Note 5. Pledged Assets and Debt

PIK notes payable at March 31, 2020 and December 31, 2019 consisted of the following:


	March 31, 2020						December 31, 2019
	Principal		Discount		Fair Value		Principal		Discount		Principal
Senior PIK notes, 10.750% interest payable in-kind, due December 2023	$	307,860	$	271,190	$	36,670	$	307,860	$	233,617	$	74,243
		307,860		271,190		36,670		307,860		233,617		74,243
Less current maturities		—		—		—		—		—		—
Long-term portion	$	307,860	$	271,190	$	36,670	$	307,860	$	233,617	$	74,243

The Company elected to apply the fair value option to the PIK Notes because the notes were initially recognized at a significant discount, all subsequent interest will be paid-in kind rather than in cash, and management expects it to be likely that the notes will be converted to equity upon maturity. For these reasons, management believes reporting the PIK Notes at fair value provides better information to the users of the Company’s financial statements. The fair value option was not elected for the Company’s other debt obligations because they do not have the same characteristics as the PIK Notes.

The fair value of the PIK Notes was determined using an approach that considered both a Black Scholes option price methodology and the intrinsic value of the notes on an ‘‘as-if-converted’’ basis. This approach was selected because the PIK Notes are expected to be converted to equity upon redemption and the face value of the PIK Notes is greater than the enterprise value of the Company. Significant assumptions used in the Black Scholes option price methodology include the following:


	March 31,		December 31,
	2020		2019
Risk-free interest rate		0.33%		1.65%
Dividend yield		0.00%		0.00%
Expected volatility		43.00%		39.30%
Expected term (years)		3.70		3.95

The risk-free interest rate is based on the yield on 5-year Treasury bonds, and the expected volatility was determined using the guideline public company method. The expected term is based on when management expects the PIK Notes to be redeemed for equity. The intrinsic value at each measurement date is based on the estimated enterprise value adjusted for net debt, and assumes a redemption of all outstanding PIK Notes at that time. An average of the allocated value from the Black Scholes option price methodology and the intrinsic value is used to estimate fair value at each measurement date.

The change in the fair value of the PIK Notes during the three months ended March 31, 2020 and 2019, of ($37,573) and $14,645, respectively, has been recognized in other comprehensive income as the entire change in fair value is attributable to the instrument-specific credit risk of the PIK Notes. We measure the fair value of the PIK Notes on a quarterly basis using a similar methodology, unless there is a quoted market price that can be used instead.

Interest on the PIK Notes accrues at the rate of 10.750% per annum and is payable by increasing the principal amount of the PIK Notes. Interest is payable semiannually in arrears for the prior six-month period on June 15 and December 15 to the Holders of PIK Notes of record on the immediately preceding June 1 and December 1. Interest on the PIK Notes is accrued and recorded as accrued interest until June 15 and December 15, at which time the accrual is released and the additional principal amount is recorded. Accrued interest for the PIK Notes at March 31, 2020, and December 31, 2019, was $9,653 and $1,379, respectively, and is included as a current liability on the Consolidated Balance Sheet.

On December 12, 2018, the Revolving Credit Agreement (which is an intercompany obligation and eliminated upon consolidation) was simultaneously amended and restated. The Revolving Credit Agreement initially provided for borrowings of up to $42,000 and had a maturity date of June 15, 2023. All borrowings under the Revolving Credit Agreement are secured by substantially all of the assets of CCF OpCo, CCF Intermediate Holdings LLC, a Delaware limited liability company, the sole member of CCF OpCo and our wholly owned subsidiary and certain of CCF OpCo’s subsidiaries. The Revolving Credit Agreement is guaranteed by certain subsidiaries of CCF OpCo. We discuss this intercompany obligation because the intercompany obligation (and the collateral securing this intercompany obligation) has been given as security for the obligations under the Secured Notes. Borrowings under the Revolving Credit Agreement bear interest at a rate of 9.00% per annum. Those interest payments are used to fund the interest payments on the Secured Notes.

Secured notes payable at March 31, 2020, and December 31, 2019, consisted of the following:


	March 31, 2020						December 31, 2019
			Deferred						Deferred
			Issuance		Net				Issuance		Net
	Principal		Costs		Principal		Principal		Costs		Principal
$40,000 Secured note payable, 9.00%, collateralized by all Guarantor Company assets, due June 2023	$	40,000	$	—	$	40,000	$	40,000	$	—	$	40,000
		40,000		—		40,000		40,000		—		40,000
Less current maturities		—		—		—		—		—		—
Long-term portion	$	40,000	$	—	$	40,000	$	40,000	$	—	$	40,000

On December 12, 2018, CCF Issuer issued an aggregate principal amount of $42,000 in Secured Notes to previous holders of secured obligations. The Secured Notes bear interest at 9.00% per annum and mature on June 15, 2023. Pursuant to the indenture dated as of September 6. 2018, CCF Issuer and Community Choice Holdings each granted a pledge over all of their respective assets. CCF Issuer was also required to pledge its interests in the Revolving Credit Agreement and the security granted as collateral for the obligations under the Revolving Credit Agreement. The SPV Indenture also contains restrictive covenants that limit our subsidiaries’ ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase our capital stock or the capital stock of our subsidiaries, make certain investments, enter into certain types of transactions with affiliates, create liens or merge with or into other companies.

On January 15, 2019, the Company repaid $2,000 of the outstanding borrowings under the Credit Agreement, and repurchased $2,000 of the Secured Notes and 7,143 Class B Common Units corresponding to the repurchased Secured Notes, with the payment allocated to the Secured Notes. The outstanding balances of the Credit Agreement and Secured Notes are $40,000 at March 31, 2020.

Subsidiary notes payable at March 31, 2020, and December 31, 2019, consisted of the following:


	March 31, 2020						December 31, 2019
			Deferred						Deferred
			Issuance		Net				Issuance		Net
	Principal		Costs		Principal		Principal		Costs		Principal
$73,000 Note, secured, 16.75%, collateralized by acquired loans, due April 2021	$	73,000	$	1,159	$	71,841	$	73,000	$	367	$	72,633
$1,425 Term note, secured, 4.75%, collateralized by financed asset, due November 2024		761		—		761		777		—		777
$1,165 Term note, secured, 4.50%, collateralized by financed asset, due May 2021		938		6		932		954		6		948
		74,699		1,165		73,534		74,731		373		74,358
Less current maturities		129		1		128		128		1		127
Long-term portion	$	74,570	$	1,164	$	73,406	$	74,603	$	372	$	74,231

On December 12, 2018, CCFI Funding II LLC, a non-guarantor subsidiary of CCF OpCo, entered into an amendment to the Amended and Restated Loan and Security Agreement, dated as of April 25, 2017 (as amended, modified or supplemented from time to time, the “Ivy Credit Agreement”) pursuant to which, among other things, our borrowings under the Ivy Credit Agreement were increased from $63,500 to $70,000.

The Ivy Credit Agreement was amended on March 18, 2019, to extend the maturity date to April 30, 2020, and establish an interest rate of 16.75% on the entire credit facility. The Agreement was further amended on September 9, 2019, to increase the Company’s borrowings from $70,000 to $73,000. The Ivy Credit Agreement was amended on February 7, 2020, to extend the maturity date to April 30, 2021.

The $1,425 term note was amended on November 22, 2019, to extend the maturity date to November 22, 2024, and increased the interest rate to 4.75%.

Liquidity and Need for Additional Capital

As of April 24, 2020 (see Note 13 to the Company’s financial statements, included elsewhere in this report), the Company’s indebtedness includes $69,000 subject to the Ivy Credit Agreement that is due in the second quarter of 2021, and its expected cash position will not be sufficient to repay this indebtedness as it becomes due. Declining portfolio levels will have a negative impact on operating profits and liquidity and may impact our ability to meet the Ivy Credit Agreement and Revolving Credit Agreement covenants.

Management has hired advisors to assist with negotiations with the lenders to either amend or obtain waivers from those lenders. Ivy and its affiliates have been a long-term partner to the Company, directly providing the Ivy Credit Agreement, and indirectly through involvement in the third-party lender programs. Management believes that they will be able to extend the Ivy Credit Agreement based upon the Company’s relationship with the lender and historical experience of past extensions.

While the Company believes that it will be successful in extending the maturity of the Ivy Credit Agreement and amending the Revolving Credit Agreement’ covenants, there is no assurance that the Company will be able to extend the maturity or otherwise refinance the Ivy Credit Agreement and amend the Ivy Credit Agreement and Revolving Credit Agreements’ covenants.

Any amendment to or refinancing of this indebtedness could result in an even higher interest rate and may require us to comply with more burdensome restrictive covenants, which may have a material adverse effect on our business, ability to meet our payment obligations, financial condition, and results of operations. If the Company is not able to achieve the plan as outlined herein, substantial doubt may exist regarding the Company’s ability to meet its obligations and continue as a going concern.