Elevate Credit, Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 001-37680

ELEVATE CREDIT, INC.

(Exact name of registrant as specified in its charter)



Delaware		46-4714474
State or Other Jurisdiction of Incorporation or Organization		I.R.S. Employer Identification Number

4150 International Plaza, Suite 300 Fort Worth, Texas 76109		76109
Address of Principal Executive Offices		Zip Code
	(817) 928-1500
Registrant’s Telephone Number, Including Area Code

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.



Yes	x	No	o

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).



Yes	x	No	o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	o	Non-accelerated filer	o
Accelerated filer	x	Smaller reporting company	o
Emerging growth company	x

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

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

Securities registered pursuant to Section 12(b) of the Act.



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares, $0.0004 par value	ELVT	New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:



Class		Outstanding at August 7, 2019
Common Shares, $0.0004 par value		44,134,011

TABLE OF CONTENTS



Note About Forward-Looking Statements			4
Part I - Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018	6
		Unaudited Condensed Consolidated Income Statements for the three and six months ended June 30, 2019 and 2018	7
		Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018	8
		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2019 and 2018	9
		Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	10
		Notes to Unaudited Condensed Consolidated Financial Statements	12
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	43
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	85
	Item 4.	Controls and Procedures	86
Part II - Other Information
	Item 1.	Legal Proceedings	87
	Item 1A.	Risk Factors	88
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	93
	Item 6.	Exhibits	94
SIGNATURES			95

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained throughout this Quarterly Report on Form 10-Q, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and "Risk Factors." Forward-looking statements include information concerning our strategy, future operations, future financial position, future revenues, projected expenses, margins, prospects and plans and objectives of management. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “seek,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:


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


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


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


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


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


•	our expectations with respect to trends in our average portfolio effective annual percentage rate;


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


•	our anticipated expansion of relationships with strategic partners, including banks;


•	customer demand for our product and our ability to rapidly grow our business in response to fluctuations in demand;


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


•	the ability of customers to repay loans;


•	interest rates and origination fees on loans;


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


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


•	our reliance on third-party service providers;


•	our access to the automated clearing house system;


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


•	our anticipated direct marketing costs and spending;


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


•	continued innovation of our analytics platform, including releases of new credit models;


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


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


•	our ability to adequately protect our intellectual property;


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


•	our compliance with, and the effects on our business and results of operations from, current or future applicable regulatory developments and regulations, including developments or changes from the Consumer Financial Protection Bureau ("CFPB") and developments or changes in state law;


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


•	public perception of our business and industry;


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


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


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


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


•	our liquidity and working capital requirements;


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


•	the utility of non-GAAP financial measures;


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


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


•	our anticipated investing activity;


•	trends anticipated to continue as our portfolio of loans matures; and


•	any future repurchases under our share repurchase program, including the timing and amount of repurchases thereunder.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Elevate Credit, Inc. and Subsidiaries

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS



(Dollars in thousands except share amounts)	June 30, 2019			December 31, 2018
	(unaudited)
ASSETS
Cash and cash equivalents*	$	63,399		$	58,313
Restricted cash	2,491			2,591
Loans receivable, net of allowance for loan losses of $75,896 and $91,608, respectively*	535,405			561,694
Prepaid expenses and other assets*	11,990			11,418
Operating lease right of use assets	11,858			—
Receivable from CSO lenders	10,246			16,183
Receivable from payment processors*	27,129			21,716
Deferred tax assets, net	13,605			21,628
Property and equipment, net	47,629			41,579
Goodwill	16,027			16,027
Intangible assets, net	1,462			1,712
Derivative assets at fair value (cost basis of $0 and $109, respectively)*	—			412
Total assets	$	741,241		$	753,273

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities (See Note 14)*	$	41,445		$	44,950
Operating lease liabilities	16,160			—
State and other taxes payable	1,222			681
Deferred revenue*	15,246			28,261
Notes payable, net*	527,237			562,590
Total liabilities	601,310			636,482
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 12)
STOCKHOLDERS’ EQUITY
Preferred stock; $0.0004 par value; 24,500,000 authorized shares; None issued and outstanding at June 30, 2019 and December 31, 2018.	—			—
Common stock; $0.0004 par value; 300,000,000 authorized shares; 44,173,872 and 43,329,262 issued and outstanding, respectively	18			18
Additional paid-in capital	187,521			183,244
Accumulated deficit	(47,395		)	(66,525		)
Accumulated other comprehensive income (loss), net of tax benefit of $1,353 and $1,257, respectively*	(213		)	54
Total stockholders’ equity	139,931			116,791
Total liabilities and stockholders’ equity	$	741,241		$	753,273

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

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

Elevate Credit, Inc. and Subsidiaries

CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands, except share and per share amounts)	2019			2018			2019			2018
Revenues	$	177,760		$	184,377		$	367,264		$	377,914
Cost of sales:
Provision for loan losses	78,025			88,598			165,456			180,740
Direct marketing costs	16,194			22,180			27,348			42,875
Other cost of sales	8,562			6,566			13,622			12,895
Total cost of sales	102,781			117,344			206,426			236,510
Gross profit	74,979			67,033			160,838			141,404
Operating expenses:
Compensation and benefits	25,638			23,380			51,348			45,807
Professional services	8,860			8,374			18,559			16,686
Selling and marketing	2,205			2,403			4,051			5,355
Occupancy and equipment (See Note 14)	5,179			4,630			10,231			8,749
Depreciation and amortization	4,324			2,962			8,590			5,677
Other	1,710			1,568			3,017			2,785
Total operating expenses	47,916			43,317			95,796			85,059
Operating income	27,063			23,716			65,042			56,345
Other expense:
Net interest expense (See Note 14)	(17,947		)	(19,263		)	(37,166		)	(38,476		)
Foreign currency transaction loss	(710		)	(1,231		)	(97		)	(475		)
Non-operating loss	—			—			—			(38		)
Total other expense	(18,657		)	(20,494		)	(37,263		)	(38,989		)
Income before taxes	8,406			3,222			27,779			17,356
Income tax expense	2,634			94			8,649			4,745
Net income	$	5,772		$	3,128		$	19,130		$	12,611

Basic earnings per share	$	0.13		$	0.07		$	0.44		$	0.30
Diluted earnings per share	$	0.13		$	0.07		$	0.43		$	0.29
Basic weighted average shares outstanding	43,681,159			42,561,403			43,514,862			42,386,660
Diluted weighted average shares outstanding	44,291,816			44,239,007			44,142,947			43,937,066

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

Elevate Credit, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)



(Dollars in thousands)	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2019		2018			2019			2018
Net income	$	5,772	$	3,128		$	19,130		$	12,611
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment, net of tax of $(1) and $0 for the three and six months ended 2019 and 2018, respectively	724		(1,495		)	(59		)	(402		)
Reclassification of certain deferred tax effects	—		—			—			(920		)
Change in derivative valuation, net of tax of $(95) and $164 for the three and six months ended 2019 and 2018, respectively	—		(243		)	(208		)	1,091
Total other comprehensive income (loss), net of tax	724		(1,738		)	(267		)	(231		)
Total comprehensive income	$	6,496	$	1,390		$	18,863		$	12,380

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

Elevate Credit, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

For the periods ended June 30, 2019 and 2018



(Dollars in thousands except share amounts)	Preferred Stock		Common Stock			Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive income (loss)			Total
(Dollars in thousands except share amounts)	Shares	Amount	Shares	Amount		Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive income (loss)			Total
Balances at December 31, 2017	—	—	42,165,524	$	17	$	174,090		$	(79,954	)	$	2,003		$	96,156
Share-based compensation	—	—	—	—		3,647			—			—			3,647
Exercise of stock options	—	—	259,196	—		969			—			—			969
Vesting of restricted stock units	—	—	629,147	—		—			—			—			—
ESPP shares issued	—	—	61,996	—		408			—			—			408
Tax benefit of equity issuance costs	—	—	—	—		(674		)	—			—			(674		)
Comprehensive income:
Foreign currency translation adjustment net of tax expense of $0	—	—	—	—		—			—			(402		)	(402		)
Change in derivative valuation net of tax expense of $164	—	—	—	—		—			—			1,091			1,091
Reclassification of certain deferred tax effects	—	—	—	—		—			920			(920		)	—
Net income	—	—	—	—		—			12,611			—			12,611
Balances at June 30, 2018	—	—	43,115,863	$	17	$	178,440		$	(66,423	)	$	1,772		$	113,806

Balances at December 31, 2018	—	—	43,329,262	18		183,244			(66,525		)	54			116,791
Share-based compensation	—	—	—	—		4,911			—			—			4,911
Exercise of stock options	—	—	25,000	—		81			—			—			81
Vesting of restricted stock units	—	—	677,343	—		(1,211		)	—			—			(1,211		)
ESPP shares issued	—	—	142,267	—		498			—			—			498
Tax benefit of equity issuance costs	—	—	—	—		(2		)	—			—			(2		)
Comprehensive loss:
Foreign currency translation adjustment net of tax benefit of $1	—	—	—	—		—			—			(59		)	(59		)
Change in derivative valuation net of tax benefit of $95	—	—	—	—		—			—			(208		)	(208		)
Net income	—	—	—	—		—			19,130			—			19,130
Balances at June 30, 2019	—	—	44,173,872	$	18	$	187,521		$	(47,395	)	$	(213	)	$	139,931

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

Elevate Credit, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



(Dollars in thousands)	Six Months Ended June 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	19,130		$	12,611
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	8,590			5,677
Provision for loan losses	165,456			180,740
Share-based compensation	4,911			3,647
Amortization of debt issuance costs	283			191
Amortization of loan premium	2,981			3,006
Amortization of convertible note discount	—			138
Amortization of derivative assets	108			606
Amortization of operating leases	145			—
Deferred income tax expense, net	8,117			4,602
Unrealized loss from foreign currency transactions	97			475
Non-operating loss	—			38
Changes in operating assets and liabilities:
Prepaid expenses and other assets	(594		)	(2,134		)
Receivables from payment processors	(5,511		)	(5,864		)
Receivables from CSO lenders	5,937			4,921
Interest receivable	(34,769		)	(43,097		)
State and other taxes payable	549			71
Deferred revenue	(9,583		)	1,171
Accounts payable and accrued liabilities	3,580			(4,314		)
Net cash provided by operating activities	169,427			162,485
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans receivable originated or participations purchased	(613,987		)	(625,951		)
Principal collections and recoveries on loans receivable	503,190			497,076
Participation premium paid	(2,491		)	(3,020		)
Purchases of property and equipment	(14,042		)	(12,450		)
Net cash used in investing activities	(127,330		)	(144,345		)

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

Elevate Credit, Inc. and Subsidiaries



	Six Months Ended June 30,
(Dollars in thousands)	2019			2018
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable	$	27,000		$	12,135
Payments of notes payable	(60,000		)	—
Cash paid for interest rate caps	—			(1,367		)
Settlement of derivative liability	—			(2,010		)
Debt issuance costs paid	(2,598		)	(25		)
Debt prepayment costs paid	(850		)	—
ESPP shares issued	498			408
Proceeds from stock option exercises	81			969
Taxes paid related to net share settlement of equity awards	(1,211		)	—
Net cash (used in) provided by financing activities	(37,080		)	10,110
Effect of exchange rates on cash	(31		)	(25		)
Net increase in cash, cash equivalents and restricted cash	4,986			28,225

Cash and cash equivalents, beginning of period	58,313			41,142
Restricted cash, beginning of period	2,591			1,595
Cash, cash equivalents and restricted cash, beginning of period	60,904			42,737

Cash and cash equivalents, end of period	63,399			69,368
Restricted cash, end of period	2,491			1,594
Cash, cash equivalents and restricted cash, end of period	$	65,890		$	70,962

Supplemental cash flow information:
Interest paid	$	36,850		$	37,696
Taxes paid	$	338		$	332

Non-cash activities:
CSO fees charged-off included in Deferred revenues and Loans receivable	$	3,432		$	5,331
CSO fees on loans paid-off prior to maturity included in Receivable from CSO lenders and Deferred revenue	$	127		$	137
Annual membership fee included in Deferred revenues and Loans receivable	$	126		$	—
Prepaid expenses accrued but not yet paid	$	—		$	559
Property and equipment accrued but not yet paid	$	—		$	442
Impact on OCI and retained earnings of adoption of ASU 2018-02	$	—		$	920
Changes in fair value of interest rate caps	$	304		$	1,255
Tax benefit of equity issuance costs included in Additional paid-in capital	$	2		$	674
Impact of deferred tax asset included in Other comprehensive income (loss)	$	96		$	—
Leasehold improvements allowance included in Property and equipment, net	$	439		$	—
Lease incentives allowance included in Accounts payable and accrued liabilities	$	3,720		$	—
Operating lease right of use assets recognized	$	13,399		$	—
Operating lease liabilities recognized	$	17,556		$	—

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

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three and six months ended June 30, 2019 and 2018

NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING CHANGES

Business Operations

Elevate Credit, Inc. (the “Company”) is a Delaware corporation. The Company provides technology-driven, progressive online credit solutions to non-prime consumers. The Company uses advanced technology and proprietary risk analytics to provide more convenient and more responsible financial options to its customers, who are not well-served by either banks or legacy non-prime lenders. The Company currently offers unsecured online installment loans, lines of credit and credit cards in the United States (the “US”) and the United Kingdom (the “UK”). The Company’s products, Rise, Elastic, Today Card and Sunny, reflect its mission of “Good Today, Better Tomorrow” and provide customers with access to competitively priced credit and services while helping them build a brighter financial future with credit building and financial wellness features. In the UK, the Company directly offers unsecured installment loans via the internet through its wholly owned subsidiary, Elevate Credit International (UK), Limited, (“ECI”) under the brand name of Sunny.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of June 30, 2019 and for the three and six month periods ended June 30, 2019 and 2018 include the accounts of the Company, its wholly owned subsidiaries and variable interest entities ("VIEs") where the Company is the primary beneficiary. All significant intercompany transactions and accounts have been eliminated.

The unaudited condensed consolidated financial information included in this report has been prepared in accordance with accounting principles generally accepted in the US (“US GAAP”) for interim financial information and Article 10 of Regulation S-X and conform, as applicable, to general practices within the finance company industry. The principles for interim financial information do not require the inclusion of all the information and footnotes required by US GAAP for complete financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2018 in the Company's Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission ("SEC") on March 8, 2019. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. Our business is seasonal in nature so the results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Significant items subject to such estimates and assumptions include the valuation of the allowance for loan losses, goodwill, long-lived and intangible assets, deferred revenues, contingencies, the fair value of derivatives, the income tax provision, valuation of share-based compensation, operating lease right of use assets, operating lease liabilities and the valuation allowance against deferred tax assets. The Company bases its estimates on historical experience, current data and assumptions that are believed to be reasonable. Actual results in future periods could differ from those estimates.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

Property and Equipment, net

Property and equipment are stated at cost, net of accumulated depreciation and amortization. The following table summarizes the components of net property and equipment.



(Dollars in thousands)	June 30, 2019			December 31, 2018
Property and equipment, gross	$	112,709		$	98,357
Accumulated depreciation and amortization	(65,080		)	(56,778		)
Property and equipment, net	$	47,629		$	41,579

Interest Rate Caps

The Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. On January 11, 2018, the Company and ESPV each entered into one interest rate cap transaction with a counterparty to mitigate the floating rate interest risk on a portion of the debt underlying the Rise and Elastic portfolios, respectively. The interest rate caps matured on February 1, 2019. The interest rate caps were designated as cash flow hedges against expected future cash flows attributable to future interest payments on debt facilities held by each entity. The Company initially reported the gains or losses related to the hedges as a component of Accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets in the period incurred and subsequently reclassified the interest rate caps’ gains or losses to interest expense when the hedged expenses were recorded. The Company excluded the change in the time value of the interest rate caps in its assessment of their hedge effectiveness. The Company presented the cash flows from cash flow hedges in the same category in the Condensed Consolidated Statements of Cash Flows as the category for the cash flows from the hedged items. The interest rate caps did not contain any credit risk related contingent features. The Company’s hedging program is not designed for trading or speculative purposes.

For additional information related to derivative instruments, see Note 9—Fair Value Measurements.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease right of use (“ROU”) assets and Operating lease liabilities on our Condensed Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The operating lease ROU asset may also include initial direct costs incurred and excludes any lease payments made and lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components. The lease and non-lease components are accounted for as a single lease component.

Recently Adopted Accounting Standards

In July 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-09, Codification Improvements ("ASU 2018-09"). The purpose of ASU 2018-09 is to clarify, correct errors in or make minor improvements to the Codification. Among other revisions, the amendments clarify that an entity should recognize excess tax benefits or tax deficiencies for share compensation expense that is taken on an entity’s tax return in the period in which the amount of the deduction is determined. The Company has adopted all of the amendments of ASU 2018-09 as of January 1, 2019 on a modified retrospective basis. The adoption of ASU 2018-09 did not have a material impact on the Company's condensed consolidated financial statements.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). The purpose of ASU 2018-02 is to allow an entity to elect to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act from Accumulated other comprehensive income (loss) into Retained earnings. The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. Early adoption is permitted. The Company adopted all amendments of ASU 2018-02 on a prospective basis as of January 1, 2018 and elected to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act from Accumulated other comprehensive income (loss) to Accumulated deficit. The amount of the reclassification for the six months ended June 30, 2018 was $920 thousand.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815)—Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). The purpose of ASU 2017-12 is to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. In addition, ASU 2017-12 makes certain targeted improvements to simplify the application of the hedge accounting guidance. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments ("ASU 2019-04"). This amendment clarifies the guidance in ASU 2017-12. ASU 2017-12 is effective for public companies for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. Early adoption is permitted. The Company has adopted all of the amendments of ASU 2017-12 on a prospective basis as of January 1, 2018. Since the Company did not have derivatives accounted for as hedges prior to December 31, 2017, there was no cumulative-effect adjustment needed to Accumulated other comprehensive income (loss) and Accumulated deficit. The adoption of ASU 2017-12 did not have a material impact on the Company's condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. ASU 2016-02 will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), which clarifies certain matters in the codification with the intention to correct unintended application of the guidance. Also in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which provides entities with an additional (and optional) transition method whereby the entity applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, under the new transition method, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with current US GAAP (Topic 840, Leases). ASU 2016-02, as amended, is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company elected to adopt the transition method in ASU 2018-11 by applying the practical expedient prospectively at January 1, 2019. The Company also elected to apply the optional practical expedient package to not reassess existing or expired contracts for lease components, lease classification or initial direct costs. The adoption of ASU 2016-02, as amended, resulted in the recognition of approximately $12.3 million and $16.0 million additional right of use assets and liabilities for operating leases, respectively, but did not have a material impact on the Company's condensed consolidated income statements.

Accounting Standards to be Adopted in Future Periods

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The purpose of ASU 2018-15 is to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is still assessing the potential impact of ASU 2018-15 on the Company's condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The purpose of ASU 2018-13 is to modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This guidance is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and requires both a prospective and retrospective approach to adoption based on amendment specifications. Early adoption of any removed or modified disclosures is permitted. Additional disclosures may be delayed until their effective date. The Company does not expect ASU 2018-13 to have a material impact on the Company's condensed consolidated financial statements.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). The purpose of ASU 2017-04 is to simplify the subsequent measurement of goodwill. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This guidance is effective for public companies for goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is still assessing the potential impact of ASU 2017-04 on the Company's condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 is intended to replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates to improve the quality of information available to financial statement users about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments ("ASU 2019-04"). This amendment clarifies the guidance in ASU 2016-13. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief ("ASU 2019-05"). The purpose of this amendment is to provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments-Overall, on an instrument-by-instrument basis. Election of this option is intended to increase comparability of financial statement information and reduce costs for certain entities to comply with ASU 2016-13. For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company anticipates that the adoption of ASU 2016-13 will have a material impact on the Company’s condensed consolidated financial statements and related disclosures. The Company’s implementation efforts are underway, including identifying all relevant data points, drafting the accounting policies and internal controls, and developing new models. Substantial progress has been made towards the development of these new models including validation testing against historical periods to refine the accuracy. The Company will continue to refine its methodology and begin running in parallel with the existing models in the third quarter of 2019. The Company's efforts are expected to be complete as of the effective date.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 2 - EARNINGS PER SHARE

Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding ("WASO") during each period. Also, basic EPS includes any fully vested stock and unit awards that have not yet been issued as common stock. There are no unissued fully vested stock and unit awards at June 30, 2019 and 2018.

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

The computation of earnings per share was as follows for three and six months ended June 30, 2019 and 2018:



	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except share and per share amounts)	2019		2018		2019		2018
Numerator (basic):
Net income	$	5,772	$	3,128	$	19,130	$	12,611

Numerator (diluted):
Net income	$	5,772	$	3,128	$	19,130	$	12,611

Denominator (basic):
Basic weighted average number of shares outstanding	43,681,159		42,561,403		43,514,862		42,386,660

Denominator (diluted):
Basic weighted average number of shares outstanding	43,681,159		42,561,403		43,514,862		42,386,660
Effect of potentially dilutive securities:
Employee share plans (options, RSUs and ESPP)	610,657		1,677,604		628,085		1,550,406
Diluted weighted average number of shares outstanding	44,291,816		44,239,007		44,142,947		43,937,066

Basic and diluted earnings per share:
Basic earnings per share	$	0.13	$	0.07	$	0.44	$	0.30
Diluted earnings per share	$	0.13	$	0.07	$	0.43	$	0.29

For the three months ended June 30, 2019 and 2018, the Company excluded the following potential common shares from its diluted earnings per share calculation because including these shares would be anti-dilutive:


•	1,482,143 and 941,832 common shares issuable upon exercise of the Company's stock options; and


•	2,470,870 and 855,909 common shares issuable upon vesting of the Company's RSUs.

For the six months ended June 30, 2019 and 2018, the Company excluded the following potential common shares from its diluted earnings per share calculation because including these shares would be anti-dilutive:


•	1,622,111 and 567,754 common shares issuable upon exercise of the Company's stock options; and


•	3,415,118 and 484,511 common shares issuable upon vesting of the Company's RSUs.

ASC Topic 260, “Earnings Per Share” (“ASC Topic 260”) requires companies with participating securities to utilize a two-class method for the computation of net income per share attributable to the Company. The two-class method requires a portion of net income attributable to the Company to be allocated to participating securities. Net losses are not allocated to participating securities unless those securities are obligated to participate in losses. The Company did not have any participating securities for the three and six month periods ended June 30, 2019 and 2018.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 3 - LOANS RECEIVABLE AND REVENUE

Revenues generated from the Company’s consumer loans for the three and six months ended June 30, 2019 and 2018 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2019		2018		2019		2018
Finance charges	$	107,622	$	110,519	$	218,170	$	229,015
CSO fees	10,092		13,577		23,800		28,436
Lines of credit fees	59,317		59,298		124,050		118,201
Other	729		983		1,244		2,262
Total revenues	$	177,760	$	184,377	$	367,264	$	377,914

The Company's portfolio consists of both installment loans and lines of credit, which are considered the portfolio segments at June 30, 2019 and December 31, 2018. The Rise product is primarily installment loans in the US with lines of credit offered in two states. The Sunny product is an installment loan product offered in the UK. The Elastic product is a line of credit product in the US. In November of 2018, the Company expanded a test launch of the Today Card, a credit card product offered in the US. Balances and activity for the Today Card as of and for the six months ended June 30, 2019 were not material.

The following reflects the credit quality of the Company’s loans receivable as of June 30, 2019 and December 31, 2018 as delinquency status has been identified as the primary credit quality indicator. The Company classifies its loans as either current or past due. A customer in good standing may request up to a 16-day grace period when or before a payment becomes due and, if granted, the loan is considered current during the grace period. Installment loans, lines of credit and credit cards are considered past due if a grace period has not been requested and a scheduled payment is not paid on its due date. All impaired loans that were not accounted for as a troubled debt restructuring ("TDR") as of June 30, 2019 and December 31, 2018 have been charged off.



	June 30, 2019
(Dollars in thousands)	Rise and Sunny			Elastic(1)			Total
Current loans	$	306,892		$	236,731		$	543,623
Past due loans	46,071			19,612			65,683
Total loans receivable	352,963			256,343			609,306
Net unamortized loan premium	138			1,857			1,995
Less: Allowance for loan losses	(49,417		)	(26,479		)	(75,896		)
Loans receivable, net	$	303,684		$	231,721		$	535,405



	December 31, 2018
(Dollars in thousands)	Rise and Sunny			Elastic(1)			Total
Current loans	$	296,339		$	273,217		$	569,556
Past due loans	53,491			27,778			81,269
Total loans receivable	349,830			300,995			650,825
Net unamortized loan premium	54			2,423			2,477
Less: Allowance for loan losses	(55,557		)	(36,051		)	(91,608		)
Loans receivable, net	$	294,327		$	267,367		$	561,694

(1) Includes immaterial balances related to the Today Card, which expanded its test launch in November 2018.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

Total loans receivable includes approximately $9.2 million and $7.4 million of loans in a non-accrual status at June 30, 2019 and December 31, 2018, respectively. The previously reported non-accrual loan balance as of December 31, 2018 excluded certain non-accrual loans that amounted to $2.7 million. The omission of these amounts only impacted the footnote disclosure and not the reported balances on the balance sheet and statement of operations, the Company does not believe this omission has a material impact on the previously reported balances in the consolidated financial statements as of December 31, 2018.

Additionally, total loans receivable includes approximately $31.8 million and $41.6 million of interest receivable at June 30, 2019 and December 31, 2018, respectively. The carrying value for Loans receivable, net of the allowance for loan losses approximates the fair value due to the short-term nature of the loans receivable.

The changes in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018 are as follows:



	Three Months Ended June 30, 2019
(Dollars in thousands)	Rise and Sunny			Elastic(1)			Total
Balance beginning of period	$	51,358		$	28,341		$	79,699
Provision for loan losses	52,757			25,268			78,025
Charge-offs	(58,323		)	(30,452		)	(88,775		)
Recoveries of prior charge-offs	5,844			3,322			9,166
Effect of changes in foreign currency rates	(236		)	—			(236		)
Total	51,400			26,479			77,879
Accrual for CSO lender owned loans	(1,983		)	—			(1,983		)
Balance end of period	$	49,417		$	26,479		$	75,896



	Three Months Ended June 30, 2018
(Dollars in thousands)	Rise and Sunny			Elastic(1)			Total
Balance beginning of period	$	56,148		$	28,098		$	84,246
Provision for loan losses	58,812			29,786			88,598
Charge-offs	(68,650		)	(31,065		)	(99,715		)
Recoveries of prior charge-offs	5,384			2,575			7,959
Effect of changes in foreign currency rates	(557		)	—			(557		)
Total	51,137			29,394			80,531
Accrual for CSO lender owned loans	(3,956		)	—			(3,956		)
Balance end of period	$	47,181		$	29,394		$	76,575



	Six Months Ended June 30, 2019
(Dollars in thousands)	Rise and Sunny			Elastic(1)			Total
Balance beginning of period	$	60,002		$	36,050		$	96,052
Provision for loan losses	110,626			54,830			165,456
Charge-offs	(130,458		)	(70,011		)	(200,469		)
Recoveries of prior charge-offs	11,265			5,610			16,875
Effect of changes in foreign currency rates	(35		)	—			(35		)
Total	51,400			26,479			77,879
Accrual for CSO lender owned loans	(1,983		)	—			(1,983		)
Balance end of period	$	49,417		$	26,479		$	75,896

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018



	Six Months Ended June 30, 2018
(Dollars in thousands)	Rise and Sunny			Elastic(1)			Total
Balance beginning of period	$	64,919		$	28,870		$	93,789
Provision for loan losses	122,041			58,699			180,740
Charge-offs	(147,194		)	(63,044		)	(210,238		)
Recoveries of prior charge-offs	11,571			4,869			16,440
Effect of changes in foreign currency rates	(200		)	—			(200		)
Total	51,137			29,394			80,531
Accrual for CSO lender owned loans	(3,956		)	—			(3,956		)
Balance end of period	$	47,181		$	29,394		$	76,575

(1) Includes immaterial balances related to the Today Card, which expanded its test launch in November 2018.

As of June 30, 2019 and December 31, 2018, estimated losses of approximately $2.0 million and $4.4 million for the CSO owned loans receivable guaranteed by the Company of approximately $23.4 million and $39.8 million, respectively, are initially recorded at fair value and are included in Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets.

Troubled Debt Restructurings

In certain circumstances, the Company modifies the terms of its finance receivables for borrowers experiencing financial difficulties. Modifications may include principal and interest forgiveness. A modification of finance receivable terms is considered a TDR if the Company grants a concession to a borrower for economic or legal reasons related to the borrower’s financial difficulties that would not otherwise have been considered. Management considers TDRs to include all installment and line of credit loans that were granted principal and interest forgiveness as a part of a loss mitigation strategy for Rise, Elastic and Sunny. Once a loan has been classified as a TDR, it is assessed for impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate considering all available evidence.

The following table summarizes the financial effects, excluding impacts related to credit loss allowance and impairment, of TDRs for the three and six months ended June 30, 2019 and 2018:



	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2019		2018		2019		2018
Outstanding recorded investment before TDR	$	8,039	$	2,054	$	20,764	$	5,098
Outstanding recorded investment after TDR	7,976		1,696		19,331		3,792
Total principal and interest forgiveness included in charge-offs within the Allowance for loan losses	$	63	$	358	$	1,433	$	1,306

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

A loan that has been classified as a TDR remains classified as a TDR until it is liquidated through payoff or charge-off. The table below presents the Company's average outstanding recorded investment and interest income recognized on TDR loans for the three and six months ended June 30, 2019 and 2018:



	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2019		2018		2019		2018
Average outstanding recorded investment(1)	$	15,244	$	3,317	$	13,477	$	3,988
Interest income recognized	$	945	$	1,162	$	2,870	$	2,814
1. Simple average as of June 30, 2019 and 2018, respectively.

The table below presents the Company's loans modified as TDRs as of June 30, 2019 and December 31, 2018:



(Dollars in thousands)	2019			2018
Current outstanding investment	$	7,374		$	7,627
Delinquent outstanding investment	6,421			5,531
Outstanding recorded investment	13,795			13,158
Less: Impairment	(3,924		)	(969		)
Outstanding recorded investment, net of impairment	$	9,871		$	12,189

A TDR is considered to have defaulted upon charge-off when it is over 60 days past due or earlier if deemed uncollectible. There were loan restructurings accounted for as TDRs that subsequently defaulted of approximately $6.2 million and $2.7 million for the three months ended June 30, 2019 and 2018, respectively, and $10.7 million and $7.1 million for the six months ended June 30, 2019 and 2018, respectively. The Company had commitments to lend additional funds of approximately $0.4 million to customers with available and unfunded lines of credit as of June 30, 2019.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 4—VARIABLE INTEREST ENTITIES

The Company is involved with five entities that are deemed to be a VIE: Elastic SPV, Ltd., EF SPV, Ltd. and three Credit Services Organization ("CSO") lenders. Under ASC 810-10-15, Variable Interest Entities, a VIE is an entity that: (1) has an insufficient amount of equity investment at risk to permit the entity to finance its activities without additional subordinated financial support by other parties; (2) the equity investors are unable to make significant decisions about the entity’s activities through voting rights or similar rights; or (3) the equity investors do not have the obligation to absorb expected losses or the right to receive residual returns of the entity. The Company is required to consolidate a VIE if it is determined to be the primary beneficiary, that is, the enterprise has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the VIE. The Company evaluates its relationships with VIEs to determine whether it is the primary beneficiary of a VIE at the time it becomes involved with the entity and it re-evaluates that conclusion each reporting period.

Elastic SPV, Ltd.

On July 1, 2015, the Company entered into several agreements with a third-party lender and Elastic SPV, Ltd. (“ESPV”), an entity formed by third-party investors for the purpose of purchasing loan participations from the third-party lender. Per the terms of the agreements, the Company provides customer acquisition services to generate loan applications submitted to the third-party lender. In addition, the Company licenses loan underwriting software and provides services to the third-party lender to evaluate the credit quality of those loan applications in accordance with the third-party lender’s credit policies. ESPV accounts for the loan participations acquired in accordance with ASC 860-10-40, Transfers and Services, Derecognition, as the lines of credit acquired meet the criteria of a participation interest.

Once the third-party lender originates the loan, ESPV has the right, but not the obligation, to purchase a 90% interest in each Elastic line of credit. Victory Park Management, LLC (“VPC”) entered into an agreement (the "ESPV Facility") under which it loans ESPV all funds necessary up to a maximum borrowing amount to purchase such participation interests in exchange for a fixed return (see Note 5—Notes Payable—ESPV Facility). The Company entered into a separate credit default protection agreement with ESPV whereby the Company agreed to provide credit protection to the investors in ESPV against Elastic loan losses in return for a credit premium. The Company does not hold a direct ownership interest in ESPV, however, as a result of the credit default protection agreement, ESPV was determined to be a VIE and the Company qualifies as the primary beneficiary.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

The following table summarizes the assets and liabilities of the VIE that are included within the Company’s Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018:



(Dollars in thousands)	June 30, 2019		December 31, 2018
ASSETS
Cash and cash equivalents	$	22,938	$	18,723
Loans receivable, net of allowance for loan losses of $25,805 and $36,019, respectively	228,508		266,725
Prepaid expenses and other assets ($0 and $64, respectively, eliminates upon consolidation)	—		251
Derivative asset at fair value (cost basis of $0 and $51, respectively)	—		195
Receivable from payment processors	12,072		12,212
Total assets	$	263,518	$	298,106
LIABILITIES AND SHAREHOLDER’S EQUITY
Accounts payable and accrued liabilities ($7,434 and $9,372, respectively, eliminates upon consolidation)	$	16,994	$	17,923
Deferred revenue	4,880		5,293
Reserve deposit liability ($23,150 and $35,850, respectively, eliminates upon consolidation)	23,150		35,850
Notes payable, net	218,494		238,896
Accumulated other comprehensive income	—		144
Total liabilities and shareholder’s equity	$	263,518	$	298,106

EF SPV, Ltd.

On October 15, 2018, the Company entered into several agreements with a third-party lender and EF SPV, Ltd. (“EF SPV”), an entity formed by third-party investors for the purpose of purchasing loan participations from the third-party lender. Per the terms of the agreements, the Company provides customer acquisition services to generate loan applications submitted to the third-party lender. In addition, the Company licenses loan underwriting software and provides services to the third-party lender to evaluate the credit quality of those loan applications in accordance with the third-party lender’s credit policies. EF SPV accounts for the loan participations acquired in accordance with ASC 860-10-40, Transfers and Services, Derecognition, as the installment loans acquired meet the criteria of a participation interest.

Once the third-party lender originates the loan, EF SPV has the right, but not the obligation, to purchase a 95% interest in each Rise bank originated installment loan. VPC lends EF SPV all funds necessary up to a maximum borrowing amount to purchase such participation interests in exchange for a fixed return (see Note 5—Notes Payable—EF SPV Facility). The Company entered into a separate credit default protection agreement with EF SPV whereby the Company agreed to provide credit protection to the investors in EF SPV against Rise bank originated loan losses in return for a credit premium. The Company does not hold a direct ownership interest in EF SPV, however, as a result of the credit default protection agreement, EF SPV was determined to be a VIE and the Company qualifies as the primary beneficiary.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

The following table summarizes the assets and liabilities of the VIE that are included within the Company’s Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018:



(Dollars in thousands)	June 30, 2019		December 31, 2018
ASSETS
Cash and cash equivalents	$	5,144	$	8,185
Loans receivable, net of allowance for loan losses of $11,178 and $3,388, respectively	75,112		25,484
Receivable from payment processors ($0 and $101 eliminates upon consolidation)	2,551		285
Total assets	$	82,807	$	33,954
LIABILITIES AND SHAREHOLDER’S EQUITY
Accounts payable and accrued liabilities ($2,822 and $905, respectively, eliminates upon consolidation)	$	4,883	$	1,332
Reserve deposit liability ($7,950 and $4,650, respectively, eliminates upon consolidation)	7,950		4,650
Notes payable, net	69,974		27,972
Total liabilities and shareholder’s equity	$	82,807	$	33,954

CSO Lenders

The three CSO lenders are considered VIE's of the Company; however, the Company does not have any ownership interest in the CSO lenders, does not exercise control over them, and is not the primary beneficiary, and therefore, does not consolidate the CSO lenders’ results with its results.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 5—NOTES PAYABLE, NET

The Company has three debt facilities with VPC. The Rise SPV, LLC credit facility (the "VPC Facility"), the EF SPV Facility, and the ESPV Facility. The facilities were modified effective February 1, 2019 to the following terms.

VPC Facility

The VPC Facility is primarily used to fund the Rise and Sunny loan portfolio with a subordinated debt component used for general corporate purposes. It provides the following term notes:

•

A maximum borrowing amount of $350 million used to fund the Rise loan portfolio (“US Term Note”). Prior to the February 1, 2019 amendment, the interest rate paid on this facility was a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 11%. This resulted in a blended interest rate paid of 12.79% on debt outstanding under this facility as of December 31, 2018. Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%). All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1% ) plus 7.5% at the borrowing date. The weighted average base rate on the outstanding balance at June 30, 2019 was 2.73% and the overall interest rate was 10.23%.

•

A maximum borrowing amount of $127 million used to fund the UK Sunny loan portfolio (“UK Term Note”). Prior to the February 1, 2019 amendment, the interest rate paid on this facility was a base rate (defined as the 3-month LIBOR) plus 14%. This resulted in a blended interest rate paid of 16.74% on debt outstanding under this facility as of December 31, 2018. Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%). All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.5% at the borrowing date. The weighted average base rate on the outstanding balance at June 30, 2019 was 2.73% and the overall interest rate was 10.23%.

•

A maximum borrowing amount of $18 million used to fund working capital, and prior to February 1, 2019, at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 13% (“4^th Tranche Term Note”). Upon the February 1, 2019 amendment date, the interest rate was fixed through the February 1, 2021 maturity date at a base rate of 2.73% plus 13%. The interest rate at June 30, 2019 and December 31, 2018 was 15.73% and 15.74%, respectively. There was no change in the interest rate spread on this facility upon the February 1, 2019 amendment.


•	Revolving feature providing the option to pay down up to 20% of the outstanding balance, excluding the 4^th Tranche Term Note, once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.

The 4^th Tranche Term Note matures on February 1, 2021. The US Term Note and the UK Term Note both mature on January 1, 2024. There are no principal payments due or scheduled until the respective maturity dates. All assets of the Company are pledged as collateral to secure the VPC Facility. The VPC Facility contains certain covenants for the Company such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the VPC Facility as of June 30, 2019 and December 31, 2018.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

EF SPV Facility

The EF SPV Facility has a maximum borrowing amount of $150 million used to purchase loan participations from a third-party lender. Prior to execution of the agreement with VPC effective February 1, 2019, EF SPV was a borrower on the US Term Note under the VPC Facility and the interest rate paid on this facility was a base rate (defined as 3-month LIBOR, with a 1% floor) plus 11%. Upon the February 1, 2019 amendment date, $43 million was re-allocated into the EF SPV Facility and the interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%). All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.5% at the borrowing date. The weighted average base rate on the outstanding balance at June 30, 2019 was 2.67% and the overall interest rate was 10.17%. The EF SPV Term Note has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.

The EF SPV Term Note matures on January 1, 2024. There are no principal payments due or scheduled until the maturity date. All assets of the Company and EF SPV are pledged as collateral to secure the EF SPV Facility. The EF SPV Facility contains certain covenants for the Company such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the EF SPV Facility as of June 30, 2019.

ESPV Facility

The ESPV Facility has a maximum borrowing amount of $350 million used to purchase loan participations from a third-party lender. Prior to the February 1, 2019 amendment, the interest rate paid on this facility was a base rate (defined as the greater of the 3-month LIBOR rate or 1% per annum) plus 13% for the outstanding balance up to $50 million, plus 12% for the outstanding balance greater than $50 million up to $100 million, plus 13.5% for any amounts greater than $100 million up to $150 million, and plus 12.75% for borrowing amounts greater than $150 million. This resulted in a blended interest rate paid of 14.65% on debt outstanding under this facility at December 31, 2018. Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed at 15.48% (base rate of 2.73% plus 12.75%). Effective July 1, 2019, the interest rate on the debt outstanding as of the amendment date will be 10.23% (base rate of 2.73% plus 7.50%). All future borrowings under this facility after July 1, 2019 will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.5% at the borrowing date. The weighted average base rate on the outstanding balance at June 30, 2019 was 2.73% and the overall interest rate was 15.48%. The ESPV Term Note has a revolving feature providing the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.

There are no principal payments due or scheduled until the maturity date. All assets of the Company and ESPV are pledged as collateral to secure the ESPV Facility. The ESPV Facility contains certain covenants for the Company such as minimum cash requirements and a minimum book value of equity requirement. There are also certain covenants for the product portfolio underlying the facility including, among other things, excess spread requirements, maximum roll rate and charge-off rate levels, and maximum loan-to-value ratios. The Company was in compliance with all covenants related to the ESPV Facility as of June 30, 2019 and December 31, 2018.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

VPC, EF SPV and ESPV Facilities:

The outstanding balances of Notes payable, net of debt issuance costs, are as follows:



(Dollars in thousands)	June 30, 2019			December 31, 2018
US Term Note bearing interest at the base rate + 7.5% (2019) and 11% (2018)	$	182,000		$	250,000
UK Term Note bearing interest at the base rate + 7.5% (2019) + 14% (2018)	39,158			39,196
4^th Tranche Term Note bearing interest at the base rate + 13%	18,050			35,050
EF SPV Term Note bearing interest at the base rate + 7.5%	70,000			—
ESPV Term Note bearing interest at the base rate + 12.75% (2019) and + 12-13.5% (2018)	221,000			239,000
Debt issuance costs	(2,971		)	(656		)
Total	$	527,237		$	562,590

The change in the facility balances includes the following:


•	US Term Note - $43 million re-allocation to new EF SPV facility and pay down of $25 million in the first quarter of 2019 under the revolver component of the facility;


•	4th Tranche Term Note - $17 million early repayment in the second quarter of 2019;


•	EF SPV Term note - $43 million re-allocation from US Term Note in the first quarter of 2019 and additional draws of $10 million and $17 million in the first and second quarters of 2019, respectively; and


•	ESPV Term Note - Pay-down of $18 million in the first quarter of 2019 under the revolver component of the facility.

The Company paid a $2.4 million amendment fee on the ESPV Facility during the first quarter of 2019 that is included in deferred debt issuance costs and will be amortized into interest expense over the remaining life of the facility (through January 1, 2024). Additionally, the Company incurred an $850 thousand prepayment penalty during the second quarter of 2019 for the early repayment on the 4th Tranche Term Note that is included in interest expense.

The Company has evaluated the interest rates for its debt and believes they represent market rates based on the Company’s size, industry, operations and recent amendments. As a result, the carrying value for the debt approximates the fair value.

Future debt maturities as of June 30, 2019 are as follows:



Year (dollars in thousands)	June 30, 2019
Remainder of 2019	$	—
2020	—
2021	18,050
2022	—
2023	—
Thereafter	512,158
Total	$	530,208

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 6—GOODWILL AND INTANGIBLE ASSETS

The carrying value of goodwill at June 30, 2019 and December 31, 2018 was approximately $16 million. There were no changes to goodwill during the three and six months ended June 30, 2019. Goodwill represents the excess purchase price over the estimated fair market value of the net assets acquired by the predecessor parent company, Think Finance, Inc. ("Think Finance") related to the Elastic and UK reporting units. Of the total goodwill balance, approximately $0.4 million is deductible for tax purposes.

The carrying value of acquired intangible assets as of June 30, 2019 is presented in the table below:



(Dollars in thousands)	Cost		Accumulated Amortization			Net
Assets subject to amortization:
Acquired technology	$	946	$	(946	)	$	—
Non-compete	3,404		(2,622		)	782
Customers	126		(126		)	—
Assets not subject to amortization:
Domain names	680		—			680
Total	$	5,156	$	(3,694	)	$	1,462

The carrying value of acquired intangible assets as of December 31, 2018 is presented in the table below:



(Dollars in thousands)	Cost		Accumulated Amortization			Net
Assets subject to amortization:
Acquired technology	$	946	$	(946	)	$	—
Non-compete	3,404		(2,372		)	1,032
Customers	126		(126		)	—
Assets not subject to amortization:
Domain names	680		—			680
Total	$	5,156	$	(3,444	)	$	1,712

In May 2018, a party to a non-compete agreement terminated employment with the Company. The terms of the non-compete agreement expired one year after termination. The Company determined that the useful life of the non-compete agreement should coincide with its expiration and therefore amortized the remaining carrying value on a straight-line basis through May 2019. As of June 30, 2019, that non-compete agreement was fully amortized.

Total amortization expense recognized for the three months ended June 30, 2019 and 2018 was approximately $106 thousand and $78 thousand, respectively. Total amortization expense recognized for the six months ended June 30, 2019 and 2018 was approximately $250 thousand and $123 thousand, respectively. The weighted average remaining amortization period for the intangible assets was 6.5 years at June 30, 2019.

Estimated amortization expense relating to intangible assets subject to amortization for each of the five succeeding fiscal years is as follows:



Year (dollars in thousands)	Amount
2020	$	120
2021	120
2022	120
2023	120
2024	120

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 7—LEASES

The Company has non-cancelable operating leases for facility space and equipment with varying terms. All of the leases for facility space qualified for capitalization under FASB ASC 842, Leases. These leases have remaining lease terms of one to eight years, and some may include options to extend the leases for up to ten years. The extension terms are not recognized as part of the right-of-use assets. The Company has elected not to capitalize leases with terms equal to or less than one year. As of June 30, 2019, net assets recorded under operating leases were $11.9 million and net lease liabilities were $16.2 million.

The Company analyzes contracts above certain thresholds to identify leases and lease components. Lease and non-lease components are not separated for facility space leases. The Company uses its contractual borrowing rate to determine lease discount rates when an implicit rate is not available.

Total lease cost for the three and six months ended June 30, 2019, included in Occupancy and equipment in the Condensed Consolidated Income Statements, is detailed in the table below



	Three Months Ended June 30,		Six Months Ended June 30,
Lease cost (dollars in thousands)	2019		2019
Operating lease cost	$	1,215	$	2,363
Short-term lease cost	7		17
Total lease cost	$	1,222	$	2,380

Further information related to leases is as follows:



	Three Months Ended June 30,			Six Months Ended June 30,
Supplemental cash flows information (dollars in thousands)	2019			2019
Cash paid for amounts included in the measurement of lease liabilities	$	1,198		$	2,218
Right-of-use assets obtained in exchange for lease obligations	$	1,110		$	1,110
Weighted average remaining lease term	4.6 years			4.6 years
Weighted average discount rate	10.23		%	10.23		%

Future minimum lease payments as of June 30, 2019 are as follows:



Year (dollars in thousands)	Operating Leases
2019	$	2,598
2020	3,760
2021	3,876
2022	3,984
2023	3,486
Thereafter	3,330
Total future minimum lease payments	$	21,034
Less: Imputed interest	(4,874		)
Operating lease liabilities	$	16,160

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 8—SHARE-BASED COMPENSATION

Share-based compensation expense recognized for the three months ended June 30, 2019 and 2018 totaled approximately $2.5 million and $2.0 million, respectively. Share-based compensation expense recognized for the six months ended June 30, 2019 and 2018 totaled approximately $4.9 million and $3.6 million, respectively.

2016 Omnibus Incentive Plan

The 2016 Omnibus Incentive Plan ("2016 Plan") was adopted by the Company’s Board of Directors on January 5, 2016 and approved by the Company’s stockholders thereafter. The 2016 Plan became effective on June 23, 2016. The 2016 Plan provides for the grant of incentive stock options to the Company’s employees, and for the grant of non-qualified stock options, stock appreciation rights, restricted stock, RSUs, dividend equivalent rights, cash-based awards (including annual cash incentives and long-term cash incentives), and any combination thereof to the Company’s employees, directors and consultants. In connection with the 2016 Plan, the Company has reserved but not issued 7,482,364 shares of common stock, which includes shares that would otherwise return to the 2014 Equity Incentive Plan (the "2014 Plan") as a result of forfeiture, termination, or expiration of awards previously granted under the 2014 Plan and outstanding when the 2016 Plan became effective.

The 2016 Plan will automatically terminate 10 years following the date it became effective, unless the Company terminates it sooner. In addition, the Company’s Board of Directors has the authority to amend, suspend or terminate the 2016 Plan provided such action does not impair the rights under any outstanding award.

As of June 30, 2019, the total number of shares available for future grants under the 2016 Plan was 1,914,929 shares.

The Company has in the past and may in the future make grants of share-based compensation as inducement awards to new employees who are outside the 2016 Plan. The Company's board may rely on the employment inducement exception under NYSE Rule 303A.08 in order to approve the grants.

2014 Equity Incentive Plan

The Company adopted the 2014 Plan on May 1, 2014. The 2014 Plan permitted the grant of incentive stock options, nonstatutory stock options, and restricted stock. On April 27, 2017, the Company's Board of Directors terminated the 2014 Plan as to future awards and confirmed that underlying shares corresponding to awards under the 2014 Plan that were outstanding at the time the 2016 Plan became effective, that are forfeited, terminated or expired, will become available for issuance under the 2016 Plan.

For the six months ended June 30, 2019, the Company had the following activity related to outstanding share-based awards:

Stock Options

Stock options are awarded to encourage ownership of the Company's common stock by employees and to provide increased incentive for employees to render services and to exert maximum effort for the success of the Company. The Company's stock options generally permit net-share settlement upon exercise. The option exercise price, vesting schedule and exercise period are determined for each grant by the administrator of the applicable plan. The Company's stock options generally have a 10-year contractual term and vest over a 4-year period.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

A summary of stock option activity as of and for the six months ended June 30, 2019 is presented below:



Stock Options(1)	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
Outstanding at December 31, 2018	2,328,154		$	4.63
Granted	122,400		3.98
Exercised	(25,000	)	3.25
Forfeited	(105,852	)	5.43
Outstanding at June 30, 2019	2,319,702		4.57		4.45
Options exercisable at June 30, 2019	2,187,462		$	4.58	4.15

(1) All awards presented in the table are for Elevate stock only.

At June 30, 2019, there was approximately $0.2 million of unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted average period of 2.4 years. The total intrinsic value of options exercised for the six months ended June 30, 2019 was $30 thousand.

Restricted Stock Units

RSUs are awarded to serve as a key retention tool for the Company to retain its executives and key employees. RSUs will transfer value to the holder even if the Company’s stock price falls below the price on the date of grant, provided that the recipient provides the requisite service during the period required for the award to “vest.”

The weighted-average grant-date fair value for RSUs granted under the 2016 Plan during the six months ended June 30, 2019 was $4.67. These RSUs primarily vest 25% on the first anniversary of the effective date, and 25% each year thereafter, until full vesting on the fourth anniversary of the effective date.

A summary of RSU activity as of and for the six months ended June 30, 2019 is presented below:



RSUs(1)	Shares		Weighted Average Grant-Date Fair Value		Weighted Average Remaining Contractual Life (in years)
Nonvested at December 31, 2018	3,155,041		$	7.91
Granted	1,309,931		4.67
Vested	(942,466	)	7.85
Forfeited	(274,776	)	7.37
Nonvested at June 30, 2019	3,247,730		6.66		8.82
Expected to vest at June 30, 2019	2,523,770		$	6.74	8.76

(1) All awards presented in the table are for Elevate stock only.

At June 30, 2019, there was approximately $15.0 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 2.5 years. During the six months ended June 30, 2019, the total vest-date fair value of RSUs was approximately $4.3 million. As of June 30, 2019, the aggregate intrinsic value of the vested and expected to vest RSUs was approximately $10.4 million.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

Employee Stock Purchase Plan

The Company offers an Employee Stock Purchase Plan ("ESPP") to eligible US employees. There are currently 1,379,948 shares authorized and 981,418 reserved for the ESPP. There have been 142,267 shares purchased under the ESPP for the six months ended June 30, 2019. Within share-based compensation expense for the six months ended June 30, 2019 and 2018, $386 thousand and $268 thousand, respectively, relates to the ESPP. For the three months ended June 30, 2019 and 2018, $193 thousand and $134 thousand, respectively, within share-based compensation expense relates to the ESPP.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 9—FAIR VALUE MEASUREMENTS

The accounting guidance on fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

The Company groups its assets and liabilities measured at fair value in three levels of the fair value hierarchy, based on the fair value measurement technique, as described below:

Level 1—Valuation is based upon quoted prices (unadjusted) for identical assets and liabilities in active exchange markets that the Company has the ability to access at the measurement date.

Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques with significant assumptions and inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3—Valuation is derived from model-based techniques that use inputs and significant assumptions that are supported by little or no observable market data. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.

The Company monitors the market conditions and evaluates the fair value hierarchy levels at least quarterly. For any transfers in and out of the levels of the fair value hierarchy, the Company discloses the fair value measurement at the beginning of the reporting period during which the transfer occurred. For the six month periods ended June 30, 2019 and 2018, there were no significant transfers between levels.

The level of fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is most significant to the fair value measurement in its entirety. In the determination of the classification of assets and liabilities in Level 2 or Level 3 of the fair value hierarchy, the Company considers all available information, including observable market data, indications of market conditions, and its understanding of the valuation techniques and significant inputs used. Based upon the specific facts and circumstances, judgments are made regarding the significance of the Level 3 inputs to the fair value measurements of the respective assets and liabilities in their entirety. If the valuation techniques that are most significant to the fair value measurements are principally derived from assumptions and inputs that are corroborated by little or no observable market data, the asset or liability is classified as Level 3.

Financial Assets and Liabilities Not Measured at Fair Value

The Company has evaluated Loans receivable, net of allowance for loan losses, Receivable from CSO lenders, Receivable from payment processors and Accounts payable and accrued expenses, and believes the carrying value approximates the fair value due to the short-term nature of these balances. The Company has also evaluated the interest rates for Notes payable, net and believes they represent market rates based on the Company’s size, industry, operations and recent amendments. As a result, the carrying value for Notes payable, net approximates the fair value. The Company classifies its fair value measurement techniques for the fair value disclosures associated with Loans receivable, net of allowance for loan losses, Receivable from CSO lenders, Receivable from payment processors, Accounts payable and accrued liabilities and Notes payable, net as Level 3 in accordance with ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”).

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

Fair Value Measurements on a Recurring Basis

On January 11, 2018, the Company and ESPV each entered into one interest rate cap transaction with a counterparty to mitigate the floating rate interest risk on a portion of the debt under the VPC Facility and the ESPV Facility, respectively. On January 16, 2018, the Company paid fixed premiums of $719 thousand and $648 thousand for the interest rate caps on the US Term Note (under the VPC Facility) and the ESPV Facility, respectively. The interest rate caps matured on February 1, 2019. The interest rate caps qualified for hedge accounting as cash flow hedges. Gains and losses on the interest rate caps were recognized in Accumulated other comprehensive income (loss) in the period incurred and subsequently reclassified to Interest expense when the hedged expenses were recorded.

The Company used model-derived valuations that discounted the future expected cash receipts that would occur if variable interest rates rose above the strike price of the caps. The variable interest rates used in the calculation of projected receipts on the caps were based on an expectation of future interest rates derived from observable market interest rate curves and volatilities in active markets (Level 2). The following tables summarize these interest rate caps as of June 30, 2019 and December 31, 2018 and for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):



Contract date	Maturity date	Hedged interest rate payments' related note payable	Strike rate		Notional amount		Fair value at June 30, 2019		Fair value at December 31, 2018
January 11, 2018	February 1, 2019	US Term Note	1.75	%	$	240,000	$	—	$	216
January 11, 2018	February 1, 2019	ESPV Facility	1.75	%	216,000		—		196
					$	456,000	$	—	$	412



Unrealized gains recognized in Accumulated other comprehensive income (loss)	As of June 30, 2019		As of December 31, 2018
US Term Note interest rate cap	$	—	$	159
ESPV Facility interest rate cap	—		144
	$	—	$	303

Gains recognized in Interest expense	Three Months Ended June 30, 2019		Three Months Ended June 30, 2018
US Term Note interest rate cap	$	—	$	298
ESPV Facility interest rate cap	—		269
	$	—	$	567

Gains recognized in Interest expense	Six Months Ended June 30, 2019		Six Months Ended June 30, 2018
US Term Note interest rate cap	$	159	$	408
ESPV Facility interest rate cap	144		368
	$	303	$	776

The Company has no derivative amounts subject to enforceable master netting arrangements that are offset on the Condensed Consolidated Balance Sheets. The Derivative liability related to the Convertible Term Notes is measured at fair value on a recurring basis. The changes in the Derivative liability for the three and six months ended June 30, 2018 are shown in the following table. The Convertible Term Notes converted to the 4^th Tranche Term Note upon maturity at January 30, 2018 and the Derivative liability was settled with no value remaining outstanding at December 31, 2018 and June 30, 2019.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018



(Dollars in thousands)	Embedded Derivative Liability in Convertible Term Notes
Balance, December 31, 2017	$	1,972
Settlement of derivative due to conversion of the underlying Convertible Term Note to 4^th Tranche Term Note	(2,010		)
Fair value adjustment (Non-Operating expense in the Condensed Consolidated Income Statements)	38
Balance, March 31, 2018	$	—
Balance, June 30, 2018	$	—
Balance, December 31, 2018	$	—
Balance, June 30, 2019	$	—

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 10—DERIVATIVES

The Company and ESPV use hedging programs to manage interest rate risk associated with future interest payments. The Company and ESPV entered into two interest rate cap instruments on January 11, 2018, which matured on February 1, 2019.

Cash Flow Hedges

The Company and ESPV utilize interest rate caps to offset interest rate fluctuations in the Company's and ESPV's future interest payments on certain of their Notes payable. The financial instruments are designated and accounted for as cash flow hedges, and the Company and ESPV measure the effectiveness of the hedges at least quarterly. Effective gains or losses related to these cash flow hedges are reported in Accumulated other comprehensive income (loss) and reclassified into earnings, through interest expense, in the period or periods in which the hedged transactions affect earnings. See Note 9—Fair Value for additional information on these cash flow hedges. The following tables summarize the activity that was recorded in Accumulated other comprehensive income (loss) in addition to reclassifications from Accumulated other comprehensive income (loss) into earnings related to each of the Company's and ESPV's interest rate caps during the three and six months ended June 30, 2019 and 2018.



	Three Months Ended June 30, 2019				Three Months Ended June 30, 2018
(Dollars in thousands)	US Term Note		ESPV Facility		US Term Note			ESPV Facility
Beginning unrealized gains in Accumulated other comprehensive income (loss)	$	—	$	—	$	—		$	—
Gross gains recognized in Accumulated other comprehensive income (loss)	—		—		959			863
Gains reclassified to income through Interest expense	—		—		(298		)	(269		)
Ending unrealized gains in Accumulated other comprehensive income (loss)	$	—	$	—	$	661		$	594



	Six Months Ended June 30, 2019						Six Months Ended June 30, 2018
(Dollars in thousands)	US Term Note			ESPV Facility			US Term Note			ESPV Facility
Beginning unrealized gains in Accumulated other comprehensive income (loss)	$	159		$	144		$	—		$	—
Gross gains recognized in Accumulated other comprehensive income (loss)	—			—			1,069			962
Gains reclassified to income through Interest expense	(159		)	(144		)	(408		)	(368		)
Ending unrealized gains in Accumulated other comprehensive income (loss)	$	—		$	—		$	661		$	594

Embedded Derivative

During 2016, the Company identified a bifurcated embedded derivative in its Convertible Term Notes related to its conversion feature in addition to the obligation to pay a redemption premium upon cash redemption of the notes. This derivative matured on January 30, 2018 and is no longer on the balance sheet as of June 30, 2019 and December 31, 2018. See Note 9—Fair Value for additional information about the bifurcated embedded derivative.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 11—INCOME TAXES

Income tax expense for the three and six months ended June 30, 2019 and 2018 consists of the following:



	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2019		2018			2019		2018
Current income tax expense (benefit):
Federal	$	—	$	—		$	—	$	(5	)
State	254		(42		)	532		33
Foreign	—		(290		)	—		115
Total current income tax expense	254		(332		)	532		143

Deferred income tax expense (benefit):
Federal	2,108		385			6,447		3,920
State	272		41			1,670		682
Total deferred income tax expense	2,380		426			8,117		4,602

Total income tax expense	$	2,634	$	94		$	8,649	$	4,745

No material penalties or interest related to taxes were recognized for the three and six months ended June 30, 2019 and 2018.

The Company’s consolidated effective tax rates for the six months ended June 30, 2019 and 2018, including discrete items, were 31% and 27%, respectively, while the US effective tax rates were 31% and 22%, respectively. For the six months ended June 30, 2019 and 2018, the Company’s effective tax rate differed from the standard corporate federal income tax rate of 21% for the US primarily due to its permanent non-deductible items, corporate state tax obligations in the states where it has lending activities and the impact of the Global Intangible Low-Taxed Income ("GILTI") provision of the December 22, 2017 Tax Cuts and Jobs Act (the "Act"). The Company's US cash effective tax rate was approximately 2%.

On December 22, 2017, the SEC issued SAB 118, which provides guidance on accounting for tax effects of the Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. The Company had completed its accounting of the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future, generally 21% in 2018. During the three and six months ended June 30, 2018 the Company recorded benefits of $0 and $245 thousand, respectively, to its provisional amounts related to the Act, which had a 2% impact for the six months ended June 30, 2018.

The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company would make a cumulative adjustment in that quarter.

For purposes of evaluating the need for a deferred tax valuation allowance, significant weight is given to evidence that can be objectively verified. The following provides an overview of the assessment that was performed for both the domestic and foreign deferred tax assets, net.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

US deferred tax assets, net

At June 30, 2019 and December 31, 2018, the Company did not establish a valuation allowance for its US deferred tax assets (“DTA”) based on management’s expectation of generating sufficient taxable income in a look forward period over the next three to five years. The unutilized net operating loss ("NOL") carryforward from US operations at June 30, 2019 and December 31, 2018 was approximately $42.0 million. The NOL carryforward expires beginning in 2034. The research and development credit expires beginning in 2036. The ultimate realization of the resulting deferred tax asset is dependent upon generating sufficient taxable income. The Company considered the following positive and negative factors when making their assessment regarding the ultimate realizability of the deferred tax assets.

Significant positive factors included the following:

•

In 2018, the Company continued to grow its operating income (from $48 million in 2016 to $71 million in 2017 to $95 million in 2018). The US-only pre-tax earnings improved from a US-only pre-tax loss $4.5 million in 2017 to US-only pre-tax income of $14.1 million in 2018, a 412% improvement from prior year. The primary driver for the increase in operating income is related to our continued margin expansion provided by direct marketing and operating expense while improving credit quality in the loan portfolio during the past year.

•

In 2019, the Company is forecasting US taxable income as it continues to grow its business and generate even greater operating income. The continued growth of the loan portfolio within the credit quality and marketing cost targets will drive improved gross margins for the Company. The Company's operating expenses are within targeted efficiency ratios and are expected to be relatively flat. The Company re-negotiated its debt facilities to lower interest rates, which will drive improved profitability from lower interest expense beginning in 2019. Various forecast scenarios have been performed with the results reflecting usage of the balance of the US NOL in 2019. The Company's operating income for the six months ended June 30, 2019 was $65.0 million, a 15% improvement over the prior year period.

Significant negative factor included:

•

As of December 31, 2018, the Company had a three-year cumulative pre-tax loss position of $0.8 million; which approximates a break-even profitability position. The pre-tax losses in years prior to 2018 were incurred due to the establishment of an infrastructure for the Company separate from Think Finance while the Company was scaling the growth of the relatively new products of Rise and Elastic. The Company began to utilize the NOL in 2018 and expects to be in a three-year cumulative pre-tax income position in 2019 under various forecasting scenarios.

The Company has given due consideration to all the factors and believes the positive evidence outweighs the negative evidence and has concluded that the US deferred tax asset is expected to be realized based on management’s expectation of generating sufficient taxable income over the next three to five years. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted in the future if estimates of future taxable income change.

UK deferred tax assets, net

At June 30, 2019 and December 31, 2018, the Company recognized a full valuation allowance for its foreign deferred tax assets due to the lack of sufficient objective evidence regarding the realization of these assets in the foreseeable future. The Company assesses the UK deferred tax assets on a quarterly basis, and, as a result, there have been no changes as of June 30, 2019. Regardless of the deferred tax valuation allowance recognized at June 30, 2019 and December 31, 2018, the Company continues to retain NOL carryforwards for foreign income tax purposes of approximately $56.7 million, available to offset future foreign taxable income. To the extent that the Company generates taxable income in the future to utilize the tax benefits of the related deferred tax assets, subject to certain potential limitations, it may be able to reduce its effective tax rate by reducing the valuation allowance. The Company’s foreign NOL carryforward can be carried forward indefinitely.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 12—COMMITMENTS, CONTINGENCIES AND GUARANTEES

Contingencies

Currently and from time to time, the Company may become a defendant in various legal and regulatory actions that arise in the ordinary course of business. The Company generally cannot predict the eventual outcome, the timing of the resolution or the potential losses, fines or penalties of such legal and regulatory actions. Actual outcomes or losses may differ materially from the Company's current assessments and estimates, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition or cash flows.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation, regulatory matters and other legal proceedings when those matters present material loss contingencies that are both probable and reasonably estimable. Even when an accrual is recorded, the Company may be exposed to loss in excess of any amounts accrued.

UK Claims Accrual:

During the second half of 2018, the Company's UK business began to receive an increased number of customer complaints initiated by claims management companies ("CMCs") related to the affordability assessment of certain loans. If the Company's evidence supports the affordability assessment and the Company rejects the claim, the customer has the right to take the complaint to the Financial Ombudsman Service for further adjudication. The CMCs' campaign against the high cost lending industry increased significantly during the second half of 2018 resulting in a significant increase in affordability claims against all companies in the industry during this period. The Company believes that many of the increased claims against it are without merit and reflect the use of abusive and deceptive tactics by the CMCs. The Financial Conduct Authority, a regulator in the UK financial services industry, began regulating the CMCs in April 2019 in order to ensure that the methods used by the CMCs are in the best interests of the consumer and the industry.

As of June 30, 2019 and December 31, 2018, the Company accrued approximately $1.6 million and $0.9 million, respectively, for the claims that were determined to be probable and reasonably estimable based on the Company's historical loss rates related to these claims. This accrual is recognized as Other cost of sales in the Condensed Consolidated Income Statements and as Accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets. There was no expense accrued in the three or six months ended June 30, 2018. The outcomes of the adjudication of these claims may differ from the Company's estimates, and as a result, the Company's estimates may change in the near term and the effect of any such change could be material to the financial statements. The Company continues to monitor the matters for further developments that could affect the amount of the loss contingency recognized. The following tables present a rollforward of the amount accrued for the three months and six months ended June 30, 2019.



(Dollars in thousands)	Three Months Ended June 30, 2019
Beginning balance at March 31, 2019	$	1,129
Accruals	2,968
Payments	(2,572		)
Effects of changes in foreign currency rates	66
Ending balance	$	1,591



(Dollars in thousands)	Six Months Ended June 30, 2019
Beginning balance at December 31, 2018	$	925
Accruals	4,092
Payments	(3,494		)
Effects of changes in foreign currency rates	68
Ending balance	$	1,591

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

Other Matters:

The company is cooperating with the Consumer Financial Protection Bureau (the "CFPB") related to a civil investigative demand ("CID") received by Think Finance requesting information about the operations of Think Finance prior to the spin-off. In November 2017, the CFPB sued Think Finance in the U.S. District Court for the District of Montana. Elevate is not a party to this lawsuit. The CFPB and Think Finance have agreed to settle all claims and executed a settlement agreement that is awaiting final court approval in the United States Bankruptcy Court for the Northern District of Texas.

Commitments

The Elastic product, which offers lines of credit to consumers, had approximately $262.8 million and $250.1 million in available and unfunded credit lines at June 30, 2019 and December 31, 2018, respectively. In May 2017, the Rise product began offering lines of credit to consumers in certain states and had approximately $10.2 million and $9.3 million in available and unfunded credit lines at June 30, 2019 and December 31, 2018, respectively. The Today Card, which expanded its test launch in November 2018, had approximately $4.9 million and $0.4 million in available and unfunded credit lines as of June 30, 2019 and December 31, 2018, respectively. While these amounts represented the total available unused credit lines, the Company has not experienced and does not anticipate that all line of credit customers will access their entire available credit lines at any given point in time. The Company has not recorded a loan loss reserve for unfunded credit lines as the Company has the ability to cancel commitments within a relatively short timeframe.

Effective June 2017, the Company entered into a seven-year lease agreement for office space in California. Upon the commencement of the lease, the Company was required to provide the lessor with an irrevocable and unconditional $500 thousand letter of credit. Provided the Company is not in default of any terms of the lease agreement, the outstanding required balance of the letter of credit will be reduced by $100 thousand per year beginning on the second anniversary of the lease commencement and ending on the fifth anniversary of the lease agreement. The minimum balance of the letter of credit will be at least $100 thousand throughout the duration of the lease. At June 30, 2019 and December 31, 2018, the Company had $400 thousand and $500 thousand, respectively, of cash balances securing the letter of credit which is included in Restricted cash within the Condensed Consolidated Balance Sheets.

Guarantees

In connection with its CSO programs, the Company guarantees consumer loan payment obligations to CSO lenders and is required to purchase any defaulted loans it has guaranteed. The guarantee represents an obligation to purchase specific loans that go into default.

Indemnification

In the ordinary course of business, the Company may indemnify customers, vendors, lessors, investors, and other parties for certain matters subject to various terms and scopes. For example, the Company may indemnify certain parties for losses due to the Company's breach of certain agreements or due to certain services it provides. The Company has not incurred material costs to settle claims related to such indemnification provisions as of June 30, 2019 and December 31, 2018. The fair value of these liabilities is immaterial; accordingly, there are no liabilities recorded for these agreements as of June 30, 2019 and December 31, 2018.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 13—OPERATING SEGMENT INFORMATION

The Company determines operating segments based on how its chief operating decision-maker manages the business, including making operating decisions, deciding how to allocate resources and evaluating operating performance. The Company's chief operating decision-maker is its Chief Executive Officer, who reviews the Company's operating results monthly on a consolidated basis.

The Company has one reportable segment, which provides online financial services for subprime consumers, which is composed of the Company’s operations in the United States and the United Kingdom. The Company has aggregated all components of its business into a single reportable segment based on the similarities of the economic characteristics, the nature of the products and services, the distribution methods, the type of customers, and the nature of the regulatory environments.

Information related to each reportable segment is outlined below. Segment revenue is used to measure performance because management believes that this information is the most relevant in evaluating the results of the respective segments relative to other entities that operate in the same industry.

The following tables summarize the allocation of net revenues and long-lived assets based on geography. The geographic presentation of the Company's segment assets was based on the geographic location of the asset and revenue by the Company's country of domicile.



	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2019		2018		2019		2018
Revenues
United States	$	150,376	$	154,909	$	310,441	$	318,215
United Kingdom	27,384		29,468		56,823		59,699
Total	$	177,760	$	184,377	$	367,264	$	377,914

	June 30, 2019		December 31, 2018
Long-lived assets
United States	$	55,351	$	41,933
United Kingdom	21,625		17,385
Total	$	76,976	$	59,318

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 14—RELATED PARTIES

The Company entered into sublease agreements with Think Finance for office space that expired in 2018. Total rent and utility payments made to Think Finance for office space were approximately $0 thousand and $297 thousand for the three months ended June 30, 2019 and 2018, respectively and $0 thousand and $585 thousand for the six months ended June 30, 2019 and 2018, respectively. Rent and utility expense is included in Occupancy and equipment within the Condensed Consolidated Income Statements.

Expenses related to our board of directors, including board fees, travel reimbursements, share-based compensation and a consulting arrangement with a related party for the three and six months ended June 30, 2019 and 2018 are included in Professional services within the Condensed Consolidated Income Statements and were as follows:



	Three Months Ended June 30,
(Dollars in thousands)	2019		2018
Fees and travel expenses	$	172	$	142
Stock compensation	379		296
Consulting	92		75
Total board related expenses	$	643	$	513



	Six Months Ended June 30,
(Dollars in thousands)	2019		2018
Fees and travel expenses	$	342	$	284
Stock compensation	746		510
Consulting	184		150
Total board related expenses	$	1,272	$	944

During the year ended December 31, 2017, a member of the board of directors entered into a direct investment of $800 thousand in the VPC Facility. For the three months ended June 30, 2019 and 2018, the interest payments on this loan were $21 thousand and $28 thousand, respectively. The interest payments on this loan were $43 thousand and $55 thousand for the six months ended June 30, 2019 and 2018, respectively.

At June 30, 2019 and December 31, 2018, the Company had approximately $120 thousand and $119 thousand, respectively, due to board members related to the above expenses, which is included in Accounts payable and accrued liabilities within the Condensed Consolidated Balance Sheets.

Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For the three and six months ended June 30, 2019 and 2018

NOTE 15—SUBSEQUENT EVENTS

The Company evaluated subsequent events as of the date these financial statements are made available and determined there has been no material subsequent events that required recognition or additional disclosure in these condensed consolidated financial statements, except as follows:

The Company made draws on the EF SPV Facility of $12 million subsequent to June 30, 2019.

On July 25, 2019, the Board of Directors of the Company accepted the resignation of Kenneth E. Rees as Chief Executive Officer of the Company, effective on July 31, 2019. Mr. Rees will remain a director of the Company but has resigned as Chairman of the Board of Directors.

For the period from July 1, 2019 to August 8, 2019, the Company repurchased 91,370 shares of its common stock on the open market for a total purchase price of $434 thousand, including any fees or commissions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Note About Forward-Looking Statements" section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We generally refer to loans, customers and other information and data associated with each of Rise, Elastic, Sunny and Today Card as Elevate’s loans, customers, information and data, irrespective of whether Elevate directly originates the credit to the customer or whether such credit is originated by a third party.

OVERVIEW

We provide online credit solutions to consumers in the US and the UK who are not well-served by traditional bank products and who are looking for better options than payday loans, title loans, pawn and storefront installment loans. Non-prime consumers now represent a larger market than prime consumers but are risky to underwrite and serve with traditional approaches. We’re succeeding at it - and doing it responsibly - with best-in-class advanced technology and proprietary risk analytics honed by serving more than 2.3 million customers with $7.4 billion in credit. Our current online credit products, Rise, Elastic and Sunny, and our recently test launched Today Card reflect our mission to provide customers with access to competitively priced credit and services while helping them build a brighter financial future with credit building and financial wellness features. We call this mission "Good Today, Better Tomorrow."

We earn revenues on the Rise and Sunny installment loans, on the Rise and Elastic lines of credit and on the Today Card credit card product. Our revenue primarily consists of finance charges and line of credit fees. Finance charges are driven by our average loan balances outstanding and by the average annual percentage rate (“APR”) associated with those outstanding loan balances. We calculate our average loan balances by taking a simple daily average of the ending loan balances outstanding for each period. Line of credit fees are recognized when they are assessed and recorded to revenue over the life of the loan. We present certain key metrics and other information on a “combined” basis to reflect information related to loans originated by us and by our bank partners that license our brands, Republic Bank, FinWise Bank and Capital Community Bank, as well as loans originated by third-party lenders pursuant to CSO programs, which loans originated through CSO programs are not recorded on our balance sheet in accordance with US GAAP. See “—Key Financial and Operating Metrics” and “—Non-GAAP Financial Measures.”

We use our working capital, funds provided by third-party lenders pursuant to CSO programs and our credit facility with Victory Park Management, LLC ("VPC” and the "VPC Facility") to fund the loans we make to our Rise and Sunny customers and provide working capital. Since originally entering into the VPC Facility, it has been amended several times to increase the maximum total borrowing amount available from the original amount of $250 million to $495 million at June 30, 2019. See “—Liquidity and Capital Resources—Debt facilities.”

Beginning in the fourth quarter of 2018, the Company also licenses its Rise installment loan brand to a third-party lender, FinWise Bank, which originates Rise installment loans in 19 states. FinWise Bank retains 5% of the balances of all loans originated and then sells a 95% loan participation in those Rise installment loans to a third-party special purpose vehicle, EF SPV, Ltd. ("EF SPV"). We do not own EF SPV, but we have a credit default protection agreement with EF SPV whereby we provide credit protection to the investors in EF SPV against the Rise installment loan losses in return for a credit premium. Per the terms of this agreement, under US GAAP, the Company is the primary beneficiary of EF SPV and is required to consolidate the financial results of EF SPV as a VIE in its consolidated financial results. The condensed consolidated financial statements include revenue, losses and loans receivable related to the 95% of Rise installment loans originated by FinWise Bank and sold to EF SPV. These loan participation purchases are funded through a separate financing facility (the "EF SPV Facility"), effective February 1, 2019, and through cash flows from operations generated by EF SPV. The EF SPV Facility has a maximum total borrowing amount available of $150 million.

The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all loans originated and sells a 90% loan participation in the Elastic lines of credit. An SPV structure was implemented such that the loan participations are sold by Republic Bank to Elastic SPV, Ltd. (“Elastic SPV”) and Elastic SPV receives its funding from VPC in a separate financing facility (the “ESPV Facility”), which was finalized on July 13, 2015. We do not own Elastic SPV but we have a credit default protection agreement with Elastic SPV whereby we provide credit protection to the investors in Elastic SPV against Elastic loan losses in return for a credit premium. Per the terms of this agreement, under US GAAP, the Company is the primary beneficiary of Elastic SPV and is required to consolidate the financial results of Elastic SPV as a VIE in its consolidated financial results.

The ESPV Facility has also been amended several times and the original commitment amount of $50 million has grown to $350 million as of June 30, 2019. See “—Liquidity and Capital Resources—Debt facilities.”

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

•

Revenue Growth. Key metrics related to revenue performance that we monitor by product include the ending and average combined loan balances outstanding, the effective APR of our product loan portfolios, the total dollar value of loans originated, the number of new customer loans made, the ending number of customer loans outstanding and the related customer acquisition costs (“CAC”) associated with each new customer loan made. We include CAC as a key metric when analyzing revenue growth (rather than as a key metric within margin expansion).

•

Stable credit quality. Since the time they were managing our legacy US products, our management team has maintained stable credit quality across the loan portfolio they were managing. Additionally, in the periods covered in this Management's Discussion and Analysis of Financial Condition and Results of Operations, we have improved our credit quality. The credit quality metrics we monitor include net charge-offs as a percentage of revenues, the combined loan loss reserve as a percentage of outstanding combined loans, total provision for loan losses as a percentage of revenues and the percentage of past due combined loans receivable – principal.

•

Margin expansion. We expect that our operating margins will continue to expand over the near term as we lower our direct marketing costs and efficiently manage our operating expenses while continuing to improve our credit quality. Over the next several years, as we continue to scale our loan portfolio, we anticipate that our direct marketing costs primarily associated with new customer acquisitions will decline to approximately 10% of revenues and our operating expenses will decline to approximately 20% of revenues. We aim to manage our business to achieve a long-term operating margin of 20%, and do not expect our operating margin to increase beyond that level, as we intend to pass on any improvements over our targeted margins to our customers in the form of lower APRs. We believe this is a critical component of our responsible lending platform and over time will also help us continue to attract new customers and retain existing customers.

KEY FINANCIAL AND OPERATING METRICS

As discussed above, we regularly monitor a number of metrics in order to measure our current performance and project our future performance. These metrics aid us in developing and refining our growth strategies and in making strategic decisions.

Certain of our metrics are non-GAAP financial measures. We believe that such metrics are useful in period-to-period comparisons of our core business. However, non-GAAP financial measures are not an alternative to any measure of financial performance calculated and presented in accordance with US GAAP. See “—Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to US GAAP.

Revenue Growth



	As of and for the three months ended June 30,						As of and for the six months ended June 30,
Revenue metrics (dollars in thousands, except as noted)	2019			2018			2019			2018
Revenues	$	177,760		$	184,377		$	367,264		$	377,914
Period-over-period revenue	(4		)%	23		%	(3		)%	23		%
Ending combined loans receivable – principal(1)	601,191			589,465			601,191			589,465
Average combined loans receivable – principal(1)(2)	580,937			573,956			595,174			586,515
Total combined loans originated – principal	367,155			380,145			665,419			689,691
Average customer loan balance (in dollars)(3)	1,620			1,582			1,620			1,582
Number of new customer loans	70,650			85,146			121,126			155,281
Ending number of combined loans outstanding	371,218			372,592			371,218			372,592
Customer acquisition costs (in dollars)	229			260			226			276
Effective APR of combined loan portfolio	122		%	128		%	124		%	129		%

_________

(1)

Combined loans receivable is defined as loans owned by the Company and consolidated VIEs plus loans originated and owned by third-party lenders pursuant to our CSO programs. See “—Non-GAAP Financial Measures” for more information and for a reconciliation of Combined loans receivable to Loans receivable, net, the most directly comparable financial measure calculated in accordance with US GAAP.


(2)	Average combined loans receivable – principal is calculated using an average of daily Combined loans receivable – principal balances.


(3)	Average customer loan balance is an average of all four products and is calculated for each product by dividing the ending Combined loans receivable – principal by the number of loans outstanding at period end.

Revenues. Our revenues are composed of Rise finance charges, Rise CSO fees (which are fees we receive from customers who obtain a loan through the CSO program for the credit services, including the loan guaranty, we provide), finance charges on Sunny installment loans and revenues earned on the Rise and Elastic lines of credit. Finance charge and fee revenues from the recently test launched Today Card credit card product were immaterial. See “—Components of our Results of Operations—Revenues.”

Ending and average combined loans receivable – principal. We calculate the average combined loans receivable – principal by taking a simple daily average of the ending combined loans receivable – principal for each period. Key metrics that drive the ending and average combined loans receivable – principal include the amount of loans originated in a period and the average customer loan balance. All loan balance metrics include only the 90% participation in the related Elastic line of credit advances (we exclude the 10% held by Republic Bank) and the 95% participation in FinWise Bank originated Rise installment loans, but include the full loan balances on CSO loans, which are not presented on our Condensed Consolidated Balance Sheet.

Total combined loans originated – principal. The amount of loans originated in a period is driven primarily by loans to new customers as well as new loans to prior customers, including refinancings of existing loans to customers in good standing.

Average customer loan balance and effective APR of combined loan portfolio. The average loan amount and its related APR are based on the product and the underlying credit quality of the customer. Generally, better credit quality customers are offered higher loan amounts at lower APRs. Additionally, new customers have more potential risk of loss than prior or existing customers due to lack of payment history and the potential for fraud. As a result, newer customers typically will have lower loan amounts and higher APRs to compensate for that additional risk of loss. The effective APR is calculated based on the actual amount of finance charges generated from a customer loan divided by the average outstanding balance for the loan, and can be lower than the stated APR on the loan due to waived finance charges and other reasons. For example, a Rise customer may receive a $2,000 installment loan with a term of 24 months and a stated rate of 180%. In this example, the customer’s monthly installment loan payment would be $310.86. As the customer can prepay the loan balance at any time with no additional fees or early payment penalty, the customer pays the loan in full in month eight. The customer’s loan earns interest of $2,337.81 over the eight month period and has an average outstanding balance of $1,948.17. The effective APR for this loan is 180% over the eight month period calculated as follows:

($2,337.81 interest earned / $1,948.17 average balance outstanding) x 12 months per year = 180%

8 months

In addition, as an example for Elastic, if a customer makes a $2,500 draw on the customer’s line of credit and this draw required bi-weekly minimum payments of 5% (equivalent to 20 bi-weekly payments), and if all minimum payments are made, the draw would earn finance charges of $1,148. The effective APR for the line of credit in this example is 109% over the payment period and is calculated as follows:

($1,148.00 fees earned / $1,369.05 average balance outstanding) x 26 bi-weekly periods per year = 109%

20 payments

The actual amount of revenue we realize on a loan portfolio is also impacted by the amount of prepayments and charged-off customer loans in the portfolio. For a single loan, on average, we typically expect to realize approximately 60% of the revenues that we would otherwise realize if the loan were to fully amortize at the stated APR. From the Rise example above, if we waived $400 of interest for this customer, the effective APR for this loan would decrease to 149%.

Number of new customer loans. We define a new customer loan as the first loan made to a customer for each of our products (so a customer receiving a Rise installment loan and then at a later date taking their first cash advance on an Elastic line of credit would be counted twice). The number of new customer loans is subject to seasonal fluctuations. New customer acquisition is typically slowest during the first six months of each calendar year, primarily in the first quarter, compared to the latter half of the year, as our existing and prospective US customers usually receive tax refunds during this period and, thus, have less of a need for loans from us. Further, many US customers will use their tax refunds to prepay all or a portion of their loan balance during this period, so our overall loan portfolio typically decreases during the first quarter of the calendar year. Overall loan portfolio growth and the number of new customer loans tends to accelerate during the summer months (typically June and July), at the beginning of the school year (typically late August to early September) and during the winter holidays (typically late November to early December).

Customer acquisition costs. A key expense metric we monitor related to loan growth is our CAC. This metric is the amount of direct marketing costs incurred during a period divided by the number of new customer loans originated during that same period. New loans to former customers are not included in our calculation of CAC (except to the extent they receive a loan through a different product) as we believe we incur no material direct marketing costs to make additional loans to a prior customer through the same product.

The following tables summarize the changes in customer loans by product for the three and six months ended June 30, 2019 and 2018.



	Three Months Ended June 30, 2019
	Rise (US)			Elastic (US)(1)			Total Domestic			Sunny (UK)			Total
Beginning number of combined loans outstanding	125,021			145,760			270,781			93,898			364,679
New customer loans originated	30,177			13,826			44,003			26,647			70,650
Former customer loans originated	18,850			18			18,868			—			18,868
Attrition	(38,277		)	(17,043		)	(55,320		)	(27,659		)	(82,979		)
Ending number of combined loans outstanding	135,771			142,561			278,332			92,886			371,218
Customer acquisition cost	$	243		$	271		$	252		$	192		$	229
Average customer loan balance	$	2,253		$	1,738		$	1,989		$	512		$	1,620



	Three Months Ended June 30, 2018
	Rise (US)			Elastic (US)			Total Domestic			Sunny (UK)			Total
Beginning number of combined loans outstanding	127,263			138,555			265,818			86,791			352,609
New customer loans originated	27,149			26,305			53,454			31,692			85,146
Former customer loans originated	22,816			127			22,943			—			22,943
Attrition	(46,331		)	(15,847		)	(62,178		)	(25,928		)	(88,106		)
Ending number of combined loans outstanding	130,897			149,140			280,037			92,555			372,592
Customer acquisition cost	$	307		$	234		$	271		$	243		$	260
Average customer loan balance	$	2,187		$	1,711		$	1,934		$	519		$	1,582



	Six Months Ended June 30, 2019
	Rise (US)			Elastic (US)(1)			Total Domestic			Sunny (UK)			Total
Beginning number of combined loans outstanding	142,758			166,397			309,155			89,449			398,604
New customer loans originated	47,542			18,664			66,206			54,920			121,126
Former customer loans originated	36,641			27			36,668			—			36,668
Attrition	(91,170		)	(42,527		)	(133,697		)	(51,483		)	(185,180		)
Ending number of combined loans outstanding	135,771			142,561			278,332			92,886			371,218
Customer acquisition cost	$	276		$	277		$	276		$	165		$	226



	Six Months Ended June 30, 2018
	Rise (US)			Elastic (US)			Total Domestic			Sunny (UK)			Total
Beginning number of combined loans outstanding	140,790			140,672			281,462			80,510			361,972
New customer loans originated	49,414			47,185			96,599			58,682			155,281
Former customer loans originated	38,199			216			38,415			—			38,415
Attrition	(97,506		)	(38,933		)	(136,439		)	(46,637		)	(183,076		)
Ending number of combined loans outstanding	130,897			149,140			280,037			92,555			372,592
Customer acquisition cost	$	318		$	252		$	286		$	260		$	276

(1) Includes immaterial balances related to the Today Card, which expanded its test launch in November 2018.

Recent trends. Our revenues for the three months ended June 30, 2019 totaled $177.8 million, a decrease of 4% versus the three months ended June 30, 2018. Additionally, a similar trend occurred for the six months ended June 30, 2019 as revenues totaled $367.3 million, down 3% versus the prior year. This decrease in revenues was primarily driven by a 600 basis points decrease in our effective APR on the combined loans receivable - principal balance as the APR declined to 122% during the three months ended June 30, 2019 from 128% during the comparable prior year period. This decrease in the average APR resulted primarily from our Rise product as the average APR of a new Rise loan originated by a FinWise Bank customer is 130%; which is lower than our typical state-licensed Rise customer but with a better credit profile. In addition, we have experienced slower new loan growth as we funded approximately 70,650 new customer loans in the second quarter of this year, a decrease of 17% versus the second quarter of 2018. As we disclosed in our 2018 Annual Report on Form 10-K, we have chosen to moderate our new customer growth through the first and second quarters as we deploy our new credit models during the second and third quarters of 2019.

Our CAC was significantly lower in the second quarter of 2019 as compared to the second quarter of 2018 and was below the lower end of our targeted range of $250 to $300. This decrease was attributable to our Sunny and Rise products. The Rise CAC decreased from $307 for the three months ended June 30, 2018 to $243 due to more efficient marketing spend in the Rise portfolio originated by FinWise Bank. The Sunny CAC also decreased for the three months ended June 30, 2018 from $243 to $192 due to more efficient marketing spend coupled with diminished competition in the UK market. We believe our CAC in future quarters will remain within or below our target range of $250 to $300 as we continue to optimize the efficiency of our marketing channels and benefit from continued less competition in the UK market.

Credit quality



	As of and for the three months ended June 30,						As of and for the six months ended June 30,
Credit quality metrics (dollars in thousands)	2019			2018			2019			2018
Net charge-offs(1)	$	79,609		$	91,756		$	183,594		$	193,798
Additional provision for loan losses(1)	(1,584		)	(3,158		)	(18,138		)	(13,058		)
Provision for loan losses	$	78,025		$	88,598		$	165,456		$	180,740
Past due combined loans receivable – principal as a percentage of combined loans receivable – principal(2)	9		%	10		%	9		%	10		%
Net charge-offs as a percentage of revenues(1)	45		%	50		%	50		%	51		%
Total provision for loan losses as a percentage of revenues	44		%	48		%	45		%	48		%
Combined loan loss reserve(3)	$	77,879		$	80,531		$	77,879		$	80,531
Combined loan loss reserve as a percentage of combined loans receivable(3)(4)	12		%	13		%	12		%	13		%

_________

(1)

Net charge-offs and additional provision for loan losses are not financial measures prepared in accordance with US GAAP. Net charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due, or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud, offset by any recoveries. Additional provision for loan losses is the amount of provision for loan losses needed for a particular period to adjust the combined loan loss reserve to the appropriate level in accordance with our underlying loan loss reserve methodology. See “—Non-GAAP Financial Measures” for more information and for a reconciliation to Provision for loan losses, the most directly comparable financial measure calculated in accordance with US GAAP.

(2)

(3)

Combined loan loss reserve is defined as the loan loss reserve for loans originated and owned by the Company plus the loan loss reserve for loans owned by third-party lenders and guaranteed by the Company. See “—Non-GAAP Financial Measures” for more information and for a reconciliation of Combined loan loss reserve to Allowance for loan losses, the most directly comparable financial measure calculated in accordance with US GAAP.


(4)	Combined loan loss reserve as a percentage of combined loans receivable is determined using period-end balances.



Net principal charge-offs as a percentage of average combined loans receivable - principal (1) (2) (3)	First Quarter	Second Quarter	Third Quarter	Fourth Quarter
2019	13%	11%	N/A	N/A
2018	13%	12%	13%	14%
2017	15%	14%	12%	13%

_________


(1)	Net principal charge-offs is comprised of gross principal charge-offs less recoveries.


(2)	Average combined loans receivable - principal is calculated using an average of daily Combined loans receivable - principal balances during each quarter.

(3)

In reviewing the credit quality of our loan portfolio, we break out our total provision for loan losses that is presented on our income statement under US GAAP into two separate items—net charge-offs and additional provision for loan losses. Net charge-offs are indicative of the credit quality of our underlying portfolio, while additional provision for loan losses is subject to more fluctuation based on loan portfolio growth, recent credit quality trends and the effect of normal seasonality on our business. The additional provision for loan losses is the amount needed to adjust the combined loan loss reserve to the appropriate amount at the end of each month based on our loan loss reserve methodology.

Net charge-offs. Net charge-offs comprise gross charge-offs offset by recoveries on prior charge-offs. Gross charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due, or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud. Any payments received on loans that have been charged off are recorded as recoveries and reduce the amount of gross charge-offs. Recoveries are typically less than 10% of the amount charged off, and thus, we do not view recoveries as a key credit quality metric.

Net charge-offs as a percentage of revenues can vary based on several factors, such as whether or not we experience significant growth or lower the APR of our products. Additionally, although a more seasoned portfolio will typically result in lower net charge-offs as a percentage of revenues, we do not intend to drive down this ratio significantly below our historical ratios and would instead seek to offer our existing products to a broader new customer base to drive additional revenues.

Net charge-offs as a percentage of average combined loans receivable-principal allow us to determine credit quality and evaluate loss experience trends across our loan portfolio.

Additional provision for loan losses. Additional provision for loan losses is the amount of provision for loan losses needed for a particular period to adjust the combined loan loss reserve to the appropriate level in accordance with our underlying loan loss reserve methodology.

Additional provision for loan losses relates to an increase in future inherent losses in the loan portfolio as determined by our loan loss reserve methodology. This increase could be due to a combination of factors such as an increase in the size of the loan portfolio or a worsening of credit quality or increase in past due loans. It is also possible for the additional provision for loan losses for a period to be a negative amount, which would reduce the amount of the combined loan loss reserve needed (due to a decrease in the loan portfolio or improvement in credit quality). The amount of additional provision for loan losses is seasonal in nature, mirroring the seasonality of our new customer acquisition and overall loan portfolio growth, as discussed above. The combined loan loss reserve typically decreases during the first quarter or first half of the calendar year due to a decrease in the loan portfolio from year end. Then, as the rate of growth for the loan portfolio starts to increase during the second half of the year, additional provision for loan losses is typically needed to increase the reserve for future losses associated with the loan growth. Because of this, our provision for loan losses can vary significantly throughout the year without a significant change in the credit quality of our portfolio.

The following provides an example of the application of our loan loss reserve methodology and the break out of the provision for loan losses between the portion associated with replenishing the reserve due to net charge-offs and the amount related to the additional provision for loan losses. If the beginning combined loan loss reserve were $25 million, and we incurred $10 million of net charge-offs during the period and the ending combined loan loss reserve needed to be $30 million according to our loan loss reserve methodology, our total provision for loan losses would be $15 million, comprising $10 million in net charge-offs (provision needed to replenish the combined loan loss reserve) plus $5 million of additional provision related to an increase in future inherent losses in the loan portfolio identified by our loan loss reserve methodology.



Example (dollars in thousands)
Beginning combined loan loss reserve		$	25,000
Less: Net charge-offs		(10,000		)
Provision for loan losses:
Provision for net charge-offs	10,000
Additional provision for loan losses	5,000
Total provision for loan losses		15,000
Ending combined loan loss reserve balance		$	30,000

Loan loss reserve methodology. Our loan loss reserve methodology is calculated separately for each product and, in the case of Rise loans originated under the state lending model (including CSO program loans), is calculated separately based on the state in which each customer resides to account for varying state license requirements that affect the amount of the loan offered, repayment terms and other factors. For each product, loss factors are calculated based on the delinquency status of customer loan balances: current, 1 to 30 days past due or 31 to 60 days past due. These loss factors for loans in each delinquency status are based on average historical loss rates by product (or state) associated with each of these three delinquency categories. Hence, another key credit quality metric we monitor is the percentage of past due combined loans receivable – principal, as an increase in past due loans will cause an increase in our combined loan loss reserve and related additional provision for loan losses to increase the reserve. For customers that are not past due, we further stratify these loans into loss rates by payment number, as a new customer that is about to make a first loan payment has a significantly higher risk of loss than a customer who has successfully made ten payments on an existing loan with us. Based on this methodology, during the past three years we have seen our combined loan loss reserve as a percentage of combined loans receivable fluctuate between approximately 12% and 17% depending on the overall mix of new, former and past due customer loans.

Recent trends. Total loan loss provision for the three and six months ended June 30, 2019 was 44% and 45% of revenues, respectively, which was at the low end of our targeted range of 45% to 55%, and lower than the 48% for the three and six months ended June 30, 2018. For the three and six months ended June 30, 2019, net charge-offs as a percentage of revenues totaled 45% and 50%, respectively, compared to 50% and 51% in the respective prior year periods. We expect loan loss provision as a percentage of revenues to continue to remain within our targeted range due to ongoing maturation of the loan portfolio and continued improvements in our underwriting process.

The combined loan loss reserve as a percentage of combined loans receivable totaled 12% and 13% as of June 30, 2019 and June 30, 2018, respectively, reflecting improvements in our credit quality and ongoing maturation of the loan portfolio. Past due loan balances at June 30, 2019 were 9% of total combined loans receivable - principal, lower than 10% from a year ago.

Additionally, we also look at principal loan charge-offs (including both credit and fraud losses) by vintage as a percentage of combined loans originated - principal. As the below table shows, our cumulative principal loan charge-offs through June 30, 2019 for each annual vintage since the 2013 vintage are generally under 30% and continue to generally trend at or slightly below our 25% to 30% targeted range, with both 2018 and 2017 performing the best of our historical vintages and within our targeted range of 25% to 30%. In the beginning of 2019, we implemented new fraud tools that have helped lower fraud losses. Additionally, we rolled out our next generation of credit models during the second quarter of 2019 and will continue to refine the models during the second half of 2019. The preliminary data on the 2019 vintage is that it is performing better than both 2017 and 2018.

(1) The 2018 and 2019 vintages are not yet fully mature from a loss perspective.

Margins



	Three Months Ended June 30,						Six Months Ended June 30,
Margin metrics (dollars in thousands)	2019			2018			2019			2018

Revenues	$	177,760		$	184,377		$	367,264		$	377,914
Net charge-offs(1)	(79,609		)	(91,756		)	(183,594		)	(193,798		)
Additional provision for loan losses(1)	1,584			3,158			18,138			13,058
Direct marketing costs	(16,194		)	(22,180		)	(27,348		)	(42,875		)
Other cost of sales	(8,562		)	(6,566		)	(13,622		)	(12,895		)
Gross profit	74,979			67,033			160,838			141,404
Operating expenses	(47,916		)	(43,317		)	(95,796		)	(85,059		)
Operating income	$	27,063		$	23,716		$	65,042		$	56,345
As a percentage of revenues:
Net charge-offs	45		%	50		%	50		%	51		%
Additional provision for loan losses	(1		)	(2		)	(5		)	(3		)
Direct marketing costs	9			12			7			11
Other cost of sales	5			4			4			3
Gross margin	42			36			44			37
Operating expenses	27			23			26			23
Operating margin	15		%	13		%	18		%	14		%

_________


(1)	Non-GAAP measure. See “—Non-GAAP Financial Measures—Net charge-offs and additional provision for loan losses.”

Gross margin is calculated as revenues minus cost of sales, or gross profit, expressed as a percentage of revenues, and operating margin is calculated as operating income expressed as a percentage of revenues. We expect our margins to continue to increase as we continue to scale our business while maintaining stable credit quality. We allocate all marketing spend only to new customer loans. As our loan portfolio continues to mature with more customer loans that are from repeat customers, we will be generating revenue from those repeat customer loans without incurring any related marketing expense. As a result, we expect marketing expense as a percentage of revenue to continue to decline over time resulting in an increased gross profit margin. Additionally, being an online fintech company, we believe that as we continue to scale our business, we will generate operating efficiencies and our operating expense as a percentage of revenues will decline resulting in an increased operating margin.

Recent operating margin trends. For the three months ended June 30, 2019, our operating margin was 15%, which was an increase from 13% in the prior year period. For the six months ended June 30, 2019, our operating margin was 18%, which was also an improvement from 14% in the prior year period. These increases were largely due to a higher gross margin driven by lower direct marketing costs and an overall lower loan loss provision due to slower growth and the improved credit quality of the loan portfolio.

Direct marketing costs for the three and six months ended June 30, 2019 decreased to 9% and 7%, respectively from 12% and 11% in the respective prior year periods. This decrease is due to the moderate new customer growth we targeted as we focused on deploying our new credit models during the second quarter of 2019. The lower marketing spend, coupled with improved marketing efficiencies, resulted in a CAC of $229 and $226 for the three and six months ended June 30, 2019, respectively, which is below the low end of our targeted range of $250 to $300 and lower than the CAC of $260 and $276 for the respective periods in 2018. We expect CAC to continue to be lower than our targeted range of $225 to $250 as we continue to optimize the efficiency of our marketing channels, specifically in the Rise portfolio originated by FinWise Bank, and benefit from decreased competition in the UK, although we may see some quarterly volatility in CAC.

NON-GAAP FINANCIAL MEASURES

We believe that the inclusion of the following non-GAAP financial measures in this Quarterly Report on Form 10-Q can provide a useful measure for period-to-period comparisons of our core business, provide transparency and useful information to investors and others in understanding and evaluating our operating results, and enable investors to better compare our operating performance with the operating performance of our competitors. Management uses these non-GAAP financial measures frequently in its decision-making because they provide supplemental information that facilitates internal comparisons to the historical operating performance of prior periods and give an additional indication of the Company’s core operating performance. However, non-GAAP financial measures are not a measure calculated in accordance with US generally accepted accounting principles, or US GAAP, and should not be considered an alternative to any measures of financial performance calculated and presented in accordance with US GAAP. Other companies may calculate these non-GAAP financial measures differently than we do.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents our net income, adjusted to exclude:


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


•	Share-based compensation;


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


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


•	Fair value gains and losses included in non-operating losses; and


•	Income taxes.

Adjusted EBITDA margin is Adjusted EBITDA divided by revenue.

Management believes that Adjusted EBITDA and Adjusted EBITDA margin are useful supplemental measures to assist management and investors in analyzing the operating performance of the business and provide greater transparency into the results of operations of our core business.

Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to net income or any other performance measure derived in accordance with US GAAP. Our use of Adjusted EBITDA and Adjusted EBITDA margin has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are:


•	Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect expected cash capital expenditure requirements for such replacements or for new capital assets;


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


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

The following table presents a reconciliation of net income to Adjusted EBITDA and Adjusted EBITDA margin for each of the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2019			2018			2019			2018
Net income	$	5,772		$	3,128		$	19,130		$	12,611
Adjustments:
Net interest expense	17,947			19,263			37,166			38,476
Share-based compensation	2,476			2,010			4,911			3,647
Foreign currency transaction loss	710			1,231			97			475
Depreciation and amortization	4,324			2,962			8,590			5,677
Non-operating loss	—			—			—			38
Income tax expense	2,634			94			8,649			4,745
Adjusted EBITDA	$	33,863		$	28,688		$	78,543		$	65,669

Adjusted EBITDA margin	19		%	16		%	21		%	17		%

Free cash flow

Free cash flow (“FCF”) represents our net cash provided by operating activities, adjusted to include:


•	Net charge-offs – combined principal loans; and


•	Capital expenditures.

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



	Six Months Ended June 30,
(Dollars in thousands)	2019			2018

Net cash provided by operating activities(1)	$	169,427		$	162,485
Adjustments:
Net charge-offs – combined principal loans	(142,287		)	(151,023		)
Capital expenditures	(14,042		)	(12,450		)
FCF	$	13,098		$	(988	)

_________


(1)	Net cash provided by operating activities includes net charge-offs – combined finance charges.

Net charge-offs and additional provision for loan losses

We break out our total provision for loan losses into two separate items—first, the amount related to net charge-offs, and second, the additional provision for loan losses needed to adjust the combined loan loss reserve to the appropriate amount at the end of each month based on our loan loss provision methodology. We believe this presentation provides more detail related to the components of our total provision for loan losses when analyzing the gross margin of our business.



	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2019			2018			2019			2018

Net charge-offs	$	79,609		$	91,756		$	183,594		$	193,798
Additional provision for loan losses	(1,584		)	(3,158		)	(18,138		)	(13,058		)
Provision for loan losses	$	78,025		$	88,598		$	165,456		$	180,740

Combined loan information

The information presented in the tables below on a combined basis are non-GAAP measures based on a combined portfolio of loans, which includes the total amount of outstanding loans receivable that we own and that are on our balance sheet plus outstanding loans receivable originated and owned by third parties that we guarantee pursuant to CSO programs in which we participate. See “—Basis of Presentation and Critical Accounting Policies—Allowance and liability for estimated losses on consumer loans” and “—Basis of Presentation and Critical Accounting Policies—Liability for estimated losses on credit service organization loans.”

We believe these non-GAAP measures provide investors with important information needed to evaluate the magnitude of potential loan losses and the opportunity for revenue performance of the combined loan portfolio on an aggregate basis. We also believe that the comparison of the combined amounts from period to period is more meaningful than comparing only the amounts reflected on our balance sheet since both revenues and cost of sales as reflected in our financial statements are impacted by the aggregate amount of loans we own and those CSO loans we guarantee.

Our use of total combined loans and fees receivable has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are:


•	Rise CSO loans are originated and owned by a third-party lender and


•	Rise CSO loans are funded by a third-party lender and are not part of the VPC Facility.

As of each of the period ends indicated, the following table presents a reconciliation of:


•	Loans receivable, net, Company owned (which reconciles to our Condensed Consolidated Balance Sheets included elsewhere in this Quarterly Report on Form 10-Q);


•	Loans receivable, net, guaranteed by the Company (as disclosed in Note 3 of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q);


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


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



	2018										2019
(Dollars in thousands)		June 30			September 30			December 31			March 31			June 30

Company Owned Loans:
Loans receivable – principal, current, company owned		$	493,908		$	525,717		$	543,405		$	491,208		$	523,785
Loans receivable – principal, past due, company owned		58,949			69,934			68,251			55,286			55,711
Loans receivable – principal, total, company owned		552,857			595,651			611,656			546,494			579,496
Loans receivable – finance charges, company owned		31,519			36,747			41,646			32,491			31,805
Loans receivable – company owned		584,376			632,398			653,302			578,985			611,301
Allowance for loan losses on loans receivable, company owned		(76,575		)	(89,422		)	(91,608		)	(76,457		)	(75,896		)
Loans receivable, net, company owned		$	507,801		$	542,976		$	561,694		$	502,528		$	535,405
Third Party Loans Guaranteed by the Company:
Loans receivable – principal, current, guaranteed by company		$	35,114		$	36,649		$	35,529		$	27,941		$	21,099
Loans receivable – principal, past due, guaranteed by company		1,494			1,661			1,353			696			596
Loans receivable – principal, total, guaranteed by company(1)		36,608			38,310			36,882			28,637			21,695
Loans receivable – finance charges, guaranteed by company(2)		2,777			3,103			2,944			2,164			1,676
Loans receivable – guaranteed by company		39,385			41,413			39,826			30,801			23,371
Liability for losses on loans receivable, guaranteed by company		(3,956		)	(4,510		)	(4,444		)	(3,242		)	(1,983		)
Loans receivable, net, guaranteed by company(2)		$	35,429		$	36,903		$	35,382		$	27,559		$	21,388
Combined Loans Receivable(3):
Combined loans receivable – principal, current		$	529,022		$	562,366		$	578,934		$	519,149		$	544,884
Combined loans receivable – principal, past due		60,443			71,595			69,604			55,982			56,307
Combined loans receivable – principal		589,465			633,961			648,538			575,131			601,191
Combined loans receivable – finance charges		34,296			39,850			44,590			34,655			33,481
Combined loans receivable		$	623,761		$	673,811		$	693,128		$	609,786		$	634,672
Combined Loan Loss Reserve(3):
Allowance for loan losses on loans receivable, company owned		$	(76,575	)	$	(89,422	)	$	(91,608	)	$	(76,457	)	$	(75,896	)
Liability for losses on loans receivable, guaranteed by company		(3,956		)	(4,510		)	(4,444		)	(3,242		)	(1,983		)
Combined loan loss reserve		$	(80,531	)	$	(93,932	)	$	(96,052	)	$	(79,699	)	$	(77,879	)
Combined loans receivable – principal, past due(3)		$	60,443		$	71,595		$	69,604		$	55,982		$	56,307
Combined loans receivable – principal(3)		$	589,465		$	633,961		$	648,538		$	575,131		$	601,191
Percentage past due(1)		10		%	11		%	11		%	10		%	9		%
Combined loan loss reserve as a percentage of combined loans receivable(3)(4)		13		%	14		%	14		%	13		%	12		%
Allowance for loan losses as a percentage of loans receivable – company owned		13		%	14		%	14		%	13		%	12		%

_________


(1)	Represents loans originated by third-party lenders through the CSO programs, which are not included in our condensed consolidated financial statements.


(2)	Represents finance charges earned by third-party lenders through the CSO programs, which are not included in our condensed consolidated financial statements.


(3)	Non-GAAP measure.


(4)	Combined loan loss reserve as a percentage of combined loans receivable is determined using period-end balances.

COMPONENTS OF OUR RESULTS OF OPERATIONS

Revenues

Our revenues are composed of Rise finance charges and CSO fees, finance charges on Sunny installment loans, cash advance fees attributable to the participation in Elastic lines of credit that we consolidate and marketing and licensing fees received from third-party lenders related to the Rise, Rise CSO and Elastic products. See “—Overview” above for further information on the structure of Elastic. Finance charge and fee revenues related to the test launch of the Today Card credit card product were immaterial.

Cost of sales

Provision for loan losses. Provision for loan losses consists of amounts charged against income during the period related to net charge-offs and the additional provision for loan losses needed to adjust the loan loss reserve to the appropriate amount at the end of each month based on our loan loss methodology.

Direct marketing costs. Direct marketing costs consist of online marketing costs such as sponsored search and advertising on social networking sites, and other marketing costs such as purchased television and radio air time and direct mail print advertising. In addition, direct marketing cost includes affiliate costs paid to marketers in exchange for referrals of potential customers. All direct marketing costs are expensed as incurred.

Other cost of sales. Other cost of sales includes data verification costs associated with the underwriting of potential customers, automated clearing house (“ACH”) transaction costs associated with customer loan funding and payments, and settlement expense associated with UK affordability claims.

Operating expenses

Operating expenses consist of compensation and benefits, professional services, selling and marketing, occupancy and equipment, depreciation and amortization as well as other miscellaneous expenses.

Compensation and benefits. Salaries and personnel-related costs, including benefits, bonuses and share-based compensation expense, comprise a majority of our operating expenses and these costs are driven by our number of employees.

Professional services. These operating expenses include costs associated with legal, accounting and auditing, recruiting and outsourced customer support and collections.

Selling and marketing. Selling and marketing costs include costs associated with the use of agencies that perform creative services and monitor and measure the performance of the various marketing channels. Selling and marketing costs also include the production costs associated with media advertisements that are expensed as incurred over the licensing or production period. These expenses do not include direct marketing costs incurred to acquire customers, which comprises CAC.

Occupancy and equipment. Occupancy and equipment includes rent expense on our leased facilities, as well as telephony and web hosting expenses.

Depreciation and amortization. We capitalize all acquisitions of property and equipment of $500 or greater as well as certain software development costs. Costs incurred in the preliminary stages of software development are expensed. Costs incurred thereafter, including external direct costs of materials and services as well as payroll and payroll-related costs, are capitalized. Post-development costs are expensed. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets.

Other expense

Net interest expense. Net interest expense primarily includes the interest expense associated with the VPC Facility that funds the Rise and Sunny installment loans, the EF SPV Facility that funds Rise installment loans originated by FinWise Bank and the interest expense associated with the ESPV Facility related to the Elastic lines of credit and related Elastic SPV entity. For the six months ended June 30, 2019 and 2018, amortization of the costs of and realized gains from the interest rate caps on the VPC and ESPV Facility are included within Net interest expense.

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

Non-operating loss. Non-operating loss primarily includes gains and losses on adjustments to the fair value of derivatives not designated as cash flow hedges.

INCOME STATEMENT

The following table sets forth our condensed consolidated income statements data for each of the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
Condensed consolidated income statements data (dollars in thousands)	2019			2018			2019			2018

Revenues	$	177,760		$	184,377		$	367,264		$	377,914
Cost of sales:
Provision for loan losses	78,025			88,598			165,456			180,740
Direct marketing costs	16,194			22,180			27,348			42,875
Other cost of sales	8,562			6,566			13,622			12,895
Total cost of sales	102,781			117,344			206,426			236,510
Gross profit	74,979			67,033			160,838			141,404
Operating expenses:
Compensation and benefits	25,638			23,380			51,348			45,807
Professional services	8,860			8,374			18,559			16,686
Selling and marketing	2,205			2,403			4,051			5,355
Occupancy and equipment	5,179			4,630			10,231			8,749
Depreciation and amortization	4,324			2,962			8,590			5,677
Other	1,710			1,568			3,017			2,785
Total operating expenses	47,916			43,317			95,796			85,059
Operating income	27,063			23,716			65,042			56,345
Other expense:
Net interest expense	(17,947		)	(19,263		)	(37,166		)	(38,476		)
Foreign currency transaction loss	(710		)	(1,231		)	(97		)	(475		)
Non-operating loss	—			—			—			(38		)
Total other expense	(18,657		)	(20,494		)	(37,263		)	(38,989		)
Income before taxes	8,406			3,222			27,779			17,356
Income tax expense	2,634			94			8,649			4,745
Net income	$	5,772		$	3,128		$	19,130		$	12,611



	Three Months Ended June 30,				Six Months Ended June 30,
As a percentage of revenues	2019		2018		2019		2018

Cost of sales:
Provision for loan losses	44	%	48	%	45	%	48	%
Direct marketing costs	9		12		7		11
Other cost of sales	5		4		4		3
Total cost of sales	58		64		56		63
Gross profit	42		36		44		37
Operating expenses:
Compensation and benefits	14		13		14		12
Professional services	5		5		5		4
Selling and marketing	1		1		1		1
Occupancy and equipment	3		3		3		2
Depreciation and amortization	2		2		2		2
Other	1		1		1		1
Total operating expenses	27		23		26		23
Operating income	15		13		18		14
Other expense:
Net interest expense	(10	)	(10	)	(10	)	(10	)
Foreign currency transaction loss	—		(1	)	—		—
Non-operating loss	—		—		—		—
Total other expense	(10	)	(11	)	(10	)	(10	)
Income before taxes	5		2		8		5
Income tax expense	2		—		2		2
Net income	3	%	2	%	5	%	3	%

Comparison of the three months ended June 30, 2019 and 2018

Revenues



	Three Months Ended June 30,
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount			Percentage

Finance charges	$	177,031	100	%	$	183,394	99	%	$	(6,363	)	(3	)%
Other	729		—		983		1		(254		)	(26	)
Revenues	$	177,760	100	%	$	184,377	100	%	$	(6,617	)	(4	)%

Revenues decreased by $6.6 million, or 4%, from $184.4 million for the three months ended June 30, 2018 to $177.8 million for the three months ended June 30, 2019. This decrease in revenues was primarily due to a decline in the effective APR of the combined loans receivable, partially offset by an increase in our average combined loans receivable - principal balance, as illustrated in the tables below. The decrease in Other revenues is due to a decrease in marketing and licensing fees related to the Rise CSO programs as our CSO partners stopped originating Rise CSO loans in Ohio in April 2019 due to a state law change.

The tables below break out this change in revenue (including CSO fees and cash advance fees) by product:



	Three Months Ended June 30, 2019
(Dollars in thousands)	Rise (US)(1)			Elastic (US)(2)			Total Domestic			Sunny (UK)			Total

Average combined loans receivable – principal(3)	$	287,073		$	243,691		$	530,764		$	50,173		$	580,937
Effective APR	126		%	98		%	113		%	219		%	122		%
Finance charges	$	90,384		$	59,317		$	149,701		$	27,330		$	177,031
Other	387			288			675			54			729
Total revenue	$	90,771		$	59,605		$	150,376		$	27,384		$	177,760

	Three Months Ended June 30, 2018
(Dollars in thousands)	Rise (US)(1)			Elastic (US)			Total Domestic			Sunny (UK)			Total

Average combined loans receivable – principal(3)	$	277,281		$	244,583		$	521,864		$	52,092		$	573,956
Effective APR	137		%	97		%	118		%	226		%	128		%
Finance charges	$	94,716		$	59,298		$	154,014		$	29,380		$	183,394
Other	435			460			895			88			983
Total revenue	$	95,151		$	59,758		$	154,909		$	29,468		$	184,377

_________

(1) Includes loans originated by third-party lenders through the CSO programs, which are not included in the Company’s condensed consolidated financial statements.

(2) Includes immaterial balances related to the Today Card, which expanded its test launch in November 2018.

(3) Average combined loans receivable - principal is calculated using daily Combined loans receivable – principal balances. Not a financial measure prepared in accordance with US GAAP. See reconciliation table accompanying this release for a reconciliation of non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with US GAAP.

Our average APR dropped from 128% in the second quarter of 2018 to 122% for the second quarter of 2019. The reduction in APR for the three months ended June 30, 2019 as compared to the prior year period resulted in a $8.6 million reduction in finance charges primarily from our Rise product as the average APR of a new Rise loan originated by a FinWise Bank customer is 130%; which is lower than our typical state-licensed Rise customer but with a better credit profile. This decrease was partially offset by a $2.1 million increase in finance charges that resulted from a $7.0 million increase in the average combined loans receivable - principal during the three months ended June 30, 2019 compared to the same prior year period.

Cost of sales



	Three Months Ended June 30,								Period-to-period change
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount			Percentage

Cost of sales:
Provision for loan losses	$	78,025	44	%	$	88,598	48	%	$	(10,573	)	(12	)%
Direct marketing costs	16,194		9		22,180		12		(5,986		)	(27	)
Other cost of sales	8,562		5		6,566		4		1,996			30
Total cost of sales	$	102,781	58	%	$	117,344	64	%	$	(14,563	)	(12	)%

Provision for loan losses. Provision for loan losses decreased by $10.6 million, or 12%, from $88.6 million for the three months ended June 30, 2018 to $78.0 million for the three months ended June 30, 2019 primarily due to a $12.1 million decrease in net charge-offs resulting from the improved credit quality partially offset by an increase of $1.6 million in the additional provision for loan losses resulting from an increase in the overall loan portfolio as compared to prior year.

The tables below break out these changes by loan product:



	Three Months Ended June 30, 2019
(Dollars in thousands)	Rise (US)			Elastic (US)(1)			Total Domestic			Sunny (UK)			Total

Combined loan loss reserve(2):
Beginning balance	$	39,350		$	28,341		$	67,691		$	12,008		$	79,699
Net charge-offs	(40,970		)	(27,130		)	(68,100		)	(11,509		)	(79,609		)
Provision for loan losses	43,013			25,268			68,281			9,744			78,025
Effect of foreign currency	—			—			—			(236		)	(236		)
Ending balance	$	41,393		$	26,479		$	67,872		$	10,007		$	77,879
Combined loans receivable(2)(3)	$	324,620		$	258,200		$	582,820		$	51,852		$	634,672
Combined loan loss reserve as a percentage of ending combined loans receivable	13		%	10		%	12		%	19		%	12		%
Net charge-offs as a percentage of revenues	45		%	46		%	45		%	42		%	45		%
Provision for loan losses as a percentage of revenues	47		%	42		%	45		%	36		%	44		%



	Three Months Ended June 30, 2018
(Dollars in thousands)	Rise (US)			Elastic (US)			Total Domestic			Sunny (UK)			Total

Combined loan loss reserve(2):
Beginning balance	$	44,209		$	28,098		$	72,307		$	11,939		$	84,246
Net charge-offs	(49,494		)	(28,490		)	(77,984		)	(13,772		)	(91,756		)
Provision for loan losses	46,081			29,786			75,867			12,731			88,598
Effect of foreign currency	—			—			—			(557		)	(557		)
Ending balance	$	40,796		$	29,394		$	70,190		$	10,341		$	80,531
Combined loans receivable(2)(3)	$	305,674		$	265,959		$	571,633		$	52,128		$	623,761
Combined loan loss reserve as a percentage of ending combined loans receivable	13		%	11		%	12		%	20		%	13		%
Net charge-offs as a percentage of revenues	52		%	48		%	50		%	47		%	50		%
Provision for loan losses as a percentage of revenues	48		%	50		%	49		%	43		%	48		%

_________

(1) Includes immaterial balances related to the Today Card, which expanded its test launch in November 2018.

(2) Not a financial measure prepared in accordance with US GAAP. See “—Non-GAAP Financial Measures” for more information and for a reconciliation to the most directly comparable financial measure calculated in accordance with US GAAP.

(3) Includes loans originated by third-party lenders through the CSO programs, which are not included in our condensed consolidated financial statements.

Net charge-offs decreased $12.1 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, due to the improved credit quality, with the primary decrease attributed to the Rise product. Net charge-offs as a percentage of revenues for the three months ended June 30, 2019 was 45%, a decrease from 50% for the comparable period in 2018. Loan loss provision for the three months ended June 30, 2019 totaled 44% of revenues, lower than 48% for the three months ended June 30, 2018.

Direct marketing costs. Direct marketing costs decreased by $6.0 million, or 27%, from $22.2 million for the three months ended June 30, 2018 to $16.2 million for the three months ended June 30, 2019. The decrease is due to the moderate growth we targeted as we focused on deploying our new credit models during the second quarter of 2019. For the three months ended June 30, 2019, the number of new customers acquired decreased to 70,650 compared to 85,146 during the three months ended June 30, 2018. For the three months ended June 30, 2019 and 2018, our CAC was $229 and $260, respectively. We expect CAC to continue to be lower than or within our targeted range of $225 to $250 as we continue to optimize the efficiency of our marketing channels, specifically in the Rise portfolio originated by FinWise Bank, and benefit from decreased competition in the UK, although we may see some quarterly volatility in CAC.

Other cost of sales. Other cost of sales increased by $2.0 million, or 30%, from $6.6 million for the three months ended June 30, 2018 to $8.6 million for the three months ended June 30, 2019 due to increased affordability claim settlement expenses primarily related to the Sunny product, partially offset by decreased data verification costs incurred from the lower new customer loan volume for the Rise and Elastic product.

Operating expenses



	Three Months Ended June 30,								Period-to-period change
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount			Percentage

Operating expenses:
Compensation and benefits	$	25,638	14	%	$	23,380	13	%	$	2,258		10	%
Professional services	8,860		5		8,374		5		486			6
Selling and marketing	2,205		1		2,403		1		(198		)	(8	)
Occupancy and equipment	5,179		3		4,630		3		549			12
Depreciation and amortization	4,324		2		2,962		2		1,362			46
Other	1,710		1		1,568		1		142			9
Total operating expenses	$	47,916	27	%	$	43,317	23	%	$	4,599		11	%

Compensation and benefits. Compensation and benefits increased by $2.3 million, or 10%, from $23.4 million for the three months ended June 30, 2018 to $25.6 million for the three months ended June 30, 2019 primarily due to an increase in the number of employees.

Professional services. Professional services increased by $0.5 million, or 6%, from $8.4 million for the three months ended June 30, 2018 to $8.9 million for the three months ended June 30, 2019 primarily due to increased legal expenses related to various regulatory matters and outsourced servicing expense.

Selling and marketing. Selling and marketing decreased by $0.2 million, or 8%, from $2.4 million for the three months ended June 30, 2018 to $2.2 million for the three months ended June 30, 2019 primarily due to decreased advertising.

Occupancy and equipment. Occupancy and equipment increased by $0.5 million, or 12%, from $4.6 million for the three months ended June 30, 2018 to $5.2 million for the three months ended June 30, 2019 primarily due to increased web hosting and data center costs as well as increased rent expense needed to support an increased number of employees.

Depreciation and amortization. Depreciation and amortization increased by $1.4 million, or 46%, from $3.0 million for the three months ended June 30, 2018 to $4.3 million for the three months ended June 30, 2019 primarily due to increased purchases of property and equipment, including depreciation on internally developed software.

Net interest expense



	Three Months Ended June 30,								Period-to-period change
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount			Percentage

Net interest expense	$	17,947	10	%	$	19,263	10	%	$	(1,316	)	(7	)%

Net interest expense decreased 7% during the three months ended June 30, 2019 as compared to the prior year period. At June 30, 2018, we had an average balance of $523.3 million in notes payable outstanding under our debt facilities, which increased to $530.4 million at June 30, 2019, resulting in additional interest expense of approximately $0.2 million. Our average effective interest rate on our notes payable outstanding has decreased from 14.8% for the three months ended June 30, 2018 to 13.6% for the three months ended June 30, 2019, resulting in a decrease in interest expense of approximately $1.6 million. In addition, we incurred an $850 thousand prepayment penalty during the second quarter of 2019 for the early repayment on the 4th Tranche Term Note that is included in interest expense within the VPC Facility.

The following table shows the effective cost of funds of each debt facility for the period:



	Three Months Ended June 30,
(Dollars in thousands)	2019			2018

VPC Facility
Average facility balance during the period	$	249,998		$	307,333
Net interest expense	7,708			11,105
Less: prepayment penalty associated with the early repayment on the 4th Tranche Term Note	(850		)	—
Net interest expense, as adjusted	$	6,858		$	11,105
Effective cost of funds	12.4		%	14.5		%
Effective cost of funds, as adjusted	11.0		%	14.5		%

EF SPV Facility
Average facility balance during the period	$	59,363		N/A
Net interest expense	1,539			N/A
Effective cost of funds	10.4		%	N/A

ESPV Facility
Average facility balance during the period	$	221,000		$	216,000
Net interest expense	8,701			8,158
Effective cost of funds	15.8		%	15.2		%

In January 2018, the Company entered into interest rate caps, which capped 3-month LIBOR at 1.75%, to mitigate the floating interest rate risk on $240 million of the US Term Notes included in the VPC Facility and on $216 million of the ESPV Facility. The interest rate caps matured on February 1, 2019. Additionally, effective February 1, 2019, the VPC Facility and ESPV Facility were amended and a new facility, the EF SPV Facility, was created. The amended facilities included reductions to the interest rates paid on our debt in addition to other changes. The reduction in interest rates was effective February 1, 2019 for the VPC Facility and the EF SPV Facility. The reduction in interest rates for the ESPV Facility will be effective July 1, 2019. All existing debt outstanding under these facilities (excluding the 4th Tranche Term Note of $18.1 million under the VPC Facility) will have an effective cost of funds of approximately 10.3%. As a result, we expect interest expense in the third and fourth quarters of 2019 to be lower than the prior year comparable periods. See "—Liquidity and Capital Resources-Debt facilities" for more information.

Foreign currency transaction loss

During the three months ended June 30, 2019, we realized a $0.7 million loss in foreign currency remeasurement primarily related to a portion of the debt facility that our UK entity, Elevate Credit International, Ltd., has with a third-party lender, VPC, which is denominated in US dollars. The foreign currency remeasurement loss for the three months ended June 30, 2018 was $1.2 million.

Income tax expense



	Three Months Ended June 30,								Period-to-period change
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount		Percentage

Income tax expense	$	2,634	2	%	$	94	—	%	$	2,540	2,702	%

Our income tax expense increased $2.5 million, from $0.1 million for the three months ended June 30, 2018 to $2.6 million for the three months ended June 30, 2019. Our consolidated effective tax rates for the three months ended June 30, 2019 and 2018 were 31% and 3%, respectively. Our effective tax rates are different from the standard corporate federal income tax rate of 21% in the US primarily due to our permanent non-deductible items, corporate state tax obligations in the states where we have lending activities and, starting January 1, 2019, the impact of the Global Intangible Low-Taxed Income ("GILTI") provision of the December 22, 2017 Tax Cuts and Jobs Act. The Company's US cash effective tax rate was approximately 2% for the second quarter of 2019. Our UK operations have generated net operating losses which have a full valuation allowance provided due to the lack of sufficient objective evidence regarding the realizability of this asset. Therefore, no UK deferred tax benefit has been recognized in the condensed consolidated financial statements for the three months ended June 30, 2019 and 2018.

Net income



	Three Months Ended June 30,								Period-to-period change
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount		Percentage

Net income	$	5,772	3	%	$	3,128	2	%	$	2,644	85	%

Our net income increased $2.6 million, or 85%, from $3.1 million for the three months ended June 30, 2018 to $5.8 million for the three months ended June 30, 2019 due to improved gross profit and lower interest expense offset by increasing operating expenses and income tax expense.

Comparison of the six months ended June 30, 2019 and 2018

Revenues



	Six Months Ended June 30,
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount			Percentage

Finance charges	$	366,020	100	%	$	375,652	99	%	$	(9,632	)	(3	)%
Other	1,244		—		2,262		1		(1,018		)	(45	)
Revenues	$	367,264	100	%	$	377,914	100	%	$	(10,650	)	(3	)%

Revenues decreased by $10.7 million, or 3%, from $377.9 million for the six months ended June 30, 2018 to $367.3 million for the six months ended June 30, 2019. This decrease in revenues was primarily due to a decline in the effective APR of the combined loans receivable, partially offset by an increase in our average combined loans receivable - principal balance, as illustrated in the tables below. The decrease in Other revenues is due to a decrease in marketing and licensing fees related to the Rise CSO programs as our CSO partners stopped originating Rise CSO loans in Ohio in April 2019 due to a state law change.

The tables below break out this change in revenue (including CSO fees and cash advance fees) by product:



	Six Months Ended June 30, 2019
(Dollars in thousands)	Rise (US)(1)			Elastic (US)(2)			Total Domestic			Sunny (UK)			Total

Average combined loans receivable – principal(3)	$	288,941		$	254,980		$	543,921		$	51,254		$	595,174
Effective APR	129		%	98		%	115		%	223		%	124		%
Finance charges	$	185,269		$	124,050		$	309,319		$	56,701		$	366,020
Other	738			384			1,122			122			1,244
Total revenue	$	186,007		$	124,434		$	310,441		$	56,823		$	367,264

	Six Months Ended June 30, 2018
(Dollars in thousands)	Rise (US)(1)			Elastic (US)			Total Domestic			Sunny (UK)			Total

Average combined loans receivable – principal(3)	$	289,565		$	244,980		$	534,545		$	51,970		$	586,515
Effective APR	138		%	97		%	119		%	231		%	129		%
Finance charges	$	197,924		$	118,201		$	316,125		$	59,527		$	375,652
Other	1,265			825			2,090			172			2,262
Total revenue	$	199,189		$	119,026		$	318,215		$	59,699		$	377,914

_________

(1) Includes loans originated by third-party lenders through the CSO programs, which are not included in the Company’s condensed consolidated financial statements.

(2) Includes immaterial balances related to the Today Card, which expanded its test launch in November 2018.

Our average APR dropped from 129% in the first half of 2018 to 124% for the first half of 2019. The reduction in APR for the six months ended June 30, 2019 as compared to the prior year period resulted in a $14.5 million reduction in finance charges primarily from our Rise product as the average APR of a new Rise loan originated by a FinWise Bank customer is 130%; which is lower than our typical state-licensed Rise customer but with a better credit profile. This decrease was partially offset by a $5.3 million increase in finance charges that resulted from a $8.6 million increase in the average combined loans receivable - principal during the six months ended June 30, 2019 compared to the same prior year period.

Cost of sales



	Six Months Ended June 30,								Period-to-period change
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount			Percentage

Cost of sales:
Provision for loan losses	$	165,456	45	%	$	180,740	48	%	$	(15,284	)	(8	)%
Direct marketing costs	27,348		7		42,875		11		(15,527		)	(36	)
Other cost of sales	13,622		4		12,895		3		727			6
Total cost of sales	$	206,426	56	%	$	236,510	63	%	$	(30,084	)	(13	)%

Provision for loan losses. Provision for loan losses decreased by $15.3 million, or 8%, from $180.7 million for the six months ended June 30, 2018 to $165.5 million for the six months ended June 30, 2019 due to a $10.2 million decrease in net charge-offs and a decrease of $5.1 million in the additional provision for loan losses resulting from improved credit quality.

The tables below break out these changes by loan product:



	Six Months Ended June 30, 2019
(Dollars in thousands)	Rise (US)			Elastic (US)(1)			Total Domestic			Sunny (UK)			Total

Combined loan loss reserve(2):
Beginning balance	$	50,597		$	36,050		$	86,647		$	9,405		$	96,052
Net charge-offs	(98,010		)	(64,401		)	(162,411		)	(21,183		)	(183,594		)
Provision for loan losses	88,806			54,830			143,636			21,820			165,456
Effect of foreign currency	—			—			—			(35		)	(35		)
Ending balance	$	41,393		$	26,479		$	67,872		$	10,007		$	77,879
Combined loans receivable(2)(3)	$	324,620		$	258,200		$	582,820		$	51,852		$	634,672
Combined loan loss reserve as a percentage of ending combined loans receivable	13		%	10		%	12		%	19		%	12		%
Net charge-offs as a percentage of revenues	53		%	52		%	52		%	37		%	50		%
Provision for loan losses as a percentage of revenues	48		%	44		%	46		%	38		%	45		%



	Six Months Ended June 30, 2018
(Dollars in thousands)	Rise (US)			Elastic (US)			Total Domestic			Sunny (UK)			Total

Combined loan loss reserve(2):
Beginning balance	$	55,867		$	28,870		$	84,737		$	9,052		$	93,789
Net charge-offs	(112,941		)	(58,175		)	(171,116		)	(22,682		)	(193,798		)
Provision for loan losses	97,870			58,699			156,569			24,171			180,740
Effect of foreign currency	—			—			—			(200		)	(200		)
Ending balance	$	40,796		$	29,394		$	70,190		$	10,341		$	80,531
Combined loans receivable(2)(3)	$	305,674		$	265,959		$	571,633		$	52,128		$	623,761
Combined loan loss reserve as a percentage of ending combined loans receivable	13		%	11		%	12		%	20		%	13		%
Net charge-offs as a percentage of revenues	57		%	49		%	54		%	38		%	51		%
Provision for loan losses as a percentage of revenues	49		%	49		%	49		%	40		%	48		%

_________

(1) Includes immaterial balances related to the Today Card, which expanded its test launch in November 2018.

(3) Includes loans originated by third-party lenders through the CSO programs, which are not included in our condensed consolidated financial statements.

Net charge-offs decreased $10.2 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, due to the improved credit quality, with the primary decrease attributed to the Rise product. Net charge-offs as a percentage of revenues for the six months ended June 30, 2019 was 50%, a decrease from 51% for the comparable period in 2018. Loan loss provision for the six months ended June 30, 2019 totaled 45% of revenues, lower than 48% for the six months ended June 30, 2018.

Direct marketing costs. Direct marketing costs decreased by $15.5 million, or 36%, from $42.9 million for the six months ended June 30, 2018 to $27.3 million for the six months ended June 30, 2019. The decrease is due to the moderate growth we targeted in the first half of 2019 as we focused on deploying our new credit models. For the six months ended June 30, 2019, the number of new customers acquired decreased to 121,126 compared to 155,281 during the six months ended June 30, 2018. For the six months ended June 30, 2019 and 2018, our CAC was $226 and $276, respectively. We expect CAC to continue to be lower than, or within, our targeted range of $225 to $250 as we continue to optimize the efficiency of our marketing channels, specifically in the Rise portfolio originated by FinWise Bank, and benefit from decreased competition in the UK, although we may see some quarterly volatility in CAC.

Other cost of sales. Other cost of sales increased by $0.7 million, or 6%, from $12.9 million for the six months ended June 30, 2018 to $13.6 million for the six months ended June 30, 2019 due to increased affordability claim settlement expenses primarily related to the Sunny product partially offset by decreased data verification costs incurred from the lower new customer loan volume for the Rise and Elastic products.

Operating expenses



	Six Months Ended June 30,								Period-to-period change
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount			Percentage

Operating expenses:
Compensation and benefits	$	51,348	14	%	$	45,807	12	%	$	5,541		12	%
Professional services	18,559		5		16,686		4		1,873			11
Selling and marketing	4,051		1		5,355		1		(1,304		)	(24	)
Occupancy and equipment	10,231		3		8,749		2		1,482			17
Depreciation and amortization	8,590		2		5,677		2		2,913			51
Other	3,017		1		2,785		1		232			8
Total operating expenses	$	95,796	26	%	$	85,059	23	%	$	10,737		13	%

Compensation and benefits. Compensation and benefits increased by $5.5 million, or 12%, from $45.8 million for the six months ended June 30, 2018 to $51.3 million for the six months ended June 30, 2019 primarily due to an increase in the number of employees.

Professional services. Professional services increased by $1.9 million, or 11%, from $16.7 million for the six months ended June 30, 2018 to $18.6 million for the six months ended June 30, 2019 primarily due to increased legal expenses related to various regulatory matters and outsourced servicing expense, partially offset by decreased consulting expenses.

Selling and marketing. Selling and marketing decreased by $1.3 million, or 24%, from $5.4 million for the six months ended June 30, 2018 to $4.1 million for the six months ended June 30, 2019 primarily due to decreased marketing agency fees.

Occupancy and equipment. Occupancy and equipment increased by $1.5 million, or 17%, from $8.7 million for the six months ended June 30, 2018 to $10.2 million for the six months ended June 30, 2019 primarily due to increased web hosting expense, increased licenses, and increased rent expense needed to support a greater number of employees.

Depreciation and amortization. Depreciation and amortization increased by $2.9 million, or 51%, from $5.7 million for the three months ended June 30, 2018 to $8.6 million for the three months ended June 30, 2019 primarily due to increased purchases of property and equipment, including depreciation on internally developed software.

Net interest expense



	Six Months Ended June 30,								Period-to-period change
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount			Percentage

Net interest expense	$	37,166	10	%	$	38,476	10	%	$	(1,310	)	(3	)%

Net interest expense decreased $1.3 million, or 3%, during the six months ended June 30, 2019 as compared to the prior year period. For the first six months of 2018, we had an average balance of $511.8 million in notes payable outstanding under our debt facilities, which increased to $550.6 million for the first six months of 2019, resulting in additional interest expense of approximately $2.6 million. Our average effective interest rate on our notes payable outstanding has decreased from 15.2% for the six months ended June 30, 2018 to 13.6% for the six months ended June 30, 2019, resulting in a decrease in interest expense of approximately $3.9 million. In addition, we incurred an $850 thousand prepayment penalty during the second quarter of 2019 for the early repayment on the 4th Tranche Term Note that is included in interest expense within the VPC Facility.

The following table shows the effective cost of funds of each debt facility for the period:



	Six Months Ended June 30,
(Dollars in thousands)	2019			2018

VPC Facility
Average facility balance during the period	$	268,325		$	296,198
Net interest expense	16,399			22,317
Less: prepayment penalty associated with the early repayment on the 4th Tranche Term Note	(850		)	—
Net interest expense, as adjusted	$	15,549		$	22,317
Effective cost of funds	12.3		%	15.2		%
Effective cost of funds, as adjusted	11.7		%	15.2		%

EF SPV Facility
Average facility balance during the period	$	52,635		N/A
Net interest expense	2,813			N/A
Effective cost of funds	10.8		%	N/A

ESPV Facility
Average facility balance during the period	$	229,652		$	215,558
Net interest expense	17,954			16,159
Effective cost of funds	15.8		%	15.1		%

Foreign currency transaction loss

During the six months ended June 30, 2019, we realized a $0.1 million loss in foreign currency remeasurement primarily related to a portion of the debt facility that our UK entity, Elevate Credit International, Ltd., has with a third-party lender, VPC, which is denominated in US dollars. The foreign currency remeasurement loss for the six months ended June 30, 2018 was $0.5 million.

Non-operating loss

During the six months ended June 30, 2018, we recognized non-operating losses related to the change in fair value on the embedded derivative in the Convertible Term Notes.

Income tax expense



	Six Months Ended June 30,								Period-to-period change
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount		Percentage

Income tax expense	$	8,649	2	%	$	4,745	2	%	$	3,904	82	%

Our income tax expense increased $3.9 million, or 82%, from a $4.7 million expense for the six months ended June 30, 2018 to $8.6 million expense for the six months ended June 30, 2019. Our consolidated effective tax rates for the six months ended June 30, 2019 and 2018 were 31% and 27%, respectively. Our effective tax rates are different from the standard corporate federal income tax rate of 21% in the US primarily due to our permanent non-deductible items, corporate state tax obligations in the states where we have lending activities and, starting January 1, 2019, the impact of the Global Intangible Low-Taxed Income ("GILTI") provision of the December 22, 2017 Tax Cuts and Jobs Act. The Company's US cash effective tax rate was approximately 2% for the first six months of 2019. Our UK operations have generated net operating losses which have a full valuation allowance provided due to the lack of sufficient objective evidence regarding the realizability of this asset. Therefore, no UK deferred tax benefit has been recognized in the condensed consolidated financial statements for the six months ended June 30, 2019 and 2018.

Net income



	Six Months Ended June 30,								Period-to-period change
	2019				2018				Period-to-period change
(Dollars in thousands)	Amount		Percentage of revenues		Amount		Percentage of revenues		Amount		Percentage

Net income	$	19,130	5	%	$	12,611	3	%	$	6,519	52	%

Our net income increased $6.5 million, or 52%, from $12.6 million for the six months ended June 30, 2018 to $19.1 million for the six months ended June 30, 2019 due to improved gross profit and lower interest expense offset by increased operating expenses and income tax expense.

LIQUIDITY AND CAPITAL RESOURCES

We principally rely on our working capital, funds from third-party lenders under the CSO programs, and our credit facility with VPC to fund the loans we make to our customers.

On July 25, 2019, the Company's Board of Directors authorized a share repurchase program providing for the repurchase of up to $10 million of our common stock through July 31, 2024. The share repurchase program provides that up to a maximum aggregate amount of $5 million shares may be repurchased in any given fiscal year. Repurchases will be made in accordance with applicable securities laws from time-to-time in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. The share repurchase program does not require the purchase of any minimum number of shares and may be implemented, modified, suspended or discontinued in whole or in part at any time without further notice. Any repurchased shares will be available for use in connection with equity plans and for other corporate purposes.

Debt Facilities

VPC Facility

VPC Facility Term Notes

On January 30, 2014, we entered into the VPC Facility in order to fund our Rise and Sunny products and provide working capital. The VPC Facility has been amended several times, with the most recent amendment effective February 1, 2019, to increase the maximum total borrowing amount available and other terms of the VPC Facility.

The VPC Facility provided the following term notes as of June 30, 2019:

•

A maximum borrowing amount of $18 million used to fund working capital , and prior to February 1, 2019, at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 13% (“4^th Tranche Term Note”). Upon the February 1, 2019 amendment date, the interest rate was fixed through the February 1, 2021 maturity date at a base rate of 2.73% plus 13%. The interest rate at June 30, 2019 and December 31, 2018 was 15.73% and 15.74%, respectively. There was no change in the interest rate spread on this facility upon the February 1, 2019 amendment.


•	A revolving feature which provides the option to pay down up to 20% of the outstanding balance, excluding the 4^th Tranche Term Note, once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.

There are no principal payments due or scheduled under the VPC Facility until the respective maturity dates of the US Term Note, the UK Term Note and the 4^th Tranche Term Note. The 4^th Tranche Term Note matures on February 1, 2021. The US Term Note and the UK Term Note mature on January 1, 2024.

All of our assets are pledged as collateral to secure the VPC Facility. The agreement contains customary financial covenants, including minimum cash and excess spread requirements, maximum roll rate and charge-off rate levels, maximum loan-to-value ratios and a minimum book value of equity requirement. We were in compliance with all covenants as of June 30, 2019.

EF SPV Facility

EF SPV Term Note

On February 1, 2019, we entered into the EF SPV Facility in order to fund the EF SPV participation purchases of Rise installment loans from a third-party lender. Prior to the execution of the agreement with VPC, EF SPV was a borrower on the US Term Note under the VPC Facility. FinWise Bank retains 5% of the balances of all loans originated and sells a 95% loan participation in the Rise installment loans. The EF SPV Term Note has a $150 million commitment amount. The interest rate on the debt outstanding as of the amendment date was fixed through the January 1, 2024 maturity date at 10.23% (base rate of 2.73% plus 7.5%). All future borrowings under this facility will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.5% at the borrowing date. The weighted average base rate on the $53.0 million outstanding balance at June 30, 2019 was 2.67% and the overall interest rate was 10.17%. The EF SPV Term Note has a revolving feature which provides the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity. There are no principal payments due or scheduled prior to the maturity date of January 1, 2024.

All of our assets are pledged as collateral to secure the EF SPV Term Note. The agreement contains customary financial covenants, including minimum cash and excess spread requirements, maximum roll rate and charge-off rate levels, maximum loan-to-value ratios and a minimum book value of equity requirement. We were in compliance with all covenants as of June 30, 2019.

ESPV Facility

ESPV Term Note

Elastic SPV receives its funding from VPC in the ESPV Facility, which was finalized on July 13, 2015 and amended effective February 1, 2019. The ESPV Facility has a maximum borrowing amount of $350 million used to purchase loan participations from a third-party lender. Prior to the February 1, 2019 amendment, the interest rate paid on this facility was a base rate (defined as the greater of the 3-month LIBOR rate or 1% per annum) plus 13% for the outstanding balance up to $50 million, plus 12% for the outstanding balance greater than $50 million up to $100 million, plus 13.5% for any amounts greater than $100 million up to $150 million, and plus 12.75% for borrowing amounts greater than $150 million. This resulted in a blended interest rate paid of 14.65% on debt outstanding under this facility at December 31, 2018. Upon the February 1, 2019 amendment date, the interest rate on the debt outstanding as of the amendment date was fixed at 15.48% (base rate of 2.73% plus 12.75%). Effective July 1, 2019, the interest rate on the debt outstanding as of the amendment date will be 10.23% (base rate of 2.73% plus 7.50%). All future borrowings under this facility after July 1, 2019 will bear an interest rate at a base rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus 7.5% at the borrowing date. The weighted average base rate on the outstanding balance at June 30, 2019 was 2.73% and the overall interest rate was 15.48%. The Company entered into an interest rate cap on January 11, 2018 to mitigate the floating rate interest risk on the $216 million then outstanding. The interest rate cap matured on February 1, 2019. There are no principal payments due or scheduled until the credit facility maturity date of January 1, 2024. The ESPV Term Note has a revolving feature which provides the option to pay down up to 20% of the outstanding balance once per year during the first quarter. Amounts paid down may be drawn again at a later date prior to maturity.

All of our assets are pledged as collateral to secure the ESPV Facility. The agreement contains customary financial covenants, including minimum cash and excess spread requirements, maximum roll rate and charge-off rate levels, maximum loan-to-value ratios and a minimum book value of equity requirement. We were in compliance with all covenants as of June 30, 2019.

Outstanding Notes Payable

The outstanding balances of notes payable as of June 30, 2019 and December 31, 2018 are as follows:



(Dollars in thousands)	June 30, 2019		December 31, 2018
US Term Note bearing interest at the base rate + 7.5%	$	182,000	$	250,000
UK Term Note bearing interest at the base rate + 7.5%	39,158		39,196
4th Tranche Term Note bearing interest at the base rate + 13%	18,050		35,050
EF SPV Term Note bearing interest at the base rate + 7.5%	70,000		—
ESPV Term Note bearing interest at the base rate + 12.75%	221,000		239,000
Total	$	530,208	$	563,246

The change in the facility balances includes the following:


•	US Term Note - $43 million re-allocation to new EF SPV facility and pay down of $25 million in the first quarter of 2019 under the revolver component of the facility;


•	4th Tranche Term Note - $17 million early repayment in the second quarter of 2019;


•	EF SPV Term note - $43 million re-allocation from US Term Note in the first quarter of 2019 and additional draws of $10 million and $17 million in the first and second quarters of 2019, respectively; and


•	ESPV Term Note - Pay-down of $18 million in the first quarter of 2019 under the revolver component of the facility.

The following table presents the future debt maturities as of June 30, 2019:



Year (dollars in thousands)	June 30, 2019
Remainder of 2019	$	—
2020	—
2021	18,050
2022	—
2023	—
Thereafter	512,158
Total	$	530,208

Cash and cash equivalents, restricted cash, loans (net of allowance for loan losses), and cash flows

The following table summarizes our cash and cash equivalents, restricted cash, loans receivable, net and cash flows for the periods indicated:



	As of and for the six months ended June 30,
(Dollars in thousands)	2019			2018

Cash and cash equivalents	$	63,399		$	69,368
Restricted cash	2,491			1,594
Loans receivable, net	535,405			507,801
Cash provided by (used in):
Operating activities	169,427			162,485
Investing activities	(127,330		)	(144,345		)
Financing activities	(37,080		)	10,110

Our cash and cash equivalents at June 30, 2019 were held primarily for working capital purposes. We may, from time to time, use excess cash and cash equivalents to fund our lending activities. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate working capital requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our excess cash is invested primarily in demand deposit accounts that are currently providing only a minimal return.

Net cash provided by operating activities

We generated $169.4 million in cash from our operating activities for the six months ended June 30, 2019, primarily from revenues derived from our loan portfolio. This was up $6.9 million from the $162.5 million of cash provided by operating activities during the six months ended June 30, 2018. This increase was the result of the expansion of our gross margin, which contributed to the $6.5 million increase in our net income for the six months ended June 30, 2019 compared to the same prior year period.

Net cash used in investing activities

For the six months ended June 30, 2019 and 2018, cash used in investing activities was $127.3 million and $144.3 million, respectively. The decrease was primarily due to a decrease in net loans issued to customers. The following table summarizes cash used in investing activities for the periods indicated:



	For the six months ended June 30,
(Dollars in thousands)	2019			2018

Cash used in investing activities
Net loans issued to consumers, less repayments	$	(110,797	)	$	(128,875	)
Participation premium paid	(2,491		)	(3,020		)
Purchases of property and equipment	(14,042		)	(12,450		)
	$	(127,330	)	$	(144,345	)

Net cash provided by (used in) financing activities

Cash flows from financing activities primarily include cash received from issuing notes payable, payments on notes payable, and activity related to stock awards. For the six months ended June 30, 2019 and 2018, cash provided by (used in) financing activities was $(37.1) million and $10.1 million, respectively. The following table summarizes cash provided by (used in) financing activities for the periods indicated:



	For the six months ended June 30,
(Dollars in thousands)	2019			2018

Cash provided by (used in) financing activities
Proceeds from issuance of Notes payable, net	$	27,000		$	12,110
Payments on Notes payable	(60,000		)	—
Debt issuance costs paid	(2,598		)	—
Debt prepayment costs paid	(850		)	—
Cash paid for interest rate caps	—			(1,367		)
Settlement of derivative liability	—			(2,010		)
Proceeds from issuance of stock, net	579			1,377
Other activities	(1,211		)	—
	$	(37,080	)	$	10,110

The decrease in cash provided by financing activities for the six months ended June 30, 2019 versus the comparable period of 2018 was primarily due to payments made on notes payable made during 2019.

Free Cash Flow

In addition to the above, we also review FCF when analyzing our cash flows from operations. We calculate free cash flow as cash flows from operating activities, adjusted for the principal loan net charge-offs and capital expenditures incurred during the period. While this is a non-GAAP measure, we believe it provides a useful presentation of cash flows derived from our core operating activities.



	For the six months ended June 30,
(Dollars in thousands)	2019			2018

Net cash provided by operating activities	$	169,427		$	162,485
Adjustments:
Net charge-offs – combined principal loans	(142,287		)	(151,023		)
Capital expenditures	(14,042		)	(12,450		)
FCF	$	13,098		$	(988	)

Our FCF was $13.1 million for the first six months of 2019 compared to negative $1.0 million for the comparable prior year period. The increase in our FCF was the result of the increase in cash provided by operations and a decrease in net charge-offs - combined principal loans during the first six months of 2019, which were partially offset by increased capital expenditures.

Operating and capital expenditure requirements

We believe that our existing cash balances, together with the available borrowing capacity under our VPC Facility, EF SPV Facility and ESPV Facility, will be sufficient to meet our anticipated cash operating expense and capital expenditure requirements through at least the next 12 months. If our loan growth exceeds our expectations, our available cash balances may be insufficient to satisfy our liquidity requirements, and we may seek additional equity or debt financing. This additional capital may not be available on reasonable terms, or at all.

CONTRACTUAL OBLIGATIONS

Our principal commitments consist of obligations under our debt facilities and operating lease obligations. There have been no material changes to our contractual obligations since December 31, 2018, with the exception of the extensions of our debt facilities discussed previously. See “—Liquidity and Capital Resources.”

OFF-BALANCE SHEET ARRANGEMENTS

We provide services in connection with installment loans originated by independent third-party lenders (“CSO lenders”) whereby we act as a credit service organization/credit access business on behalf of consumers in accordance with applicable state laws through our “CSO program.” The CSO program includes arranging loans with CSO lenders, assisting in the loan application, documentation and servicing processes. Under the CSO program, we guarantee the repayment of a customer’s loan to the CSO lenders as part of the credit services we provide to the customer. A customer who obtains a loan through the CSO program pays us a fee for the credit services, including the guaranty, and enters into a contract with the CSO lenders governing the credit services arrangement. We estimate a liability for losses associated with the guaranty provided to the CSO lenders using assumptions and methodologies similar to the allowance for loan losses, which we recognize for our consumer loans.

RECENT REGULATORY DEVELOPMENTS

During the year ended December 31, 2018, our UK business began to receive an increased number of customer complaints initiated by claims management companies ("CMCs") related to the affordability assessment of certain loans. If our evidence supports the affordability assessment and we reject the claim, the customer has the right to take the complaint to the Financial Ombudsman Service for further adjudication. The CMCs' campaign against the high cost lending industry increased significantly during the third and fourth quarters of 2018 and continued during the first half of 2019 resulting in a significant increase in affordability claims against all companies in the industry during this period. We believe that many of the increased claims are without merit and reflect the use of abusive and deceptive tactics by the CMCs. The Financial Conduct Authority, a regulator in the UK financial services industry, began regulating the CMCs in April 2019 in order to ensure that the methods used by the CMCs are in the best interests of the consumer and the industry. As of June 30, 2019, we accrued approximately $1.6 million for the claims received that were determined to be probable and reasonably estimable based on the Company's historical loss rates related to these claims. The outcomes of the adjudication of these claims may differ from the Company's estimates, and as a result, our estimates may change in the near term and the effect of any such change could be material to the financial statements. We continue to monitor the matters for further developments that could affect the amount of the accrued liability recognized.

On May 7, 2019, the Consumer Financial Protection Bureau (the "CFPB") proposed amendments to Regulation F, which implements the FDCPA. The Bureau's proposal would, among other things, address communications in connection with debt collection; interpret and apply prohibitions on harassment or abuse, false or misleading representations, and unfair practices in debt collection; and clarify requirements for certain consumer-facing debt collection disclosures. The public comment period on the proposed amendments closes on September 18, 2019. Once a final rule is promulgated, we will take the necessary steps to ensure that the third-party debt collectors we work with are compliant with the final rule.

On June 26, 2019, the California Senate Banking and Financial Institutions Committee passed Assembly Bill 539, which imposes an interest rate cap on all consumer loans between $2,500 and $10,000 of 36% plus the Federal Funds Rate. On July 9, 2019, the California Senate Judiciary Committee also passed Assembly Bill 539 and the bill was referred to the Senate Appropriations Committee. The deadline for Assembly Bill 539 to pass both houses is September 13, 2019, and the deadline to be signed by the Governor and passed into law is October 13, 2019. We will continue to evaluate the potential effect of this bill on our results of operations and financial condition in the California market. We cannot currently assess the likelihood of any other future unfavorable federal, state, local or international legislation or regulations being proposed or enacted that could affect our products and services.

The California Consumer Privacy Act (the “CCPA”), which comes into effect January 1, 2020, broadly defines personal information and provides California consumers increased privacy rights and protections, including imposing expanded obligations to disclose the categories and uses of personal information a business collects, providing consumers a right to access that information, a right to opt out of the sale of personal information and the right to request that a business delete personal information about the consumer subject to certain exemptions. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches, which may increase the costs of data breach litigation. While it is too early to know its full impact, implementation of the CCPA and its related requirements could increase costs or otherwise adversely affect our business in the California market.

BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

Revenue recognition

We recognize consumer loan fees as revenues for each of the loan products we offer. Revenues on the Condensed Consolidated Statements of Operations include: finance charges, lines of credit fees, fees for services provided through CSO programs (“CSO fees”), and interest, as well as any other fees or charges permitted by applicable laws and pursuant to the agreement with the borrower. We also record revenues related to the sale of customer applications to unrelated third parties. These applications are sold with the customer’s consent in the event that we or our CSO lenders are unable to offer the customer a loan. Revenue is recognized at the time of the sale. Other revenues also include marketing and licensing fees received from the originating lender related to the Elastic product and Rise bank-originated loans and from CSO fees related to the Rise product. Revenues related to these fees are recognized when the service is performed.

We accrue finance charges on installment loans on a constant yield basis over their terms. We accrue and defer fixed charges such as CSO fees and lines of credit fees when they are assessed and recognize them to earnings as they are earned over the life of the loan. We accrue interest on credit cards based on the amount of the loan outstanding and their contractual interest rate. Credit card membership fees are amortized to revenue over the card membership period. Other credit card fees, such as late payment fees and returned payment fees, are accrued when assessed. We do not accrue finance charges and other fees on installment loans or lines of credit for which payment is greater than 60 days past due. Credit card interest charges are recognized based on the contractual provisions of the underlying arrangements and are not accrued for which payment is greater than 90 days past due. Installment loans and lines of credit are considered past due if a grace period has not been requested and a scheduled payment is not paid on its due date. Credit cards have a grace period of 25 days. Payments received on past due loans are applied against the loan and accrued interest balance to bring the loan current. Payments are generally first applied to accrued fees and interest, and then to the principal loan balance.

Our business is affected by seasonality, which can cause significant changes in portfolio size and profit margins from quarter to quarter. Although this seasonality does not impact our policies for revenue recognition, it does generally impact our results of operations by potentially causing an increase in its profit margins in the first quarter of the year and decreased margins in the second through fourth quarters.

Allowance and liability for estimated losses on consumer loans

We have adopted Financial Accounting Standards Board (“FASB”) guidance for disclosures about the credit quality of financing receivables and the allowance for loan losses (“allowance”). We maintain an allowance for loan losses for loans and interest receivable for loans not classified as TDRs at a level estimated to be adequate to absorb credit losses inherent in the outstanding loans receivable. We primarily utilize historical loss rates by product, stratified by delinquency ranges, to determine the allowance, but we also consider recent collection and delinquency trends, as well as macro-economic conditions that may affect portfolio losses. Additionally, due to the uncertainty of economic conditions and cash flow resources of our customers, the estimate of the allowance for loan losses is subject to change in the near-term and could significantly impact the consolidated financial statements. If a loan is deemed to be uncollectible before it is fully reserved, it is charged-off at that time. For loans classified as TDRs, impairment is typically measured based on the present value of the expected future cash flows discounted at the original effective interest rate.

We classify loans as either current or past due. An installment loan or line of credit customer in good standing may request a 16-day grace period when or before a payment becomes due and, if granted, the loan is considered current during the grace period. Credit card customers have a 25-day grace period for each payment. Installment loans and lines of credit are considered past due if a grace period has not been requested and a scheduled payment is not paid on its due date. Credit cards are considered past due if the grace period has passed and the scheduled payment has not been made. Increases in the allowance are created by recording a Provision for loan losses in the Condensed Consolidated Statements of Operations. Installment loans and lines of credit are charged off, which reduces the allowance, when they are over 60 days past due or earlier if deemed uncollectible. Credit cards are charged off, which reduces the allowance, when they are over 120 days past due or earlier if deemed uncollectible. Recoveries on losses previously charged to the allowance are credited to the allowance when collected.

Liability for estimated losses on credit service organization loans

Under the CSO program, we guarantee the repayment of a customer’s loan to the CSO lenders as part of the credit services we provide to the customer. A customer who obtains a loan through the CSO program pays us a fee for the credit services, including the guaranty, and enters into a contract with the CSO lenders governing the credit services arrangement. We estimate a liability for losses associated with the guaranty provided to the CSO lenders using assumptions and methodologies similar to the allowance for loan losses, which we recognize for our consumer loans.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. We perform an impairment review of goodwill and intangible assets with an indefinite life annually at October 31 and between annual tests if we determine that an event has occurred or circumstances changed in a way that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Such a determination may be based on our consideration of macro-economic and other factors and trends, such as current and projected financial performance, interest rates and access to capital.

Our impairment evaluation of goodwill is based on comparing the fair value of the respective reporting unit to its carrying value. The fair value of the reporting unit is determined based on a weighted average of the income and market approaches. The income approach establishes fair value based on estimated future cash flows of the reporting unit, discounted by an estimated weighted-average cost of capital developed using the capital asset pricing model, which reflects the overall level of inherent risk of the reporting unit. The income approach uses our projections of financial performance for a six- to nine-year period and includes assumptions about future revenue growth rates, operating margins and terminal values. The market approach establishes fair value by applying cash flow multiples to the respective reporting unit’s operating performance. The multiples are derived from other publicly traded companies that are similar but not identical from an operational and economic standpoint.

We completed our 2018 annual test and determined that there was no evidence of impairment of goodwill for the two reporting units that have goodwill. Although no goodwill impairment was noted, there can be no assurances that future goodwill impairments will not occur.

Internal-use software development costs

We capitalize certain costs related to software developed for internal-use, primarily associated with the ongoing development and enhancement of our technology platform. Costs incurred in the preliminary development and post-development stages are expensed. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally three years.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized.

Relative to uncertain tax positions, we accrue for losses we believe are probable and can be reasonably estimated. The amount recognized is subject to estimate and management judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. If the amounts recorded are not realized or if penalties and interest are incurred, we have elected to record all amounts within income tax expense.

We have no recorded liabilities for US uncertain tax positions at June 30, 2019 and December 31, 2018. Tax periods from fiscal years 2014 to 2018 remain open and subject to examination for US federal and state tax purposes. As we had no operations nor had filed US federal tax returns prior to May 1, 2014, there are no other US federal or state tax years subject to examination.

For UK taxes, tax periods from fiscal years 2010 to 2018 remain open and subject to examination. We had an uncertain tax position at December 31, 2017 that was resolved and released during the year ended December 31, 2018. There are no additional UK uncertain tax positions at June 30, 2019.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act", or "Tax Reform") was enacted into law. The Act contains several changes to the US federal tax law including a reduction to the US federal corporate tax rate from 35% to 21%, an acceleration of the expensing of certain business assets, a reduction to the amount of executive pay that could qualify as a tax deduction, and the addition of a repatriation tax on any accumulated offshore earnings and profit.

The Tax Reform also included a new “Mandatory Repatriation” that required a one-time tax on shareholders of Specific Foreign Corporations (“SFCs”). The one-time tax was imposed using the Subpart F rules to require US shareholders to include in income the pro rata share of their SFC’s previously untaxed accumulated post 1986 deferred foreign income. Our SFC, ECI, had an accumulated earnings and profit ("E&P") deficit at December 31, 2017, and therefore, we had no US impact from the new mandatory repatriation law.

Additionally, tax reform included a new anti-deferral provision, similar to the subpart F provision, requiring a US shareholder of Controlled Foreign Corporation’s (“CFC”) to include in income annually its pro rata share of a CFC’s “global intangible low-taxed income” (“GILTI”). Our SFC, ECI, qualifies as a CFC, and as such, requires a GILTI inclusion in the applicable tax year. ECI has a US tax year end of November 30. We have elected to treat GILTI as a period cost, and therefore, will recognize those taxes as expenses in the period incurred.

Share-Based Compensation

In accordance with applicable accounting standards, all share-based compensation, consisting of stock options and restricted stock units (“RSUs") issued to employees is measured based on the grant-date fair value of the awards and recognized as compensation expense on a straight-line basis over the period during which the recipient is required to perform services in exchange for the award (the requisite service period). Starting July 2017, we also have an employee stock purchase plan (“ESPP”). The determination of fair value of share-based payment awards and ESPP purchase rights on the date of grant using option-pricing models is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise activity, risk-free interest rate, expected dividends and expected term. We use the Black-Scholes-Merton Option Pricing Model to estimate the grant-date fair value of stock options. We also use an equity valuation model to estimate the grant-date fair value of RSUs. Additionally, the recognition of share-based compensation expense requires an estimation of the number of awards that will ultimately vest and the number of awards that will ultimately be forfeited.

Derivative Financial Instruments

On January 11, 2018, we and ESPV each entered into one interest rate cap transaction with a counterparty to mitigate the floating rate interest risk on a portion of the debt underlying the Rise and Elastic portfolios, respectively, which matured on February 1, 2019. The interest rate caps were designated as cash flow hedges against expected future cash flows attributable to future interest payments on debt facilities held by each entity. We initially reported the gains or losses related to the hedges as a component of Accumulated other comprehensive income (loss) in the Consolidated Balance Sheets in the period incurred and subsequently reclassified the interest rate caps’ gains or losses to interest expense when the hedged expenses were recorded. We excluded the change in the time value of the interest rate caps in its assessment of their hedge effectiveness. We present the cash flows from cash flow hedges in the same category in the Consolidated Statements of Cash Flows as the category for the cash flows from the hedged items. The interest rate caps do not contain any credit risk related contingent features. Our hedging program is not designed for trading or speculative purposes.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND JOBS ACT ELECTION

Under the Jumpstart Our Business Startups Act (the “JOBS Act”), we meet the definition of an emerging growth company. We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

Recently Adopted Accounting Standards

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements ("ASU 2018-09"). The purpose of ASU 2018-09 is to clarify, correct errors in, or make minor improvements to the Codification. Among other revisions, the amendments clarify that an entity should recognize excess tax benefits or tax deficiencies for share compensation expense that is taken on an entity’s tax return in the period in which the amount of the deduction is determined. The Company has adopted all of the amendments of ASU 2018-09 as of January 1, 2019 on a modified retrospective basis. The adoption of ASU 2018-09 did not have a material impact on the Company's condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. ASU 2016-02 will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), which clarifies certain matters in the codification with the intention to correct unintended application of the guidance. Also in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which provides entities with an additional (and optional) transition method whereby the entity applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, under the new transition method, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with current US GAAP (Topic 840, Leases). ASU 2016-02, as amended, is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company elected to adopt the transition method in ASU 2018-11 by applying the practical expedient prospectively at January 1, 2019. The Company also elected to apply the optional practical expedient package to not reassess existing or expired contracts for lease components, lease classification, or initial direct costs. The adoption of ASU 2016-02, as amended, resulted in the recognition of approximately $12.3 million and $16.0 million additional right of use assets and liabilities for operating leases, respectively, but did not have a material impact on the Company's condensed consolidated income statements.

Accounting Standards to be Adopted in Future Periods

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes, although in the future we may continue to enter into interest rate hedging arrangements or enter into exchange rate hedging arrangements to manage the risks described below.

Interest rate sensitivity

Our cash and cash equivalents as of June 30, 2019 consisted of demand deposit accounts. Our primary exposure to market risk for our cash and cash equivalents is interest income sensitivity, which is affected by changes in the general level of US interest rates. Given the currently low US interest rates, we generate only a de minimis amount of interest income from these deposits.

All of our customer loan portfolios are fixed APR loans and not variable in nature. Additionally, given the high APRs associated with these loans, we do not believe there is any interest rate sensitivity associated with our customer loan portfolio.

Prior to February 1, 2019, our VPC Facility and ESPV Facility were variable rate in nature and tied to the 3-month LIBOR rate. In January 2018, the Company and ESPV each entered into interest rate caps, which cap 3-month LIBOR at 1.75%, to mitigate the floating interest rate risk on $240 million of the US Term Notes included in the VPC Facility and on $216 million of the ESPV Facility, respectively. These interest rate caps matured on February 1, 2019. On February 1, 2019, the VPC and ESPV Facilities were amended and a new EF SPV Facility was added. As part of these amendments, the base interest rate on existing debt outstanding on February 1, 2019 was locked to the 3-month LIBOR as of February 1, 2019 of 2.73% until note maturity. Any additional borrowings on the facilities (excluding the 4th Tranche Term Note) after February 1, 2019 bear a base interest rate (defined as the greater of 3-month LIBOR, the five-year LIBOR swap rate or 1%) plus the applicable spread at the borrowing date.

Any increase in the base interest rate on future borrowings will result in an increase in our net interest expense. The outstanding balance of our VPC Facility at June 30, 2019 was $239.2 million and the balance at December 31, 2018 was $324.2 million. The outstanding balance of our EF SPV Facility was $70 million at June 30, 2019 and there was no balance at December 31, 2018. The outstanding balance of our ESPV Facility was $221.0 million and $239.0 million at June 30, 2019 and December 31, 2018, respectively. Based on the average outstanding indebtedness through the six months ended June 30, 2019, a 1% (100 basis points) increase in interest rates would have only increased our interest expense by approximately $0.2 million for the period as all of our existing debt outstanding has a fixed interest rate through maturity.

Foreign currency exchange risk

We provide installment loans to customers in the UK. Interest income from our Sunny UK installment loans is earned in GBP. Fluctuations in exchange rate of the USD against the GBP and cash held in such foreign currency can result, and have resulted, in fluctuations in our operating income and foreign currency transaction gains and losses. We had foreign currency transaction losses of approximately $0.1 million and $0.5 million during the six months ended June 30, 2019 and 2018, respectively. We currently do not engage in any foreign exchange hedging activity but may do so in the future.

At June 30, 2019, our GBP-denominated net assets were approximately $62.2 million (which excludes the $26.8 million then drawn under the USD-denominated UK term note under the VPC Facility). A hypothetical 10% strengthening or weakening in the value of the USD compared to the GBP at this date would have resulted in a decrease/increase in net assets of approximately $6.2 million. During the six months ended June 30, 2019, the GBP-denominated pre-tax loss was approximately $209 thousand. A hypothetical 10% strengthening or weakening in the value of the USD compared to the GBP during this period would have resulted in a decrease/increase in the pre-tax income of approximately $21 thousand.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Interim Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In addition to the matters discussed below, in the ordinary course of business, from time to time, we have been and may be named as a defendant in various legal proceedings arising in connection with our business activities, including affordability claims related to the Sunny product. We may also be involved, from time to time, in reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding our business (collectively, “regulatory matters”). We contest liability and/or the amount of damages as appropriate in each such pending matter. We do not anticipate that the ultimate liability, if any, arising out of any such pending matter will have a material effect on our financial condition, results of operations or cash flows.

Civil Investigative Demand

In June 2012, prior to the spin-off from Think Finance, Inc. ("TFI"), and in February 2016, after the spin-off, TFI received Civil Investigative Demands from the CFPB. The purpose of the Civil Investigative Demands was to determine whether small-dollar online lenders or other unnamed persons engaged in unlawful acts or practices relating to the advertising, marketing, provision, or collection of small-dollar loan products, in violation of Section 1036 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Electronic Funds Transfer Act, the Gramm-Leach-Bliley Act, or any other federal consumer financial law and to determine whether CFPB action to obtain legal or equitable relief would be in the public interest. Further, on November 15, 2017 the CFPB sued TFI alleging it deceived consumers into paying debts that were not valid and that it collected loan payments that consumers did not owe. The CFPB and TFI have agreed to settle all claims and executed a settlement agreement that is awaiting final court approval in the United States Bankruptcy Court for the Northern District of Texas. While TFI’s business is distinct from our business, we cannot predict the final outcome of the Civil Investigative Demands or to what extent any obligations arising out of such final outcome will be applicable to our company or business, if at all.

Item 1A. Risk Factors

There have been no material changes from the Risk Factors described in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except as set forth in our Quarterly Report on Form 10-Q for the period ended March 31, 2019 and as set forth below.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

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

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

In recent years, consumer loans, and in particular the category commonly referred to as “payday loans,” have come under increased regulatory scrutiny that has resulted in increasingly restrictive regulations and legislation that makes offering consumer loans in certain states in the US or the UK less profitable or unattractive. On October 5, 2017 the Consumer Financial Protection Bureau (the "CFPB") issued a final rule covering loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, longer-term loans with balloon payments and any loan with an annual percentage rate over 36% that includes authorization for the lender to access the borrower’s checking or prepaid account (the "2017 Rule"). Since that time, the 2017 Rule has been amended. See "—The CFPB issued proposed revisions to the 2017 Rule affecting the consumer lending industry, and these or subsequent new rules and regulations, if they are finalized, may impact our US consumer lending business" for more information.

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

In order to serve our non-prime customers profitably we need to sufficiently price the risk of the transaction into the annual percentage rate (“APR”) of our loans. If individual states or the US federal government or regulators in the UK impose rate caps lower than those at which we can operate our current business profitably or otherwise impose stricter limits on non-prime lending, we would need to exit such states or dramatically reduce our rate of growth by limiting our products to customers with higher creditworthiness. On April 30, 2019, Senator Dick Durbin reintroduced a bill that would create a national interest rate cap of 36% on consumer loans. The "Protecting Consumers from Unreasonable Credit Rates Act of 2019" is co-sponsored by Senators Jeff Merkley, Sheldon Whitehouse, and Richard Blumenthal. Previous versions have been proposed in 2009, 2013, 2015 and 2017, but the bill has never made it to the House or Senate floor.

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

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

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

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

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

Third parties may also seek to take advantage of unique regulations applicable to consumer loan products to drive up complaints and the cost of doing business in our industry. Over the last 12 months, the Company's UK business began to receive an increased number of customer complaints initiated by claims management companies ("CMCs") related to the affordability assessment of certain loans. If the Company's evidence supports the affordability assessment and the Company rejects the claim, the customer has the right to take the complaint to the Financial Ombudsman Service (“FOS”) for further adjudication. We have incurred significant costs in the form of FOS administrative fees associated with each individual complaint submitted to FOS, operational costs necessary to manage the large volume of complaints, and payments we are required to make to customers to resolve these complaints. We believe that many of the increased claims against us are without merit and reflect the use of abusive and deceptive tactics by the CMCs. On April 1, 2019, the Financial Conduct Authority (the "FCA") took over responsibility for supervision and authorization of a high percentage of CMCs (those regulated by the Solicitor's Regulation Authority, which account for the minority of CMCs, will not be automatically impacted). In addition

to the CMCs issuing claims, some law firms are also issuing claims on behalf of claimants. If we experience an increased volume of complaints due to the activities of the CMCs and law firms representing claimants and continue incurring significant costs to resolve such complaints, such costs could have a material adverse effect on our business, results of operations, financial condition and cash flows. A significant number of consumer complaints could also trigger enhanced regulatory scrutiny by the FCA.

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

RISKS RELATED TO OUR ASSOCIATION WITH TFI

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

The CFPB has authority to investigate and issue Civil Investigative Demands (“CIDs”) to consumer lending businesses, including us. In June 2012, prior to the spin-off, and after the spin-off, TFI received CIDs from the CFPB. The purpose of the CIDs purportedly was to determine whether TFI engaged in unlawful acts or practices relating to the advertising, marketing, provision, or collection of small-dollar loan products, in violation of parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Truth in Lending Act, the Electronic Funds Transfer Act, the Gramm-Leach-Bliley Act, or any other federal consumer financial law and to determine whether CFPB action to obtain legal or equitable relief would be in the public interest. On November 15, 2017, the CFPB sued TFI alleging it engaged in unfair, deceptive, or abusive acts or practices. Further, the CFPB and TFI have agreed to settle all claims and executed a settlement agreement that is awaiting final court approval in the United States Bankruptcy Court for the Northern District of Texas. While TFI’s business is distinct from our business, we cannot predict the final outcome of this litigation or to what extent any obligations arising out of such final outcome will be applicable to our Company, business or officers, if at all.

OTHER RISKS RELATED TO COMPLIANCE AND REGULATION

The CFPB issued proposed revisions to the 2017 Rule affecting the consumer lending industry, and these or subsequent new rules and regulations, if they are finalized, may impact our US consumer lending business.

The CFPB released its final “Payday, Vehicle Title, and Certain High-Cost Lending Rule” (the "2017 Rule") on October 5, 2017, covering certain short-term and longer-term loans with an APR of 36% or higher and have a “leveraged payment mechanism” such as an ACH payment plan. On February 6, 2019, the CFPB issued proposed revisions to the 2017 Rule (the “2019 Proposed Revisions”). The 2019 Proposed Revisions leave in place requirements and limitations on attempts to withdraw payments from consumers’ checking, savings or prepaid accounts. Among other requirements, the payment provisions prohibit lenders that have had two consecutive attempts to collect money from a consumers’ account returned for insufficient funds from making any further attempts to collect from the account unless the consumers have provided new authorizations for additional payment transfers. Additionally, the payment provisions require us to give consumers at least three business days' advance notice before attempting payment withdrawals. The mandatory compliance deadline for the payment provisions of the 2017 Rule still stands at August 19, 2019. Language in the 2019 Proposed Revisions suggest that the CFPB may be receptive to informal requests to revisit such payment provisions requirements. There are also recordkeeping requirements and compliance plan requirements in the 2019 Proposed Rule that will apply to us. On June 7, 2019, the CFPB announced a 15-month delay in the rule's August 19, 2019 compliance date to November 19, 2020 that applies only to the proposed rescinded ability-to-pay provisions. Relatedly, the Community Financial Services Association of America (“CFSA”) sued the CFPB in April 2018 over the Payday, Vehicle Title, and Certain High-Cost Lending Rule. As a result, the court suspended the Bureau’s August 19, 2019 implementation of the 2019 Proposed Revisions pending further order of the court. On August 6, 2019 the court issued an order that leaves the compliance date stay in effect. The court will evaluate whether to leave or lift the stay after the parties file their next joint status report, which is due no later than December 6, 2019. To the extent that the 2019 Proposed Revisions, or subsequent new rules and regulations proposed by the CFPB, are finalized, the results of operations of our US consumer lending business could be adversely affected.

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

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

A number of proposals have recently been implemented or are pending before federal, state, and international legislative and regulatory bodies that could impose new obligations in areas such as privacy. For example, the European Union's new General Data Protection Regulation (the “GDPR”) was implemented in the UK in May 28, 2018, and the California Consumer Privacy Act (the “CCPA”) comes into effect in January 2020. The GDPR is more prescriptive than the prior regime and includes new obligations on businesses, including the requirement to appoint a data protection officer, self-report breaches, obtain express consent to data processing and provide more rights to individuals whose data they process, including the "right to be forgotten," by having their records erased. Penalties for non-compliance with the GDPR are significant, with a maximum fine calculated as the higher of €20 million or 4% of global turnover for the preceding year. The CCPA broadly defines personal information and provides California consumers increased privacy rights and protections.

In addition, the 4th European Union's anti-money laundering directive (2015/849/EC) came into effect in June 2017 and requires changes to customer due diligence assessments and greater focus on a risk-based approach.

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

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

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

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

On May 28, 2018, our UK business became subject to the GDPR, and in January 2020, our California business will become subject to the CCPA. As described above in "-Our business is subject to complex and evolving US and international laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement or otherwise harm our business," the CCPA broadly defines personal information and provides California consumers increased privacy rights and protections, and the GDPR is more prescriptive than the prior regime and includes new obligations on businesses, including the requirement to appoint a data protection officer, self-report breaches, obtain express consent to data processing and provide more rights to individuals whose data they process, including the “right to be forgotten,” by having their records erased. Penalties for non-compliance with the GDPR are significant with a maximum fine calculated as the higher of €20 million or 4% of global turnover for the preceding year. There are also strict rules on the use of credit reference data under the CCA regulations and the CONC. We are also subject to laws limiting the transfer of personal data from the European Economic Area to non-European Economic Area countries or territories. There are also strict rules on the instigation of electronic communications such as email, text message and telephone calls under the Privacy and Electronic Communications (EC Directive) Regulations 2003, which prohibit unsolicited direct marketing by electronic means without express consent, as well as the monitoring of devices. When the UK leaves the European Union, it is expected that the UK will establish a new framework for data flow between the UK and the US or will agree to continue the protections of the GDPR for the transfer of personal data into and out of the UK. We expect to comply with any framework established by the UK for the transfer of personal data into and out of the UK but can provide no assurances as to whether such regulation will be more or less burdensome than the GDPR and other European Union regulations, and we may incur significant costs in transitioning to any new regulatory model. Furthermore, compliance with any new or developing privacy laws in the US, including the CCPA or other state or federal laws that may be enacted in the future, may require significant resources and could have a material adverse impact on our business and results of operations.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Repurchases of Equity Securities

On July 25, 2019, the Company's Board of Directors authorized a share repurchase program providing for the repurchase of up to $10 million of our common stock through July 31, 2024. The share repurchase program provides that up to a maximum aggregate amount of $5 million shares may be repurchased in any given fiscal year. Repurchases will be made in accordance with applicable securities laws from time-to-time in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. We did not repurchase any shares of common stock during the three and six months ended June 30, 2019. The share repurchase plan does not require the purchase of any minimum number of shares and may be implemented, modified, suspended or discontinued in whole or in part at any time without further notice.

Item 6. Exhibits



Exhibit number	Description
10.1	First Amendment to Financing Agreement, dated August 1, 2019 by and among EF SPV, Ltd. as borrower, the guarantors party thereto, the lenders party thereto and Victory Park Management, LLC as administrative agent and collateral agent.
10.2#∞	Amendment to Amended and Restated Special Limited Agency Agreement, dated April 1, 2019, between First Financial Loan Company, LLC as lender and Rise Credit Service of Texas, LLC as CSO. (1)
10.3#	First Amendment to Credit Default Protection Agreement, dated April 24, 2019, by and between Elastic SPV, Ltd. and Elastic Louisville, LLC. (1)
10.4+	Resignation and Release of Claims Agreement, dated July 25, 2019, between Elevate Credit Service, LLC and Kenneth E. Rees
10.5+	Fourth Amendment to Employment, Confidentiality and Non-Compete Agreement, dated August 1, 2019, by and between Jason Harvison and Elevate Credit Service, LLC.
10.6+	Fourth Amendment to Employment, Confidentiality and Non-Compete Agreement, dated August 1, 2019, by and between Christopher Lutes and Elevate Credit Service, LLC.
10.7+	Form of Elevate 2016 Omnibus Incentive Plan, Notice of Restricted Stock Unit Award.
10.8+	Form of Elevate 2016 Omnibus Incentive Plan, Notice of Restricted Stock Bonus Award.
10.9+	Form of Elevate 2016 Omnibus Incentive Plan, Notice Stock Option Award.
10.10+	Form of Elevate 2016 Omnibus Incentive Plan, Notice of Restricted Stock Unit Award (Section 16 Grantees).
10.11+	Form of Elevate 2016 Omnibus Incentive Plan, Notice of Restricted Stock Bonus Award (Section 16 Grantees).
10.12+	Form of Elevate 2016 Omnibus Incentive Plan, Notice Stock Option Award (Section 16 Grantees).
31.1	Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the Securities and Exchange Act, as amended
31.2	Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the Securities and Exchange Act, as amended
32.1&	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2&	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema Document.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*	XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.



#		Previously filed.
∞		Confidential treatment has been requested as to certain portions of this exhibit, which portions have been omitted and submitted separately to the Securities and Exchange Commission.
+		Indicates a management contract or compensatory plan.
&		This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
*		Pursuant to applicable securities laws and regulations, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, are deemed not filed for purposes of section 18 of the Exchange Act and otherwise are not subject to liability under these sections.

(1) Filed as an exhibit to our Quarterly Report on Form 10-Q filed on May 10, 2019.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.



		Elevate Credit, Inc.

Date:	August 9, 2019	By:	/s/ Jason Harvison
			Jason Harvison
			Interim Chief Executive Officer (Principal Executive Officer)

Date:	August 9, 2019	By:	/s/ Christopher Lutes
			Christopher Lutes
			Chief Financial Officer (Principal Financial Officer)