that, in our opinion, include all adjustments, consisting of normal, recurring adjustments, necessary for the fair presentation of such information. Our historical operating results are not necessarily indicative of results we may expect or achieve in any future period. Our results for the nine months ended September 30, 2017 are not necessarily indicative of results we may achieve during a full year.

The following information is only a summary and may not be complete. Accordingly, you should read these selected consolidated financial data in conjunction with the sections entitled “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and the notes thereto contained elsewhere in this prospectus.

 

(in thousands, except per share data)

   Nine Months Ended
September 30,

(unaudited)
    Year Ended
December 31,
 
     2017      2016     2016     2015  

Consolidated Statements of Income Data:

         

Revenue

   $ 696,643      $ 609,692     $ 828,596     $ 813,131  

Provision for losses

     226,523        177,756       258,289       281,210  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net revenue

     470,120        431,936       570,307       531,921  

Cost of providing services

         

Salaries and benefits

     79,554        79,359       104,541       107,059  

Occupancy

     41,421        40,368       54,509       53,288  

Office

     15,519        14,294       20,463       19,929  

Other costs of providing services

     40,954        39,385       53,617       47,380  

Advertising

     35,599        28,925       43,921       65,664  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total cost of providing services

     213,047        202,331       277,051       293,320  
  

 

 

    

 

 

   

 

 

   

 

 

 

Gross margin

     257,073        229,605       293,256       238,601  

Operating (income) expense

         

Corporate and district

     103,605        95,109       125,119       129,046  

Interest expense

     60,694        48,179       64,334       65,020  

Loss (gain) on extinguishment of debt

     12,458        (6,991     (6,991     —    

Restructuring costs

     7,393        2,967       3,618       4,291  

Goodwill and intangible asset impairment charges

     —          —         —         2,882  

Other (income)/expense

     192        (559     (845     1,488  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expense

     184,342        138,705       185,235       202,727  

Net income before taxes

     72,731        90,900       108,021       35,874  

Provision for income tax expense

     29,988        35,041       42,577       18,105  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 42,743      $ 55,859     $ 65,444     $ 17,769  
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share(1)

   $ 1.13      $ 1.47     $ 1.73     $ 0.47  

Diluted earnings per share(1)

   $ 1.10      $ 1.44     $ 1.69     $ 0.46  

 

(1) The per share information has been adjusted to give effect to the 36-for-1 stock split approved by our board of directors on November 8, 2017 that will occur prior to the effectiveness of the Registration Statement.

 

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(in thousands, except per share data)

   Nine Months Ended
September 30,

(unaudited)
    Year Ended
December 31,
 
     2017     2016     2016     2015  

Non-GAAP Statement of Operations Data and Other Operating Data (unaudited):

        

Adjusted Earnings(2)

   $ 59,372     $ 55,688     $ 66,411     $ 24,656  

EBITDA(3)

   $ 147,545     $ 153,323     $ 191,260     $ 120,006  

Adjusted EBITDA(4)

   $ 173,257     $ 150,260     $ 189,361     $ 130,876  

Adjusted EBITDA Margin(5)

     24.9     24.6     22.9     16.1

Gross Margin Percentage(6)

     36.9     37.7     35.4     29.3

Number of stores (at period end)

     405       420       420       420  

Selected Balance Sheet Data (at period end)

        

Cash

   $ 95,545     $ 175,418     $ 193,525     $ 100,561  

Gross loans receivable

   $ 393,423     $ 244,602     $ 286,196     $ 252,180  

Less: allowance for loan losses

     (71,271     (33,302     (39,192     (32,948
  

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable, net

   $ 322,152     $ 211,300     $ 247,004     $ 219,232  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 762,139     $ 721,119     $ 780,798     $ 666,017  

Total liabilities (including debt)

   $ 696,249     $ 682,716     $ 739,943     $ 685,399  

Total stockholders’ equity

   $ 65,890     $ 38,403     $ 40,855     $ (19,382

 

(2) We define Adjusted Earnings as net income plus or minus certain non-cash or other adjusting items. We provide Adjusted Earnings in this prospectus because our management finds its useful in evaluating the performance and underlying operations of our business. We provide a detailed description of Adjusted Earnings and how we use it, including a reconciliation of Adjusted Earnings to net income, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Non-GAAP Financial Information.”
(3) We define EBITDA as earnings before interest, income taxes, depreciation and amortization. We provide EBITDA in this prospectus because our management finds it useful in evaluating the performance and underlying operations of our business. We provide a detailed description of EBITDA and how we use it, along with a reconciliation of EBITDA to net income, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Non-GAAP Financial Information.”
(4) We define Adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization, plus or minus certain non-cash or other adjusting items. We provide Adjusted EBITDA in this prospectus because our management finds it useful in evaluating the performance and underlying operations of our business. We provide a detailed description of Adjusted EBITDA and how we use it, along with a reconciliation of Adjusted EBITDA to net income, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Non-GAAP Financial Information.”
(5) Calculated as Adjusted EBITDA as a percentage of revenue.
(6) Calculated as Gross Margin as a percentage of revenue.

 

 

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

You should read the following discussion and analysis in conjunction with the “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” We undertake no obligation to update any forward-looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made. Therefore, no reader of this document should rely on these statements being current as of any time other than the date of this prospectus. See “Special Note Regarding Forward-Looking Statements.”

Overview

We are a growth-oriented, technology-enabled, highly-diversified consumer finance company serving a wide range of underbanked consumers in the United States, Canada and the United Kingdom and are a market leader in our industry based on revenues. We believe that we have the only true omni-channel customer acquisition, onboarding and servicing platform in our industry that is integrated across store, online, mobile and contact center touchpoints. Our IT platform, which we refer to as the “Curo Platform,” seamlessly integrates loan underwriting, scoring, servicing, collections, regulatory compliance and reporting activities into a single, centralized system. We use advanced risk analytics powered by proprietary algorithms and over 15 years of loan performance data to efficiently and effectively score our customers’ loan applications. Since 2010, we have extended $13.9 billion in total credit across approximately 36.5 million total loans, and our revenue of $828.6 million in 2016 represents a 26.3% compound annual growth rate, or CAGR, over the same time period.

We operate in the United States under two principal brands, “Speedy Cash” and “Rapid Cash,” and launched our new brand “Avio Credit” in the United States in the second quarter of 2017. In the United Kingdom we operate online as “Wage Day Advance” and “Juo Loans” and, prior to their closure in the third quarter of 2017, our stores were branded “Speedy Cash.” In Canada our stores are branded “Cash Money” and we offer “LendDirect” installment loans online. As of September 30, 2017, our store network consisted of 405 locations across 14 U.S. states and seven Canadian provinces. As of September 30, 2017, we offered our online services in 26 U.S. states, five Canadian provinces, and the United Kingdom.

Company History

The CURO business was founded in 1997 to meet the growing needs of consumers looking for access to credit. The Company set out to offer a variety of convenient, easily-accessible financial and loan services and over its 20 years of operations, expanded across the United States, Canada and the United Kingdom.

CURO Financial Technologies Corp., or CFTC (then known as Speedy Cash Holdings Corp.), was incorporated in Delaware on July 16, 2008. On September 10, 2008, our founders sold or otherwise contributed all of the outstanding equity of the various operating entities that comprised the CURO business to a wholly-owned subsidiary of CFTC in connection with an investment in CFTC by Friedman Fleischer & Lowe Capital Partners II, L.P. and its affiliated funds, or FFL Partners. CURO Group Holdings Corp. (then known as Speedy Group Holdings Corp.) was incorporated in Delaware on February 7, 2013 as the parent company of CFTC. On May 11, 2016, we changed the name of Speedy Group Holdings Corp. to CURO Group Holdings Corp. We similarly changed the names of some of its subsidiaries.

In May 2011, we completed the acquisition of Cash Money Group, Inc., a Canadian entity, for approximately $104.5 million.

 

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In August 2012, we completed the acquisition of The Money Store, L.P., a Texas limited partnership which operated as The Money Box® Check Cashing for approximately $26.1 million.

In February 2013, we completed the acquisition of Wage Day Advance Limited, a United Kingdom entity, for approximately $80.9 million. We subsequently effected a corporate name change of Wage Day Advance Limited to CURO Transatlantic Limited, although we still operate online in the United Kingdom as Wage Day Advance.

In October 2015, we opened a state-of-the-art fintech office in Chicago to continue to attract and retain talented IT development and data science professionals. As of September 30, 2017, this office was staffed with 24 professionals.

In March 2016, we launched LendDirect, an online Installment Loan brand in Alberta, Canada. These loans are now offered in four provinces.

In June 2017, we launched Avio Credit, an online Installment Loan brand in the U.S. market. These loans are currently available in California, Missouri, South Carolina and Wisconsin.

Recent Developments

Additional Notes Offering and Dividend

On November 2, 2017, CFTC issued $135 million principal amount of additional 12.00% Senior Secured Notes in a private offering exempt from the registration requirements of the Securities Act, or the Additional Notes Offering. The proceeds from the Additional Notes Offering were used, together with available cash, to (i) pay a cash dividend, in an amount of $140 million, to CFTC’s sole stockholder, the Company, and ultimately our stockholders and (ii) pay fees, expenses, premiums and accrued interest in connection with the Additional Notes Offering. CFTC received the consent of the holders holding a majority in the outstanding principal amount outstanding of the current 12.00% Senior Secured Notes to a one-time waiver with respect to the restrictions contained in Section 5.07(a) of the indenture governing the 12.00% Senior Secured Notes to permit the dividend.

Senior Secured Revolving Loan Facility

On September 1, 2017, we closed a $25 million Senior Secured Revolving Loan Facility, or the Senior Revolver. The negative covenants of the Senior Revolver generally conform to the related provisions of the Indenture governing the 12.00% Senior Secured Notes. We believe this facility complements our other financing sources, while providing seasonal short-term liquidity. Under the Senior Revolver, there is $25 million maximum availability, including up to $5 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The Senior Revolver accrues interest at the one-month LIBOR (which may not be negative) plus 5.00% per annum and is repayable on demand. The terms of the Senior Revolver require that the outstanding balance be reduced to $0 for at least 30 consecutive days in each calendar year. The Senior Revolver is guaranteed by all of our subsidiaries that guarantee the 12.00% Senior Secured Notes and is secured by a lien on substantially all of our assets and the guarantor subsidiaries that is senior to the lien securing the 12.00% Senior Secured Notes. The Senior Revolver was undrawn at September 30, 2017.

U.K. Store Closures

In the third quarter of 2017, the Boards of Directors of the Company and its U.K. subsidiaries approved a plan to close the remaining 13 Speedy Cash branch locations in the United Kingdom. The affected branches closed during the third quarter and our financial results include $7.4 million of related charges primarily for the remaining net cash obligations for store leases, employee redundancy and severance payments ($5.9 million), and the noncash write-off of fixed assets and leasehold improvements ($1.5 million).

 

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Hurricane Harvey Impact

In a good-faith effort to help our store and online customers in the affected areas of Houston, Corpus Christi and the surrounding areas we waived loan payments that were due during the period from August 25, 2017 to September 8, 2017. This affected approximately 22,500 customers and amounted to approximately $3.0 million in total loan payments. The waived payments and losses on secured installment loans in the market increased our provision for losses by approximately $3.3 million. Property damage to our 18 stores in the affected areas was not material. Our stores in the Texas markets resumed normal operations in September.

Products and Services

We designed our products and customer journey to be consumer-friendly, accessible and easy to understand. Below is an outline of our loan products as of September 30, 2017.

 

     Installment          
     Unsecured   Secured    Open-End    Single-Pay

Channel

   Online and in-store: 15
U.S. states, Canada
and the United
Kingdom(1)
  Online and in-store: 7
U.S. states
   Online: KS, TN, ID,

VA, UT, DE and RI.
In-store: KS and TN

   Online and in-store: 12
U.S. states, Canada
and the United
Kingdom(1)

Approximate Average Loan Size(2)

   $636   $1,299    $463    $335

Duration

   Up to 48 months   Up to 42 months    Revolving/Open-ended    Up to 62 days

Pricing

   13.2% average
monthly interest rate(3)
  10.6% average
monthly interest rate(3)
   Daily interest rates
ranging from 0.74% to
0.99%
   Fees ranging from $13
to $25 per $100
borrowed.

 

(1) Online only in the United Kingdom.
(2) Includes CSO loans.
(3) Weighted average of the contractual interest rates for the portfolio as of September 30, 2017. Excludes CSO fees.

Unsecured Installment Loans

Unsecured Installment Loans are fixed-term, fully-amortizing loans with a fixed payment amount due each period during the term of the loan. Loans are originated and owned by us or third-party lenders pursuant to credit services organization and credit access business statutes, which we refer to as our CSO programs. For CSO programs, we arrange and guarantee the loans. Payments are due bi-weekly or monthly to match the customer’s pay cycle. Customers may prepay without penalty or fees. Unsecured Installment Loan terms are governed by enabling state legislation in the United States, provincial and federal legislation in Canada and national regulation in the United Kingdom. Unsecured Installment Loans comprised 49.3% and 40.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. We believe that the flexible terms and lower payments associated with Installment Loans significantly expand our addressable market by allowing us to serve a broader range of customers with a variety of credit needs.

Secured Installment Loans

Secured Installment Loans are similar to Unsecured Installment Loans but are also secured by a vehicle title. These loans are originated and owned by us or by third-party lenders through our CSO programs. For these loans the customer provides clear title or security interest in the vehicle as collateral. The customer receives the benefit of immediate cash but retains possession of the vehicle while the loan is outstanding. The loan requires periodic payments of principal and interest with a fixed payment amount due each period during the term of the loan. Payments are due bi-weekly or monthly to match the customer’s pay cycle. Customers may prepay without

 

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penalty or fees. Secured Installment Loan terms are governed by enabling state legislation in the United States. Secured Installment Loans comprised 10.5% and 9.8% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

Open-End Loans

Open-End Loans are a line of credit for the customer without a specified maturity date. Customers may draw against their line of credit, repay with minimum, partial or full payment and redraw as needed. We report and earn interest on the outstanding loan balances drawn by the customer against their approved credit limit. Customers may prepay without penalty or fees. Typically, customers do not draw the full amount of their credit limit. Loan terms are governed by enabling state legislation in the United States. Unsecured Open-End Loans comprised 6.6% and 7.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. Secured Open-End Loans are offered as part of our product mix in states with enabling legislation and accounted for approximately 0.9% and 1.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

Single-Pay Loans

Single-Pay Loans are generally unsecured short-term, small-denomination loans whereby a customer receives cash in exchange for a post-dated personal check or a pre-authorized debit from the customer’s bank account. These loans are originated and owned by us or by third-party lenders through our CSO programs. We agree to defer deposit of the check or debiting of the customer’s bank account until the loan due date which typically falls on the customer’s next pay date. Single-Pay Loans are governed by enabling state legislation in the United States, federal and provincial regulations in Canada and national regulation in the United Kingdom Single-Pay Loans comprised 28.4% and 37.8% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

Ancillary Products

We also provide a number of ancillary financial products including check cashing, proprietary reloadable prepaid debit cards (Opt+), money transfer services, gold buying, credit protection insurance in the Canadian market and retail installment sales. Ancillary products comprised 4.3% and 4.4% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

CSO Programs

Through our CSO programs, we act as a credit services organization/credit access business on behalf of customers in accordance with applicable state laws. We currently offer loans through CSO programs in stores and online in the state of Texas and online in the state of Ohio. In Texas we offer Unsecured Installment Loans and Secured Installment Loans with a maximum term of 180 days. In Ohio we offer an Unsecured Installment Loan product with a maximum term of 18 months. As a CSO we earn revenue by charging the customer a fee, or the CSO Fee, for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with us under our CSO programs, we agree, for a CSO fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customer’s obligation to repay the loan the customer receives from the third-party lender. CSO fees are calculated based on the amount of the customer’s outstanding loan. For CSO loans, each lender is responsible for providing the criteria by which the customer’s application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go into default.

As of September 30, 2017, the maximum amount payable under all such guarantees was $59.1 million, compared to $59.6 million at December 31, 2016. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover the amount we pay from the customers. We hold no collateral in respect of the guarantees.

 

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These guarantees are performance guarantees as defined in ASC Topic 460. Performance guarantees are initially accounted for pursuant to ASC Topic 460 and recognized at fair value, and subsequently pursuant to ASC Topic 450 as contingent liabilities when we incur losses as the guarantor. The initial measurement of the guarantee liability is recorded at fair value and reported in the Credit services organization guarantee liability line in our Consolidated Balance Sheets. The initial fair value of the guarantee is the price we would pay to a third party market participant to assume the guarantee liability. There is no active market for transferring the guarantee liability. Accordingly, we determine the initial fair value of the guarantee by estimating the expected losses on the guaranteed loans. The expected losses on the guaranteed loans are estimated by assessing the nature of the loan products, the credit worthiness of the borrowers in the customer base, our historical loan default history for similar loans, industry loan default history, and historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. We review the factors that support estimates of expected losses and the guarantee liability monthly. In addition, because the majority of the underlying loan customers make bi-weekly payments, loan-pool payment performance is evaluated more frequently than monthly.

Our guarantee liability was $16.9 million and $17.1 million at September 30, 2017 and December 31, 2016, respectively. This liability represents the unamortized portion of the guarantee obligation required to be recognized at inception of the performance guarantee in accordance with ASC Topic 460 and a contingent liability for those performance guarantees where it is probable that we will be required to purchase the guaranteed loan from the lender in accordance with ASC Topic 450.

CSO fees are calculated based on the amount of the customer’s outstanding loan. We comply with the applicable jurisdiction’s Credit Services Organization Act or a similar statute. These laws generally define the services that we can provide to consumers and require us to provide a contract to the customer outlining our services and the cost of those services to the customer. For services we provide under our CSO programs, we receive payments from customers on their scheduled loan repayment due dates. The CSO fee is earned ratably over the term of the loan as the customers make payments. If a loan is paid off early, no additional CSO fees are due or collected. The maximum CSO loan term is 180 days and 18 months in Texas and Ohio, respectively. During the year ended December 31, 2016 and the nine months ended September 30, 2017, approximately 53.2% and 52.9%, respectively, of Unsecured Installment Loans, and 62.5% and 52.7%, respectively, of Secured Installment Loans originated under CSO programs were paid off prior to the original maturity date.

Since CSO loans are made by a third party lender, we do not include them in our Consolidated Balance Sheets as loans receivable. CSO fees receivable are included in “Prepaid expense and other” in our Consolidated Balance Sheets. We receive payments from customers for these fees on their scheduled loan repayment due dates.

The majority of revenue generated through our CSO programs was for Unsecured Installment Loans, which comprised 96.2% and 91.6% of total CSO revenue for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

Total revenue generated through our CSO programs comprised 26.5% and 26.1% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

 

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Our revenue diversification, including CSO fees, by product for the periods indicated, with percentages rounded up to the nearest whole digit:

 

Year Ended December 31, 2016

$829 million

 

Nine Months Ended September 30, 2017

$697 million

LOGO   LOGO

For the year ended December 31, 2016 and the period ending September 30, 2017, revenue generated through our online channel was 33% and 37%, respectively, of consolidated revenue.

Components of Our Results of Operations

Revenue

We offer a variety of loan products including Installment, Open-End and Single-Pay Loans. Revenue in our consolidated statements of income includes: interest income, finance charges, CSO fees, late fees and non-sufficient funds fees as permitted by applicable laws and pursuant to the agreement with the customer. Product offerings differ by jurisdiction and are governed by the laws in each separate jurisdiction.

Installment Loans are fully amortizing loans with a fixed payment amount due each period during the term of the loan. We record revenue from Installment Loans on a simple-interest basis. Accrued interest and fees are included in gross loans receivable in the Consolidated Balance Sheets.

Open-End Loans are a revolving line-of-credit with no defined loan term. We record revenue from Open-End Loans on a simple-interest basis. Accrued interest and fees are included in gross loans receivable in the Consolidated Balance Sheets.

Single-Pay Loans are primarily payday loans. Revenues from Single-Pay loan products are recognized each period on a constant-yield basis ratably over the term of each loan. We defer recognition of unearned fees based on the remaining term of the loan at the end of each reporting period.

We also provide a number of ancillary financial products including check cashing, proprietary reloadable prepaid debit cards (Opt+), credit protection insurance in the Canadian market, gold buying, retail installment sales and money transfer services.

Provision for Losses

We calculate provision for losses based on evaluation of the historical and expected cumulative net losses inherent in the underlying loan portfolios, by vintage, and several other quantitative and qualitative factors. We apply the resulting loss provision rate to our loan originations to determine the provision for losses. Accordingly, at the time we originate a loan, we recognize a loss on a portion of the loan balance based upon the applicable

 

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loss provision rate. We would then recognize any revenue in connection with that loan over the life of the loan, as described above. We may also record additional provision for losses for owned loans in connection with the periodic assessment of the adequacy of the Allowance for loan losses.

Q1 Loss Recognition Change

Effective January 1, 2017, we modified the timeframe in which Installment Loans are charged-off and made related refinements to our loss provisioning methodology. Prior to January 1, 2017, we deemed all loans uncollectible and charged-off when a customer missed a scheduled payment and the loan was considered past-due. Because of the Company’s continuing shift from Single-Pay to Installment Loan products and our analysis of payment patterns on early-stage versus late-stage delinquencies, we revised our estimates and now consider Installment Loans uncollectible when the loan has been contractually past-due for 90 consecutive days. Consequently, past-due Installment Loans and related accrued interest remain in loans receivable, with disclosure of past-due balances, for 90 days before being charged off against the allowance for loan losses. All recoveries on charged-off loans are credited to the allowance for loan losses. We evaluate the adequacy of the allowance for loan losses compared to the related gross loans receivable balances that include accrued interest.

In the income statement, the provision for losses for Installment Loans is based on assessment of the cumulative net losses inherent in the underlying loan portfolios, by vintage, and several other quantitative and qualitative factors. The resulting loss provision rate is applied to loan originations to determine the provision for losses. In addition to improving estimated collectability and loss recognition for Installment Loans, we also believe these refinements result in a loss provisioning methodology that is better aligned with industry comparisons and practices.

The aforementioned change was treated as a change in accounting estimate for accounting purposes and applied prospectively beginning January 1, 2017, which we refer to throughout this prospectus as the Q1 Loss Recognition Change.

The change affects comparability to prior periods as follows:

 

    Gross Combined Loans Receivable—balances in 2017 include Installment Loans that are up to 90 days past-due with related accrued interest, while balances in prior periods do not include these loans.

 

    Revenues—for the nine months ended September 30, 2017, revenues include accrued interest on past-due loan balances, while revenues in prior periods do not include these amounts.

 

    Provision for Losses—prospectively, loans charged off on day 91 include accrued interest. Thus, provision rates in 2017 have been adjusted to account for both principal and accrued interest. Additionally, because loss provision rates are applied to originations while charge-offs and recoveries are applied to the allowance for loan losses, provisioning is less affected by seasonality for the first quarter income tax refunds in the United States, which increases recoveries of delinquent balances.

For a full discussion of the change, refer to Note 1, “Summary of Significant Accounting Policies and Nature of Operations” in our Notes to Consolidated Interim Financial Statements included elsewhere in this prospectus.

Cost of Providing Services

Salaries and Benefits

Salaries and benefits include personnel-related costs for our store operations, including salaries, benefits and bonuses and are driven by the number of employees.

 

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Occupancy

Occupancy and equipment includes rent expense for our leased facilities, as well as depreciation, maintenance, insurance, and utility expense.

Office

Office includes expenses related to software, computer hardware, bank service charges, credit scoring charges and other office supplies.

Other Costs of Providing Services

Our other costs of providing services includes expenses related to operations such as processing fees, collections expense, security expense, taxes, repairs and professional fees.

Advertising

Advertising includes costs associated with attracting, retaining and/or reactivating customers as well as creating awareness for the brands we promote. Creative, web and print design capabilities exist within the Company and are rarely outsourced. The use of third-party agencies is limited to mass-media production and placement. Advertising expense also includes costs for all marketing activities including paid search, advertising on social networking sites, affiliate programs, direct response television, radio air time and direct mail.

All advertising costs are expensed as incurred. Cost-per-funded loan, or CPF, is a key metric for measuring the effectiveness and efficiency of our advertising spend. CPF is the amount of direct advertising and promotional costs during a period divided by the number of new customer loans originated during the period. New loans to existing or returning customers are not included in the denominator of CPF because we believe little or no incremental cost is incurred to make loans to existing customers or returning customers

Operating Expense

Corporate, District and Other Expenses

Corporate, district and other expenses include costs such as salaries and benefits associated with our corporate and district-level employees, as well as other corporate-related costs such as rent, insurance, professional fees, utilities, travel and entertainment expenses and depreciation expense.

Interest Expense

Interest expense primarily includes interest related to our Notes and our Non-Recourse U.S. SPV Facility.

Other Expenses

Other (income) and expense includes the foreign currency impact to our intercompany balances, gains or losses on foreign currency exchanges and disposals of fixed assets and other miscellaneous income and expense amounts.

Discussion of Revenue by Product and Segment and Related Loan Portfolio Performance

Revenue by Product

Unsecured and Secured Installment revenue includes interest income, CSO fees, and non-sufficient-funds or returned-items fees on late or defaulted payments on past-due loans (to which we refer collectively in this prospectus as “late fees”). Late fees comprise less than one-half of one percent of Installment revenues.

 

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Open-End revenues include interest income on outstanding revolving balances and other usage or maintenance fees as permitted by underlying statutes.

Single-Pay revenues represent deferred presentment or other fees as defined by the underlying state, provincial or national regulations.

The following table summarizes revenue by product, including CSO fees, for the periods indicated:

 

    Nine Months Ended September 30, 2017     Nine Months Ended September 30, 2016  

(in thousands)

  United
States
    Canada     United
Kingdom
    Total     United
States
    Canada     United
Kingdom
    Total  

Unsecured Installment

  $ 311,884     $ 13,244     $ 18,237     $ 343,365     $ 229,358     $ 328     $ 6,713     $ 236,399  

Secured Installment

    73,249       —         —         73,249       60,346       —         —         60,346  

Open-End

    52,342       —         —         52,342       49,862       —         3       49,865  

Single-Pay

    78,961       108,676       10,289       197,926       86,300       130,862       18,481       235,643  

Ancillary

    15,476       13,899       386       29,761       17,241       9,662       536       27,439  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 531,912     $ 135,819     $ 28,912     $ 696,643     $ 443,107     $ 140,852     $ 25,733     $ 609,692  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the nine months ended September 30, 2017, total lending revenue (excluding revenues from ancillary products) grew $84.6 million, or 14.5%, to $666.9 million, compared to the prior year period, predominantly driven by growth in Secured and Unsecured Installment loan revenue. Unsecured Installment Loan revenues rose 45.2% on related origination increase of 60.8%. Secured Installment revenues increased $12.9 million, or 21.4%, on related origination increase of 43.5%. Single-Pay revenues were affected primarily by regulatory changes in Canada (rate changes in Ontario and British Columbia and product changes in Alberta), but U.S. and U.K. Single-Pay revenues also decreased 8.5% and 44.3%, respectively, because of continued mix shift from Single-Pay to other loan products. Ancillary revenues increased 8.5% versus the same period a year ago primarily due to insurance revenue related to our Canadian installment product, partially offset by a decrease in check cashing fees. U.K. revenue increased by $3.2 million, or 12.4% ($5.8 million or 22.5% on a constant currency basis).

 

     Year Ended December 31, 2016     Year Ended December 31, 2015  

(in thousands)

  United
States
    Canada     United
Kingdom
    Total     United
States
    Canada     United
Kingdom
    Total  

Unsecured Installment

  $ 318,460     $ 1,143     $ 11,110     $ 330,713     $ 295,007     $ 322     $ 19,054     $ 314,383  

Secured Installment

    81,453       —         —         81,453       86,307       —         18       86,325  

Open-End

    66,945       —         3       66,948       51,304       —         7       51,311  

Single-Pay

    117,609       173,779       21,888       313,276       116,714       170,852       34,031       321,597  

Ancillary

    22,332       13,155       719       36,206       24,331       13,686       1,498       39,515  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 606,799     $ 188,077     $ 33,720     $ 828,596     $ 573,663     $ 184,860     $ 54,608     $ 813,131  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total lending revenue (excluding revenues from ancillary products) increased $18.8 million, or 2.4%, compared to the prior year, driven by growth in Installment and Open-End Loans. Unsecured Installment revenues rose 5.2% on related gross combined loan receivables growth of 29.0%, led by 7.9% growth in the United States (primarily in Texas, California and Missouri). U.K. Unsecured Installment revenues declined 41.7% because we discontinued a longer-term Installment Loan product in late 2015 due to regulatory changes. Secured Installment revenues decreased 5.6% mostly driven by competitive pressures in Nevada and Arizona. Open-End revenues grew 30.5% year-over-year primarily because in Kansas and Tennessee we replaced Single-pay products with Open-End products. Single-Pay revenues declined 2.6%. In the United States, the decline was primarily driven by the aforementioned changes in Kansas and in Tennessee. Ancillary revenues were down 8.4% year-over-year primarily because secular declines in check usage continue to affect check-cashing revenues and we experienced tighter margins on foreign currency exchange. U.K. revenue comparisons

 

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are also affected meaningfully by a weaker pound. On a constant-currency basis, U.K. revenue declined $16.5 million, or 30.2%, compared to the prior year.

Loan Volume and Portfolio Performance Analysis

We consider first-pay defaults (the number of customers that default on their first payment, or FPD) to be an early leading indicator of customer credit performance. FPD levels are dependent upon underwriting and scoring effectiveness, strategic or tactical management decisions to tighten or expand customer credit availability within scoring bands, seasonality, product terms and structure, origination channel and geography. Following is a recap by channel of origination for the United States and Canada:

 

    U.S. Online FPD has ranged from 20.1% in the second quarter of 2015 to 13.2% in the first quarter of 2017. FPD for the nine months ended September 30, 2017, 2016 and 2015 has averaged 14.9%, 16.9% and 18.4%, respectively. During 2015, FPD was affected by elevated levels of new customer investment. New customers have higher FPD rates than returning or existing customers. In periods such as the second and third quarters of 2015 when we increased new customer acquisition spend to take advantage of online market disruptions, the percentage of new-customer volume to total-customer volume increases as does FPD. U.S. Online FPD rates were lower in 2016 because the percentage of new customers to total volume decreased year-over-year and the data from the high volume of new customers acquired in 2015 allowed us to improve our scoring models. Through the nine months ended September 30, 2017, we have increased customer acquisition spend versus the same periods in 2016 and have acquired more online customers period-over-period, but FPD has improved primarily because of improved underwriting and scoring.

 

    U.S. Store FPD averaged 14.0%, 14.7% and 15.4% for the nine months ended September 30, 2017, 2016, 2015, respectively. New customers as a percentage of total customers has been more stable than U.S. online mix so the improving trends are primarily due to improved underwriting and scoring and product and geographical mix shifts.

 

    For Canada, online volume is relatively low and FPD rates are sensitive to product changes and the launch of our LendDirect online Installment product in early-2016. Canadian online FPD rates have trended from an average of 12.8%, 14.9% and 14.3% for the nine months ended September 30, 2017, 2016 and 2015, respectively.

 

    Canada Store FPD has remained relatively stable, averaging 7.9%, 8.7% and 9.1%, in the nine months ended September 30, 2017, 2016 and 2015 respectively. Other than Alberta, Canada, store volume is almost entirely Single-Pay Loans for which FPD rates are very stable.

Cost-per-funded loan, or CPF, is dependent primarily upon marketing channel, seasonality, strategic and tactical objectives for targeted vintage performance, online versus store customer acquisition mix, underwriting and scoring effectiveness and application-to-funded loan conversion rates. Following is a recap of CPF (rounded to the nearest tenth) by country:

 

    U.S. CPF ranged from $82.40 in the third quarter of 2015 to $33.50 in the first quarter of 2016. CPF for the nine months ended September 30, 2017, 2016 and 2015 has averaged $63.30, $48.20 and $72.90, respectively. CPF for 2015 was affected by the aforementioned high levels of new customer investment, primarily in the online channel. CPF tends to be higher in the online channel because of the relative cost of the marketing channels and lower application-to-funded conversion rates. CPF for 2016 was lower than 2015 because of more stable mix between online and store customer acquisition and improving scoring that resulted in better relative approval rates. CPF in the nine months ended September 30, 2017 has been slightly higher to the same period in 2016 because a higher percentage of new customer volume is online.

 

   

Canada CPF ranged from $88.60 in the third quarter of 2017 to $52.80 in the first quarter of 2016. CPF for the nine months ended September 30, 2017, 2016 and 2015 has averaged $73.40, $60.20 and $81.10, respectively. Canada CPF change is due primarily to the same reasons as the U.S. trends described above,

 

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but historically has been less sensitive to online versus store mix because online has been a relatively low percentage of total new customer acquisition.

 

    U.K. CPF ranged from $125.00 in the third quarter of 2015 to $71.40 in the first quarter of 2017. U.K. CPF for the nine months ended September 30, 2017, 2016 and 2015 has averaged $73.90, $91.70 and $109.70, respectively. U.K. CPF is affected primarily by reformulation of all of our U.K. loan products after 2014 regulatory changes, changes in product terms and mix and rebuilding of the overall executive and marketing and analytics leadership teams and organization.

We currently have relationships with four unaffiliated third-party lenders. We periodically evaluate the competitive terms of our unaffiliated third-party lender contracts and such evaluation may result transfer of volume and loan balances between lenders. The process does not require significant effort or resources outside the normal course of business and we believe the incremental cost of changing or acquiring new unaffiliated third-party lender relationships to be immaterial.

Unsecured Installment Loans

Unsecured Installment revenue and gross combined loans receivable increased from the prior year quarter due to growth in the United States, primarily in Texas (CSO), California and Ohio (CSO); growth in Canada, primarily in Alberta; and growth in the United Kingdom. Gross combined Unsecured Installment Loan balances (excluding past due loans) grew $79.6 million, or 67.6%, compared to September 30, 2016, on $86.0 million (63.6%) and $212.9 million (60.8%) higher originations during the three and nine months, respectively.

Loss provision rates rose in the third quarter of 2017 versus the second quarter of 2017 for Company Owned loans primarily due to seasonality. Loss provision rates increased for loans Guaranteed by the Company versus the second quarter of 2017 and the third quarter of 2016 due to seasonality similar to Company Owned loans and because of the effect of waiving loan payments for customers affected by Hurricane Harvey. For more information, see “—Recent Developments—Hurricane Harvey Impact.” Seasonally, third quarter loan vintages consistently perform worse than those of earlier quarters in the fiscal year. Based on our experience, the input of our store operators, feedback from our collections and contact center activities and analysis of weekly payment default trends, this is primarily because of the increased expenses that families with children returning to school incur in July and August.

Provisions as a percentage of loan originations for both Company Owned and loans Guaranteed by the Company were higher for the nine months ended September 30, 2017 compared to the same period a year ago, primarily because of the Q1 Loss Recognition Change. For more information, see “—Components of our Results of Operations—Provision for Losses—Q1 Loss Recognition Change.” Provision as a percentage of originations – Guaranteed by the Company and the provision as a percentage of gross loans receivable – Guaranteed by the Company were elevated in the third quarter of 2017 for the effect of the aforementioned loan payments that we waived for customers affected by Hurricane Harvey.

The Unsecured Installment CSO guarantee liability as a percentage of Unsecured Installment gross loans guaranteed by the Company declined from 27.7% in the third quarter of 2016 to 23.8% this third quarter because of improved underwriting and credit scoring. We made several refinements to our Texas scoring models over the course of 2017 resulting in better credit performance. The result of such refinements is a lower required CSO guarantee liability percentage despite the aforementioned increases in the related loss rates for the Q1 Loss Recognition Change and Hurricane Harvey relief in August.

 

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    2017     2016  

(dollars in thousands, except average loan amount, unaudited)

  Third
Quarter
    Second
Quarter
    First
Quarter
    Fourth
Quarter
    Third
Quarter
 

Unsecured Installment loans:

         

Revenue - Company Owned

  $ 61,653     $ 52,550     $ 51,206     $ 39,080     $ 34,057  

Provision for losses - Company Owned

    29,079       17,845       19,309       24,557       12,523  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue - Company Owned

  $ 32,574     $ 34,705     $ 31,897     $ 14,523     $ 21,534  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs - Company Owned

  $ 23,858     $ 18,858     $ (4,918   $ 18,836     $ 10,741  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue - Guaranteed by the Company

  $ 67,132     $ 52,599     $ 58,225     $ 55,234     $ 51,320  

Provision for losses - Guaranteed by the Company

    36,212       23,575       19,940       22,364       26,626  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue - Guaranteed by the Company

  $ 30,920     $ 29,024     $ 38,285     $ 32,870     $ 24,694  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs - Guaranteed by the Company

  $ 34,904     $ 27,309     $ 17,088     $ 21,144     $ 25,103  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unsecured Installment gross combined loans receivable:

         

Company owned

  $ 181,831     $ 156,075     $ 131,386     $ 102,090     $ 65,746  

Guaranteed by the Company(1)(2)

    67,438       58,289       53,978       62,360       52,079  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unsecured Installment gross combined loans receivable(1)(2)

  $ 249,269     $ 214,364     $ 185,364     $ 164,450     $ 117,825  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unsecured Installment Allowance for loan losses(3)

  $ 46,938     $ 41,406     $ 42,040     $ 17,775     $ 12,122  

Unsecured Installment CSO guarantee liability(3)

  $ 16,056     $ 14,748     $ 18,482     $ 15,630     $ 14,410  

Unsecured Installment Allowance for loan losses as a percentage of Unsecured Installment gross loans receivable

    25.8     26.5     32.0     17.4     18.4

Unsecured Installment CSO guarantee liability as a percentage of Unsecured Installment gross loans guaranteed by the Company

    23.8     25.3     34.2     25.1     27.7

Unsecured Installment past-due balances:

         

Unsecured Installment gross loans receivable(4)

  $ 41,353     $ 33,534     $ 28,913       —         —    

Unsecured Installment gross loans guaranteed by the Company(4)

  $ 10,462     $ 8,204     $ 11,196       —         —    

Past-due Unsecured Installment gross loans receivable—percentage(2)(4)

    22.7     21.5     22.0     —         —    

Past-due Unsecured Installment gross loans guaranteed by the Company—percentage(2)(4)

    15.5     14.1     20.7     —         —    

Unsecured Installment other information:

         

Originations - Company owned(5)

  $ 137,618     $ 119,636     $ 98,691     $ 111,412     $ 71,801  

Average loan amount - Company owned

  $ 730     $ 697     $ 687     $ 646     $ 512  

Originations - Guaranteed by the Company(1)(5)

  $ 83,680     $ 68,338     $ 55,112     $ 71,858     $ 63,472  

Average loan amount - Guaranteed by the Company

  $ 526     $ 485     $ 482     $ 478     $ 463  

Unsecured Installment ratios:

         

Provision as a percentage of originations - Company Owned

    21.1     14.9     19.6     22.0     17.4

Provision as a percentage of gross loans receivable - Company Owned

    16.0     11.4     14.7     24.1     19.0

Provision as a percentage of originations - Guaranteed by the Company

    43.3     34.5     36.2     31.1     41.9

Provision as a percentage of gross loans receivable - Guaranteed by the Company

    53.7     40.4     36.9     35.9     51.1

 

(1) Includes loans originated by third-party lenders through CSO programs, which are not included in our consolidated financial statements.
(2) Non-GAAP measure.
(3) Allowance for loan losses is reported as a contra-asset reducing gross loans receivable while the CSO guarantee liability is reported as a liability on our Consolidated Balance Sheets.
(4) As part of the Q1 Loan Loss Recognition Change past-due receivables remain on our balance sheet until charged off. In all prior periods loans were written-off when a customer missed a scheduled payment.
(5) We have revised previously-reported origination statistics to conform to current year methodology.

 

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Secured Installment Loans

Secured Installment loan revenue and gross combined loans receivable increased from the prior year quarter due primarily to growth in California and Arizona. Gross combined Secured Installment loan balances (excluding past due loans) increased by $12.9 million, or 21.3%, compared to September 30, 2016, driven by $15.3 million, or 40.9% higher originations during the third quarter of 2017 as compared to the third quarter of 2016. Provision as a percentage of originations increased due to improved collection trends on secured installment loans.

 

     2017     2016  

(dollars in thousands, except average loan amount, unaudited)

   Third
Quarter
    Second
Quarter
    First
Quarter
    Fourth
Quarter
    Third
Quarter
 

Secured Installment Loans:

          

Revenue

   $ 26,407     $ 23,173     $ 23,669     $ 21,107     $ 19,920  

Provision for losses

     6,512       4,955       7,436       7,159       6,897  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

   $ 19,895     $ 18,218     $ 16,233     $ 13,948     $ 13,023  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

   $ 11,597     $ 6,481     $ (2,235   $ 6,588     $ 5,503  

Secured Installment gross combined loan balances:

          

Company owned

   $ 84,983     $ 76,286     $ 67,455     $ 63,157     $ 56,305  

Guaranteed by the Company(1)(2)

     3,747       3,791       3,758       4,581       4,259  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Secured Installment gross combined loans receivable(1)(2)

   $ 88,730     $ 80,077     $ 71,213     $ 67,738     $ 60,564  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Secured Installment Allowance for loan losses(3)

   $ 14,111     $ 19,196     $ 20,270     $ 10,737     $ 10,135  

Secured Installment CSO guarantee liability(3)

   $ 834     $ 834     $ 1,287     $ 1,148     $ 1,179  

Secured Installment Allowance for loan losses as a percentage of Secured Installment gross loans receivable

     16.6     25.2     30.0     17.0     18.0

Secured Installment CSO guarantee liability as a percentage of Secured Installment gross loans guaranteed by the Company

     22.3     22.0     34.2     25.1     27.7

Secured Installment past-due balances:

          

Secured Installment past-due gross loans receivable(4)

   $ 14,660     $ 12,091     $ 9,539       —         —    

Secured Installment past-due gross loans receivable guaranteed by the Company(4)

     605       539       647       —         —    

Past-due gross Secured Installment gross loans receivable - percentage(2)(4)

     17.3     15.8     14.1     —         —    

Past-due gross Secured Installment gross loans receivable guaranteed by the Company—percentage(2)(4)

     16.1     14.2     17.2     —         —    

Secured Installment other information:

          

Originations(1)(5)

   $ 52,526     $ 45,596     $ 37,641     $ 43,803     $ 37,266  

Average loan amount(1)(5)

   $ 1,299     $ 1,231     $ 1,326     $ 1,197     $ 1,070  

Secured Installment ratios:

          

Provision as a percentage of originations

     12.4     10.9     19.8     16.3     18.5

Provision as a percentage of gross combined loans receivable

     7.3     6.2     10.4     10.6     11.4

 

(1) Includes loans originated by third-party lenders through CSO programs, which are not included in our consolidated financial statements.
(2) Non-GAAP measure.
(3) Allowance for loan losses is reported as a contra-asset reducing gross loans receivable while the CSO guarantee liability is reported as a liability on our Consolidated Balance Sheets.

 

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(4) As part of the Q1 Loan Loss Recognition Change past-due receivables remain on our balance sheet until charged off. In all prior periods loans were written-off when a customer missed a scheduled payment.
(5) We have revised certain previously-reported origination statistics to conform to current year methodology.

Open-End Loans

Net revenue and provision for losses improved compared to the third quarter of 2016. This was mostly due to receivables growth in the Kansas and Tennessee online markets and the maturation of the Tennessee market, which began offering open-end loans in the third quarter of 2015. Overall, Open-End loan balances increased by $4.5 million, or 16.1%, compared to September 30, 2016.

Net revenue was higher but loss rates were higher sequentially primarily due to seasonality.

 

     2017     2016  

(dollars in thousands, except average loan amount, unaudited)

   Third
Quarter
    Second
Quarter
    First
Quarter
    Fourth
Quarter
    Third
Quarter
 

Open-End Loans:

  

Revenue

   $ 18,630     $ 15,805     $ 17,907     $ 17,085     $ 16,652  

Provision for losses

     6,348       4,298       3,265       6,283       7,295  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

   $ 12,282     $ 11,507     $ 14,642     $ 10,802     $ 9,357  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

   $ 5,991     $ 4,343     $ 3,876     $ 6,085     $ 7,133  

Open-End gross combined loan balances:

  

Company owned

   $ 32,133     $ 26,771     $ 25,626     $ 30,462     $ 27,678  

Allowance for loan losses

   $ 4,880     $ 4,523     $ 4,572     $ 5,179     $ 4,981  

Open-End Allowance for loan losses as a percentage of Open-End gross loans receivable

     15.2     16.9     17.8     17.0     18.0

Open-End other information:

  

Originations(1)

   $ 9,388     $ 6,646     $ 5,463     $ 9,880     $ 8,621  

Average loan amount(1)

   $ 463     $ 451     $ 454     $ 459     $ 448  

Open-End ratios:

          

Provision as a percentage of originations

     67.6     64.7     59.8     63.6     84.6

Provision as a percentage of gross combined loans receivable

     19.8     16.1     12.7     20.6     26.4

 

(1) We have revised certain previously-reported origination statistics to conform to current year methodology.

 

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Single-Pay

Single-Pay revenue, provision and combined loans receivable during the three and nine months ended September 30, 2017 were affected by regulatory changes in Canada (rate changes in Ontario and British Columbia and product shift from Single-Pay to Installment in Alberta). Single-Pay revenue in the United States also declined compared to the prior year due to the continued shift toward Installment and Open-End products. The improvement in the provision for losses in the third quarter of 2017 as compared to the third quarter of 2016 was primarily due to a lower proportion of Single-Pay Loans in the United Kingdom where loan loss rates are higher than in the United States and Canada.

 

     2017     2016  

(dollars in thousands, unaudited)

   Third
Quarter
    Second
Quarter
    First
Quarter
    Fourth
Quarter
    Third
Quarter
 

Single-Pay Loans:

          

Revenue

   $ 70,895     $ 63,241     $ 63,790     $ 77,617     $ 82,020  

Provision for losses

     20,632       14,289       11,399       19,655       23,113  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

   $ 50,263     $ 48,952     $ 52,391     $ 57,962     $ 58,907  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

   $ 20,515     $ 13,849     $ 12,499     $ 20,468     $ 22,914  

Single-Pay gross combined loan balances:

          

Company owned

   $ 94,476     $ 91,230     $ 80,375     $ 90,487     $ 94,873  

Guaranteed by the Company(1)(2)

     —         —         48       1,092       2,326  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Single-Pay gross combined loans receivable(1)(2)

   $ 94,476     $ 91,230     $ 80,423     $ 91,579     $ 97,199  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses(3)

   $ 5,342     $ 5,313     $ 4,720     $ 5,501     $ 6,064  

CSO guarantee liability(3)

     —         —       $ 16     $ 274     $ 644  

Single-Pay Allowance for loan losses as a percentage of Single-pay gross loans receivable

     5.7     5.8     5.9     6.1     6.4

Single-Pay CSO guarantee liability as a percentage of Single-Pay gross loans guaranteed by the Company

     —         —         33.3     25.1     27.7

 

(1) Includes loans originated by third-party lenders through CSO programs, which are not included in our consolidated financial statements.
(2) Non-GAAP measure.
(3) Allowance for loan losses is reported as a contra-asset reducing gross loans receivable while the CSO guarantee liability is reported as a liability on our Consolidated Balance Sheets.

Supplemental Non-GAAP Financial Information

Non-GAAP Financial Measures

In addition to the financial information prepared in conformity with U.S. GAAP, we provide certain “non-GAAP financial measures” as defined under SEC rules, including:

 

    EBITDA (earnings before interest, income taxes, depreciation and amortization);

 

    Adjusted EBITDA (EBITDA plus or minus certain non-cash and other adjusting items);

 

    Adjusted Earnings and Adjusted Earnings Per Share, or the Adjusted Earnings Measures (net income plus or minus gain (loss) on extinguishment of debt, restructuring and other costs, goodwill and intangible asset impairments, transaction-related costs, share-based compensation, intangible asset amortization and cumulative tax effect of adjustments, on a total and per share basis); and

 

    Gross Combined Loans Receivable (includes loans originated by third-party lenders through CSO programs which are not included in our consolidated financial statements).

 

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We believe that presentation of non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. We believe that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting our business.

We believe that investors regularly rely on non-GAAP financial measures, such as the Adjusted Earnings Measures, to assess operating performance and that such measures may highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. In addition, we believe that the adjustments shown below are useful to investors in order to allow them to compare our financial results during the periods shown without the effect of each of these income or expense items. In addition, we believe that EBITDA, Adjusted EBITDA and Adjusted Earnings are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in our industry, many of which present EBITDA, Adjusted EBITDA and/or Adjusted Earnings when reporting their results.

We provide non-GAAP financial information for informational purposes and to enhance understanding of our GAAP consolidated financial statements. EBITDA, Adjusted EBITDA, Adjusted Earnings and Gross Combined Loans Receivable should not be considered as alternatives to income from continuing operations or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities or any other liquidity measure derived in accordance with U.S. GAAP. Rather, these measures should be considered in addition to results prepared in accordance with U.S. GAAP, but should not be considered a substitute for, or superior to, U.S. GAAP results. Readers should consider the information in addition to, but not instead of or superior to, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.

Description and Reconciliations of Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA and the Adjusted Earnings Measures

EBITDA, Adjusted EBITDA and the Adjusted Earnings Measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our income or cash flows as reported under U.S. GAAP. Some of these limitations are:

 

    they do not include our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    they do not include changes in, or cash requirements for our working capital needs;

 

    they do not include the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

    depreciation and amortization are non-cash expense items reported in our statements of cash flows; and

 

    other companies in our industry may calculate these measures differently, limiting their usefulness as comparative measures.

We evaluate our stores based on revenue per store, net charge-offs at each store and EBITDA per store, with consideration given to the length of time a store has been open and its geographic location. We monitor newer stores for their progress to profitability and their rate of revenue growth.

We believe EBITDA and Adjusted EBITDA are used by investors to analyze operating performance and evaluate our ability to incur and service debt and our capacity for making capital expenditures. Adjusted EBITDA is also useful to investors to help assess our estimated enterprise value. The computation of Adjusted EBITDA as presented below may differ from the computation of similarly-titled measures provided by other companies.

 

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The following table sets forth a reconciliation of our net income to EBITDA and EBITDA to Adjusted EBITDA for the periods indicated:

 

     Nine Months Ended
September 30,
(unaudited)
    Year Ended
December 31,
 

(dollars in thousands)

   2017     2016     2016     2015  

Net income

   $ 42,743     $ 55,859     $ 65,444     $ 17,769  

Provision for income taxes

     29,988       35,041       42,577       18,105  

Interest expense

     60,694       48,179       64,334       65,020  

Depreciation and amortization

     14,120       14,244       18,905       19,112  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     147,545       153,323       191,260       120,006  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Gain) loss on extinguishment of debt(1)

     12,458       (6,991     (6,991     —    

Restructuring and other costs(2)

     7,393       2,967       3,618       4,291  

Legal settlement cost(3)

     2,311       —         —         —    

Goodwill and intangible asset impairment(4)

     —         —         —         2,882  

Other adjustments(5)

     (733     (22     (3     1,602  

Share-based cash and non-cash compensation(6)

     1,760       837       1,148       1,271  

Transaction-related costs(7)

     2,523       146       329       824  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     173,257       150,260     $ 189,361     $ 130,876  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin

     24.9     24.6     22.9     16.1

 

(1) For the nine months ended September 30, 2017, the $12.5 million loss from the extinguishment of debt was due to the redemption of CURO Intermediate’s 10.75% Senior Secured Notes due 2018 and our 12.00% Senior Cash Pay Notes due 2017. For year ended December 31, 2016, the $7.0 million gain resulted from the Company’s purchase of CURO Intermediate’s 10.75% Senior Secured Notes in September 2016.
(2) Restructuring costs of $4.3 million for the year ended December 31, 2015 represented the expected costs to be incurred related to the closure of ten underperforming stores in the United Kingdom, restructuring costs of $3.6 million for the year ended December 31, 2016 represented the elimination of certain corporate positions in our Canadian headquarters and the costs incurred related to the closure of seven underperforming stores in Texas. Restructuring costs of $1.5 million for the nine months ended September 30, 2016 primarily represented the expected costs to be incurred related to the closure of six underperforming stores in Texas. Restructuring costs in the nine months ended September 30, 2017 were due to the closure of the remaining 13 U.K. stores.
(3) Legal settlement cost relates to the accrual for the settlement of Harrison, et al v. Principal Investments, Inc. et al. See litigation discussion in Note 18, “Litigation” in the Notes to our Interim Consolidated Financial Statements for further detail.
(4) Goodwill and intangible asset impairment charges in 2015 include a non-cash goodwill impairment charge of $0.9 million, and non-cash impairment charges related to the Wage Day trade name intangible asset and customer relationship intangible asset of $1.8 million and $0.2 million, respectively.
(5) Other adjustments include deferred rent and the intercompany foreign exchange impact. Deferred rent represents the non-cash component of rent expense. Rent expense is recognized ratably on a straight-line basis over the lease term.
(6) The Company approved the adoption of a share-based compensation plan during 2010 for key members of its senior management team. The estimated fair value of share-based awards is recognized as non-cash compensation expense on a straight-line basis over the vesting period. During the second and third quarters of 2017, option holders were paid a bonus in conjunction with the dividend paid during the quarter. The expense recognized during the quarter related to the payment of the dividend on vested options. The remaining bonus will be paid over the vesting period of the unvested stock options.
(7) Transaction-related costs include professional fees paid in connection with potential transactions.

 

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In addition to reporting financial results in accordance with GAAP, we have provided the Adjusted Earnings Measures. We believe that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments and amortization methods, which provides a more complete understanding of our financial performance, competitive position and prospects for the future.

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

 

     Nine Months Ended
September 30,

(unaudited)
    Year Ended
December 31,
 

(in thousands, except per share data)

   2017     2016     2016     2015  

Net income

   $ 42,743     $ 55,859     $ 65,444     $ 17,769  

Adjustments:

        

Loss (gain) on extinguishment of debt(1)

     12,458       (6,991     (6,991     —    

Restructuring costs(2)

     7,393       2,967       3,618       4,291  

Legal settlement cost(3)

     2,311       —         —         —    

Goodwill and intangible asset impairment(4)

     —         —         —         2,882  

Transaction-related costs(5)

     2,523       146       329       824  

Share-based cash and non-cash compensation(6)

     1,760       837       1,148       1,271  

Intangible asset amortization

     1,807       2,708       3,492       4,645  

Cumulative tax effect of adjustments

     (11,623     162       (629     (7,026
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Earnings

   $ 59,372     $ 55,688     $ 66,411     $ 24,656  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share(7)

   $ 1.10     $ 1.44     $ 1.69     $ 0.46  

Adjustments:

        

Loss (gain) on extinguishment of debt(1)

     0.32       (0.18     (0.18     —    

Restructuring costs(2)

     0.19       0.08       0.09       0.11  

Legal settlement costs(3)

     0.06       —         —         —    

Goodwill and intangible asset impairment(4)

     —         —         —         0.07  

Transaction-related costs(5)

     0.06       0.00       0.01       0.02  

Share-based cash and non-cash compensation(6)

     0.05       0.02       0.03       0.03  

Intangible asset amortization

     0.05       0.07       0.09       0.12  

Cumulative tax effect of adjustments

     (0.30     0.00       (0.02     (0.18
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Earnings per share

   $ 1.52     $ 1.44     $ 1.71     $ 0.63  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For the nine months ended September 30, 2017, the $12.5 million loss from the extinguishment of debt was due to the redemption of CURO Intermediate’s 10.75% Senior Secured Notes due 2018 and our 12.00% Senior Cash Pay Notes due 2017. For year ended December 31, 2016, the $7.0 million gain resulted from the Company’s purchase of CURO Intermediate’s 10.75% Senior Secured Notes in September 2016.
(2) Restructuring costs of $4.3 million for the year ended December 31, 2015 represented the expected costs to be incurred related to the closure of ten underperforming stores in the United Kingdom, restructuring costs of $3.6 million for the year ended December 31, 2016 represented the elimination of certain corporate positions in our Canadian headquarters and the costs incurred related to the closure of seven underperforming stores in Texas. Restructuring costs of $1.5 million for the nine months ended September 30, 2016 primarily represented the expected costs to be incurred related to the closure of six underperforming stores in Texas. Restructuring costs in the nine months ended September 30, 2017 were due to the closure of the remaining 13 U.K. stores.
(3) Legal settlement cost relates to the accrual for the settlement of Harrison, et al v. Principal Investments, Inc. et al. See litigation discussion in Note 18, “Litigation” in the Notes to our Interim Consolidated Financial Statements for further detail.

 

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(4) Goodwill and intangible asset impairment charges in 2015 include a non-cash goodwill impairment charge of $0.9 million, and non-cash impairment charges related to the Wage Day trade name intangible asset and customer relationship intangible asset of $1.8 million and $0.2 million, respectively.
(5) Transaction-related costs include professional fees paid in connection with potential transactions.
(6) The Company approved the adoption of a share-based compensation plan during 2010 for key members of its senior management team. The estimated fair value of share-based awards is recognized as non-cash compensation expense on a straight-line basis over the vesting period. During the second and third quarters of 2017, option holders were paid a bonus in conjunction with the dividend paid during the quarter. The expense recognized during the quarter related to the payment of the dividend on vested options. The remaining bonus will be paid over the vesting period of the unvested stock options.
(7) The per share information has been adjusted to give effect to the 36-for-1 stock split approved by our board of directors on November 8, 2017 that will occur prior to the effectiveness of the Registration Statement.

Gross Combined Loans Receivable

In addition to reporting loans receivable information in accordance with U.S. GAAP (see Note 7, “Loans Receivable and Revenue” in the Notes to Interim Consolidated Financial Statements included elsewhere in this prospectus), we provide below gross combined loans receivable consisting of owned loans receivable plus loans funded by third-party lenders through the CSO programs, which we guarantee but do not include in our Consolidated Financial Statements. Management believes this analysis provides investors with important information needed to evaluate overall lending performance.

The following table reconciles our Company-owned gross loans receivable to gross combined loans receivable.

 

    Three Months Ended  

(in millions)

  September 30,
2017
    June 30,
2017
    March 31,
2017
    December 31,
2016
    September 30,
2016
    June 30,
2016
    March 31,
2016
    December 31,
2015
 

Company-owned gross loans receivable

  $ 393.4     $ 350.3     $ 304.8     $ 286.2     $ 244.6     $ 233.1     $ 220.7     $ 252.2  

Gross loans receivable guaranteed by the Company

    71.2       62.1       57.8       68.0       58.7       52.6       45.4       60.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross combined loans receivable

  $ 464.6     $ 412.4     $ 362.6     $ 354.2     $ 303.3     $ 285.7     $ 266.1     $ 312.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Gross combined loans receivable by product are presented below:

Gross Combined Loans Receivable

 

 

LOGO

Gross combined loans receivable were $464.6 million and $303.3 million at September 30, 2017 and 2016, respectively. The increase was a result of Installment Loan growth from higher originations and the Q1 Loss Recognition Change to include past due loan balances since January 1, 2017. Installment Loans that are up to 90 days past due are included in gross combined loans receivable in amounts disclosed in the table above. Excluding the year-over-year effect of such past-due loans, gross combined loans receivable increased $94.3 million or 31.1% during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.

 

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Results of Operations

Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016

The following table sets forth our results of operations for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016:

 

     Nine Months Ended
September 30,

(unaudited)
    Change  

(dollars in thousands)

   2017     2016     $     %  

Consolidated Statements of Income Data:

        

Revenue

   $ 696,643     $ 609,692     $ 86,951       14.3

Provision for losses

     226,523       177,756       48,767       27.4
  

 

 

   

 

 

   

 

 

   

Net revenue

     470,120       431,936       38,184       8.8
  

 

 

   

 

 

   

 

 

   

Advertising costs

     35,599       28,925       6,674       23.1

Non-advertising costs of providing services

     177,448       173,406       4,042       2.3
  

 

 

   

 

 

   

 

 

   

Total cost of providing services

     213,047       202,331       10,716       5.3
  

 

 

   

 

 

   

 

 

   

Gross margin

     257,073       229,605       27,468       12.0

Operating expense:

        

Corporate, district and other

     103,797       94,550       9,247       9.8

Interest expense

     60,694       48,179       12,515       26.0

Loss (gain) on extinguishment of debt

     12,458       (6,991     19,449       #  

Restructuring costs

     7,393       2,967       4,426       #  
  

 

 

   

 

 

   

 

 

   

Total operating expense

     184,342       138,705       45,637       32.9
  

 

 

   

 

 

   

 

 

   

Net income before taxes

     72,731       90,900       (18,169     (20.0 )% 

Provision for income taxes

     29,988       35,041       (5,053     (14.4 )% 
  

 

 

   

 

 

   

 

 

   

Net income

   $ 42,743     $ 55,859     $ (13,116     (23.5 )% 
  

 

 

   

 

 

   

 

 

   

Net income

   $ 42,743     $ 55,859     $ (13,116     (23.5 )% 

Adjustments:

        

Loss (gain) on extinguishment of debt(1)

     12,458       (6,991     19,449       #  

Restructuring costs(2)

     7,393       2,967       4,426       #  

Legal settlement costs(3)

     2,311       —         2,311       #  

Transaction-related costs(4)

     2,523       146       2,377       #  

Share-based cash and non-cash compensation(5)

     1,760       837       923       #  

Intangible asset amortization

     1,807       2,708       (901     (33.3 )% 

Cumulative tax effect of adjustments

     (11,623     162       (11,785     #  
  

 

 

   

 

 

   

 

 

   

Adjusted Earnings

   $ 59,372     $ 55,688     $ 3,684       6.6
  

 

 

   

 

 

   

 

 

   

 

#— Variance greater than 100% or not meaningful.
(1) For the nine months ended September 30, 2017, the $12.5 million loss from the extinguishment of debt was due to the redemption of CURO Intermediate’s 10.75% Senior Secured Notes due 2018 and our 12.00% Senior Cash Pay Notes due 2017. For the nine months ended September 30, 2016, the $7.0 million gain resulted from the Company’s purchase of CURO Intermediate’s 10.75% Senior Secured Notes in September 2016.
(2) Restructuring costs of $7.4 million for the nine months ended September 30, 2017 relate to the closure of the remaining 13 stores in the U.K. during the third quarter of 2017. Restructuring costs of $1.5 million for the nine months ended September 30, 2016 primarily represented costs related to the closure of six underperforming stores in Texas.

 

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(3) Legal settlement cost relates to the accrual for the settlement of the Harrison, et al v. Principal Investment, Inc. et al. See litigation discussion in Note 18, “Litigation” in the Notes of our Interim Consolidated Financial Statements included elsewhere in this prospectus for further detail.
(4) Transaction-related costs include professional fees paid in connection with potential transactions.
(5) The Company approved the adoption of a share-based compensation plan during 2010 for key members of its senior management team. The estimated fair value of share-based awards is recognized as non-cash compensation expense on a straight-line basis over the vesting period. During the second quarter of 2017, option holders were paid a bonus in conjunction with the dividend paid during the quarter. The expense recognized during the quarter related to the payment of the dividend on vested options. The remaining bonus will be paid over the vesting period of the unvested stock options.

Revenue and Net Revenue

Revenue increased $87.0 million, or 14.3%, to $696.6 million for the nine months ended September 30, 2017 from $609.7 million for the prior year period. U.S. revenue increased $88.8 million on volume growth, U.K. revenue increased $3.2 million, and Canada declined $5.0 million because of regulatory impacts on rates and product mix.

Provision for losses increased $48.8 million, or 27.4%, to $226.5 million for the nine months ended September 30, 2017 from $177.8 million for the prior year period because of higher origination volumes and higher loan balances. This is explained more fully in the segment analysis that follows.

Cost of Providing Services.

The total cost of providing services increased $10.7 million, or 5.3%, to $213.0 million for the nine months ended September 30, 2017, compared to $202.3 million for the nine months ended September 30, 2016 due primarily to 23.1% higher marketing spend as well as increases in occupancy, office and other operating expenses. This is explained more fully in the segment analysis that follows.

Operating Expenses

Corporate, district and other expenses increased $9.2 million primarily because of $2.3 million in legal settlement costs, and higher payroll, collections, office and technology-related costs.

Other changes in operating expenses were impacted by (i) a pretax loss of $12.5 million on the extinguishment of debt, primarily of CURO Intermediate Holdings’ 10.75% Senior Secured Notes due 2018 during the nine months ended September 30, 2017, (ii) a prior year gain of $7.0 million gain on the extinguishment of debt which resulted from the open-market repurchase of $25.1 million of Senior Secured Notes due 2018, (iii) $7.4 million of restructuring costs related to the closure of the remaining 13 stores in the U.K. during the third quarter of 2017 and (iv) $3.0 million of restructuring costs in the third quarter of 2016 primarily related to Canadian back-office consolidation. Interest expense in the current year period increased by approximately $12.5 million which was the result of accrued interest on the retired notes through the redemption notice period and increased debt outstanding.

Provision for Income Taxes.

Our effective tax rate for the nine months ended September 30, 2017 was 41.2% compared to 38.5% for the prior year. The change in the effective tax rate from the prior year quarter was primarily due to a change in the mix of income by jurisdiction. In the nine months ended September 30, 2017, U.K. results were impacted by the $7.4 million of restructuring costs related to the closure of the remaining 13 United Kingdom stores during the third quarter. We recorded a 100% valuation allowance against the resulting deferred tax.

 

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Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016 - Segment Analysis

We report financial results for three reportable segments: the United States, Canada and the United Kingdom. Following are a recap of results of operations for the segment and period indicated:

 

U.S. Segment Results

        
     Nine Months Ended September 30,
(unaudited)
    Change  

(dollars in thousands)

             2017                         2016               $     %  

Consolidated Statements of Income Data

        

Revenue

   $ 531,912     $ 443,107     $ 88,805       20.0

Provision for losses

     180,658       142,598       38,060       26.7
  

 

 

   

 

 

   

 

 

   

Net revenue

     351,254       300,509       50,745       16.9
  

 

 

   

 

 

   

 

 

   

Advertising costs

     24,596       18,947       5,649       29.8

Non-advertising costs of providing services

     125,304       121,960       3,344       2.7
  

 

 

   

 

 

   

 

 

   

Total cost of providing services

     149,900       140,907       8,993       6.4
  

 

 

   

 

 

   

 

 

   

Gross margin

     201,354       159,602       41,752       26.2

Operating expense

        

Corporate, district and other

     78,299       65,532       12,767       19.5

Interest expense

     60,563       48,127       12,436       25.8

Loss on extinguishment of debt

     12,458       (6,991     19,449       #  

Intercompany interest income

     (3,747     (3,888     141       (3.6 )% 

Restructuring and other costs

     —         1,528       (1,528     #  
  

 

 

   

 

 

   

 

 

   

Total operating expense

     147,573       104,308       43,265       41.5
  

 

 

   

 

 

   

 

 

   

Net income before taxes

     53,781       55,294       (1,513     (2.7 )% 

Provision for income taxes

     23,722       25,250       (1,528     (6.1 )% 
  

 

 

   

 

 

   

 

 

   

Net income

     30,059       30,044       15       0.0

Provision for income taxes

     23,722       25,250       (1,528     (6.1 )% 

Interest expense

     56,816       44,239       12,577       28.4

Depreciation and amortization

     10,200       9,801       399       4.1
  

 

 

   

 

 

   

 

 

   

EBITDA

     120,797       109,334       11,463       10.5

Loss (gain) on extinguishment of debt

     12,458       (6,991     19,449       #  

Restructuring and other costs

     2,523       1,674       849       #  

Legal settlement costs

     2,311       —         2,311       #  

Other adjustments

     (47     110       (157     #  

Share-based cash and non-cash compensation

     1,756       837       919       #  
  

 

 

   

 

 

   

 

 

   

Adjusted EBITDA

   $ 139,798     $ 104,964     $ 34,834       33.2
  

 

 

   

 

 

   

 

 

   

 

#—Variance greater than 100% or not meaningful

U.S revenue growth was driven by a $51.9 million, or 21.8%, increase in gross combined loans receivable (excluding past due loans) to $531.9 million at September 30, 2017 compared to $443.1 million in the prior year period. Strong volume growth in our Unsecured Installment originations, which increased year-over-year $106.4 million, or 32.1%. Secured Installment originations grew $41.2 million, or 43.5%, compared to the same period a year ago.

 

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The increase of $38.1 million, or 26.7%, in provision for losses was primarily driven by a $36.9 million, or 34.1%, increase in Unsecured Installment Loan gross receivables (excluding past due loans), but was also affected by the Q1 Loss Recognition Change as follows:

 

    Volume impact. Unsecured and Secured Installment Loan origination dollar volume increased $106.4 million and $41.2 million, respectively year-over-year. Applying last year’s provision rates for the nine months ended September 30, 2017 as a percentage of originations, Unsecured and Secured Installment volume added $27.2 million and $5.8 million, respectively to the provision for losses versus the same period a year ago.

 

    Rate impact. The provision rate as a percentage of originations for Unsecured Installment Loans for the nine months ended September 30, 2017 was 29.2% versus 25.6% the same period in the prior year, and the provision rate as a percentage of originations for Secured Installment Loans for the nine months ended September 30, 2017 was 13.9% versus 14.0% in the same period in the prior year. The Unsecured Installment Loan increase is due to two factors. First, historically the first quarter provision rates for all products have been lower seasonally because of higher recoveries from tax refunds and related seasonal decline in loan balances. Prospectively, we would expect less seasonal effect in first quarters. Second, provision rates for the nine months ended September 30, 2017 were adjusted to include accrued interest on past-due loans. The Secured Installment Loans remain flat due to lower provisioning in the current year. The change in provision rate for the Unsecured and Secured Installment Loans origination volume for the nine months ended September 30, 2017 added approximately $11.3 million and $0.2 million, respectively, to the provision for losses.

 

    Past-due loan impact. The Q1 Loss Recognition Change added an average of $23.6 million and $8.6 million of Unsecured and Secured Installment past-due principal balances, respectively, that would not have been recognized prior to January 1, 2017 since loans were previously charged off when a scheduled payment was missed. Using current Unsecured and Secured loss provision rates as a percentage of gross combined loans receivable, this change added approximately $4.0 million to the provision for losses.

This change in estimate resulted in approximately $56.0 million of Installment Loans at September 30, 2017 that remained on our balance sheet that were between 1 and 90 days delinquent, as compared to none in the prior year period. Additionally, the installment allowance for loan losses as of September 30, 2017 of $71.3 million includes an estimated allowance of $36.4 million for the Installment Loans between 1 and 90 days delinquent, as compared to none in the prior year period.

This change in estimate resulted in an approximately $11.1 million of Installment Loans guaranteed by the company at September 30, 2017 that were between 1 and 90 days delinquent, as compared to none in the prior year period. Additionally, the installment CSO guarantee liability as of September 30, 2017 of $16.9 million includes an estimated liability of $7.8 million for the Installment Loans guaranteed by the company that were between 1 and 90 days delinquent, as compared to none in the prior year period.

Recap of year-over-year change in U.S. provision for losses:

 

     Nine Months Ended September 30, 2017 compared to Nine
Months Ended September 30, 2016
 

(in millions)

   Unsecured
Installment
     Secured
Installment
    Consolidated  

Installment Loans impact:

       

Volume impact

   $ 27.2      $ 5.8     $ 33.0  

Rate impact

     11.3        0.2       11.5  

Past-due impact

     4.3        (0.3     4.0  
  

 

 

    

 

 

   

 

 

 

Total Installment Loan impact

     42.8        5.7       48.5  

Other impact (Single Pay, Open-End and Ancillary)

     —          —         (10.4
  

 

 

    

 

 

   

 

 

 

Total

   $ 42.8      $ 5.7     $ 38.1  
  

 

 

    

 

 

   

 

 

 

 

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U.S. cost of providing services for the nine months ended September 30, 2017 were $149.9 million, an increase of $9.0 million, or 6.4% compared to $140.9 million for the nine months ended September 30, 2016. This increase was due primarily to $5.6 million (29.8%) higher marketing spend, as well as increases in volume-driven expenses and increases in store security and maintenance costs.

Operating expenses were $147.6 million for the nine months ended September 30, 2017, an increase of $43.3 million, or 41.5%, compared to $104.3 million in the prior year period primarily due to the following:

 

    A pretax loss in the current year of $12.5 million on the extinguishment of CURO Intermediate’s 10.75% Senior Secured Notes due 2018, compared to a gain of $7.0 million on the extinguishment of debt which resulted from the open-market repurchase of $25.1 million of Senior Secured Notes in the prior year period.

 

    An increase in interest expense in the current year period of approximately $12.4 million resulting from accrued interest on the retired notes through the redemption notice period, and increased debt outstanding.

 

    An increase in corporate, district and other expenses of $12.8 million, primarily for higher payroll costs from increases in technology and analytical headcount.

 

    $2.3 million related to the legal settlement in the second quarter of 2017 which increased professional. See litigation discussion in Note 18, “Litigation” in the Notes of our Interim Consolidated Financial Statements included elsewhere in this prospectus for further detail.

 

Canada Segment Results

      
     Nine Months Ended September 30,
(unaudited)
    Change  

(dollars in thousands)

             2017                         2016               $     %  

Revenue

   $ 135,819     $ 140,852     $ (5,033     (3.6 )% 

Provision for losses

     36,246       27,793       8,453       30.4
  

 

 

   

 

 

   

 

 

   

Net revenue

     99,573       113,059       (13,486     (11.9 )% 

Advertising costs

     6,944       6,320       624       9.9

Non-advertising costs of providing services

     46,718       45,789       929       2.0
  

 

 

   

 

 

   

 

 

   

Total cost of providing services

     53,662       52,109       1,553       3.0
  

 

 

   

 

 

   

 

 

   

Gross margin

     45,911       60,950       (15,039     (24.7 )% 

Corporate, district and other

     12,407       13,693       (1,286     (9.4 )% 

Interest expense

     142       73       69       94.5

Intercompany interest expense

     3,262       3,058       204       6.7

Restructuring and other costs

     —       933       (933     #  
  

 

 

   

 

 

   

 

 

   

Total operating expense

     15,811       17,757       (1,946     (11.0 )% 
  

 

 

   

 

 

   

 

 

   

Net income before taxes

     30,100       43,193       (13,093     (30.3 )% 

Provision for income taxes

     6,266       9,909       (3,643     (36.8 )% 
  

 

 

   

 

 

   

 

 

   

Net income

     23,834       33,284       (9,450     (28.4 )% 

Provision for income taxes

     6,266       9,909       (3,643     (36.8 )% 

Interest expense

     3,404       3,131       273       8.7

Depreciation and amortization

     3,389       3,762       (373     (9.9 )% 
  

 

 

   

 

 

   

 

 

   

EBITDA

     36,893       50,086       (13,193     (26.3 )% 

Restructuring and other costs

     —       933       (933     #  

Other adjustments

     (654     (359     (295     (82.2 )% 
  

 

 

   

 

 

   

 

 

   

Adjusted EBITDA

   $ 36,239     $ 50,660     $ (14,421     (28.5 )% 
  

 

 

   

 

 

   

 

 

   

 

#—Variance greater than 100% or not meaningful

 

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Revenue in Canada was affected by product transition in Alberta from Single-Pay Loans to Unsecured Installment Loans and the impact of regulatory rate changes in Ontario and British Columbia.

Non-Alberta Single-Pay revenue decreased $1.3 million, or 1.2% to $107.3 million for the nine months ended September 30, 2017 and was affected by lower rates from provincial regulatory changes effective January 1, 2017. The impact of the rate changes was offset by higher origination volumes resulting in a modest increase in related revenue. The year-over-year effect of regulatory rate changes in Ontario and British Columbia would have implied a decline in revenue of $14.1 million. However, higher origination volumes offset the effect of rate changes by approximately $12.1 million. Single-Pay origination dollar volumes in Canada (excluding Alberta) increased $68.0 million, or 13.3%, to $578.1 million from $510.0 million in the prior year, and Single-Pay ending receivables (excluding Alberta) increased $8.8 million, or 21.3%, to $50.1 million from $41.3 million in the prior year period.

In Alberta, Single-Pay receivables in the nine months ended September 30, 2016 averaged $7.3 million and related Single-Pay revenue was $22.2 million. In the nine months ended September 30, 2017, Alberta had $32.0 million in average Unsecured Installment receivables and $10.4 million of related revenue. As of September 30, 2017 $42.5 million of Unsecured Installment receivables were outstanding in Alberta.

The provision for losses rose $8.5 million or 30.4% to $36.2 million for the nine months ended September 30, 2017, compared to $27.8 million in the prior year period. As in the U.S., the increase was due to higher loan volume.

The cost of providing services in Canada increased $1.6 million, or 3.0%, to $53.7 million for the nine months ended September 30, 2017, compared to $52.1 million in the prior year period due primarily to an increase in occupancy expense, based on a higher number of stores in operation during the nine months ended September 30, 2017 as compared to the prior year, as well as an increase in store maintenance costs and higher marketing spend.

 

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Operating expenses decreased $1.9 million, or 11.0%, to $15.8 million in the nine months ended September 30, 2017, from $17.8 million in the prior year period, due to the consolidation of certain back-office functions during the third quarter of 2016.

 

U.K. Segment Results

        
     Nine Months Ended September 30,
(unaudited)
    Change  

(dollars in thousands)

         2017                 2016           $     %  

Revenue

   $ 28,912     $ 25,733     $ 3,179       12.4

Provision for losses

     9,619       7,365       2,254       30.6
  

 

 

   

 

 

   

 

 

   

Net revenue

     19,293       18,368       925       5.0

Advertising costs

     4,059       3,658       401       11.0

Non-advertising costs of providing services

     5,426       5,657       (231     (4.1 )% 
  

 

 

   

 

 

   

 

 

   

Total cost of providing services

     9,485       9,315       170       1.8
  

 

 

   

 

 

   

 

 

   

Gross margin

     9,808       9,053       755       8.3

Corporate, district and other

     13,091       15,325       (2,234     (14.6 )% 

Interest income

     (11     (21     10       47.6

Intercompany interest expense

     485       830       (345     (41.6 )% 

Restructuring and other costs

     7,393       506       6,887       #  
  

 

 

   

 

 

   

 

 

   

Total operating expense

     20,958       16,640       4,318       25.9
  

 

 

   

 

 

   

 

 

   

Net loss before taxes

     (11,150     (7,587     (3,563     (47.0 )% 

Benefit for income taxes

     —       (118     118       #  
  

 

 

   

 

 

   

 

 

   

Net loss

     (11,150     (7,469     (3,681     (49.3 )% 

Benefit for income taxes

     —       (118     118       #  

Interest expense

     474       809       (335     (41.4 )% 

Depreciation and amortization

     531       681       (150     (22.0 )% 
  

 

 

   

 

 

   

 

 

   

EBITDA

     (10,145     (6,097     (4,048     (66.4 )% 

Other adjustments

     (28     227       (255     #  

Restructuring and other costs

     7,393       506       6,887       #  
  

 

 

   

 

 

   

 

 

   

Adjusted EBITDA

   $ (2,780   $ (5,364   $ 2,584       48.2
  

 

 

   

 

 

   

 

 

   

 

#—Variance greater than 100% or not meaningful

U.K. revenue improved $3.2 million, or 12.4% to $28.9 million for the nine months ended September 30, 2017 from $25.7 million in the prior year period. On a constant currency basis, revenue was up $5.8 million, or 22.5%. Provision for losses increased $2.3 million, or 30.6%, and increased $3.1 million, or 41.9% on a constant currency basis, due to growth in Installment Loan receivables.

The cost of providing services in the United Kingdom increased slightly from the prior year period. On a constant currency basis the cost of providing services increased $1.0 million, or 11.2%.

Operating expenses increased $4.3 million, or 25.9%, from the prior year period, and on a constant currency basis increased $6.1 million, or 36.9%, due to restructuring costs of $7.4 million related to the closure of the remaining 13 stores in the United Kingdom during the nine months ended September 30, 2017, compared to $0.5 million in the prior year period. This increase was partially offset by a decline in payroll expense at our U.K. corporate office.

 

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Year Ended December 31, 2016 Compared with Year Ended December 31, 2015

The following table sets forth our results of operations for the year ended December 31, 2016 compared with the year ended December 31, 2015:

 

      Year Ended December 31,     Change  

(dollars in thousands)

       2016             2015         $     %  

Consolidated Statements of Income Data:

        

Revenue

   $ 828,596     $ 813,131     $ 15,465       1.9

Provision for losses

     258,289       281,210       (22,921     (8.2
  

 

 

   

 

 

   

 

 

   

Net revenue

     570,307       531,921       38,386       7.2  

Cost of Providing Services

     277,051       293,320       (16,269     (5.5
  

 

 

   

 

 

   

 

 

   

Gross Margin

     293,256       238,601       54,655       22.9  

Operating Expense

        

Corporate, district and other

     124,274       130,534       (6,260     (4.8

Interest expense

     64,334       65,020       (686     (1.1

Goodwill and intangible asset impairment charges

     —         2,882       (2,882     #  

Gain on extinguishment of debt

     (6,991     —         (6,991     #  

Restructuring costs

     3,618       4,291       (673     (15.7
  

 

 

   

 

 

   

 

 

   

Total operating expense

     185,235       202,727       (17,492     (8.6
  

 

 

   

 

 

   

 

 

   

Net Income Before Taxes

     108,021       35,874       72,147       #  

Provision for income taxes

     42,577       18,105       24,472       #  
  

 

 

   

 

 

   

 

 

   

Net Income

   $ 65,444     $ 17,769     $ 47,675       #  
  

 

 

   

 

 

   

 

 

   

Net Income

   $ 65,444     $ 17,769     $ 47,675       #  

Adjustments:

        

Gain on extinguishment of debt(1)

     (6,991     —         (6,991     #  

Restructuring costs(2)

     3,618       4,291       (673     (15.7

Goodwill and intangible asset impairment(3)

     —         2,882       (2,882     #  

Transaction-related costs(3)

     329       824       (495     (60.1

Share-based compensation(4)

     1,148       1,271       (123     (9.7

Intangible asset amortization

     3,492       4,645       (1,153     (24.8

Cumulative tax effect of adjustments

     (629     (7,026     6,397       91.0
  

 

 

   

 

 

   

 

 

   

Adjusted Earnings

   $ 66,411     $ 24,656     $ 41,755       #  
  

 

 

   

 

 

   

 

 

   

 

#—Variance greater than 100% or not meaningful

(1) For the year ended December 31, 2016, the $7.0 million gain on extinguishment of debt resulted from the Company’s purchase of CURO Intermediate’s 10.75% Senior Secured Notes in September 2016.
(2) Restructuring costs of $4.3 million for the year ended December 31, 2015 represented the expected costs to be incurred related to the closure of ten underperforming stores in the United Kingdom. Restructuring costs of $3.6 million for the year ended December 31, 2016 represented the elimination of certain corporate positions in our Canadian headquarters and the costs incurred related to the closure of seven under-performing stores in Texas.
(3) Transaction-related costs include professional fees paid in connection with potential transactions.
(4) The Company approved the adoption of a share-based compensation plan during 2010 for key members of its senior management team. The estimated fair value of share-based awards is recognized as non-cash compensation expense on a straight-line basis over the vesting period.

Revenue and Net Revenue

Revenue increased $15.5 million, or 1.9%, to $828.6 million for the year ended December 31, 2016 from $813.1 million for the prior year. Volume growth in the United States and revenue growth in Canada driven by de novo store expansion and modest same-store volume growth, were partially offset by a decline in U.K.

 

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revenue due to currency translation impact, product mix and volume changes, as well as the closure of nearly half of the U.K. stores in December 2015. A detailed discussion of results by segment is included in the Segment Analysis below.

Provision for losses decreased by $22.9 million, or 8.2%, to $258.3 million in the year ended December 31, 2016 from $281.2 million in the prior year. Improved performance in the United States resulted from continuous refinements and improvements to scoring models, portfolio seasoning, and improved collection efforts. Lower relative customer acquisition spend in 2016 reduced the volume mix attributable to new customers compared to the same period a year ago. In the United Kingdom, loss provisions have improved because of tightened underwriting and seasoning. The increase in the provision for losses in Canada was due to the growth of newer bankline loan products, which have a higher provision rate as a percent of revenue than traditional Canadian single-pay products.

Cost of Providing Services

The total cost of providing services decreased $16.3 million, or 5.5%, to $277.1 million in 2016, compared to $293.3 million in the prior year primarily due to a decline in advertising expense of $21.7 million, or 33.1%, compared to the prior year, as we normalized customer acquisition in 2016 to maintain earning-asset levels but without the elevated levels of new customer investment of 2015. In addition, cost-per-funded loan improved significantly year-over-year so less total spend was necessary to drive similar customer volumes. Salaries and benefits also declined compared to the prior year driven by the closure of ten stores in the United Kingdom in December 2015. These declines were partially offset by an increase in other store operating expense which was attributable to higher collections costs, partially offset by a decline in store maintenance costs associated with store refurbishments that took place in the prior year.

Operating Expense

Corporate, district and other expenses declined 4.8% in the year ended December 31, 2016 primarily because of U.K. store closures in 2015, a decrease in payroll costs at our U.K. corporate office, and declines in U.K. collections and office expense, as well as the impact of Canadian back-office consolidation during 2016, and the impact of certain intangible assets related to the 2011 Cash Money acquisition which became fully amortized. These declines were partially offset by an increase in U.S. corporate expense from higher payroll costs for additional headcount (primarily analytics and technology) and an increase in variable, performance-based compensation, as well as an increase in professional fees and office expense.

Other changes in operating expenses were affected by a pretax gain of $7.0 million related to the discount on the repurchase of $25.1 million of CFTC’s outstanding May 2011 10.75% Senior Secured Notes, as well as $3.6 million of restructuring costs related to the elimination of certain positions, primarily Finance and IT, at our Canadian headquarters, and the closure of seven underperforming The Money Box stores in Texas, and one store in Missouri that we were unable to reopen after it was damaged by a fire, and costs related to the 2015 closure of ten U.K. stores.

Results in 2015 were also impacted by a $2.9 million non-cash goodwill and intangible asset impairment charges, and $4.3 million of costs related to the closure of ten U.K. stores mentioned above. These costs primarily consisted of adjustments to lease obligations associated with these locations.

Provision for Income Taxes

Our effective tax rate for the year ended December 31, 2016 was 39.4% compared to 50.5% for the year ended December 31, 2015. Our recorded income tax expense is affected by our mix of domestic and foreign earnings.

 

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2016 Compared to 2015—Segment Analysis

Following is the detail of the results of operations for the each segment for the years ended December 31, 2016 and 2015:

 

U.S. Segment Results

 
     Year Ended December 31,     Change  

(dollars in thousands)

         2016                 2015           $     %  

Revenue

   $ 606,798     $ 573,664     $ 33,134       5.8  % 

Provision for losses

     207,748       222,867       (15,119     (6.8