FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2021

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company is required to use valuation techniques that are consistent with the market approach, income approach and/or cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability based on observable market data obtained from independent sources, or unobservable, meaning those that reflect the Company's own judgment about the assumptions market participants would use in pricing the asset or liability based on the best information available for the specific circumstances. Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of inputs used to measure fair value are listed below.

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has access to at the measurement date.

Level 2 – Inputs include quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 – Unobservable inputs reflecting the Company's own judgments about the assumptions market participants would use in pricing the asset or liability as a result of limited market data. The Company develops these inputs based on the best information available, including its own data.

Financial Assets and Liabilities Carried at Fair Value

The table below presents the assets and liabilities that were carried at fair value on the unaudited Condensed Consolidated Balance Sheets at September 30, 2021 (in thousands):


			Estimated Fair Value
	Carrying Value September 30, 2021		Level 1		Level 2		Level 3		Total
Financial assets:
Cash Surrender Value of Life Insurance	$	7,994	$	7,994	$	—	$	—	$	7,994

Financial liabilities:
Non-qualified deferred compensation plan	$	4,945	$	4,945	$	—	$	—	$	4,945
Contingent consideration related to acquisition	24,129		—		—		24,129		24,129

Contingent consideration related to acquisition

In connection with the acquisition of Flexiti during the first quarter of 2021, the Company recorded a liability for contingent consideration based on the achievement of revenue less NCOs and loan origination targets over the two years following closing of the acquisition that could result in additional cash consideration up to $32.8 million to Flexiti's former stockholders. The fair value of the liability is estimated using the option-based income approach using a Monte Carlo simulation model discounted back to the reporting date. The significant unobservable inputs (Level 3) used to estimate the fair value included the expected future tax benefits associated with the acquisition, the probability that the risk adjusted-revenue and origination targets will be achieved and discount rates. The contingent consideration measured at fair value using unobservable inputs increased from the initial measurement of $20.6 million as of March 31, 2021 to $24.1 million as of September 30, 2021. For additional information on Flexiti and the related contingent consideration, refer to Note 15, "Acquisitions."

The table below presents the assets and liabilities that were carried at fair value on the unaudited Condensed Consolidated Balance Sheets at December 31, 2020 (in thousands):


			Estimated Fair Value
	Carrying Value December 31, 2020		Level 1		Level 2		Level 3		Total
Financial assets:
Cash Surrender Value of Life Insurance	$	7,140	$	7,140	$	—	$	—	$	7,140
Financial liabilities:
Non-qualified deferred compensation plan	$	4,690	$	4,690	$	—	$	—	$	4,690

Financial Assets and Liabilities Not Carried at Fair Value

The table below presents the assets and liabilities that were not carried at fair value on the unaudited Condensed Consolidated Balance Sheets at September 30, 2021 (in thousands):


			Estimated Fair Value
	Carrying Value September 30, 2021		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	205,785	$	205,785	$	—	$	—	$	205,785
Restricted cash	66,168		66,168		—		—		66,168
Loans receivable, net	809,813		—		—		809,813		809,813

Financial liabilities:
Liability for losses on CSO lender-owned consumer loans	$	7,007	$	—	$	—	$	7,007	$	7,007
7.50% Senior Secured Notes	734,533		—		757,650		—		757,650

Non-Recourse U.S. SPV facility	44,940		—		—		49,456		49,456
Non-Recourse Canada SPV facility	96,821		—		—		97,818		97,818
Non-Recourse Flexiti SPE facility	255,704		—		—		259,940		259,940

The table below presents the assets and liabilities that were not carried at fair value on the unaudited Condensed Consolidated Balance Sheets at December 31, 2020 (in thousands):


			Estimated Fair Value
	Carrying Value December 31, 2020		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	213,343	$	213,343	$	—	$	—	$	213,343
Restricted cash	54,765		54,765		—		—		54,765
Loans receivable, net	467,560		—		—		467,560		467,560

Financial liabilities:
Liability for losses on CSO lender-owned consumer loans	$	7,228	$	—	$	—	$	7,228	$	7,228
8.25% Senior Secured Notes	680,000		—		646,000		—		646,000
Non-Recourse U.S. SPV facility	43,586		—		—		49,456		49,456
Non-Recourse Canada SPV facility	96,075		—		—		97,971		97,971

Loans Receivable, Net

Loans receivable are carried on the unaudited Condensed Consolidated Balance Sheets net of the ALL. The unobservable inputs used to calculate the carrying values include quantitative factors, such as current default trends. Also considered in evaluating the accuracy of the models are changes to the loan portfolio mix, the impact of new loan products, 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. The carrying value of loans receivable approximates their fair value. Refer to Note 3, "Loans Receivable and Revenue" for additional information. Loans receivable acquired as part of the Flexiti acquisition, which represent $82.3 million of the $809.8 million, are carried at gross contractual balance less unamortized fair value discount and ALL. For additional information on the determination of the fair value discount, refer to Note 15, "Acquisitions."

CSO Program

In connection with CSO programs, the Company guarantees consumer loan payment obligations to unrelated third-party lenders for loans that the Company arranges for consumers on the third-party lenders’ behalf. The Company is required to purchase from the lender charged-off loans that it has guaranteed. Refer to Note 3, "Loans Receivable and Revenue" and Note 4, Credit Services Organization" for additional information.

7.50% Senior Secured Notes, 8.25% Senior Secured Notes, Non-Recourse U.S. Facility, Non-Recourse Canada SPV Facility and Non-Recourse Flexiti SPE Facility

The fair value disclosure for the 7.50% Senior Secured Notes as of September 30, 2021 and 8.25% Senior Secured Notes as of December 31, 2020 were based on observable market trading data. The fair values of the Non-Recourse U.S. SPV Facility, Non-Recourse Canada SPV Facility and Non-Recourse Flexiti SPE Facility were based on the cash needed for their respective final settlements.

Investment in Katapult

The table below presents the Company's investment in Katapult (in thousands):


	Equity Method Investment		Measurement Alternative (1)		Total Investment in Katapult
Balance at December 31, 2019	$	10,068	$	—	$	10,068
Equity method (loss) - Q1 2020	(1,618)		—		(1,618)
Balance at March 31, 2020	8,450		—		8,450
Equity method income - Q2 2020	741				741
Balance at June 30, 2020	9,191		—		9,191
Equity method income - Q3 2020	3,530		—		3,530
Accounting policy change for certain securities from equity method investment to measurement alternative	(12,452)		12,452		—
Purchases of common stock warrants and preferred shares	4,030		7,157		11,187
Balance at September 30, 2020	4,299		19,609		23,908
Equity method income - Q4 2020	1,893		—		1,893
Purchases of common stock	1,570		—		1,570
Balance at December 31, 2020	7,762		19,609		27,371
Equity method income - Q1 2021	546		—		546
Balance at March 31, 2021	8,308		19,609		27,917
Equity method income - Q2 2021	1,712		—		1,712
Conversion of investment(2)	6,481		(19,609)		(13,128)
Balance at June 30, 2021	16,501		—		16,501
Equity method loss - Q3 2021	(1,582)		$	—	(1,582)
Balance at September 30, 2021	$	14,919	$	—	$	14,919

Classification as of December 31, 2020	Level 3, not carried at fair value		Level 3, carried at measurement alternative
Classification as of September 30, 2021	Level 3, not carried at fair value		N/A
(1) The Company elected to measure this equity security without a readily determinable fair value equal to its cost minus impairment. If the Company identifies an observable price change in orderly transactions for same or similar investment in Katapult, it will measure the equity security at fair value as of the date that the observable transaction occurred.
(2) On June 9, 2021, Katapult completed its merger with FinServ. Immediately prior to the merger, the Company first converted all of its preferred stock and exercised all common stock warrants, and then exchanged all shares of Katapult common stock for $146.9 million in cash and 18.9 million shares of common stock in the resulting public company, Katapult (NASDAQ: KPLT). The Company's entire investment in Katapult is now accounted for under the equity method of accounting. The Company recorded a related net gain of $135.4 million on its equity method investment in Katapult, based on the pro rata cost basis of the investment and the discharge of the guarantee provided during the second quarter of 2021.

Prior to September 2020, the Company owned 42.5% of the outstanding shares (excluding unexercised options) of Katapult, comprised of multiple classes of equity, including preferred stock and certain common stock warrants, which met the accounting criteria for in-substance common stock at the time of their acquisition. This financial asset was not carried at fair value. The Company accounted for this investment under the equity method, and recognized a proportionate share of Katapult’s income or loss on a two-month lag.

In September 2020, the Company acquired common stock warrants and preferred shares of Katapult from existing shareholders for $11.2 million in cash. This transaction resulted in the reevaluation of the accounting for all of the Company’s holdings in Katapult. The Company determined that its holdings of certain common stock warrants qualified as in-substance common stock and were required to be accounted for using the equity method. The Company’s holdings in preferred stock and certain other common stock warrants did not meet the criteria for in-substance common stock and therefore were carried at cost minus impairment under the measurement alternative. As a result, the Company (i) reclassified $12.5 million from an equity method investment to cost minus impairment under the measurement alternative, (ii) recorded a purchase of common stock warrants for $4.0 million determined to be in-substance common stock within its equity method investment and (iii) recorded a purchase of preferred stock for $7.2 million that was accounted for under the measurement alternative.

In October and November 2020, the Company acquired common stock of Katapult from existing shareholders for an aggregate $1.6 million. The Company recorded this purchase within its equity method investment.

During the first quarter of 2021, the Company changed the two-month reporting lag to a one-quarter reporting lag, as discussed in Note 1, "Summary of Significant Accounting Policies and Nature of Operations." The Company recorded a loss of $1.6 million for the three months ended September 30, 2021 and income of $0.7 million for the nine months ended September 30, 2021, based on its share of Katapult’s earnings for the respective periods.

On June 9, 2021, Katapult completed its merger with FinServ. As a result, the Company received $146.9 million in cash and 18.9 million shares of common stock of the resulting public company, Katapult (NASDAQ: KPLT), which are subject to a six-month trading restriction. The Company recorded a related net gain of $135.4 million on its equity method investment in Katapult during the second quarter of 2021. Additionally, as part of the merger, CURO received 3.0 million earn-out warrants and holds two of the seven board of director seats for Katapult. For further information regarding the merger between Katapult and FinServ and its impact on CURO, refer to the description immediately following the table above.

Both the equity method investment and the previously recognized investment measured at cost minus impairment are presented within "Investments in Katapult" on the unaudited Condensed Consolidated Balance Sheet.

The Company's total ownership of Katapult's shares, on a fully diluted basis, was 19.3% as of September 30, 2021.