UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2021

or

☐ 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,

TX

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

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 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			☒			No			☐

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 such files).

Yes			☒			No			☐

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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			☐			Non-accelerated filer			☒
Accelerated filer			☐			Smaller reporting company			☒
						Emerging growth company			☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

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

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 4, 2021
Common Shares, $0.0004 par value						33,598,775

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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, 2021 (unaudited) and December 31, 2020			6
						Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020			7
						Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2021 and 2020			8
						Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020			9
						Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2021 and 2020			11
						Notes to Unaudited Condensed Consolidated Financial Statements			13
			Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations			42
			Item 3.			Quantitative and Qualitative Disclosures About Market Risk			80
			Item 4.			Controls and Procedures			81
Part II - Other Information
			Item 1.			Legal Proceedings			82
			Item 1A.			Risk Factors			83
			Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			88
			Item 6.			Exhibits			89
SIGNATURES									90

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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 effects of the outbreak and continuation of the novel coronavirus ("COVID-19") on demand for our products, our business, our financial condition and results of operations, including as a result of the expansion of our payment flexibility program to provide temporary relief to certain customers, underwriting changes we and the bank originators we support are implementing to address credit risk associated with originations during the economic crisis created by the COVID-19 pandemic, and new legislation or other governmental responses to the pandemic;

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

•our ability to meet anticipated cash operating expenses and capital expenditure requirements, including our plans with respect to assessing minimum cash and liquidity requirements and implementing measures to ensure that our cash and liquidity position is maintained through the current economic cycle;

•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 respond 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;

4

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•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, and in "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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.

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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, 2021						December 31, 2020
						(unaudited)
ASSETS
Cash and cash equivalents*						$	105,782					$	197,983
Restricted cash*						3,862						3,135
Loans receivable, net of allowance for loan losses of $40,314 and $48,399, respectively*						378,142						374,832
Prepaid expenses and other assets*						13,114						10,060
Operating lease right of use assets						6,819						8,320
Receivable from CSO lenders						14						1,255
Receivable from payment processors*						5,485						6,147
Deferred tax assets, net						22,332						25,958
Property and equipment, net						32,175						34,000
Goodwill, net						6,776						6,776
Intangible assets, net						231						1,133
Total assets						$	574,732					$	669,599
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities (See Note 13)*						$	52,784					$	52,252
Operating lease liabilities						10,617						11,952
Deferred revenue*						2,465						3,134
Notes payable, net (See Note 5)*						351,214						438,403
Total liabilities						417,080						505,741
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 11)
STOCKHOLDERS’ EQUITY
Preferred stock; $0.0004 par value; 24,500,000 authorized shares; none issued and outstanding at June 30, 2021 and December 31, 2020.						—						—
Common stock; $0.0004 par value; 300,000,000 authorized shares; 44,960,438 and 44,960,438 issued; 33,997,881 and 37,954,138 outstanding, respectively						18						18
Additional paid-in capital						203,050						200,433
Treasury stock; at cost; 10,962,557 and 7,006,300 shares of common stock, respectively						(33,632)						(16,492)
Accumulated deficit						(11,784)						(20,101)
Total stockholders’ equity						157,652						163,858
Total liabilities and stockholders’ equity						$	574,732					$	669,599

* 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 the Company's consolidated accounts, see Note 4—Variable Interest Entities.

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

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Elevate Credit, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

						Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands, except share and per share amounts)						2021						2020						2021						2020
Revenues						$	84,540					$	117,991					$	174,273					$	280,458
Cost of sales:
Provision for loan losses						27,225						41,477						48,195						120,052
Direct marketing costs						10,564						344						14,947						11,313
Other cost of sales						2,905						1,607						4,952						4,277
Total cost of sales						40,694						43,428						68,094						135,642
Gross profit						43,846						74,563						106,179						144,816
Operating expenses:
Compensation and benefits						18,585						16,844						37,593						40,318
Professional services						8,659						8,471						15,738						16,397
Selling and marketing						710						904						1,243						1,858
Occupancy and equipment						5,289						4,843						10,245						9,479
Depreciation and amortization						4,552						4,529						9,795						8,825
Other						811						907						1,586						1,978
Total operating expenses						38,606						36,498						76,200						78,855
Operating income						5,240						38,065						29,979						65,961
Other expense:
Net interest expense (See Note 13)						(8,567)						(12,177)						(17,353)						(25,833)
Non-operating income (loss)						510						(1,422)						717						(5,685)
Total other expense						(8,057)						(13,599)						(16,636)						(31,518)
Income (loss) from continuing operations before taxes						(2,817)						24,466						13,343						34,443
Income tax expense						228						8,373						3,672						10,428
Net income (loss) from continuing operations						(3,045)						16,093						9,671						24,015
Net loss from discontinued operations						—						(7,540)						—						(20,373)
Net income (loss)						$	(3,045)					$	8,553					$	9,671					$	3,642
Basic earnings per share
Continuing operations						$	(0.09)					$	0.38					$	0.27					$	0.56
Discontinued operations						—						(0.18)						—						(0.47)
Basic earnings (loss) per share						$	(0.09)					$	0.20					$	0.27					$	0.09
Diluted earnings per share
Continuing operations						$	(0.09)					$	0.38					$	0.27					$	0.56
Discontinued operations						—						(0.18)						—						(0.47)
Diluted earnings (loss) per share						$	(0.09)					$	0.20					$	0.27					$	0.09
Basic weighted average shares outstanding						35,132,980						42,182,412						35,591,583						42,673,879
Diluted weighted average shares outstanding						35,132,980						42,511,808						36,331,631						43,090,730

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

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Elevate Credit, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(Dollars in thousands)						Three Months Ended June 30,												Six Months Ended June 30,
						2021						2020						2021						2020
Net income (loss)						$	(3,045)					$	8,553					$	9,671					$	3,642
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment, net of tax of $0 for both the three months ended 2021 and 2020, and $0 and $(14) for the six months ended 2021 and 2020, respectively						—						(58)						—						(2,061)
Reclassification of Cumulative translation adjustment to Net loss from discontinued operations						—						2,334						—						2,334
Reversal of Deferred tax asset associated with Cumulative translation adjustment						—						(1,369)						—						(1,369)
Total other comprehensive income (loss), net of tax						—						907						—						(1,096)
Total comprehensive income (loss)						$	(3,045)					$	9,460					$	9,671					$	2,546

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

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Elevate Credit, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

For the periods ended June 30, 2021 and 2020

(Dollars in thousands except share amounts)						Preferred Stock												Common Stock												Additional paid-in capital						Treasury Stock												Accumulated deficit						Accumulated other comprehensive income (loss)						Total
						Shares						Amount						Shares						Amount												Shares						Amount
Balances at December 31, 2019						—						—						43,676,826						$	18					$	193,061					768,910						$	(3,344)					$	(34,342)					$	1,096					$	156,489
Share-based compensation -US						—						—						—						—						2,748						—						—						—						—						2,748
Share-based compensation -UK						—						—						—						—						27						—						—						—						—						27
Exercise of stock options, net						—						—						34,185						—						(51)						—						—						—						—						(51)
Vesting of restricted stock units, net						—						—						28,913						—						(314)						—						—						—						—						(314)
Comprehensive loss:
Foreign currency translation adjustment net of tax of $(14)						—						—						—						—						—						—						—						—						(2,003)						(2,003)
Treasury stock acquired						—						—						(928,386)						—						—						928,386						(4,203)						—						—						(4,203)
Treasury stock reissued for RSUs vesting						—						—						188,961						—						—						(188,961)						830						(830)						—						—
Net income from continuing operations						—						—						—						—						—						—						—						7,922						—						7,922
Net loss from discontinued operations						—						—						—						—						—						—						—						(12,833)						—						(12,833)
Balances at March 31, 2020						—						—						43,000,499						$	18					$	195,471					1,508,335						$	(6,717)					$	(40,083)					$	(907)					$	147,782
Share-based compensation -US						—						—						—						—						2,599						—						—						—						—						2,599
Share-based compensation -UK						—						—						—						—						18						—						—						—						—						18
Vesting of restricted stock units, net						—						—						171,020						—						(253)						—						—						—						—						(253)
ESPP shares issued						—						—						280,584						—						353						—						—						—						—						353
Comprehensive loss:
Foreign currency translation adjustment net of tax of $1,369						—						—						—						—						—						—						—						—						907						907
Treasury stock acquired						—						—						(2,041,193)						—						—						2,041,193						(3,827)						—						—						(3,827)
Treasury stock reissued for RSUs vesting						—						—						596,257						—						—						(596,257)						2,589						(2,589)						—						—
Net income from continuing operations						—						—						—						—						—						—						—						16,093						—						16,093
Net loss from discontinued operations						—						—						—						—						—						—						—						(7,540)						—						(7,540)
Balances at June 30, 2020						—						—						42,007,167						$	18					$	198,188					2,953,271						$	(7,955)					$	(34,119)					$	—					$	156,132

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

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Elevate Credit, Inc. and Subsidiaries

(Dollars in thousands except share amounts)						Preferred Stock												Common Stock												Additional paid-in capital						Treasury Stock												Accumulated deficit						Accumulated other comprehensive income (loss)						Total
						Shares						Amount						Shares						Amount												Shares						Amount
Balances at December 31, 2020						—						—						37,954,138						$	18					$	200,433					7,006,300						$	(16,492)					$	(20,101)					$	—					$	163,858
Share-based compensation -US						—						—						—						—						1,602						—						—						—						—						1,602
Treasury stock acquired						—						—						(2,480,741)						—						—						2,480,741						(10,813)						—						—						(10,813)
Treasury stock reissued for RSUs vesting						—						—						169,091						—						(417)						(169,091)						621						(621)						—						(417)
Treasury stock reissued for Stock Option Exercise						—						—						12,500						—						—						(12,500)						73						(46)						—						27
Net income from continuing operations						—						—						—						—						—						—						—						12,716						—						12,716
Balances at March 31, 2021						—						—						35,654,988						$	18					$	201,618					9,305,450						$	(26,611)					$	(8,052)					$	—					$	166,973
Share-based compensation -US						—						—						—						—						1,787						—						—						—						—						1,787
Treasury stock acquired						—						—						(2,339,085)						—						—						2,339,085						(7,954)						—						—						(7,954)
Treasury stock reissued for RSUs vesting						—						—						532,365						—						(562)						(532,365)						687						(687)						—						(562)
Treasury stock reissued for ESPP purchases						—						—						149,613						—						207						(149,613)						246						—						—						453
Net loss from continuing operations						—						—						—						—						—						—						—						(3,045)						—						(3,045)
Balances at June 30, 2021						—						—						33,997,881						$	18					$	203,050					10,962,557						$	(33,632)					$	(11,784)					$	—					$	157,652

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

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Elevate Credit, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)			Six Months Ended June 30,
			2021						2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income			$	9,671					$	3,642
Less: Net loss from discontinued operations, net of tax			—						20,373
Net income from continuing operations			9,671						24,015
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			9,795						8,825
Provision for loan losses			48,195						120,052
Share-based compensation			3,389						5,347
Amortization of debt issuance costs			361						343
Amortization of loan premium			1,981						2,740
Amortization of operating leases			(383)						(239)
Deferred income tax expense, net			3,626						10,096
Non-operating (gain) loss			(717)						5,685
Changes in operating assets and liabilities:
Prepaid expenses and other assets			(3,054)						(3,219)
Income taxes payable			—						700
Receivables from payment processors			662						2,077
Receivables from CSO lenders			1,242						4,842
Interest receivable			(9,054)						(26,124)
State and other taxes payable			—						(91)
Deferred revenue			(625)						(6,226)
Accounts payable and accrued liabilities			1,598						(17,579)
Net cash provided by continuing operating activities			66,687						131,244
Net cash provided by discontinued operating activities			—						1,335
Net cash provided by operating activities			66,687						132,579
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans receivable originated or participations purchased			(344,351)						(307,170)
Principal collections and recoveries on loans receivable			301,446						379,791
Participation premium paid			(2,126)						(2,036)
Purchases of property and equipment			(7,563)						(9,508)
Proceeds from sale of intangible assets			1,250						—
Net cash provided by (used in) continuing investing activities			(51,344)						61,077
Net cash provided by discontinued investing activities			—						9,457
Net cash provided by (used in) investing activities			(51,344)						70,534

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

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						Six Months Ended June 30,
(Dollars in thousands)						2021						2020
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable						$	25,000					$	6,500
Payments of notes payable						(112,550)						(94,000)
Debt issuance costs paid						—						(108)
ESPP shares issued						453						354
Common stock repurchased						(18,767)						(8,030)
Proceeds from stock option exercises						27						27
Taxes paid related to net share settlement of equity awards						(980)						(644)
Net cash used in continuing financing activities						(106,817)						(95,901)
Net cash used in discontinued financing activities						—						(16,310)
Net cash used in financing activities						(106,817)						(112,211)
Net increase (decrease) in cash, cash equivalents and restricted cash						(91,474)						90,902
Change in cash, cash equivalents and restricted cash from discontinued operations						—						5,518
Change in cash, cash equivalents and restricted cash from continuing operations						(91,474)						96,420
Cash and cash equivalents, beginning of period						197,983						71,215
Restricted cash, beginning of period						3,135						2,235
Cash, cash equivalents and restricted cash, beginning of period						201,118						73,450
Cash and cash equivalents, end of period						105,782						167,735
Restricted cash, end of period						3,862						2,135
Cash, cash equivalents and restricted cash, end of period						$	109,644					$	169,870
Supplemental cash flow information:
Interest paid						$	18,075					$	25,531
Taxes paid						$	55					$	50
Non-cash activities:
CSO fees charged-off included in Deferred revenues and Loans receivable						$	37					$	630
CSO fees on loans paid-off prior to maturity included in Receivable from CSO lenders and Deferred revenue						$	7					$	33
Annual membership fee included in Deferred revenues and Loans receivable						$	—					$	113
Reissuances of Treasury stock						$	1,308					$	3,419
Impact of deferred tax asset included in Other comprehensive income						$	—					$	1,354

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

12

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Elevate Credit, Inc. and Subsidiaries

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three and six months ended June 30, 2021 and 2020

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”). The Company’s products, Rise, Elastic and Today Card, 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 United Kingdom ("UK"), the Company previously offered unsecured installment loans via the internet through its wholly owned subsidiary, Elevate Credit International Limited, (“ECIL”) under the brand name of Sunny. On June 29, 2020, ECIL entered into administration in accordance with the provisions of the UK Insolvency Act 1986 and pursuant to a resolution of the board of directors of ECIL. The onset of Coronavirus Disease 2019 ("COVID-19") coupled with the lack of clarity within the UK regulatory environment led to the decision to place ECIL into administration. The management, business, affairs and property of ECIL have been placed into the direct control of the appointed administrators, KPMG LLP. Accordingly, the Company deconsolidated ECIL as of June 29, 2020 and presents ECIL's results as discontinued operations for all periods presented. See Note 12—Discontinued Operations for more information regarding the presentation of ECIL.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of June 30, 2021 and for the three and six month periods ended June 30, 2021 and 2020 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, 2020 in the Company's Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission ("SEC") on February 26, 2021. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. The Company's business is seasonal in nature so the results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year.

Reclassification of Accumulated Other Comprehensive Income to Net Loss from Discontinued Operations

For the three and six months ended June 30, 2020, the Company reclassified a $2.3 million net loss from cumulative translation adjustments within Accumulated other comprehensive income to Net loss from discontinued operations as part of the Company's loss on disposal related to the placement of ECIL into administration. In addition, a $1.4 million deferred tax benefit was reclassified to remove the associated deferred tax asset as part of this transaction.

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.

13

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

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 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.

As the impact of the COVID-19 pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. These estimates and assumptions may change in future periods and will be recognized in the condensed consolidated financial statements as new events occur and additional information becomes known. To the extent the Company’s actual results differ materially from those estimates and assumptions, the Company's future financial statements could be affected.

Revenue Recognition

The Company recognizes consumer loan fees as revenues for each of the loan products it offers. 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. 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.

The Company accrues finance charges on installment loans on a constant yield basis over their terms. The Company accrues and defers fixed fees such as CSO fees and lines of credit fees when they are assessed and recognizes them to earnings as they are earned over the life of the loan. The Company accrues interest on credit cards based on the amount of the credit card balance outstanding and the related 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. The Company does 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 when payment is past due more than 90 days. 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 and are considered delinquent after the grace period. 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.

The spread of COVID-19 since March 2020 has created a global public health crisis that has resulted in unprecedented disruption to businesses and economies. In response to the pandemic's effects, and in accordance with federal and state guidelines, the Company expanded its payment flexibility programs for its customers, including payment deferrals. This program allows for a deferral of payments for an initial period of 30 to 60 days, and generally up to a maximum of 180 days on a cumulative basis. A customer will return to the normal payment schedule after the end of the deferral period with the extension of the maturity date equivalent to the deferral period, which is generally not to exceed an additional 180 days. The finance charges will continue to accrue at a lower effective interest rate over the expected term of the loan as adjusted for the deferral period provided (not to exceed an amount greater than the amount at which the borrower could settle the loan) or placed on non-accrual status.

The Company’s 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 the Company’s policies for revenue recognition, it does generally impact the Company’s 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.

Installment Loans, Lines of Credit and Credit Cards

Installment loans, lines of credit and credit cards, including receivables for finance charges, fees and interest, are unsecured and reported as Loans receivable, net of allowance for loan losses on the Condensed Consolidated Balance Sheets. Installment loans are multi-payment loans that require the pay-down of portions of the outstanding principal balance in multiple installments through the Rise brand. Line of credit accounts include customer cash advances made through the Elastic brand and the Rise brand in two states (which were discontinued in September 2020). Credit cards represent credit card receivable balances, uncollected billed interest and fees through the Today Card brand.

14

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

The Company offers Rise installment products directly to customers. Elastic lines of credit, Rise bank-originated installment loans and Today credit card receivables represent participation interests acquired from third-party lenders through a wholly owned subsidiary or by a VIE. Based on agreements with the third-party lenders, the VIEs pay a loan premium on the participation interests purchased. The loan premium is amortized over the expected life of the outstanding loan amount. See Note 4—Variable Interest Entities for more information regarding these participation interests in Rise and Elastic receivables.

The Company considers impaired loans as accounts over 60 days past due (for installment loans and lines of credit) or 120 days past due (for credit cards), or loans which become uncollectible based on information that the Company becomes aware of (e.g., receipt of customer bankruptcy notice). The impaired loans are charged-off at the time that they are deemed to be uncollectible.

A modification of finance receivable terms is considered a troubled debt restructuring ("TDR") if the borrower is experiencing financial difficulty and the Company grants a concession it would not otherwise have considered to a borrower. The Company typically considers TDRs to include all installment and line of credit loans that were modified by granting principal and interest forgiveness or by extension of the maturity date for more than 60 days as a part of a loss mitigation strategy.

On March 22, 2020, federal and state banking regulators issued a joint statement on working with customers affected by COVID-19 (the "Interagency Statement"). The Interagency Statement includes guidance on accounting for loan modifications. In accordance with the Interagency Statement, the Company, and the bank originators the Company supports, have elected to not recognize modified loans as TDRs if the borrower was both: 1) not more than 30 days past due as of March 1, 2020 (or at the requested modification date if originated on or after March 1, 2020); and 2) the modification stems from the effects of the COVID-19 outbreak. The modifications offered by the Company to borrowers that meet both qualifications may include short-term payment deferrals less than six months, interest or fee waivers, extensions of payment terms or delays in payment that are insignificant. If the borrower was not current at March 1, 2020, the Company offers similar modifications that are considered TDRs. This election is applicable from March 1, 2020 until the earlier of 60 days following the date the COVID-19 national emergency comes to an end or January 1, 2022.

Operating Segments

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 non-prime consumers. 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. With the disposal of ECIL, all of the Company's assets and revenue are in one geographic location, therefore, segment reporting based on geography has been discontinued.

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. In January 2021, certain assets were determined to be impaired in relation to a sublease of facility space.

(Dollars in thousands)						June 30, 2021						December 31, 2020
Property and equipment, gross						$	123,663					$	116,748
Accumulated depreciation and amortization						(91,488)						(82,748)
Property and equipment, net						$	32,175					$	34,000

15

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

Goodwill and Indefinite Lived Intangible Assets

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. In accordance with Accounting Standards Codification ("ASC") 350-20-35, Goodwill— Subsequent Measurement, the Company performs a quantitative approach method impairment review of goodwill and intangible assets with an indefinite life annually at October 1 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As a result of the recent global economic impact and uncertainty due to COVID-19, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment testing on the goodwill balances of its reporting units. The Company performed a detailed qualitative and quantitative assessment of each reporting unit and concluded that the goodwill associated with the previously consolidated UK reporting unit was impaired as the fair value of the UK reporting unit was less than its carrying amount. The impairment loss of $9.3 million was included in Loss from discontinued operations due to the deconsolidation of ECIL. While there was a decline in the fair value of the Elastic reporting unit at March 31, 2020, there was no impairment identified during the quantitative assessment. The Company completed its annual test as of October 1, 2020 and determined that there was no evidence of impairment of goodwill or indefinite lived intangible assets. The Company has $6.8 million of goodwill (all related to the Elastic reporting unit) remaining on the Condensed Consolidated Balance Sheets as of June 30, 2021.

Prior to the adoption of ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), the Company’s impairment evaluation of goodwill was already based on comparing the fair value of the Company’s reporting units to their carrying value. The adoption of ASU 2017-04 as of January 1, 2020 had no impact on the Company's evaluation procedures. The fair value of the reporting units 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 units, 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 units. The income approach uses the Company’s projections of financial performance for a six- to nine-year period and includes assumptions about future revenues growth rates, operating margins and terminal values. The market approach establishes fair value by applying cash flow multiples to the reporting units’ operating performance. The multiples are derived from other publicly traded companies that are similar but not identical to the Company from an operational and economic standpoint.

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 its 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 its 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. In accordance with ASC 360-10-35, Property, Plant & Equipment— Subsequent Measurement, the Company evaluates its ROU assets along with its Property and equipment, net for impairment annually and between annual tests as needed based on changes in circumstances or other triggering events. During the first quarter of 2021, the Company entered into a sublease for facility space, triggering an impairment assessment. The Company determined the asset group with the subleased ROU asset and related LHI was impaired. A total impairment loss of $742 thousand is included in Non-operating income (loss) in the Condensed Consolidated Statements of Operations.

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

Treasury Stock

The Company evaluates each stock repurchase transaction in the period in which it is completed. If the repurchase transaction is significantly in excess of the current market price at purchase, the Company will identify whether the price paid included payment for other agreements, rights, and privileges. Repurchase transactions that do not contain these elements or are not significantly in excess of the current market price at purchase are accounted for using the cost method. The Company anticipates using its treasury stock to fulfill certain employee stock compensation grants and settlements. The Company has elected to use a first in, first out ("FIFO") method for assigning share cost at reissuance. Any gain or loss in the stock value will be credited or charged to paid in capital upon subsequent reissuance of the shares, with losses in excess of previously recognized gains charged to retained earnings. The Company is not obligated to purchase or reissue any shares at any time in accordance with its previously disclosed share repurchase plan.

Recently Adopted Accounting Standards

In August 2018, the FASB issued Accounting Standards Update ("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. The Company elected to adopt this ASU prospectively as of January 1, 2020 and has implemented a control structure to identify cloud computing arrangements for appropriate accounting treatment similar to its procedures for right of use assets. At June 30, 2021and December 31, 2020, the Company has net capitalized implementation costs associated with cloud computing arrangements of $2.6 million and $1.0 million, respectively, included in Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2021, the Company recognized $117.2 thousand and $149.9 thousand in amortization expense, respectively, within Occupancy and equipment in the Condensed Consolidated Statements of Operations. Amortization expense recognized in 2020 was immaterial. At adoption, ASU 2018-15 did not have a material impact 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 adoption of ASU 2018-13 at January 1, 2020 did not have a material impact on the Company's condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). The purpose of ASU 2017-04 is to simplify the subsequent measurement of goodwill. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This guidance is effective for public companies for goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company has adopted all of the amendments of ASU 2017-04 as of January 2020 with no impact to the Company's condensed consolidated financial statements. The Company used the simplified subsequent measurement requirements per ASU 2017-04 in its impairment analysis.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to COVID-19. Among other things, the CARES Act provides income tax relief inclusive of permitting NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has reviewed the tax relief provisions of the CARES Act regarding its eligibility and determined that the impact is likely to be insignificant with regard to its effective tax rate. Certain portions of the CARES Act were amended by the Consolidated Appropriations Act ("CAA") on December 27, 2020. The Company continues to monitor and evaluate its eligibility for the amended CARES Act tax relief provisions to identify any that may become applicable in the future.

17

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

On March 11, 2021, the American Rescue Plan Act ("ARP Act") was signed into law. The Company reviewed the tax relief provisions of the ARP Act, including the Company's eligibility for such provisions, and determined that the impact is likely to be insignificant with regard to the Company's effective tax rate. The Company continues to monitor and evaluate its eligibility under the ARP Act tax relief provisions to identify any portions that may become applicable in the future.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The purpose of ASU 2019-12 is to reduce complexity in the accounting standards for income taxes by removing certain exceptions as well as clarifying certain allocations. This update also addresses the split recognition of franchise taxes that are partially based on income between income-based tax and non-income-based tax. This guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2019-12 at January 1, 2021 did not have a material impact on the Company's condensed consolidated financial statements.

Accounting Standards to be Adopted in Future Periods

In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments ("ASU 2020-03"). The purpose of ASU 2020-03 is to clarify, correct errors in or make minor improvements to the codification. Among other revisions, the amendments clarify that an entity should record an allowance for credit losses when an entity regains control of financial assets sold in accordance with Topic 326. ASU 2020-03 also clarifies disclosure requirements for debt securities under Topic 942 and affirms that all entities are required to provide the fair value option disclosures within paragraphs 825-10-50-24 through 50-32 of the codification. The amendments in this update are effective on the latter of the issuance of ASU 2020-03 or the effective date of their related topic. The Company does not anticipate the adoption of ASU 2020-03 to have a material impact on the Company's condensed consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The purpose of ASU 2020-04 is to provide optional guidance for a period of time related to accounting for reference rate reform on financial reporting. It is intended to reduce the potential burden of reviewing contract modifications related to discontinued rates. The amendments and expedients in this update are effective as of March 12, 2020 through December 31, 2022 and may be elected by topic. The Company is assessing the potential impact of electing all or portions of ASU 2020-04 on the Company's condensed consolidated financial statements.

In June 2016, the FASB issued ASU 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. The guidance in ASU 2016-13 was further clarified by ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments ("ASU 2019-11") issued in November 2019. ASU 2019-11 provides transition relief such as permitting entities an accounting policy election regarding existing TDRs, among other things. 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.

18

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates ("ASU 2019-10"). The purpose of this amendment is to create a two-tier rollout of major updates, staggering the effective dates between larger public companies and all other entities. This granted certain classes of companies, including Smaller Reporting Companies ("SRCs"), additional time to implement major FASB standards, including ASU 2016-13. Larger public companies will still have an effective date for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities are permitted to defer adoption of ASU 2016-13, and its related amendments, until the earlier of fiscal periods beginning after December 15, 2022. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments - Credit Losses (Topic 326), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-12 ("ASU 2020-02"). ASU 2020-02 updates the SEC staff guidance related to ASU 2016-13 and all contingent amendments. Under the current SEC definitions, the Company meets the definition of an SRC as of the ASU 2019-10 issuance date and is adopting the deferral period for ASU 2016-13.

NOTE 2 - EARNINGS PER SHARE

Basic earnings per share ("EPS") is computed by dividing net income (loss) 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, 2021 and 2020.

Diluted EPS is computed by dividing net income (loss) 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.

19

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

The computation of earnings per share was as follows for three and six months ended June 30, 2021 and 2020: 

						Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands, except share and per share amounts)						2021						2020						2021						2020
Numerator (basic and diluted):
Net income (loss) from continuing operations						$	(3,045)					$	16,093					$	9,671					$	24,015
Net loss from discontinued operations						—						(7,540)						—						(20,373)
Net income (loss)						$	(3,045)					$	8,553					$	9,671					$	3,642
Denominator (basic):
Basic weighted average number of shares outstanding						35,132,980						42,182,412						35,591,583						42,673,879
Denominator (diluted):
Basic weighted average number of shares outstanding						35,132,980						42,182,412						35,591,583						42,673,879
Effect of potentially dilutive securities:
Employee share plans (options, RSUs and ESPP)						—						329,396						740,048						416,851
Diluted weighted average number of shares outstanding						35,132,980						42,511,808						36,331,631						43,090,730
Basic and diluted earnings (loss) per share:
Continuing operations						$	(0.09)					$	0.38					$	0.27					$	0.56
Discontinued operations						—						(0.18)						—						(0.47)
Basic earnings (loss) per share						$	(0.09)					$	0.20					$	0.27					$	0.09
Continuing operations						$	(0.09)					$	0.38					$	0.27					$	0.56
Discontinued operations						—						(0.18)						—						(0.47)
Diluted earnings (loss) per share						$	(0.09)					$	0.20					$	0.27					$	0.09

For the three months ended June 30, 2021 and 2020, the Company excluded the following potential common shares from its diluted earnings (loss) per share calculation because including these shares would be anti-dilutive:

•869,923 and 2,189,205 common shares issuable upon exercise of the Company's stock options; and

•3,226,318 and 3,887,556 common shares issuable upon vesting of the Company's RSUs.

For the six months ended June 30, 2021 and 2020, the Company excluded the following potential common shares from its diluted earnings (loss) per share calculation because including these shares would be anti-dilutive:

•874,289 and 1,517,926 common shares issuable upon exercise of the Company's stock options; and

•2,087,680 and 3,780,963 common shares issuable upon vesting of the Company's RSUs.

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

NOTE 3 - LOANS RECEIVABLE AND REVENUE

Revenues generated from the Company’s consumer loans for the three and six months ended June 30, 2021 and 2020 were as follows:

						Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands)						2021						2020						2021						2020
Finance charges						$	50,783					$	71,565					$	103,975					$	167,730
Lines of credit fees						32,880						42,271						68,360						100,844
CSO fees						51						3,967						602						11,308
Other						826						188						1,336						576
Total revenues						$	84,540					$	117,991					$	174,273					$	280,458

The Company's portfolio consists of installment loans, lines of credit and credit card receivables, which are considered the portfolio segments for all periods presented. The Rise product is primarily installment loans with lines of credit offered in two states, which ceased lines of credit origination activity in September 2020. The Elastic product is a line of credit product and the Today Card is a credit card product, both offered in the US.

The following reflects the credit quality of the Company’s loans receivable as of June 30, 2021 and December 31, 2020 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. In response to the COVID-19 pandemic, the Company, along with the banks it supports, has also expanded existing payment flexibility programs to provide temporary payment relief to certain customers who meet the program’s qualifications. These programs allow for a deferral of payments for an initial period of 30 to 60 days, which the Company may extend for an additional 30 days, generally for a maximum of 180 days on a cumulative basis. A customer will return to the normal payment schedule after the end of the deferral period, with the extension of the maturity date equivalent to the deferral period, which is generally not to exceed an additional 180 days. Customers that were 30 days past due or less as of March 1, 2020 or the date the customer requested the deferral are considered current. Customers more than 30 days past due as of March 1, 2020 or the date the customer requested the deferral are considered delinquent. As of June 30, 2021, 2.3% of customers that had loan balances outstanding have been provided relief through a COVID-19 payment deferral program for a total of $9.2 million in loans with deferred payments. The Company believes that the allowance for loan losses is adequate to absorb the losses inherent in the portfolio as of June 30, 2021.

Installment loans, lines of credit and credit cards not impacted by COVID 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 TDR as of June 30, 2021 and December 31, 2020 have been charged off.

						June 30, 2021
(Dollars in thousands)						Rise						Elastic						Today						Total
Current loans						$	219,608					$	144,894					$	19,745					$	384,247
Past due loans						24,430						6,257						1,742						32,429
Total loans receivable						244,038						151,151						21,487						416,676
Net unamortized loan premium						326						1,454						—						1,780
Less: Allowance for loan losses						(28,092)						(10,372)						(1,850)						(40,314)
Loans receivable, net						$	216,272					$	142,233					$	19,637					$	378,142

21

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

						December 31, 2020
(Dollars in thousands)						Rise						Elastic						Today						Total
Current loans						$	222,937					$	154,950					$	12,954					$	390,841
Past due loans						22,383						6,926						1,564						30,873
Total loans receivable						245,320						161,876						14,518						421,714
Net unamortized loan premium						239						1,278						—						1,517
Less: Allowance for loan losses						(33,288)						(13,201)						(1,910)						(48,399)
Loans receivable, net						$	212,271					$	149,953					$	12,608					$	374,832

Total loans receivable includes approximately $12.2 million and $19.2 million of loans in a non-accrual status at June 30, 2021 and December 31, 2020, respectively.

Additionally, total loans receivable includes approximately $19.1 million and $25.3 million of interest receivable at June 30, 2021 and December 31, 2020, 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, 2021 and 2020 are as follows:

						Three Months Ended June 30, 2021
(Dollars in thousands)						Rise						Elastic						Today						Total
Balance beginning of period						$	26,592					$	10,749					$	1,818					$	39,159
Provision for loan losses						20,856						5,454						915						27,225
Charge-offs						(21,502)						(6,530)						(910)						(28,942)
Recoveries of prior charge-offs						2,153						699						27						2,879
Total						28,099						10,372						1,850						40,321
Accrual for CSO lender owned loans						(7)						—						—						(7)
Balance end of period						$	28,092					$	10,372					$	1,850					$	40,314

						Three Months Ended June 30, 2020
(Dollars in thousands)						Rise						Elastic						Today						Total
Balance beginning of period						$	51,707					$	25,145					$	908					$	77,760
Provision for loan losses						27,007						13,579						891						41,477
Charge-offs						(41,993)						(21,906)						(449)						(64,348)
Recoveries of prior charge-offs						3,893						1,786						26						5,705
Total						40,614						18,604						1,376						60,594
Accrual for CSO lender owned loans						(1,156)						—						—						(1,156)
Balance end of period						$	39,458					$	18,604					$	1,376					$	59,438

						Six Months Ended June 30, 2021
(Dollars in thousands)						Rise						Elastic						Today						Total
Balance beginning of period						$	33,968					$	13,201					$	1,910					$	49,079
Provision for loan losses						36,154						10,545						1,496						48,195
Charge-offs						(46,275)						(14,913)						(1,619)						(62,807)
Recoveries of prior charge-offs						4,252						1,539						63						5,854
Total						28,099						10,372						1,850						40,321
Accrual for CSO lender owned loans						(7)						—						—						(7)
Balance end of period						$	28,092					$	10,372					$	1,850					$	40,314

22

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

						Six Months Ended June 30, 2020
(Dollars in thousands)						Rise						Elastic						Today						Total
Balance beginning of period						$	52,099					$	28,852					$	1,041					$	81,992
Provision for loan losses						81,576						37,076						1,400						120,052
Charge-offs						(102,130)						(51,554)						(1,115)						(154,799)
Recoveries of prior charge-offs						9,069						4,230						50						13,349
Total						40,614						18,604						1,376						60,594
Accrual for CSO lender owned loans						(1,156)						—						—						(1,156)
Balance end of period						$	39,458					$	18,604					$	1,376					$	59,438

As of December 31, 2020, estimated losses of approximately $0.7 million for the CSO owned loans receivable guaranteed by the Company of approximately $2.2 million were initially recorded at fair value and are included in Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets. At June 30, 2021, the CSO owned loans receivable guaranteed by the Company and the associated estimated losses are immaterial to 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/or 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 and Elastic, unless excluded by policy. 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, 2021 and 2020:

						Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands)						2021						2020						2021						2020
Outstanding recorded investment before TDR						$	2,298					$	489					$	7,432					$	6,917
Outstanding recorded investment after TDR						2,166						457						7,205						6,562
Total principal and interest forgiveness included in charge-offs within the Allowance for loan losses						$	132					$	32					$	227					$	355

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, 2021 and 2020:

						Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands)						2021						2020						2021						2020
Average outstanding recorded investment(1)						$	20,251					$	13,266					$	21,890					$	13,914
Interest income recognized						$	2,216					$	2,522					$	5,029					$	6,252
1. Simple average as of June 30, 2021 and 2020, respectively.

23

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

The table below presents the Company's loans modified as TDRs as of June 30, 2021 and December 31, 2020:

(Dollars in thousands)						2021						2020
Current outstanding investment						$	10,994					$	21,261
Delinquent outstanding investment						5,993						5,532
Outstanding recorded investment						16,987						26,793
Less: Impairment included in Allowance for loan losses						(4,623)						(7,533)
Outstanding recorded investment, net of impairment						$	12,364					$	19,260

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 $5.8 million and $3.4 million for the three months ended June 30, 2021 and 2020, respectively, and $11.8 million and $9.3 million for the six months ended June 30, 2021 and 2020, respectively. The Company had commitments to lend additional funds of approximately $5.5 million to customers with available and unfunded lines of credit as of June 30, 2021.

NOTE 4—VARIABLE INTEREST ENTITIES

The Company is involved with four entities that are deemed to be a VIE: Elastic SPV, Ltd., EF SPV, Ltd., EC SPV, Ltd. and one Credit Services Organization ("CSO") lender. 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.

24

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

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, 2021 and December 31, 2020:

(Dollars in thousands)						June 30, 2021						December 31, 2020
ASSETS
Cash and cash equivalents						$	46,958					$	97,345
Loans receivable, net of allowance for loan losses of $10,372 and $13,202, respectively						142,234						149,951
Prepaid expenses and other assets						5						—
Receivable from payment processors						2,890						3,652
Total assets						$	192,087					$	250,948
LIABILITIES AND SHAREHOLDER’S EQUITY
Accounts payable and accrued liabilities ($7,067 and $23,337, respectively, eliminates upon consolidation)						$	13,367					$	27,663
Deferred revenue						2,358						2,300
Reserve deposit liability ($18,150 and $23,150, respectively, eliminates upon consolidation)						18,150						23,150
Notes payable, net						158,212						197,835
Total liabilities and shareholder’s equity						$	192,087					$	250,948

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 96% 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.

25

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

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, 2021 and December 31, 2020:

(Dollars in thousands)						June 30, 2021						December 31, 2020
ASSETS
Cash and cash equivalents						$	13,663					$	35,450
Loans receivable, net of allowance for loan losses of $12,437 and $14,342, respectively						97,994						83,869
Prepaid expenses and other assets						6						34
Receivable from payment processors ($346 and $231, respectively, eliminates upon consolidation)						1,062						679
Total assets						$	112,725					$	120,032
LIABILITIES AND SHAREHOLDER’S EQUITY
Accounts payable and accrued liabilities ($12,786 and $16,459, respectively, eliminates upon consolidation)						$	13,989					$	17,599
Reserve deposit liability ($8,950 and $8,950, respectively, eliminates upon consolidation)						8,950						8,950
Notes payable, net						89,786						93,483
Total liabilities and shareholder’s equity						$	112,725					$	120,032

EC SPV, Ltd.

In July 2020, the Company entered into several agreements with a third-party lender and EC SPV, Ltd. (“EC 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. EC 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, EC SPV has the right to purchase an interest in each Rise bank originated installment loan. The third-party lender retains 5% of the balances of all the loans originated and sells the remaining 95% participation to EC SPV. VPC will lend EC 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—EC SPV Facility). The Company entered into a separate credit default protection agreement with EC SPV whereby the Company agreed to provide credit protection to the investors in EC SPV against Rise bank originated loan losses in return for a credit premium. The Company does not hold a direct ownership interest in EC SPV, however, as a result of the credit default protection agreement, EC SPV was determined to be a VIE and the Company qualifies as the primary beneficiary.

26

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

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, 2021 and December 31, 2020:

(Dollars in thousands)						June 30, 2021						December 31, 2020
ASSETS
Cash and cash equivalents						$	7,414					$	9,377
Restricted cash						1,000						1,000
Loans receivable, net of allowance for loan losses of $5,025 and $1,634, respectively						33,892						19,232
Prepaid expenses and other assets						5						11
Receivable from payment processors ($20 and $6, respectively, eliminates upon consolidation)						386						199
Total assets						$	42,697					$	29,819
LIABILITIES AND SHAREHOLDER’S EQUITY
Accounts payable and accrued liabilities ($3,142 and $803, respectively, eliminates upon consolidation)						$	4,382					$	1,541
Reserve deposit liability ($3,500 and $3,500, respectively, eliminates upon consolidation)						3,500						3,500
Notes payable, net						34,815						24,778
Total liabilities and shareholder’s equity						$	42,697					$	29,819

CSO Lender

The one remaining CSO lender is considered a VIE of the Company; however, the Company does not have any ownership interest in the CSO lender, does not exercise control over it, and is not the primary beneficiary, and therefore, does not consolidate the CSO lender’s results with its results.

NOTE 5—NOTES PAYABLE, NET

The Company has four debt facilities with VPC, the Rise SPV, LLC credit facility (the "VPC Facility"), the ESPV Facility, the EF SPV Facility, and effective July 31, 2020, the EC SPV Facility. The facilities had the following terms as of June 30, 2021.

VPC Facility

The VPC facility has a maximum borrowing amount of $200 million (amended as of July 31, 2020) used to fund the Rise loan portfolio (“US Term Note”). 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%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). At December 31, 2020, the weighted average base rate on the outstanding balance was 2.73% and the overall interest rate was 9.98%. At June 30, 2021, the weighted average base rate on the outstanding balance was 2.73% and the overall interest rate was 9.73%. 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 7.0% at the borrowing date. The VPC facility 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 US Term Note matures on January 1, 2024. There are no principal payments due or scheduled until the maturity date. 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, 2021 and December 31, 2020.

27

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

The VPC Facility previously included a term note (the "4th Tranche Term Note") used to fund working capital with a maximum borrowing amount of $18 million and a base rate of 2.73% plus 13%. The interest rate at December 31, 2020 was 15.73%. In January 2021, the Company paid off this term note prior to its maturity on February 1, 2021.

Prior to ECIL entering administration and being classified a discontinued operation by the Company on June 29, 2020, the VPC Facility included a note used to fund the UK Sunny loan portfolio (“UK Term Note”). Upon deconsolidation of ECIL, this note was removed from the Company's Condensed Consolidated Balance Sheets and was presented within Liabilities from discontinued operations in all prior periods presented. Under the terms of the VPC Facility, Elevate Credit, Inc. (the "Parent") had provided a guarantee to VPC for the repayment of the debt of any subsidiary, which included the outstanding debt of ECIL. Repayment of the UK Term Note was completed by ECIL in the third quarter of 2020 and any guarantee obligation associated with the UK Term Note was released with the repayment.

ESPV Facility

The ESPV Facility has a maximum borrowing amount of $350 million used to purchase loan participations from a third-party lender. 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 was set at 10.23% (base rate of 2.73% plus 7.5%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). At December 31, 2020 the weighted average base rate on the outstanding balance was 2.72% and the overall interest rate was 9.97%. At June 30, 2021, the weighted average base rate on the outstanding balance was 2.72% and the overall interest rate was 9.72%. 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 7.0% at the borrowing date. 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.

The ESPV 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 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, 2021 and December 31, 2020.

EF SPV Facility

The EF SPV Facility has a maximum borrowing amount of $250 million (amended as of July 31, 2020) 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%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). The weighted average base rate on the outstanding balance at December 31, 2020 was 2.45% and the overall interest rate was 9.70%. The weighted average base rate on the outstanding balance at June 30, 2021 was 2.29% and the overall interest rate was 9.29%. 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 7.0% at the borrowing date. 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, 2021 and December 31, 2020.

28

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

EC SPV Facility

VPC entered into a new debt facility with EC SPV on July 31, 2020. The EC SPV Facility has a maximum borrowing amount of $100 million used to purchase loan participations from a third-party lender. The weighted average base rate on the outstanding balance at December 31, 2020 was 2.73% and the overall interest rate was 9.98%. The weighted average base rate on the outstanding balance at June 30, 2021 was 2.73% and the overall interest rate was 9.73%. 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 7.0% at the borrowing date. The EC 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 EC 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 EC SPV are pledged as collateral to secure the EC SPV Facility. The EC 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 EC SPV Facility as of June 30, 2021 and December 31, 2020.

VPC, ESPV, EF SPV and EC SPV Facilities:

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

(Dollars in thousands)						June 30, 2021						December 31, 2020
US Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)						$	68,600					$	104,500
4th Tranche Term Note bearing interest at the base rate + 13%						—						18,050
ESPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)						159,600						199,500
EF SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)						89,800						93,500
EC SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)						35,000						25,000
Debt issuance costs						(1,786)						(2,147)
Total						$	351,214					$	438,403

The change in the facility balances includes the following:

•US Term Note - Paydowns of $25.9 million and $10 million in the first and second quarter of 2021, respectively;

•4th Tranche Term Note - Debt obligation of $18.1 million paid off in the first quarter of 2021;

•ESPV Term Note - Paydown of $39.9 million in the first quarter of 2021;

•EF SPV Term note - Paydown of $18.7 million in the first quarter of 2021 and a draw of $15 million in the second quarter of 2021; and

•EC SPV Term Note - Draws of $5 million and $5 million in the first and second quarter of 2021, respectively .

Per the terms of the February 2019 amendments and the July 31, 2020 EC SPV agreement, the Company qualified for a 25 bps rate reduction on the VPC, ESPV, EF SPV and EC SPV facilities effective January 1, 2021. 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.

29

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

Future debt maturities as of June 30, 2021 are as follows:

Year (dollars in thousands)						June 30, 2021
Remainder of 2021						$	—
2022						—
2023						—
2024						353,000
2025						—
Thereafter						—
Total						$	353,000

NOTE 6—GOODWILL AND INTANGIBLE ASSETS

The Company’s 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 previously consolidated UK reporting units. The Company performs an impairment review of goodwill and intangible assets with an indefinite life annually at October 1. As a result of the recent global economic impact and uncertainty due to the COVID-19 pandemic, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment testing on the goodwill balances of its reporting units. The Company performed a detailed qualitative and quantitative assessment of each reporting unit and concluded that the goodwill associated with the previously consolidated UK reporting unit was impaired as the fair value of the UK reporting unit was less than its carrying amount. The impairment loss of $9.3 million was included in Loss from discontinued operations due to the deconsolidation of ECIL. While there was a decline in the fair value of the Elastic reporting unit at March 31, 2020, there was no impairment identified during the quantitative assessment. The annual test was completed as of October 1, 2020 and the Company determined that there was no evidence of impairment of goodwill or indefinite life intangible assets. No events or circumstances occurred between October 2, 2020 and June 30, 2021 that would more likely than not reduce the fair value of the Elastic reporting unit below the carrying amount. The Company has $6.8 million of goodwill (all related to the Elastic reporting unit) on the Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020, respectively. Of the total goodwill balance, approximately $270 thousand is deductible for tax purposes.

The Company's 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 the Company's 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. The Company’s estimates are based upon assumptions believed to be reasonable. However, given the inherent uncertainty in determining the assumptions underlying a discounted cash flow analysis, particularly in the current volatile market, actual results may differ from those used in these valuations which could result in additional impairment charges in the future.

30

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

The carrying value of acquired intangible assets as of June 30, 2021 is presented in the table below:

(Dollars in thousands)						Cost						Accumulated Amortization						Net
Assets subject to amortization:
Acquired technology						$	211					$	(211)					$	—
Non-compete						2,461						(2,461)						—
Customers						126						(126)						—
Assets not subject to amortization:
Domain names						231						—						231
Total						$	3,029					$	(2,798)					$	231

The carrying value of acquired intangible assets as of December 31, 2020 is presented in the table below:

(Dollars in thousands)						Cost						Accumulated Amortization						Net
Assets subject to amortization:
Acquired technology						$	211					$	(211)					$	—
Non-compete						2,461						(1,859)						602
Customers						126						(126)						—
Assets not subject to amortization:
Domain names						531						—						531
Total						$	3,329					$	(2,196)					$	1,133

With Robert Johnson's decision to not run for reelection to the Company's Board of Directors in March 2021, the remaining non-compete agreements expired and the Company accelerated the amortization of the assets to coincide with his announcement. Total amortization expense recognized for the six months ended June 30, 2021 and 2020 was approximately $602 thousand and $60 thousand, respectively. For the three months ended June 30, 2020, $30 thousand of amortization expense was recognized. As of March 31, 2021, there were no intangible assets subject to amortization with any remaining life.

Additionally, in January 2021, the Company sold a domain name that was held for a gain of $949 thousand, included in Non-operating income (loss) in the Condensed Consolidated Statements of Operations.

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 two to six 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, 2021 and December 31, 2020, net assets recorded under operating leases totaled $6.8 million and $8.3 million, respectively, and net lease liabilities totaled $10.6 million and $12.0 million, respectively.

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.

In January 2021, the Company entered into a sublease contract with an independent third party for facility space related to a right-of-use asset. The Company's obligation under the original lease was not relieved. As the sublease income is immaterial, payments received are recognized as an offset to Occupancy and equipment in the Condensed Consolidated Statements of Operations. The signing of the sublease triggered an impairment evaluation and the Company determined the related right-of-use asset was impaired. An impairment loss of $549 thousand was recognized in Non-operating income (loss) in the Condensed Consolidated Statements of Operations.

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

Total gross lease cost for the three and six months ended June 30, 2021 and 2020, included in Occupancy and equipment in the Condensed Consolidated Statements of Operations, is detailed in the table below:

						Three Months Ended June 30,
Lease cost (dollars in thousands)						2021						2020
Operating lease cost						$	768					$	808
Short-term lease cost						—						—
Total lease cost						$	768					$	808

						Six Months Ended June 30,
Lease cost (dollars in thousands)						2021						2020
Operating lease cost						$	1,535					$	1,616
Short-term lease cost						—						—
Total lease cost						$	1,535					$	1,616

Further information related to leases is as follows:

						Three Months Ended June 30,
Supplemental cash flows information (dollars in thousands)						2021						2020
Cash paid for amounts included in the measurement of lease liabilities						$	960					$	931
Right-of-use assets obtained in exchange for lease obligations						$	—					$	—
Weighted average remaining lease term						3.1 years						4.0 years
Weighted average discount rate						10.23		%				10.23		%

						Six Months Ended June 30,
Supplemental cash flows information (dollars in thousands)						2021						2020
Cash paid for amounts included in the measurement of lease liabilities						$	1,918					$	1,855
Right-of-use assets obtained in exchange for lease obligations						$	—					$	—
Weighted average remaining lease term						3.1 years						4.0 years
Weighted average discount rate						10.23		%				10.23		%

Future minimum lease payments as of June 30, 2021 are as follows:

Year (dollars in thousands)						Operating Leases
2021						$	1,958
2022						3,984
2023						3,486
2024						1,438
2025						1,254
Thereafter						638
Total future minimum lease payments						$	12,758
Less: Imputed interest						(2,141)
Operating lease liabilities						$	10,617

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

NOTE 8—SHARE-BASED COMPENSATION

Share-based compensation expense recognized for the three months ended June 30, 2021 and 2020 totaled approximately $1.8 million and $2.6 million, respectively, and $3.4 million and $5.3 million for the six months ended June 30, 2021 and 2020, 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 7,991,434 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, 2021, the total number of shares available for future grants under the 2016 Plan was 3,549,312 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, non-statutory 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, 2021, 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.

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

A summary of stock option activity as of and for the six months ended June 30, 2021 is presented below:

Stock Options						Shares						Weighted Average Exercise Price						Weighted Average Remaining Contractual Life (in years)
Outstanding at December 31, 2020						886,685						$	5.94
Granted						—						—
Exercised						(12,500)						2.13
Expired						—						—
Forfeited						(2,500)						6.31
Outstanding at June 30, 2021						871,685						5.99						3.49
Options exercisable at June 30, 2021						871,685						$	5.99					3.49

At June 30, 2021, there were no unrecognized compensation costs related to unvested stock options to be recognized. The total intrinsic value of options exercised for the six months ended June 30, 2021 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, 2021 was $4.35. 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, 2021 is presented below:

RSUs						Shares						Weighted Average Grant-Date Fair Value
Unvested at December 31, 2020						2,924,086						$	4.17
Granted						1,677,469						4.35
Vested(1)						(963,401)						4.72
Forfeited						(67,720)						4.65
Unvested at June 30, 2021						3,570,434						4.09
Expected to vest at June 30, 2021						2,580,652						$	4.12

(1)During the year ended certain RSUs were net share-settled to cover the required withholding tax and the remaining amounts were converted into an equivalent number of shares of the Company's common stock. The Company withheld 261,945 shares for applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities for the six months ended June 30, 2021.

At June 30, 2021, there was approximately $8.7 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 2.6 years. During the six months ended June 30, 2021, the total intrinsic value of RSUs that vested during the period was approximately $3.5 million. As of June 30, 2021, the aggregate intrinsic value of the vested and expected to vest RSUs was approximately $9.2 million.

Employee Stock Purchase Plan

The Company offers an Employee Stock Purchase Plan ("ESPP") to eligible US employees. There are currently 2,196,257 shares authorized and 934,335 reserved for the ESPP. There were 149,613 shares purchased under the ESPP for the six months ended June 30, 2021. Within share-based compensation expense for the six months ended June 30, 2021 and 2020, $342 thousand and $283 thousand, respectively, relates to the ESPP. For the three months ended June 30, 2021 and 2020, $171 thousand and $142 thousand, respectively, relates to the ESPP within share-based compensation expense.

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

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, 2021 and 2020, 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”).

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

NOTE 10—INCOME TAXES

Income tax expense for the three and six months ended June 30, 2021 and 2020 consists of the following:

						Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands)						2021						2020						2021						2020
Current income tax expense (benefit):
Federal						$	—					$	(1,152)					$	—					$	—
State						(40)						(155)						46						332
Total current income tax expense (benefit)						(40)						(1,307)						46						332
Deferred income tax expense (benefit):
Federal						1,116						6,284						4,693						6,357
State						(848)						3,396						(1,067)						3,739
Total deferred income tax expense						268						9,680						3,626						10,096
Total income tax expense						$	228					$	8,373					$	3,672					$	10,428

No material penalties or interest related to taxes were recognized for the three and six months ended June 30, 2021 and 2020.

The Company’s effective tax rates for continuing operations for the six months ended June 30, 2021 and 2020, including discrete items, were 27.5% and 30.3%, respectively. For the six months ended June 30, 2021 and 2020, the Company’s effective tax rate differed from the standard corporate federal income tax rate of 21% due to permanent non-deductible items and corporate state tax obligations in the states where it has lending activities. The Company's cash effective tax rate was approximately 2.1%.

On March 11, 2021, the American Rescue Plan Act ("ARP Act") was signed into law. The Company reviewed the tax relief provisions of the ARP Act, including the Company's eligibility for such provisions, and determined that the impact is likely to be insignificant with regard to the Company's effective tax rate. The Company continues to monitor and evaluate its eligibility under the ARP Act tax relief provisions to identify any portions that may become applicable in the future.

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 the deferred tax assets, net.

Deferred tax assets, net

At June 30, 2021 and December 31, 2020, the Company did not establish a valuation allowance for its deferred tax assets (“DTA”) based on management’s expectation of generating sufficient taxable income in a look forward period over the next one to three years. The Federal net operating loss ("NOL") carryforward from operations at December 31, 2020 was approximately $64.8 million. Any research and development credits recognized as a deferred tax asset expire beginning in 2036. The ultimate realization of the resulting deferred tax asset is dependent upon generating sufficient taxable income prior to the expiration of this carryforward. The Company considered the following factors when making its assessment regarding the ultimate realizability of the deferred tax assets.

Significant factors included the following:

•The Company is in a three-year cumulative pre-tax income position in 2021. Additionally, the Company has a history utilizing its past NOL carryforwards.

•Due to the short-term nature of the loan portfolio and the other material items that comprise the deferred tax assets, net, the Company estimates that the majority of these deferred tax items will reverse within one to three years.

36

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

The Company has given due consideration to all the factors and has concluded that the deferred tax asset is expected to be realized based on management’s expectation of generating sufficient taxable income and the reversal of tax timing differences in a look-forward period over the next one to three 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. As a result, as of June 30, 2021 and December 31, 2020, the Company did not establish a valuation allowance for the DTA.

NOTE 11—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.

Other Matters:

In December 2019, the Think Finance, Inc. ("TFI") bankruptcy plan was confirmed, and any potential future claims from the TFI Creditors' Committee were assigned to the Think Finance Litigation Trust (“TFLT”). On August 14, 2020, the TFLT filed an adversary proceeding against Elevate Credit, Inc. in the United States Bankruptcy Court for the Northern District of Texas, alleging certain avoidance claims related to Elevate's spin-off from TFI on May 1, 2014 under the Bankruptcy Code and the Texas Uniform Fraudulent Transfer Act ("TUFTA"). If it were determined that the spin-off constituted a fraudulent conveyance or that there were other avoidance actions associated with the spin-off, then the spin-off could be deemed void and there could be a number of different remedies imposed against Elevate, including without limitation, the requirement that Elevate has to pay money damages. While the TFLT values this claim at $246 million, the Company believes that it has valid defenses to the claim and intends to vigorously defend itself against this claim. Additionally, a class action lawsuit against Elevate was filed on August 14, 2020 in the Eastern District of Virginia alleging violations of usurious interest and aiding and abetting various racketeering activities related to the operations of TFI prior to and immediately after the 2014 spin-off. Elevate views this lawsuit as without merit and intends to vigorously defend its position. Based upon preliminary settlement discussions in the fourth quarter of 2020, the Company accrued a contingent loss in the amount of $17 million for estimated losses related to the TFLT and class action disputes within Accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2020.

On June 5, 2020, the District of Columbia (the "District") sued Elevate in the Superior Court of the District of Columbia alleging that Elevate may have violated the District's Consumer Protection Procedures Act and the District of Columbia's Municipal Regulations in connection with loans issued by banks in the District of Columbia. This action was removed to federal court, and on August 3, 2020, the District filed a motion to remand to Superior Court. On July 15, 2021, the District Court Judge remanded the case to Superior Court. Elevate disagrees that it has violated the above referenced laws and regulations and it intends to vigorously defend its position.

On January 27, 2020, an Elevate wholly-owned subsidiary and other non-affiliated service providers to banks were sued in a class action lawsuit in Washington state. The Plaintiff in the case claims that the Elevate subsidiary and the other non-affiliated service providers to banks violated Washington’s Consumer Protection Act by engaging in unfair or deceptive practices. The lawsuit was removed to federal court. On January 12, 2021, the court granted Rise's motion to dismiss, as well as the other non-affiliated service providers. The Judge did, however, allow Plaintiff the opportunity to amend its complaint. On June 22, 2021, the Plaintiff filed her Amended Complaint alleging that Elevate or its subsidiary were not service providers to the originating bank, but rather the true lender. On July 20, 2021, Elevate filed its Motion to Dismiss the Amended Complaint. Elevate disagrees that it has violated the Washington Consumer Protection Act and it intends to vigorously defend its position.

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

In California, all lawsuits have been dismissed and there are currently two separate demands for arbitration pending with Plaintiffs asserting claims under the “unlawful,” “unfair,” and “fraudulent” prongs of the California Unfair Competition Law (“UCL”). All other previously asserted claims have been dismissed. In order to prevail, Plaintiffs have to prove that the loans made were both procedurally and substantively unconscionable. Elevate disagrees that it has violated the UCL and it intends to vigorously defend its position in these arbitrations.

Commitments

The Elastic product, which offers lines of credit to consumers, had approximately $295.4 million and $275.9 million in available and unfunded credit lines at June 30, 2021 and December 31, 2020, respectively. The Today Card product had approximately $11.8 million and $5.4 million in available and unfunded credit lines as of June 30, 2021 and December 31, 2020, respectively. From May 2017 through September 2020, the Rise product offered lines of credit to consumers in certain states. At both June 30, 2021 and December 31, 2020, there were no remaining available and unfunded Rise credit lines. 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, 2021 and December 31, 2020, the Company had $200 thousand and $300 thousand, respectively, of cash balances securing the letter of credit which is included in Restricted cash within the Condensed Consolidated Balance Sheets.

Guarantees

CSO Program:

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.

UK Debt Guarantee:

Under the terms of the VPC Facility, Elevate Credit, Inc. (the "Parent") had provided a guarantee to VPC for the repayment of the UK Term Note. ECIL completed payment of the UK Term Note in the third quarter of 2020 and any guarantee obligation associated with the UK Term Note was released with the repayment.

Indemnifications and contingent loss accrual

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. As the Company has previously disclosed, the Company has also entered into separate indemnification agreements with the Company’s directors and executive officers, in addition to the indemnification provided for in the Company’s amended and restated bylaws. These agreements, among other things, provide that the Company will indemnify its directors and executive officers for certain expenses, including attorneys’ fees, judgments, penalties, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of the Company’s or, where applicable, TFI’s directors or executive officers, or any of the Company’s subsidiaries or any other company or enterprise to which the person provides services at the Company’s request. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder.

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

As of June 30, 2021 and December 31, 2020, the Company accrued approximately $0.0 million and $4.4 million, respectively, for a contingent loss related to a legal matter for a former executive of the company. This contingent loss was based on a probable settlement composed of both cash and certain amounts that were subject to valuation adjustments until the final settlement. The accrual was recognized as Non-operating loss in the Condensed Consolidated Statements of Operations and as Accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets. The Company accrued $5.7 million at June 30, 2020. As of June 30, 2021, the contingent loss was settled and no further accrual remains. In April 2021, the Company received a net recovery of $510 thousand. The table below presents a roll forward of the amounts accrued and paid for the three and six months ended June 30, 2021 and 2020.

						Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands)						2021						2020						2021						2020
Beginning balance						$	—					$	4,263					$	4,424					$	—
Accruals						(510)						1,407						(510)						5,670
Payments						510						—						(3,914)						—
Net contingent loss related to a legal matter						$	—					$	5,670					$	—					$	5,670

NOTE 12—DISCONTINUED OPERATIONS

As a result of the recent global economic impact and uncertainty due to the COVID-19 pandemic, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment testing on the goodwill balances of its reporting units. The Company performed a detailed qualitative and quantitative assessment of each reporting unit and concluded that the goodwill associated with the previously consolidated UK reporting unit was impaired as the fair value of the UK reporting unit was less than its carrying amount. The impairment loss of $9.3 million was included in Loss from discontinued operations due to the deconsolidation of ECIL.

On June 29, 2020, ECIL entered into administration in accordance with the provisions of the UK Insolvency Act 1986 and pursuant to a resolution of the board of directors of ECIL. The management, business, affairs and property of ECIL have been placed into the direct control of the appointed administrators, KPMG LLP. Accordingly, the Company deconsolidated ECIL as of June 29, 2020 and presents ECIL's results as Discontinued operations for all periods presented.

In connection with the disposition of ECIL, the Company recognized a loss on its investment. This loss resulted in an estimated US federal and state income tax benefit of $24.2 million and was recognized in the three- and six-month period ending June 30, 2020.

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

The table below presents the financial results of ECIL, which are considered Discontinued operations and are excluded from the Company's results of continuing operations:

						Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands)						2021						2020 (1)						2021						2020 (1)
Revenues						$	—					$	9,024					$	—					$	24,012
Cost of sales:
Provision for loan losses						—						607						—						4,785
Direct marketing costs						—						270						—						1,372
Other cost of sales						—						5,130						—						10,790
Total cost of sales						—						6,007						—						16,947
Gross profit						—						3,017						—						7,065
Operating expenses:
Compensation and benefits						—						2,068						—						4,785
Professional services						—						1,598						—						2,879
Selling and marketing						—						135						—						605
Occupancy and equipment						—						1,028						—						2,141
Depreciation and amortization						—						926						—						1,427
Other						—						108						—						288
Total operating expenses						—						5,863						—						12,125
Operating loss						—						(2,846)						—						(5,060)
Other expense:
Net interest expense						—						(357)						—						(896)
Foreign currency transaction loss						—						(42)						—						(854)
Impairment loss						—						—						—						(9,251)
Non-operating income						—						17						—						—
Total other expense						—						(382)						—						(11,001)
Loss from operations of discontinued operations						—						(3,228)						—						(16,061)
Loss on disposal of discontinued operations						—						(28,512)						—						(28,512)
Loss from discontinued operations before taxes						—						(31,740)						—						(44,573)
Income tax benefit						—						24,200						—						24,200
Net loss from discontinued operations						$	—					$	(7,540)					$	—					$	(20,373)

(1) Includes ECIL financial results for the period through June 28, 2020.

At June 30, 2021 and December 31, 2020, the Company had no assets or liabilities related to the discontinued operations of ECIL.

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Elevate Credit, Inc. and Subsidiaries

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

For the three and six months ended June 30, 2021 and 2020

NOTE 13—RELATED PARTIES

Expenses related to the Company's 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, 2021 and 2020 are included in Professional services within the Condensed Consolidated Statements of Operations and were as follows:

						Three Months Ended June 30,
(Dollars in thousands)						2021						2020
Fees and travel expenses						$	135					$	122
Stock compensation (1)						107						808
Consulting						—						50
Total board related expenses						$	242					$	980

						Six Months Ended June 30,
(Dollars in thousands)						2021						2020
Fees and travel expenses						$	257					$	255
Stock compensation (1)						186						1,787
Consulting						—						150
Total board related expenses						$	443					$	2,192

(1) Includes Elevate's former CEO from January 1, 2020 through July 17, 2020.

During the year ended December 31, 2017, a member of the board of directors entered into a direct investment of $800 thousand in the Rise portion of the VPC Facility. For the three months ended June 30, 2021 and 2020, the interest payments on this loan were $17 thousand and $20 thousand, respectively, and $37 thousand and $40 thousand for the six months ended June 30, 2021 and 2020, respectively.

In addition, during the three months ended June 30, 2021, the Company reached an agreement with a member of the board of directors for advances of legal fees under the indemnification provisions of their director agreement. Based on this agreement, the company accrued $911 thousand, which is included in Professional services in the Condensed Consolidated Statements of Operations and in Accounts payable and accrued liabilities within the Condensed Consolidated Balance Sheets.

At June 30, 2021 and December 31, 2020, the Company had approximately $135 thousand and $110 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.

NOTE 14—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:

For the period from July 1, 2021 to August 4, 2021, the Company repurchased 487,302 shares of its common stock on the open market for a total purchase price of $1.8 million, including any fees or commissions.

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

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our business, our results of operations and our financial condition. The MD&A is provided as a supplement to, and should be read in conjunction 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 our brands (Rise, Elastic 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 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 riskier 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 2.6 million customers with $9.2 billion in credit. Our current online credit products, Rise, Elastic and 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."

Prior to June 29, 2020, we provided services in the United Kingdom ("UK") through our wholly-owned subsidiary, Elevate Credit International Limited (“ECIL”) under the brand name ‘Sunny.’ During the year ended December 31, 2018, ECIL began to receive an increased number of customer complaints initiated by claims management companies ("CMCs") related to the affordability assessment of certain loans. The CMCs' campaign against the high cost lending industry increased significantly during the third and fourth quarters of 2018 and continued through 2019 and into the first half of 2020, resulting in a significant increase in affordability claims against all companies in the industry over this period. The Financial Conduct Authority ("FCA"), 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. Separately, the FCA asked all industry participants to review their lending practices to ensure that such companies are using an appropriate affordability and creditworthiness analysis. However, there continued to be a lack of clarity within the regulatory environment in the UK. This lack of clarity, coupled with the ongoing impact of the Coronavirus Disease 2019 ("COVID-19") on the UK market for Sunny, led the ECIL board of directors to place ECIL into administration under the UK Insolvency Act 1986 and appoint insolvency practitioners from KPMG LLP to take control and management of the UK business. As a result, we have deconsolidated ECIL and are presenting its results as discontinued operations.

We earn revenues on the Rise 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 ("CCB"), 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 directly make to our Rise customers and provide working capital. The VPC Facility has a maximum total borrowing amount available of $200 million at June 30, 2021. See “—Liquidity and Capital Resources—Debt facilities.”

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We also license our Rise installment loan brand to two banks. FinWise Bank originates Rise installment loans in 17 states. This bank initially provides all of the funding, retains 4% of the balances of all of the loans originated and sells the remaining 96% loan participation in those Rise installment loans to a third-party SPV, EF SPV, Ltd. ("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 $250 million. 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 Rise loan losses in return for a credit premium. Elevate is required to consolidate EF SPV as a variable interest entity ("VIE") under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 96% of the Rise installment loans originated by FinWise Bank and sold to EF SPV.

Beginning in the third quarter of 2020, we also license our Rise installment loan brand to an additional bank, CCB, which originates Rise installment loans in three different states than FinWise Bank. Similar to the relationship with FinWise Bank, CCB initially provides all of the funding, retains 5% of the balances of all of the loans originated and sells the remaining 95% loan participation in those Rise installment loans to a third-party SPV, EC SPV, Ltd. ("EC SPV"). These loan participation purchases are funded through a separate financing facility (the "EC SPV Facility"), and through cash flows from operations generated by EC SPV. The EC SPV Facility has a maximum total borrowing amount available of $100 million. We do not own EC SPV, but we have a credit default protection agreement with EC SPV whereby we provide credit protection to the investors in EC SPV against Rise loan losses in return for a credit premium. Elevate is required to consolidate EC SPV as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 95% of the Rise installment loans originated by CCB and sold to EC SPV.

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, we are the primary beneficiary of Elastic SPV and are required to consolidate the financial results of Elastic SPV as a VIE in our condensed consolidated financial statements. The ESPV Facility has a maximum total borrowing amount available of $350 million at June 30, 2021. See “—Liquidity and Capital Resources—Debt facilities.”

Today Card is a credit card product designed to meet the spending needs of non-prime consumers by offering a prime customer experience. Today Card is originated by CCB under the licensed MasterCard brand, and a 95% participation interest in the credit card receivable is sold to us. As the lowest APR product in our portfolio, Today Card allows us to serve a broader spectrum of non-prime Americans. During 2020, the Today Card experienced significant growth in its portfolio size despite the pandemic due to the success of our direct mail campaigns, the primary marketing channel for acquiring new Today Card customers. We followed a specific growth plan beginning in 2020 to grow the product while monitoring customer responses and credit quality. Customer response to the Today Card is very strong, as we continue to see extremely high response rates, high customer engagement, and positive customer satisfaction scores.

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 growth 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 US legacy 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 and lowered our credit losses. 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.

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•Margin expansion.    We aim to manage our business to achieve a long-term operating margin of 20%. While our operating margins may exceed 20% in certain years, such as in 2020 when we incurred lower levels of direct marketing expense and materially lower credit losses due to a lack of customer demand for loans resulting from the effects of COVID-19, we do not expect our operating margin to increase beyond that level over the long-term, 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.

Impact of COVID-19

The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States, including the markets that we serve. As the restrictive measures have been eased in certain geographic locations during late 2020 and the first half of 2021, the U.S. economy has begun to recover, and with the availability and distribution of a COVID-19 vaccine, we anticipate continued improvements in commercial and consumer activity and the U.S. economy. While positive signs exist, we recognize that certain of our customers are experiencing varying degrees of financial distress, which may continue, especially if new COVID-19 variant infections increase and new economic restrictions are mandated.

The portfolio of loan products we and the bank originators provide has experienced significantly decreased demand and application volume for both new and former customers since the COVID-19 pandemic began, largely because of the effects of monetary stimulus provided by the US government reducing demand for loan products. While we have experienced an increase in new customer loans in the first half of 2021 compared to a year ago, these events since the COVID-19 pandemic began are resulting in a material decrease in revenues compared to a year ago. While we have increased our marketing campaigns to acquire new customer loans during the first half of 2021, our overall loan origination volumes during the first half of 2021 were still below our historical origination volumes due to continued reduction in loan demand for our products. While customer loan demand increased sequentially in the second quarter of 2021 and we believe that customer loan demand for our products will continue to increase during the third quarter, given the uncertainty surrounding the COVID-19 pandemic, we are currently unable to determine if the demand will continue and allow our loan products to return to their prior historical levels.

In response to the COVID-19 pandemic, we, along with the banks we support, have also expanded our payment flexibility tools to provide payment assistance programs to certain customers who meet the program’s qualifications. These tools include a deferral of payments for an initial period of 30 to 60 days, which we may extend for an additional 30 days, for generally a maximum of 180 days on a cumulative basis. The customer will return to their normal payment schedule after the end of the deferral period with the extension of their maturity date equivalent to their deferral period not to generally exceed an additional 180 days. For Rise installment loans, finance charges continue to accrue at a lower effective APR over the expected extended term of the loan considering the deferral periods provided. For Elastic lines of credit, no fees accrue during the payment deferral period. As a result, the average APR of our products decreased due to the impact of the COVID-19 pandemic and the payment assistance tools that have been implemented. As the economy continues to recover and customers find financial stability, we've seen a decrease in the number of customers in an active payment flexibility program. As of June 30, 2021, 2.3% of customers with loan balances outstanding have been provided relief through our COVID-19 payment deferral programs for a total of $9.2 million in loans with deferred payments. This is a marked decrease in the volume of customers in an active payment deferral program and compares to $34.6 million in loans with deferred payments, or 8.7% of customers, as of December 31, 2020. We are also seeing that customers generally are meeting their scheduled payments once they exit the payment deferral program as our past due delinquency rate is 7% at June 30, 2021 and has remained relatively flat over the past year.

Both we and the bank originators are closely monitoring the key credit quality indicators such as payment defaults, continued payment deferrals, and line of credit utilization. While we initially anticipated that the COVID-19 pandemic would have a negative impact on our credit quality, instead the monetary stimulus programs provided by the US government to our customer base have generally allowed customers to continue making payments on their loans. At the beginning of the pandemic, we expected an increase in net charge-offs as compared to prior periods. However, the historically low net charge-offs as a percentage of revenue that we experienced in the second half of 2020 has continued into the first half of 2021. With the increased volume of new customer loans expected to be originated during the second half of 2021, we expect a return of net charge-offs to our targeted range of 45-55% of revenue. Further, we believe that the allowance for loan losses is adequate to absorb the losses inherent in the portfolio as of June 30, 2021, including loans that are part of the payment assistance tools.

As COVID-19 has continued to impact our office locations, our employee base is working in a hybrid remote environment in which employees may choose to remain remote or return to the office on a limited basis. We have sought to ensure our employees feel secure in their jobs, have flexibility in their work location and have the resources they need to stay safe and healthy. As an 100% online lending solutions provider, our technology and underwriting platform has continued to serve our customers and the bank originators that we support without any material interruption in services.

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COVID-19 has had a significant adverse impact on our business, and while uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment and expect continued loan portfolio growth and strong credit quality through the remainder of the year. We will continue assessing our minimum cash and liquidity requirement, monitoring our debt covenant compliance and implementing measures to ensure that our cash and liquidity position is maintained through the current economic cycle. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and the American Rescue Plan Act ("ARP Act"), and any further economic relief, stimulus payments or legislation by the federal government.

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.

Revenues

 

						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)						2021						2020						2021						2020
Revenues						$	84,540					$	117,991					$	174,273					$	280,458
Period-over-period change in revenue						(28)		%				(22)		%				(38)		%				(10)		%
Ending combined loans receivable – principal(1)						$	399,320					$	413,728					399,320						413,728
Average combined loans receivable – principal(1)(2)						$	355,980					$	466,694					367,365						524,932
Total combined loans originated – principal						$	210,401					$	84,502					343,914						321,398
Average customer loan balance (in dollars)(3)						$	1,827					$	1,862					1,827						1,862
Number of new customer loans						38,986						2,815						52,876						38,565
Ending number of combined loans outstanding						218,543						222,244						218,543						222,244
Customer acquisition costs (in dollars)						$	271					$	122					283						293
Effective APR of combined loan portfolio						94		%				101		%				95		%				107		%

_________

(1)Combined loans receivable is defined as loans owned by us 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 three 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), revenues earned on the Elastic line of credit, and finance charges and fee revenues from the Today Card credit card product. 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), the 96% participation in FinWise Bank originated Rise installment loans and the 95% participation in CCB originated Rise installment loans and the 95% participation in the CCB originated Today Card credit card receivables, but include the full loan balances on CSO loans, which are not presented on our Condensed Consolidated Balance Sheets.

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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 refinancing 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 total 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 or advance 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 customers usually receive tax refunds during this period and, thus, have less of a need for loans from us. Further, many 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.

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The following tables summarize the changes in customer loans by product for the three and six months ended June 30, 2021 and 2020.

						Three Months Ended June 30, 2021
						Rise						Elastic						Today
						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Beginning number of combined loans outstanding						91,508						90,021						12,802						194,331
New customer loans originated						27,704						6,339						4,943						38,986
Former customer loans originated						14,909						132						—						15,041
Attrition						(25,337)						(4,214)						(264)						(29,815)
Ending number of combined loans outstanding						108,784						92,278						17,481						218,543
Customer acquisition cost						$	294					$	332					$	64					$	271
Average customer loan balance						$	2,122					$	1,599					$	1,199					$	1,827

						Three Months Ended June 30, 2020
						Rise						Elastic						Today
						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Beginning number of combined loans outstanding						142,633						134,240						4,613						281,486
New customer loans originated						627						292						1,896						2,815
Former customer loans originated						7,593						9						—						7,602
Attrition						(43,728)						(25,988)						57						(69,659)
Ending number of combined loans outstanding						107,125						108,553						6,566						222,244
Customer acquisition cost						$	306					$	375					$	22					$	122
Average customer loan balance						$	2,249					$	1,518					$	1,231					$	1,862

						Six Months Ended June 30, 2021
						Rise						Elastic						Today
						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Beginning number of combined loans outstanding						103,940						100,105						10,803						214,848
New customer loans originated						36,360						9,191						7,325						52,876
Former customer loans originated						27,765						226						—						27,991
Attrition						(59,281)						(17,244)						(647)						(77,172)
Ending number of combined loans outstanding						108,784						92,278						17,481						218,543
Customer acquisition cost						$	302					$	376					$	70					$	283

						Six Months Ended June 30, 2020
						Rise						Elastic						Today						Total
						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Beginning number of combined loans outstanding						152,435						146,317						3,207						301,959
New customer loans originated						25,040						10,057						3,468						38,565
Former customer loans originated						24,149						140						—						24,289
Attrition						(94,499)						(47,961)						(109)						(142,569)
Ending number of combined loans outstanding						107,125						108,553						6,566						222,244
Customer acquisition cost						$	309					$	335					$	62					$	293

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Recent trends.    Our revenues for the three months ended June 30, 2021 totaled $84.5 million, a decrease of 28% versus the three months ended June 30, 2020. Additionally, our revenues for the six months ended June 30, 2021 totaled $174.3 million, down 38% versus the prior year. Both the Rise and Elastic products experienced a year-over-year decline in revenues of 41% and 34%, respectively, which were attributable to reductions in loan origination volume and lower effective APRs for the loan portfolio due to the economic crisis created by the COVID-19 pandemic beginning in March 2020, which resulted in substantial government assistance to our potential customers that lowered demand for our products. This decline in revenue was partially offset by a year-over-year increase in revenues for the Today Card product, which has more than doubled its average principal balance outstanding year-over year. We believe Today Card balances increased over the past year despite the impact of COVID-19 due to the nature of the product (credit card versus installment loan or line of credit), the lower APR of the product (effective APR of 29% in the second quarter of 2021 compared to Rise at 100% and Elastic at 95%) as customers receiving stimulus payments would be more apt to pay down more expensive forms of credit, and the added convenience of having a credit card for online purchases of day-to-day items such as groceries or clothing (whereas the primary usage of a Rise installment loan or Elastic line of credit is for emergency financial needs such as a medical deductible or automobile repair).

Additionally, the portfolio of loan products we and the bank originators provide has experienced significantly decreased loan demand for both new and former customers since the COVID-19 pandemic began, including the effects of monetary stimulus provided by the US government reducing demand for loan products. While we have experienced an increase in new customer loans compared to a year ago, these events since the COVID-19 pandemic began are resulting in a material decrease in revenues compared to a year ago. We and the bank originators experienced softer demand for the loan products during the first quarter of 2021 due to continued government stimulus programs but experienced strong origination volume, similar to historical origination levels, during the second quarter of 2021, particularly May and June 2021. We anticipate continued strong demand for the loan products for the remainder of the year. Rise and Elastic principal loan balances at June 30, 2021 totaled $230.8 million and $147.6 million, respectively, down roughly $10.1 million and $17.2 million, respectively, from a year ago. Conversely, Today Card principal loan balances at June 30, 2021 totaled $21.0 million, up $12.9 million from a year ago.

Our CAC was higher in the second quarter of 2021 at $271 as compared to the second quarter of 2020 at $122, with the second quarter of 2020 not reflective of our historical CAC due to the significant reduction in marketing activity and new loan originations due to the COVID-19 pandemic. The second quarter 2021 loan volume is being sourced from all our marketing channels including direct mail, strategic partners and digital. We’ve seen a marked improvement in loan volume from our strategic partners channel where we have improved our technology and risk capabilities to interface with the strategic partners via our application programming interface (APIs) that we developed within our new technology platform ("Blueprint") which allow us to more efficiently acquire new customers within our targeted CAC range. We believe our CAC in future quarters will continue to remain within or below our target range of $250 to $300 as we continue to optimize the efficiency of our marketing channels and continue to grow the Today Card which successfully generated new customers at a sub-$100 CAC.

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)						2021						2020						2021						2020
Net charge-offs(1)						$	26,063					$	58,643					$	56,953					$	141,450
Additional provision for loan losses(1)						1,162						(17,166)						(8,758)						(21,398)
Provision for loan losses						$	27,225					$	41,477					$	48,195					$	120,052
Past due combined loans receivable – principal as a percentage of combined loans receivable – principal(2)						7		%				5		%				7		%				5		%
Net charge-offs as a percentage of revenues(1)						31		%				50		%				33		%				50		%
Total provision for loan losses as a percentage of revenues						32		%				35		%				28		%				43		%
Combined loan loss reserve(3)						$	40,321					$	60,594					$	40,321					$	60,594
Combined loan loss reserve as a percentage of combined loans receivable(3)(4)						10		%				14		%				10		%				14		%

_________ 

(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 (Rise and Elastic) or 120 days past due (Today Card), 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.

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(2)Combined loans receivable is defined as loans owned by us 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.

(3)Combined loan loss reserve is defined as the loan loss reserve for loans originated and owned by us plus the loan loss reserve for loans owned by third-party lenders and guaranteed by us. 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
2021						6%						5%						N/A						N/A
2020						11%						10%						4%						5%
2019						13%						10%						10%						12%

_________ 

(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)Combined loans receivable is defined as loans owned by us 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.

The above chart reflects generally the positive impact COVID-19 has had on credit quality. Due to the lack of new customer loan demand, our implementation of payment assistance tools, and government stimulus payments received by our customers, net principal charge-offs as a percentage of average combined loans receivable-principal for the second quarter of 2021 is half of the second quarter of 2020. As loan originations to new customers return to historical levels pre-pandemic, we expect this quarterly loss ratio to also return to historical levels.

In reviewing the credit quality of our loan portfolio, we break out our total provision for loan losses that is presented on our statement of operations 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 (Rise and Elastic) or 120 days (Today Card), 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 total 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.

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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, 31 to 60 days past due or 61-120 past due (for Today Card only). 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 two years we have seen our combined loan loss reserve as a percentage of combined loans receivable fluctuate between approximately 10% and 14% 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, 2021 was 32% and 28% of revenues, respectively, which was below our targeted range of 45% to 55%, and below the 35% and 43% in the respective prior year periods. Net charge-offs as a percentage of revenues for the three and six months ended June 30, 2021 were 31% and 33%, respectively, compared to 50% in both the respective prior year periods. While we initially anticipated that the COVID-19 pandemic would have a negative impact on our credit quality, instead the large quantity of monetary stimulus provided by the US government to our customer base has generally allowed customers to continue making payments on their loans. However, this has also caused weaker customer demand for additional loans resulting in lower overall loan balances and revenues. We continue to monitor the portfolio during the economic recovery resulting from COVID-19 and continue to adjust our underwriting and credit policies to mitigate any potential negative impacts. In the near-term we expect that net charge-offs as a percentage of revenues will continue to trend lower than our targeted range of 45% to 55% of revenue. In the long-term (post-COVID-19) as loan demand returns and the loan portfolio grows, we expect to continue to manage our total loan loss provision as a percentage of revenues to continue to remain within our targeted range of approximately 45% to 55% of revenue.

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The combined loan loss reserve as a percentage of combined loans receivable totaled 10% and 14% as of June 30, 2021 and June 30, 2020, respectively. This year-over-year decrease reflects the continued strong credit performance of the portfolio. Past due loan balances at June 30, 2021 were 7% of total combined loans receivable - principal, up from 5% from a year ago but have remained relatively flat over the past year, which is attributable to the COVID-19 payment flexibility tools. We are continuing to see that customers are meeting their scheduled payments once they exit the payment deferral program as evidenced by our low delinquency rate as of June 30, 2021 which has decreased slightly over the past year. We anticipate the combined loan loss reserve as a percentage of combined loans receivable will move toward historic norms as we continue to grow our loan portfolio during the second half of 2021.

We also look at Rise and Elastic principal loan charge-offs (including both credit and fraud losses) by loan vintage as a percentage of combined loans originated - principal. As the below table shows, our cumulative principal loan charge-offs for Rise and Elastic through June 30, 2021 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% long-term targeted range. During 2019, we implemented new fraud tools that have helped lower fraud losses for the 2019 vintage and rolled out our next generation of credit models during the second quarter of 2019 and continued refining the models during the third and fourth quarters of 2019. Our payment deferral programs have also assisted in reducing losses in our 2019 and 2020 vintages coupled with a lower volume of new loan originations in our 2020 vintage. The 2019 and 2020 vintages are both performing better than the 2017 and 2018 vintages. While still very early, we would expect the 2021 vintage to be higher than the 2020 given the increased volume of new customer loans expected to be originated this year and a return of net charge-offs to our targeted range of 45-55% of revenue. It is also possible that the cumulative loss rates on all vintages will increase and may exceed our recent historical cumulative loss experience due to the economic impact of a prolonged crisis resulting from the COVID-19 pandemic.

_________ 

1) The 2020 and 2021 vintages are not yet fully mature from a loss perspective.

2) UK included in the 2013 to 2017 vintages only.

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We also look at Today Card principal loan charge-offs (including both credit and fraud losses) by account vintage as a percentage of account principal originations. As the below table shows, our cumulative principal credit card charge-offs through June 30, 2021 for the 2020 annual vintage is under 6%. Our 2021 annual vintage also is trending in line with the 2020 vintage. Our 2018 and 2019 vintages are considered to be test vintages and were comprised of limited originations volume and not reflective of our current underwriting standards.

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Margins

						Three Months Ended June 30,												Six Months Ended June 30,
Margin metrics (dollars in thousands)						2021						2020						2021						2020
Revenues						$	84,540					$	117,991					$	174,273					$	280,458
Net charge-offs(1)						(26,063)						(58,643)						(56,953)						(141,450)
Additional provision for loan losses(1)						(1,162)						17,166						8,758						21,398
Direct marketing costs						(10,564)						(344)						(14,947)						(11,313)
Other cost of sales						(2,905)						(1,607)						(4,952)						(4,277)
Gross profit						43,846						74,563						106,179						144,816
Operating expenses						(38,606)						(36,498)						(76,200)						(78,855)
Operating income						$	5,240					$	38,065					$	29,979					$	65,961
As a percentage of revenues:
Net charge-offs						31		%				50		%				33		%				50		%
Additional provision for loan losses						1						(15)						(5)						(8)
Direct marketing costs						12						—						9						4
Other cost of sales						3						1						3						2
Gross margin						52						63						61						52
Operating expenses						46						31						44						28
Operating margin						6		%				32		%				17		%				24		%

_________ 

(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. Due to the negative impact of COVID-19 on our loan balances and revenue, we are monitoring our profit margins closely. Long-term, we intend to continue to manage the business to a targeted 20% operating margin.

Recent operating margin trends.    For the three months ended June 30, 2021, our operating margin was 6%, which was a decrease from 32% in the prior year period. For the six months ended June 30, 2021, our operating margin was 17%, which was also a decrease from 24% in the prior year period. These margin decreases were primarily driven by decreased revenue as a result of lower average combined loans receivable-principle, lower effective APRs earned on the loan portfolio, and increased direct marketing and origination expenses as we grow our loan portfolio and acquire new customers.

Our operating expense metrics have been negatively impacted by the COVID-19 pandemic and its impact on loan balances and revenue. We expect our expense metrics to continue to be negatively impacted in the short term as we continue to focus on growth to increase our new customer loan volume and grow our overall loan portfolio. However, management will continue to look for opportunities to reduce our expenses to help offset the increased loan origination and direct marketing expenses as we continue to experience lower revenues as a result of the COVID-19 pandemic.

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 our 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.

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Adjusted Earnings

There was no difference between reported net income (loss) from continuing operations and Adjusted earnings for the second quarter and first half of 2021. Adjusted earnings for the three and six months ended June 30, 2020 represent our net income (loss) from continuing operations adjusted to exclude:

•Contingent loss related to a legal matter

•Cumulative tax effect of adjustments

Adjusted diluted earnings (loss) per share is Adjusted earnings divided by Diluted weighted average shares outstanding.

The following table presents a reconciliation of net income (loss) from continuing operations and diluted earnings (loss) per share to Adjusted earnings and Adjusted diluted earnings (loss) per share, which excludes the impact of the contingent loss for each of the periods indicated:

						Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands except per share amounts)						2021						2020						2021						2020
Net income (loss) from continuing operations						$	(3,045)					$	16,093					$	9,671					$	24,015
Impact of contingent loss related to a legal matter						—						1,422						—						5,685
Cumulative tax effect of adjustments						—						(395)						—						(1,580)
Adjusted earnings (loss)						$	(3,045)					$	17,120					$	9,671					$	28,120
Diluted earnings (loss) per share - continuing operations						$	(0.09)					$	0.38					$	0.27					$	0.56
Impact of contingent loss related to a legal matter						—						0.03						—						0.13
Cumulative tax effect of adjustments						—						(0.01)						—						(0.04)
Adjusted diluted earnings (loss) per share						$	(0.09)					$	0.40					$	0.27					$	0.65

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents our net income (loss) from continuing operations, adjusted to exclude:

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

•Share-based compensation;

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

•Gains and losses from dispositions or a contingent loss related to a legal matter included in non-operating (income) loss; 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 (loss) from continuing operations 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

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•Adjusted EBITDA does not reflect interest associated with notes payable used for funding the loan portfolios, 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 (loss) from continuing operations 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)						2021						2020						2021						2020
Net income (loss) from continuing operations						$	(3,045)					$	16,093					$	9,671					$	24,015
Adjustments:
Net interest expense						8,567						12,177						17,353						25,833
Share-based compensation						1,787						2,599						3,389						5,347
Depreciation and amortization						4,552						4,529						9,795						8,825
Non-operating (income) loss						(510)						1,422						(717)						5,685
Income tax expense						228						8,373						3,672						10,428
Adjusted EBITDA						$	11,579					$	45,193					$	43,163					$	80,133
Adjusted EBITDA margin						13.7		%				38.3		%				24.8		%				28.6		%

Free cash flow

Free cash flow (“FCF”) represents our net cash provided by continuing 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 continuing operating activities to FCF for each of the periods indicated: 

						Six Months Ended June 30,
(Dollars in thousands)						2021						2020
Net cash provided by continuing operating activities(1)						$	66,687					$	131,244
Adjustments:
Net charge-offs – combined principal loans						(41,745)						(108,532)
Capital expenditures						(7,563)						(9,508)
FCF						$	17,379					$	13,204

 _________ 

(1)Net cash provided by continuing 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.

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 (Rise and Elastic) or 120 days (Today Card), 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 total gross charge-offs.

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.

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						Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands)						2021						2020						2021						2020
Net charge-offs						$	26,063					$	58,643					$	56,953					$	141,450
Additional provision for loan losses						1,162						(17,166)						(8,758)						(21,398)
Provision for loan losses						$	27,225					$	41,477					$	48,195					$	120,052

Combined loan information

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 of the loans originated and sells a 90% loan participation in the Elastic lines of credit to a third-party SPV, Elastic SPV, Ltd. Elevate is required to consolidate Elastic SPV, Ltd. as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 90% of Elastic lines of credit originated by Republic Bank and sold to Elastic SPV.

Beginning in the fourth quarter of 2018, we started licensing our Rise installment loan brand to a third-party lender, FinWise Bank, which originates Rise installment loans in 17 states. FinWise Bank retains 4% of the balances of all the loans originated and sells a 96% participation to a third-party SPV, EF SPV, Ltd. We do not own EF SPV, but we are required to consolidate EF SPV as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 96% of Rise installment loans originated by FinWise Bank and sold to EF SPV.

Beginning in 2018, we started licensing the Today Card brand and our underwriting services and platform to launch a credit card product originated by CCB, which initially provides all of the funding for that product. CCB retains 5% of the credit card receivable balance of all the receivables originated and sells a 95% participation in the Today Card credit card receivables to us. The Today Card program was expanded beginning in 2020.

Beginning in the third quarter of 2020, we also license our Rise installment loan brand to an additional bank, CCB, which originates Rise installment loans in three different states than FinWise Bank. Similar to the relationship with FinWise Bank, CCB retains 5% of the balances of all of the loans originated and sells the remaining 95% loan participation in those Rise installment loans to EC SPV. We do not own EC SPV, but we are required to consolidate EC SPV as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 95% of the Rise installment loans originated by CCB and sold to EC SPV.

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 sheets 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).

 

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						2020																		2021
(Dollars in thousands)						June 30						September 30						December 31						March 31						June 30
Company Owned Loans:
Loans receivable – principal, current, company owned						$	387,939					$	346,380					$	372,320					$	331,251					$	372,068
Loans receivable – principal, past due, company owned						18,917						21,354						25,563						21,678						27,231
Loans receivable – principal, total, company owned						406,856						367,734						397,883						352,929						399,299
Loans receivable – finance charges, company owned						25,606						24,117						25,348						21,393						19,157
Loans receivable – company owned						432,462						391,851						423,231						374,322						418,456
Allowance for loan losses on loans receivable, company owned						(59,438)						(49,909)						(48,399)						(39,037)						(40,314)
Loans receivable, net, company owned						$	373,024					$	341,942					$	374,832					$	335,285					$	378,142
Third Party Loans Guaranteed by the Company:
Loans receivable – principal, current, guaranteed by company						$	6,755					$	9,129					$	1,795					$	145					$	17
Loans receivable – principal, past due, guaranteed by company						117						314						144						15						4
Loans receivable – principal, total, guaranteed by company(1)						6,872						9,443						1,939						160						21
Loans receivable – finance charges, guaranteed by company(2)						550						679						299						22						4
Loans receivable – guaranteed by company						7,422						10,122						2,238						182						25
Liability for losses on loans receivable, guaranteed by company						(1,156)						(1,421)						(680)						(122)						(7)
Loans receivable, net, guaranteed by company(2)						$	6,266					$	8,701					$	1,558					$	60					$	18
Combined Loans Receivable(3):
Combined loans receivable – principal, current						$	394,694					$	355,509					$	374,115					$	331,396					$	372,085
Combined loans receivable – principal, past due						19,034						21,668						25,707						21,693						27,235
Combined loans receivable – principal						413,728						377,177						399,822						353,089						399,320
Combined loans receivable – finance charges						26,156						24,796						25,647						21,415						19,161
Combined loans receivable						$	439,884					$	401,973					$	425,469					$	374,504					$	418,481
Combined Loan Loss Reserve(3):
Allowance for loan losses on loans receivable, company owned						$	(59,438)					$	(49,909)					$	(48,399)					$	(39,037)					$	(40,314)
Liability for losses on loans receivable, guaranteed by company						(1,156)						(1,421)						(680)						(122)						(7)
Combined loan loss reserve						$	(60,594)					$	(51,330)					$	(49,079)					$	(39,159)					$	(40,321)
Combined loans receivable – principal, past due(3)						$	19,034					$	21,668					$	25,707					$	21,693					$	27,235
Combined loans receivable – principal(3)						$	413,728					$	377,177					$	399,822					$	353,089					$	399,320
Percentage past due(1)						5		%				6		%				6		%				6		%				7		%
Combined loan loss reserve as a percentage of combined loans receivable(3)(4)						14		%				13		%				12		%				10		%				10		%
Allowance for loan losses as a percentage of loans receivable – company owned						14		%				13		%				11		%				10		%				10		%

_________ 

(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.

 

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COMPONENTS OF OUR RESULTS OF OPERATIONS

Revenues

Our revenues are composed of Rise finance charges and CSO fees (inclusive of finance charges attributable to the participation in Rise installment loans originated by FinWise Bank and CCB), cash advance fees attributable to the participation in Elastic lines of credit that we consolidate, finance charges and fee revenues related to the Today Card credit card product, and marketing and licensing fees received from third-party lenders related to the Rise, Rise CSO, Elastic, and Today Card products. See “—Overview” above for further information on the structure of Elastic.

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 advertising 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 and automated clearing house (“ACH”) transaction costs associated with customer loan funding and payments.

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 include 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 installment loans, the ESPV Facility related to the Elastic lines of credit and related Elastic SPV entity, and the EF SPV and EC SPV Facilities that fund Rise installment loans originated by FinWise Bank and CCB, respectively. Interest expense also includes any amortization of deferred debt issuance cost and prepayment penalties incurred associated with the debt facilities.

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STATEMENTS OF OPERATIONS

The following table sets forth our condensed consolidated statements of operations data for each of the periods indicated. Effective June 29, 2020, ECIL was placed into administration in the UK, and we deconsolidated ECIL and present it as discontinued operations for all periods presented.

						Three Months Ended June 30,												Six Months Ended June 30,
Condensed consolidated statements of operations data (Dollars in thousands)						2021						2020						2021						2020
Revenues						$	84,540					$	117,991					$	174,273					$	280,458
Cost of sales:
Provision for loan losses						27,225						41,477						48,195						120,052
Direct marketing costs						10,564						344						14,947						11,313
Other cost of sales						2,905						1,607						4,952						4,277
Total cost of sales						40,694						43,428						68,094						135,642
Gross profit						43,846						74,563						106,179						144,816
Operating expenses:
Compensation and benefits						18,585						16,844						37,593						40,318
Professional services						8,659						8,471						15,738						16,397
Selling and marketing						710						904						1,243						1,858
Occupancy and equipment						5,289						4,843						10,245						9,479
Depreciation and amortization						4,552						4,529						9,795						8,825
Other						811						907						1,586						1,978
Total operating expenses						38,606						36,498						76,200						78,855
Operating income						5,240						38,065						29,979						65,961
Other expense:
Net interest expense						(8,567)						(12,177)						(17,353)						(25,833)
Non-operating income (loss)						510						(1,422)						717						(5,685)
Total other expense						(8,057)						(13,599)						(16,636)						(31,518)
Income (loss) from continuing operations before taxes						(2,817)						24,466						13,343						34,443
Income tax expense						228						8,373						3,672						10,428
Net income (loss) from continuing operations						(3,045)						16,093						9,671						24,015
Net loss from discontinued operations						—						(7,540)						—						(20,373)
Net income (loss)						$	(3,045)					$	8,553					$	9,671					$	3,642

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						Three Months Ended June 30,												Six Months Ended June 30,
As a percentage of revenues						2021						2020						2021						2020
Revenues
Cost of sales:
Provision for loan losses						32		%				35		%				28		%				43		%
Direct marketing costs						12						—						9						4
Other cost of sales						3						1						3						2
Total cost of sales						48						37						39						48
Gross profit						52						63						61						52
Operating expenses:
Compensation and benefits						22						14						22						14
Professional services						10						7						9						6
Selling and marketing						1						1						1						1
Occupancy and equipment						6						4						6						3
Depreciation and amortization						5						4						6						3
Other						1						1						1						1
Total operating expenses						46						31						44						28
Operating income						6						32						17						24
Other expense:
Net interest expense						(10)						(10)						(10)						(9)
Non-operating income (loss)						1						(1)						—						(2)
Total other expense						(10)						(12)						(10)						(11)
Income (loss) from continuing operations before taxes						(3)						21						8						12
Income tax expense						—						8						2						4
Net income (loss) from continuing operations						(4)						14						6						9
Net loss from discontinued operations						—						(6)						—						(7)
Net income (loss)						(4)		%				7		%				6		%				1		%

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Comparison of the three months ended June 30, 2021 and 2020

Revenues 

						Three Months Ended June 30,
						2021												2020												Period-to-period change
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Finance charges						$	83,714					99		%				$	117,803					100		%				$	(34,089)					(29)		%
Other						826						1						188						—						638						339
Revenues						$	84,540					100		%				$	117,991					100		%				$	(33,451)					(28)		%

Revenues decreased by $33.5 million, or 28%, from $118.0 million for the three months ended June 30, 2020 to $84.5 million for the three months ended June 30, 2021. Total revenue from both the Rise and Elastic products decreased for the three months ended June 30, 2021 compared to the same time period in 2020. This decrease was partially offset by an increase in total revenue for the Today Card due to the growth of this portfolio over the past year.

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

						Three Months Ended June 30, 2021
						Rise(1)						Elastic						Today
(Dollars in thousands)						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Average combined loans receivable – principal(2)						$	204,625					$	133,629					$	17,726					$	355,980
Effective APR						100		%				95		%				29		%				94		%
Finance charges						$	50,834					$	31,618					$	1,262					$	83,714
Other						199						111						516						826
Total revenue						$	51,033					$	31,729					$	1,778					$	84,540
						Three Months Ended June 30, 2020
						Rise(1)						Elastic						Today
(Dollars in thousands)						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Average combined loans receivable – principal(2)						$	273,898					$	185,626					$	7,170					$	466,694
Effective APR						110		%				90		%				27		%				101		%
Finance charges						$	75,533					$	41,777					$	493					$	117,803
Other						9						5						174						188
Total revenue						$	75,542					$	41,782					$	667					$	117,991

 ________

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

(2) 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 combined loans receivable - principal decreased $111 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. This decrease in average balance is primarily due to reductions in the Rise and Elastic loan origination volume due to the impacts of the COVID-19 pandemic and substantial government assistance to our customers, which reduced their need for loans. The decrease in average balances accounted for approximately $29 million of the reduction in revenue for the period. Our average APR declined from 101% for the three months ended June 30, 2020 to 94% for the three months ended June 30, 2021. This reduction in the effective APR is due to the lower effective interest rates earned on loans in a deferral status under the payment flexibility tools that were implemented in response to the COVID-19 pandemic coupled with reduced new customer loan originations which generally have a higher effective APR. The lower effective APR accounted for approximately $5 million of the reduction in revenue for the period. We expect the overall effective APR of the loan portfolio will continue to slightly decline as more loans are originated at near-prime rates, such as the Today Card.

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Cost of sales

						Three Months Ended June 30,																								Period-to-period change
						2021												2020
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Cost of sales:
Provision for loan losses						$	27,225					32		%				$	41,477					35		%				$	(14,252)					(34)		%
Direct marketing costs						10,564						12						344						—						10,220						2,971
Other cost of sales						2,905						3						1,607						1						1,298						81
Total cost of sales						$	40,694					48		%				$	43,428					37		%				$	(2,734)					(6)		%

Provision for loan losses.    Provision for loan losses decreased by $14.3 million, or 34%, from $41.5 million for the three months ended June 30, 2020 to $27.2 million for the three months ended June 30, 2021.

The tables below break out these changes by loan product:

						Three Months Ended June 30, 2021
						Rise						Elastic						Today
(Dollars in thousands)						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Combined loan loss reserve(1):
Beginning balance						$	26,592					$	10,749					$	1,818					$	39,159
Net charge-offs						(19,349)						(5,831)						(883)						(26,063)
Provision for loan losses						20,856						5,454						915						27,225
Ending balance						$	28,099					$	10,372					$	1,850					$	40,321
Combined loans receivable(1)(2)						$	244,389					$	152,605					$	21,487					$	418,481
Combined loan loss reserve as a percentage of ending combined loans receivable						11		%				7		%				9		%				10		%
Net charge-offs as a percentage of revenues						38		%				18		%				50		%				31		%
Provision for loan losses as a percentage of revenues						41		%				17		%				51		%				32		%

						Three Months Ended June 30, 2020
						Rise						Elastic						Today
(Dollars in thousands)						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Combined loan loss reserve(1):
Beginning balance						$	51,707					$	25,145					$	908					$	77,760
Net charge-offs						(38,100)						(20,120)						(423)						(58,643)
Provision for loan losses						27,007						13,579						891						41,477
Ending balance						$	40,614					$	18,604					$	1,376					$	60,594
Combined loans receivable(1)(2)						$	260,384					$	171,196					$	8,304					$	439,884
Combined loan loss reserve as a percentage of ending combined loans receivable						16		%				11		%				17		%				14		%
Net charge-offs as a percentage of revenues						50		%				48		%				63		%				50		%
Provision for loan losses as a percentage of revenues						36		%				32		%				134		%				35		%

 _________

(1) 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.

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

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Total loan loss provision for the three months ended June 30, 2021 was 32% of revenues, which was below our targeted range of 45% to 55%, and lower than the 35% for the three months ended June 30, 2020. For the three months ended June 30, 2021, net charge-offs as a percentage of revenues decreased to 31% compared to 50% in the prior year period. We continue to monitor the portfolio during the economic recovery from COVID-19 and continue to adjust our underwriting and credit policies to mitigate any potential negative impacts. In the near-term, we expect that net charge-offs as a percentage of revenues will continue to trend lower than our targeted range of 45% to 55% of revenue. In the long-term (as the economy reopens post-COVID-19) as loan demand returns and the loan portfolio continues to grow during the second half of 2021, we expect to manage our total loan loss provision as a percentage of revenues to continue to remain within our targeted range.

The combined loan loss reserve as a percentage of combined loans receivable totaled 10% and 14% as of June 30, 2021 and June 30, 2020, respectively. This year-over-year decrease reflects the continued strong credit performance of the portfolio. Past due loan balances at June 30, 2021 were 7% of total combined loans receivable - principal, up from 5% from a year ago but have remained relatively flat over the past year, attributable to the COVID-19 payment flexibility tools. We are continuing to see that customers are meeting their scheduled payments once they exit the payment deferral program as evidenced by our low delinquency rate as of June 30, 2021 which has remained relatively flat over the past year. We anticipate the combined loan loss reserve as a percentage of combined loans receivable will move toward historic norms as we continue to grow our loan portfolio.

Direct marketing costs.    Direct marketing costs increased by $10.2 million, or 2,971%, from $0.3 million for the three months ended June 30, 2020 to $10.6 million for the three months ended June 30, 2021. We had limited marketing activities and new loan origination volume in the second quarter of 2020 in the immediate response to the COVID-19 pandemic. We have seen a return to more normalized new customer acquisition in all three products in the second quarter as the economy continues to recover from the COVID-19 pandemic and demand for our loan products return. For the three months ended June 30, 2021, the number of new customers acquired increased to 38,986 compared to 2,815 during the three months ended June 30, 2020. We anticipate our direct marketing costs will return to normalized pre-COVID 19 levels as demand for our loan products continues to grow during the remainder of the year. Our CAC was higher in the second quarter of 2021 at $271 as compared to the second quarter of 2020 at $122, with the second quarter of 2020 not reflective of our historical CAC due to the significant reduction in marketing activity and new loan originations due to the COVID-19 pandemic. We believe our CAC in future quarters will continue to remain within or below our target range of $250 to $300 as we continue to optimize the efficiency of our marketing channels and continue to grow the Today Card which successfully generated new customers at a sub-$100 CAC

Other cost of sales.    Other cost of sales increased by $1.3 million, or 81%, from $1.6 million for the three months ended June 30, 2020 to $2.9 million for the three months ended June 30, 2021 due to increased data verification costs resulting from increased loan origination volume in the second quarter of 2021.

Operating expenses

						Three Months Ended June 30,																								Period-to-period change
						2021												2020
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Operating expenses:
Compensation and benefits						$	18,585					22		%				$	16,844					14		%				$	1,741					10		%
Professional services						8,659						10						8,471						7						188						2
Selling and marketing						710						1						904						1						(194)						(21)
Occupancy and equipment						5,289						6						4,843						4						446						9
Depreciation and amortization						4,552						5						4,529						4						23						1
Other						811						1						907						1						(96)						(11)
Total operating expenses						$	38,606					46		%				$	36,498					31		%				$	2,108					6		%

Compensation and benefits.    Compensation and benefits increased by $1.7 million, or 10%, from $16.8 million for the three months ended June 30, 2020 to $18.6 million for the three months ended June 30, 2021. This primarily resulted from a reduction in our 2020 short-term incentive compensation accrual during the second quarter of 2020 as a result of an operating expense reduction plan we implemented in the second and third quarters of 2020 in response to the pandemic.

Professional services.     Professional services increased by $0.2 million, or 2%, from $8.5 million for the three months ended June 30, 2020 to $8.7 million for the three months ended June 30, 2021 due to increased legal expenses, partially offset by decreased board stock-based compensation expense due to the departure of a board member in July 2020.

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Selling and marketing.    Selling and marketing decreased by $0.2 million, or 21%, from $0.9 million for the three months ended June 30, 2020 to $0.7 million for the three months ended June 30, 2021 primarily due to decreased marketing agency fees.

Occupancy and equipment.    Occupancy and equipment increased by $0.4 million, or 9%, from $4.8 million for the three months ended June 30, 2020 to $5.3 million for the three months ended June 30, 2021 primarily due to increased web hosting expenses, partially offset by decreased rent and license expenses.

Depreciation and amortization.     Depreciation and amortization was $4.5 million for both the three months ended June 30, 2020 and 2021 as our additions to capitalized projects have been relatively flat over the past two years resulting in a consistent depreciation and amortization expense.

Other.    Other operating expenses decreased by $0.1 million, or 11%, from $0.9 million for the three months ended June 30, 2020 to $0.8 million for the three months ended June 30, 2021 primarily due to decreased dues, subscriptions, and supplies, partially offset by an increase in travel, meals and entertainment expenses.

Net interest expense

						Three Months Ended June 30,																								Period-to-period change
						2021												2020
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Net interest expense						$	8,567					10		%				$	12,177					10		%				$	(3,610)					(30)		%

Net interest expense decreased 30% during the three months ended June 30, 2021 as compared to the prior year period. Our average balance of notes payable outstanding under the debt facilities in the second quarter of 2021 decreased $118 million from the second quarter of 2020 due to debt paydowns associated with a decrease in the loan portfolio due to COVID-19, as well as the maturity of one of our term notes. This year-over-year reduction resulted in a decrease in interest expense of approximately $2.9 million. In addition, our average effective interest rate on notes payable outstanding has decreased from 10.6% for the three months ended June 30, 2020 to 10.0% for the three months ended June 30, 2021, resulting in a decrease in interest expense of approximately $0.7 million.

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

						Three Months Ended June 30,
(Dollars in thousands)						2021						2020
VPC Facility
Average facility balance during the period						$	74,754					$	157,715
Net interest expense						1,854						4,276
Effective cost of funds						10.0		%				10.9		%
ESPV Facility
Average facility balance during the period						$	159,600					$	202,357
Net interest expense						4,060						5,239
Effective cost of funds						10.2		%				10.4		%
EF SPV Facility
Average facility balance during the period						$	77,492					101,742
Net interest expense						1,850						2,662
Effective cost of funds						9.6		%				10.5		%
EC SPV Facility
Average facility balance during the period						$	31,923					$	—
Net interest expense						803						—
Effective cost of funds						10.1		%				—		%

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Non-operating income (loss)

For the three months ended June 30, 2020, we accrued a $1.4 million estimated indemnification obligation related to a legal matter for a former executive of the Company. As of March 31, 2021, the indemnification obligation was paid and no further accrual remains. For the three months ended June 30, 2021, we received a partial recovery of the indemnification obligation paid, resulting in non-operating income of $0.5 million.

Income tax expense

						Three Months Ended June 30,																								Period-to-period change
						2021												2020
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Income tax expense						$	228					—		%				$	8,373					8		%				$	(8,145)					(97)		%

Our income tax expense decreased $8.1 million, from $8.4 million for the three months ended June 30, 2020 to $0.2 million for the three months ended June 30, 2021. Our effective tax rates for continuing operations for the three months ended June 30, 2021 and 2020, including discrete items of $0.3 million and $1.2 million, respectively, were (8.1%) and 34.2%, respectively. Our effective tax rate differed from the standard corporate federal income tax rate of 21% due to permanent non-deductible items and corporate state tax obligations in the states where we have lending activities and true-up of our effective tax rate (excluding discrete items) used in the first quarter of 2021 from 21% to 24%. Our cash effective tax rate was approximately 2.1% for the second quarter of 2021.

Net loss from discontinued operations

Our loss from discontinued operations on our UK entity (ECIL) for the three months ended June 30, 2020 consists of an investment loss of $27.3 million, UK operating losses of $3.2 million and other liability accruals of $1.2 million, partially offset by an income tax benefit of $24.2 million.

Net income (loss)

						Three Months Ended June 30,																								Period-to-period change
						2021												2020
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Net income (loss)						$	(3,045)					(4)		%				$	8,553					7		%				$	(11,598)					136		%

Our net income (loss) decreased $11.6 million or 136% from $8.6 million net income for the three months ended June 30, 2020 to a $3.0 million net loss for the three months ended June 30, 2021 resulting from increased loan loss provision associated with increased loan originations and increased direct marketing expense on new customer acquisitions as our loan portfolio returns to growth mode.

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Comparison of the six months ended June 30, 2021 and 2020

Revenues

 

						Six Months Ended June 30,
						2021												2020												Period-to-period change
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Finance charges						$	172,937					99		%				$	279,882					100		%				$	(106,945)					(38)		%
Other						1,336						1						576						—						760						132
Revenues						$	174,273					100		%				$	280,458					100		%				$	(106,185)					(38)		%

Revenues decreased by $106.2 million, or 38%, from $280.5 million for the six months ended June 30, 2020 to $174.3 million for the six months ended June 30, 2021. Both Rise and Elastic products had decreased total revenue in the first six months of 2021 compared to the first six months of 2020.

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

						Six Months Ended June 30, 2021
						Rise(1)						Elastic						Today
(Dollars in thousands)						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Average combined loans receivable – principal(2)						$	211,115					$	140,309					$	15,941					$	367,365
Effective APR						100		%				95		%				30		%				95		%
Finance charges						$	104,576					$	65,988					$	2,373					$	172,937
Other						261						161						914						1,336
Total revenue						$	104,837					$	66,149					$	3,287					$	174,273
						Six Months Ended June 30, 2020
						Rise(1)						Elastic						Today
(Dollars in thousands)						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Average combined loans receivable – principal(2)						$	306,581					$	212,457					$	5,894					$	524,932
Effective APR						117		%				95		%				30		%				107		%
Finance charges						$	179,038					$	99,952					$	892					$	279,882
Other						108						176						292						576
Total revenue						$	179,146					$	100,128					$	1,184					$	280,458

 _________

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

(2) 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 combined loans receivable principal decreased $158 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. This decrease in average balance is primarily due to reductions in the Rise and Elastic loan origination volume due to the impacts of the COVID-19 pandemic and substantial government assistance to our customers. The decrease in average balances accounted for approximately $80 million of the reduction in revenue for the period. For the six months ended June 30, 2021 and 2020, the average effective APR for the portfolio was 95% and 107%, respectively. This reduction in the effective APR is due to the lower effective interest rates earned on loans in a deferral status under the payment flexibility tools that were implemented in response to the COVID-19 pandemic coupled with reduced new customer loan originations which generally have a higher effective APR. The lower effective APR accounted for approximately $26 million of the reduction in revenue for the period. The overall effective APR of the loan portfolio will continue to slightly decline as more loans are originated at near-prime rates, such as the Today Card.

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Cost of sales

 

						Six Months Ended June 30,																								Period-to-period change
						2021												2020
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Cost of sales:
Provision for loan losses						$	48,195					28		%				$	120,052					43		%				$	(71,857)					(60)		%
Direct marketing costs						14,947						9						11,313						4						3,634						32
Other cost of sales						4,952						3						4,277						2						675						16
Total cost of sales						$	68,094					39		%				$	135,642					48		%				$	(67,548)					(50)		%

Provision for loan losses.    Provision for loan losses decreased by $71.9 million, or 60%, from $120.1 million for the six months ended June 30, 2020 to $48.2 million for the six months ended June 30, 2021.

The tables below break out these changes by loan product:

						Six Months Ended June 30, 2021
						Rise						Elastic						Today
(Dollars in thousands)						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Combined loan loss reserve(1):
Beginning balance						$	33,968					$	13,201					$	1,910					$	49,079
Net charge-offs						(42,023)						(13,374)						(1,556)						(56,953)
Provision for loan losses						36,154						10,545						1,496						48,195
Ending balance						$	28,099					$	10,372					$	1,850					$	40,321
Combined loans receivable(1)(2)						$	244,389					$	152,605					$	21,487					$	418,481
Combined loan loss reserve as a percentage of ending combined loans receivable						11		%				7		%				9		%				10		%
Net charge-offs as a percentage of revenues						40		%				20		%				47		%				33		%
Provision for loan losses as a percentage of revenues						34		%				16		%				46		%				28		%

						Six Months Ended June 30, 2020
						Rise						Elastic						Today
(Dollars in thousands)						(Installment Loans)						(Lines of Credit)						(Credit Card)						Total
Combined loan loss reserve(1):
Beginning balance						$	52,099					$	28,852					$	1,041					$	81,992
Net charge-offs						(93,061)						(47,324)						(1,065)						(141,450)
Provision for loan losses						81,576						37,076						1,400						120,052
Ending balance						$	40,614					$	18,604					$	1,376					$	60,594
Combined loans receivable(1)(2)						$	260,384					$	171,196					$	8,304					$	439,884
Combined loan loss reserve as a percentage of ending combined loans receivable						16		%				11		%				17		%				14		%
Net charge-offs as a percentage of revenues						52		%				47		%				90		%				50		%
Provision for loan losses as a percentage of revenues						46		%				37		%				118		%				43		%

 _________

(1) 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.

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

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Total loan loss provision for the six months ended June 30, 2021 was 28% of revenues, which was below our targeted range of 45% to 55%, and lower than the 43% for the six months ended June 30, 2020. For the six months ended June 30, 2021, net charge-offs as a percentage of revenues decreased to 33% compared to 50% in the prior year period. We continue to monitor the portfolio during this economic crisis resulting from COVID-19 and continue to adjust our underwriting and credit policies to mitigate any potential negative impacts. In the near-term, we expect that net charge-offs as a percentage of revenues will continue to trend lower than our targeted range of 45% to 55% of revenue. In the long-term (as the economy reopens post-COVID-19), we expect to manage our total loan loss provision as a percentage of revenues to continue to remain within our targeted range as our loan portfolio continues to grow.

The combined loan loss reserve as a percentage of combined loans receivable totaled 10% and 14% as of June 30, 2021 and June 30, 2020, respectively. This year-over-year decrease reflects the continued strong credit performance of the portfolio. Past due loan balances at June 30, 2021 were 7% of total combined loans receivable - principal, up from 5% from a year ago but have remained relatively flat over the past year, which is attributable to the COVID-19 payment flexibility tools. We are continuing to see that customers are meeting their scheduled payments once they exit the payment deferral program as evidenced by our low delinquency rate at June 30, 2021 which has remained relatively flat over the past year. We anticipate the combined loan loss reserve as a percentage of combined loans receivable will move toward historic norms as we continue to grow our loan portfolio.

Direct marketing costs.    Direct marketing costs increased by $3.6 million, or 32%, from $11.3 million for the six months ended June 30, 2020 to $14.9 million for the six months ended June 30, 2021. We had limited marketing activities and new loan origination volume in the second quarter of 2020 in the immediate response to the COVID-19 pandemic. We have seen a return to more normalized new customer acquisition in all three loan products in the second quarter as the economy continues to recover from the COVID-19 pandemic and demand for our loan products returns. For the six months ended June 30, 2021, the number of new customers acquired increased to 52,876 compared to 38,565 during the six months ended June 30, 2020. We anticipate our direct marketing costs will continue to increase in the future as demand for our products continues to grow during the remainder of the year. Our CAC was lower for the six months ended June 30, 2021 at $283 as compared to the six months ended June 30, 2020 at $293, with the second quarter of 2020 not reflective of our historical CAC due to the significant reduction in marketing activity and new loan originations due to the COVID-19 pandemic. We believe our CAC in future quarters will continue to remain within or below our target range of $250 to $300 as we continue to optimize the efficiency of our marketing channels and continue to grow the Today Card which successfully generated new customers at a sub-$100 CAC.

Other cost of sales.    Other cost of sales increased by $0.7 million, or 16%, from $4.3 million for the six months ended June 30, 2020 to $5.0 million for the six months ended June 30, 2021 primarily due to increased data verification costs resulting from increased loan origination volume, partially offset by decreased program expenses.

Operating expenses

						Six Months Ended June 30,																								Period-to-period change
						2021												2020
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Operating expenses:
Compensation and benefits						$	37,593					22		%				$	40,318					14		%				$	(2,725)					(7)		%
Professional services						15,738						9						16,397						6						(659)						(4)
Selling and marketing						1,243						1						1,858						1						(615)						(33)
Occupancy and equipment						10,245						6						9,479						3						766						8
Depreciation and amortization						9,795						6						8,825						3						970						11
Other						1,586						1						1,978						1						(392)						(20)
Total operating expenses						$	76,200					44		%				$	78,855					28		%				$	(2,655)					(3)		%

Compensation and benefits.    Compensation and benefits decreased by $2.7 million, or 7%, from $40.3 million for the six months ended June 30, 2020 to $37.6 million for the six months ended June 30, 2021. This primarily resulted from a reduction in our 2020 short-term incentive compensation accrual during the second quarter of 2020 as a result of an operating expense reduction plan we implemented in the second and third quarters of 2020 in response to the pandemic.

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Professional services.     Professional services decreased by $0.7 million, or 4%, from $16.4 million for the six months ended June 30, 2020 to $15.7 million for the six months ended June 30, 2021 due to decreased board stock-based compensation expense due to the departure of a board member in July 2020, and other outside services, partially offset by increased legal expenses.

Selling and marketing.    Selling and marketing decreased by $0.6 million, or 33%, from $1.9 million for the six months ended June 30, 2020 to $1.2 million for the six months ended June 30, 2021 primarily due to decreased marketing agency fees.

Occupancy and equipment.    Occupancy and equipment increased by $0.8 million, or 8%, from $9.5 million for the six months ended June 30, 2020 to $10.2 million for the six months ended June 30, 2021 primarily due to increased web hosting expense, partially offset by a decrease in additional licenses expense.

Depreciation and amortization.     Depreciation and amortization increased by $1.0 million, or 11%, from $8.8 million for the six months ended June 30, 2020 to $9.8 million for the six months ended June 30, 2021 primarily due to the acceleration of a board member's non-compete agreement of $0.6 million with relatively flat depreciation expense between the two years.

Other.    Other operating expenses decreased by $0.4 million, or 20%, from $2.0 million for the six months ended June 30, 2020 to $1.6 million for the six months ended June 30, 2021 primarily due to decreased travel, meals and entertainment expenses.

Net interest expense

						Six Months Ended June 30,																								Period-to-period change
						2021												2020
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Net interest expense						$	17,353					10		%				$	25,833					9		%				$	(8,480)					(33)		%

Net interest expense decreased 33% during the six months ended June 30, 2021 as compared to the prior year period. Our average balance of notes payable outstanding under the debt facilities in the first six months of 2021 decreased $147.4 million from the first six months of 2020 due to debt paydowns associated with a decrease in the loan portfolio due to COVID-19, as well as the maturity of one of our term notes. This year-over-year reduction resulted in a decrease in interest expense of approximately $7.4 million. In addition, our average effective interest rate on notes payable outstanding has decreased from 10.5% for the six months ended June 30, 2020 to 10.1% for the six months ended June 30, 2021, resulting in a decrease in interest expense of approximately $1.1 million.

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

						Six Months Ended June 30,
(Dollars in thousands)						2021						2020
VPC Facility
Average facility balance during the period						$	81,717					$	176,896
Net interest expense						4,133						9,488
Effective cost of funds						10.2		%				10.8		%
ESPV Facility
Average facility balance during the period						$	160,261					$	213,643
Net interest expense						8,109						11,045
Effective cost of funds						10.2		%				10.4		%
EF SPV Facility
Average facility balance during the period						$	76,464					104,585
Net interest expense						3,633						5,300
Effective cost of funds						9.6		%				10.2		%
EC SPV Facility
Average facility balance during the period						$	29,254					$	—
Net interest expense						1,468						—
Effective cost of funds						10.1		%				—		%

In July 2020, we entered into a new facility, the EC SPV Facility. As of June 30, 2021, we have drawn $35 million on the EC SPV facility. Per the terms of the February 2019 amendments and the July 31, 2020 EC SPV agreement, we qualified for a 25 bps rate reduction on the VPC, ESPV, EF SPV and EC SPV facilities effective January 1, 2021.

Non-operating income (loss)

As of June 30, 2020, we had accrued a $5.7 million estimated indemnification obligation related to a legal matter for a former executive of the Company. As of June 30, 2021, the indemnification obligation was paid and no further accrual remains. For the six months ended June 30, 2021, we received a partial recovery of an indemnification payment we made related to a lawsuit for $0.5 million and also recognized a gain on the sale of an intangible asset of $0.9 million, partially offset by an impairment loss related to a subleased asset of $0.7 million, resulting in non-operating income of $0.7 million

Income tax expense

						Six Months Ended June 30,																								Period-to-period change
						2021												2020
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Income tax expense						$	3,672					2		%				$	10,428					4		%				$	(6,756)					(65)		%

Our income tax expense decreased $6.8 million, from $10.4 million for the six months ended June 30, 2020 to $3.7 million for the six months ended June 30, 2021. Our effective tax rates for continuing operations for the six months ended June 30, 2021 and 2020, including discrete tax expense items of $0.3 million and $1.2 million, respectively, were 27.5% and 30.3%, respectively. Our effective tax rates are different from the standard corporate federal income tax rate of 21% due to permanent non-deductible items and corporate state tax obligations in the states where we have lending activities. Our cash effective tax rate was approximately 2.1% for the first six months of 2021.

Net loss from discontinued operations

Our loss from discontinued operations on our UK entity (ECIL) consists of an investment loss of $27.3 million, UK operating losses of $6.8 million for the first six months of 2020, and a goodwill impairment loss of $9.3 million and other liability accruals of $1.2 million, partially offset by an income tax benefit of $24.2 million.

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Net income

						Six Months Ended June 30,																								Period-to-period change
						2021												2020
(Dollars in thousands)						Amount						Percentage of revenues						Amount						Percentage of revenues						Amount						Percentage
Net income						$	9,671					6		%				$	3,642					1		%				$	6,029					166		%

Our net income of $9.7 million for the six months ended June 30, 2021 was up $6.0 million from the six months ended June 30, 2020 due to eliminating the discontinued operations of the UK which resulted in a loss of $20.4 million in 2020 and offset by a decrease in net income from continuing operations of $14.3 million resulting from loan loss provision associated with increased loan originations and increased direct marketing expense on new customer acquisition.

LIQUIDITY AND CAPITAL RESOURCES

As previously discussed, we are closely monitoring the impacts of the COVID-19 pandemic across our business, including the resulting uncertainties around customer demand, credit performance of the loan portfolio, our levels of liquidity and our ongoing compliance with debt covenants. We had cash and cash equivalents available of $110 million as of June 30, 2021 compared to cash and cash equivalents available of $201 million as of December 31, 2020, a decrease of $91 million, primarily due to debt payments. Our principal debt payment obligation of $18.1 million was paid off in January 2021 prior to its maturity in February 2021, and there are no additional required principal payments on our outstanding debt until January 2024. Throughout the first and second quarter, we have made additional net paydowns on the debt facilities of approximately $70 million. As we are experiencing increased demand for the loan products resulting in increased origination volume, we are drawing down on our available debt facilities to fund the loan portfolio growth. While the ultimate impact of COVID-19 on our business, financial condition, liquidity and results of operations is dependent on future developments which are highly uncertain, we believe that our actions taken to date, future cash provided by operating activities, availability under our debt facilities with VPC, and possibly the capital markets, as well as certain potential measures within our control that could be put in place to maintain a sound financial position and liquidity will provide adequate resources to fund our operating and financing needs. We are continuing to assess minimum cash and liquidity requirements and implementing measures to ensure that our strong liquidity position is maintained through the current economic cycle created by the COVID-19 pandemic. We principally rely on our working capital and our credit facility with VPC to fund the loans we make to our customers.

Stock Repurchase Program

At June 30, 2021, we had an outstanding stock repurchase program authorized by our Board of Directors providing for the repurchase of up to $55 million of our common stock through July 31, 2024, inclusive of a $25 million increase to the plan authorized by the Board of Directors in January 2021. During the second quarter of 2021, we purchased 2.3 million common shares, roughly 7% of common shares outstanding at the beginning of the quarter, for a total of $8.0 million or $3.40 weighted average cost per share under our previously approved common stock repurchase program with $13.1 million available for further repurchases. As of June 30, 2021, we had repurchased approximately 28% of all common shares issued and outstanding since August 2019 under this common stock repurchase program.

The amended stock repurchase program provides that up to a maximum aggregate amount of $25 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 product and provide working capital. The VPC Facility has been amended several times, with the most recent amendment effective July 31, 2020, to decrease the maximum total borrowing amount available and other terms of the VPC Facility.

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The VPC facility has a maximum borrowing amount of $200 million (amended as of July 31, 2020) used to fund the Rise loan portfolio (“US Term Note”). 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%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). At December 31, 2020, the weighted average base rate on the outstanding balance was 2.73% and the overall interest rate was 9.98%. At June 30, 2021, the weighted average base rate on the outstanding balance was 2.73% and the overall interest rate was 9.73%. 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 7.0% at the borrowing date. The VPC facility 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 under the VPC Facility until the maturity date of the US Term Note. In January 2021, we paid down approximately $21 million, or 20%, of the current outstanding debt on the VPC Facility under the revolving feature noted above. The remaining outstanding debt on the US Term Note matures 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, 2021.

The VPC Facility previously included a term note (the "4th Tranche Term Note") used to fund working capital with a maximum borrowing amount of $18 million and a base rate of 2.73% plus 13%. The interest rate at December 31, 2020 was 15.73%. In January 2021, we paid off this term note prior to its maturity on February 1, 2021.

ESPV Facility

ESPV Facility Term Note

The ESPV Facility has a maximum borrowing amount of $350 million to be used to purchase loan participations from a third-party lender. 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 was set at 10.23% (base rate of 2.73% plus 7.5%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). At December 31, 2020 the weighted average base rate on the outstanding balance was 2.72% and the overall interest rate was 9.97%. At June 30, 2021, the weighted average base rate on the outstanding balance was 2.72% and the overall interest rate was 9.72%. 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 7.0% at the borrowing date. 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. In January 2021, we paid down approximately $40 million, or 20%, of the current outstanding debt balance on the ESPV Facility under the revolving feature. The remaining outstanding debt on the ESPV Term Note matures on January 1, 2024.

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 related to the ESPV facility as of June 30, 2021.

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EF SPV Facility

EF SPV Facility Term Note

The EF SPV Facility has a maximum borrowing amount of $250 million (amended as of July 31, 2020) to be used to purchase Rise installment loan participations from a third-party bank, FinWise Bank. 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%, which was reduced to 7.25% and 7.00% on January 1, 2020 and 2021, respectively, as part of the amendment). The weighted average base rate on the outstanding balance at December 31, 2020 was 2.45% and the overall interest rate was 9.70%. The weighted average base rate on the outstanding balance at June 30, 2021 was 2.29% and the overall interest rate was 9.29%. 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 7.0% at the borrowing date. 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. In January 2021, we paid down approximately $19 million, or 20%, of the current outstanding debt balance on the EF SPV Facility under the revolving feature. The remaining outstanding debt on the EF SPV Term Note matures on 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 related to the EF SPV facility as of June 30, 2021.

EC SPV Facility

EC SPV Facility Term Note

VPC entered into a new debt facility with EC SPV on July 31, 2020. The EC SPV Facility has a maximum borrowing amount of $100 million used to purchase Rise installment loan participations from a third-party bank, Capital Community Bank. The weighted average base rate on the outstanding balance at December 31, 2020 was 2.73% and the overall interest rate was 9.98%. The weighted average base rate on the outstanding balance at June 30, 2021 was 2.73% and the overall interest rate was 9.73%. 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 7.0% at the borrowing date. The EC 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 EC SPV Term Note matures on January 1, 2024. There are no principal payments due or scheduled until the maturity date. All of our assets and EC SPV are pledged as collateral to secure the EC SPV Facility. The EC SPV Facility contains certain covenants for us 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. We were in compliance with all covenants related to the EC SPV facility as of June 30, 2021.

Outstanding Notes Payable

The outstanding balances of notes payable as of June 30, 2021 and December 31, 2020 are as follows:

(Dollars in thousands)						June 30, 2021						December 31, 2020
US Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)						$	68,600					$	104,500
4th Tranche Term Note bearing interest at the base rate + 13%						—						18,050
ESPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)						159,600						199,500
EF SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)						89,800						93,500
EC SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)						35,000						25,000
Total						$	353,000					$	440,550

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The change in the facility balances includes the following:

•US Term Note - Paydowns of $25.9 million and $10 million in the first and second quarter of 2021, respectively;

•4th Tranche Term Note - Debt obligation of $18.1 million paid off in the first quarter of 2021;

•ESPV Term Note - Paydown of $39.9 million in the first quarter of 2021;

•EF SPV Term note - Paydown of $18.7 million in the first quarter of 2021 and a draw of $15 million in the second quarter of 2021; and

•EC SPV Term Note - Draws of $5 million and $5 million in the first and second quarter of 2021, respectively .

The following table presents the future debt maturities as of June 30, 2021:

Year (dollars in thousands)						June 30, 2021
Remainder of 2021						$	—
2022						—
2023						—
2024						353,000
2025						—
Thereafter						—
Total						$	353,000

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)																		2021						2020
Cash and cash equivalents																		$	105,782					$	167,735
Restricted cash																		3,862						2,135
Loans receivable, net																		378,142						373,024
Cash provided by (used in):
Operating activities - continuing operations																		66,687						131,244
Investing activities - continuing operations																		(51,344)						61,077
Financing activities - continuing operations																		(106,817)						(95,901)

Our cash and cash equivalents at June 30, 2021 were held primarily for working capital purposes. We may, from time to time, use excess cash and cash equivalents to fund our lending activities, paydown debt or repurchase stock. 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 $66.7 million in cash from our operating activities-continuing operations for the six months ended June 30, 2021. This was down $64.5 million from the $131.2 million of cash provided by operating activities-continuing operations during the six months ended June 30, 2020 due to a decrease in revenues realized for the six months ended June 30, 2021 resulting from a smaller loan portfolio and lower effective APR as compared to the prior year.

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Net cash provided by (used in) investing activities

For the six months ended June 30, 2021 and 2020, cash provided by (used in) investing activities-continuing operations was $(51.3) million and $61.1 million, respectively. The decrease was primarily due to an increase in net loans issued to customers and a growing loan portfolio compared to a declining loan portfolio year over year. The following table summarizes cash used in investing activities for the periods indicated: 

												Six Months Ended June 30,
(Dollars in thousands)																		2021						2020
Cash provided by (used in) investing activities - continuing operations
Net loans issued to consumers, less repayments																		$	(42,905)					$	72,621
Participation premium paid																		(2,126)						(2,036)
Purchases of property and equipment																		(7,563)						(9,508)
Proceeds from sale of intangible assets																		1,250						—
																		$	(51,344)					$	61,077

Net cash used in financing activities

Cash flows from financing activities-continuing operations 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, 2021 and 2020, cash used in financing activities was $106.8 million and $95.9 million, respectively. The following table summarizes cash used in financing activities for the periods indicated: 

												Six Months Ended June 30,
(Dollars in thousands)																		2021						2020
Cash used in financing activities - continuing operations
Proceeds from issuance of Notes payable, net																		$	25,000					$	6,500
Payments on Notes payable																		(112,550)						(94,000)
Debt issuance costs paid																		—						(108)
Common stock repurchased																		(18,767)						(8,030)
Proceeds from stock option exercises																		480						381
Taxes paid related to net share settlement																		(980)						(644)
																		$	(106,817)					$	(95,901)

The increase in cash used in financing activities-continuing operations for the six months ended June 30, 2021 versus the comparable period of 2020 was primarily due to increased repurchases of common stock.

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-continuing operations, 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 continuing operating activities. The below tables provides a reconciliation of free cash flow to our cash flows from operations.

												Six Months Ended June 30,
(Dollars in thousands)																		2021						2020
Net cash provided by continuing operating activities																		$	66,687					$	131,244
Adjustments:
Net charge-offs – combined principal loans																		(41,745)						(108,532)
Capital expenditures																		(7,563)						(9,508)
FCF																		$	17,379					$	13,204

Our FCF was $17.4 million for the first six months of 2021 compared to $13.2 million for the comparable prior year period. While our net cash provided by continuing operating activities decreased by $64.6 million, this was offset by a similar decrease of $66.8 million in net charge-offs - combined principal loans and a $1.9 million decrease in capital expenditures.

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Operating and capital expenditure requirements

We are continuing to assess our minimum cash and liquidity requirements and implementing measures to ensure that our cash and liquidity position is maintained through the current economic cycle created by the COVID-19 pandemic. We believe that our existing cash balances, together with the available borrowing capacity under the VPC Facility, ESPV Facility, EF SPV Facility and EC SPV Facility, will be sufficient to meet our anticipated cash operating expense and capital expenditure requirements through at least this year. 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, 2020.

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

The Consumer Financial Protection Bureau (“CFPB”) amended Regulation F, 12 CFR part 1006, which implements the Fair Debt Collection Practices Act (FDCPA), to prescribe Federal rules governing certain activities of debt collectors. The final rule, among other things, clarifies the information that a debt collector must provide to a consumer at the outset of debt collection communications and provides a model notice containing such information, prohibits debt collectors from bringing or threatening to bring a legal action against a consumer to collect a time-barred debt, and requires debt collectors to take certain actions before furnishing information about a consumer’s debt to a consumer reporting agency. The rule is effective on November 30, 2021.

On March 31, the Federal Reserve Board, the CFPB, the Federal Deposit Insurance Corporation ("FDIC"), the National Credit Union Administration ("NCUA") and the Office of the Comptroller of the Currency ("OCC") announced the request for information ("RFI") to gain input from financial institutions, trade associations, consumer groups, and other stakeholders on the growing use of Artificial Intelligence ("AI") by financial institutions. The request seeks comments regarding the use of AI, including machine learning, by financial institutions; appropriate governance, risk management and controls over AI; as well as challenges in developing, adopting and managing AI. The comment period was extended from May 30, 2021 to July 1, 2021 and is now closed.

The California Consumer Privacy Act went into effect Jan. 1, 2020, and enforcement by California’s Office of the Attorney General began July 1, 2020. The California Privacy Rights Act ballot initiative passed in November 2020, with the majority of its provisions becoming operative Jan. 1, 2023.

There are bills pending in the California Legislature that would amend the CCPA and/or the CPRA relating to the right to opt out of sales and one change to authorized agent requests. Ongoing implementation of and changes to the CCPA, the CPRA and related requirements will increase costs and create further challenges in the California market.

The CFPB’s Payday, Vehicle Title and Certain High-Cost Installment Loan rule continues to be stayed pursuant to litigation in a Texas federal court. Once the litigation is resolved, it is likely that the CFPB will revisit the rule as currently drafted. However, if the rule is not amended, Elevate is prepared to comply with the rule when it becomes effective.

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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. 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 and are considered delinquent after the grace period. 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.

The spread of COVID-19 since March 2020 has created a global public health crisis that has resulted in unprecedented disruption to businesses and economies. In response to the pandemic's effects and in accordance with federal and state guidelines, we expanded our payment flexibility programs for our customers, including payment deferrals. This program allows for a deferral of payments for an initial period of 30-60 days, and generally up to a maximum of 180 days on a cumulative basis. The customer will return to their normal payment schedule after the end of the deferral period with the extension of their maturity date equivalent to the deferral period, which is generally not to exceed an additional 180 days. Per FASB guidance, the finance charges will continue to accrue at a lower effective interest rate over the expected term of the loan considering the deferral period provided (not to exceed an amount greater than the amount at which the borrower could settle the loan) or placed on non-accrual status.

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 condensed 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. As permitted by the SEC, we have elected to not adopt the Current Expected Credit Losses ("CECL") model which would require a broader range of reasonable and supportable information to inform credit loss estimates. See "- Recently Issued Accounting Pronouncements And JOBS Act Election" for more information.

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.

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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. In accordance with Accounting Standards Codification ("ASC") 350-20-35, Goodwill—Subsequent Measurement, we perform a quantitative approach method impairment review of goodwill and intangible assets with an indefinite life annually at October 1 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Prior to the adoption of ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), our impairment evaluation of goodwill was already based on comparing the fair value of our reporting units to their carrying value. The adoption of ASU 2017-04 as of January 1, 2020 had no impact on our evaluation procedures. The fair value of the reporting units 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 units, 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 units. The income approach uses our projections of financial performance for a six to nine-year period and includes assumptions about future revenues growth rates, operating margins and terminal values. The market approach establishes fair value by applying cash flow multiples to the reporting units’ operating performance. The multiples are derived from other publicly traded companies that are similar but not identical from an operational and economic standpoint.

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, 2021 and December 31, 2020. Tax periods from fiscal years 2014 to 2019 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.

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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). 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.

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

See Note 1 in the Notes to the Consolidated Condensed Financial Statements included in this report for a discussion of recent accounting pronouncements.

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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. We do not use derivative financial instruments for speculative or trading purposes, although in the future we may enter into interest rate hedging arrangements to manage the risks described below.

Interest rate sensitivity

Our cash and cash equivalents as of June 30, 2021 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 interest rates. Given the currently low 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.

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. On July 31, 2020, the new EC SPV Facility was added. This facility does not have a rate lock and is tied to the 3-month LIBOR rate.

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, 2021 was $68.6 million and the balance at December 31, 2020 was $122.6 million. The outstanding balance of our ESPV Facility was $159.6 million and $199.5 million at June 30, 2021 and December 31, 2020, respectively. The outstanding balance of our EF SPV Facility was $89.8 million at June 30, 2021 and the balance at December 31, 2020 was $93.5 million. The outstanding balance of our EC SPV Facility was $35.0 million and $25 million at June 30, 2021 and December 31, 2020, respectively. Based on the average outstanding indebtedness through the six months ended June 30, 2021, a 1% (100 basis points) increase in interest rates would have increased our interest expense by approximately $1.3 million for the period.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our 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 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.

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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. 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.

In December 2019, the TFI bankruptcy plan was confirmed, and any potential future claims from the TFI Creditors' Committee were assigned to the Think Finance Litigation Trust (“TFLT”). On August 14, 2020, the TFLT filed an adversary proceeding against Elevate in the United States Bankruptcy Court for the Northern District of Texas, alleging certain avoidance claims related to Elevate’s spin-off from TFI under the Bankruptcy Code and TUFTA. If it were determined that the spin-off constituted a fraudulent conveyance or that there were other avoidance actions associated with the spin-off, then the spin-off could be deemed void and there could be a number of different remedies imposed against Elevate, including without limitation, the requirement that Elevate has to pay money damages. While the TFLT values this claim at $246 million, we believe that we have valid defenses to the claim and intend to vigorously defend against this claim.

Relating to the operations of TFI prior to and immediately after the 2014 spin-off from TFI, on August 14, 2020, a class action lawsuit against Elevate was filed in the Eastern District of Virginia alleging violations of usurious interest and aiding and abetting various racketeering activities. On October 26, 2020, Elevate filed a motion to dismiss and awaits a ruling on that motion. Elevate views this lawsuit as without merit and intends to vigorously defend its position. We have an accrual for a contingent loss in the amount of $17 million for estimated loss related to the TFLT and class action disputes at June 30, 2021. The accrual is recognized as Non-operating loss in the Consolidated Statements of Operations and as Accounts payable and accrued liabilities on the Consolidated Balance Sheets. Even when an accrual is recorded, we may be exposed to loss in excess of any amounts accrued. While Elevate can provide no assurances as to the duration or potential outcome of such proceedings, in the event that for either proceeding there is a settlement and Elevate is unable to pay any amount resulting from such settlement, it could have a material adverse effect on Elevate’s financial condition, or, if there is no settlement and Elevate is deemed to ultimately be liable in these matters, Elevate could be obligated to file for bankruptcy.

On June 5, 2020, the District of Columbia (the "District") sued Elevate in the Superior Court of the District of Columbia alleging that Elevate may have violated the District's Consumer Protection Procedures Act and the District of Columbia's Municipal Regulations in connection with loans issued by banks in the District of Columbia. This action was removed to federal court, and on August 3, 2020, the District filed a motion to remand to Superior Court. On July 15, 2021, the District Court Judge remanded the case to Superior Court. Elevate disagrees that it has violated the above referenced laws and regulations and it intends to vigorously defend its position.

In addition, on January 27, 2020, Sopheary Sanh filed a class action complaint in the Western District Court in the state of Washington against Rise Credit Service of Texas, LLC d/b/a Rise, Opportunity Financial, LLC and Applied Data Finance, LLC d/b/a Personify Financial. The Plaintiff in the case claims that Rise and Personify Financial have violated Washington’s Consumer Protection Act by engaging in unfair or deceptive practices, and seeks class certification, injunctive relief to prevent solicitation of consumers to apply for loans, monetary damages and other appropriate relief, including an award of costs, pre- and post-judgment interest, and attorneys' fees. The lawsuit was removed to federal court. On January 12, 2021, the court granted Rise's motion to dismiss, as well as the other non-affiliated service providers. The Judge did, however, allow Plaintiff the opportunity to amend its complaint. On June 22, 2021, the Plaintiff filed her Amended Complaint alleging that Elevate or its subsidiary were not service providers to the originating bank, but rather the true lender. On July 20, 2021, Elevate filed its Motion to Dismiss the Amended Complaint. Elevate disagrees that it has violated the Washington Consumer Protection Act and it intends to vigorously defend its position.

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On March 3, 2020, Heather Crawford filed a lawsuit in the Superior Court of the state of California, county of Los Angeles, against Elevate Credit, Inc., Elevate Credit Service, LLC and Rise Credit of California, LLC alleging unconscionable interest rates on Rise loans and seeking damages and public injunctive relief. Elevate filed a motion to compel arbitration, and Ms. Crawford dismissed the lawsuit without prejudice to refile in arbitration. Ms. Crawford has not yet filed any arbitration demand. In addition, on April 6, 2020, Dahn Le made a demand for arbitration against Elevate Credit, Inc., Elevate Credit Service, LLC and Rise Credit of California, LLC similarly alleging unconscionable interest rates on Rise loans and seeking damages and public injunctive relief. Mr. Le later filed an amended demand, dropping his request for public injunctive relief but adding alleged violations of the Electronic Fund Transfer Act and the Rosenthal Fair Debt Collection Practices Act. Prior to the arbitration hearing, Elevate was successful in dismissing most of Mr. Le's claims, and narrowing the scope of arbitration to only the unconscionability claim. The arbitration hearing concluded on June 1, 2021, and the parties are briefing the matter for a decision by the arbitrator in late summer.

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, 2020, except 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.

State and federal governments regulatory bodies may seek to impose new laws, direct contractual arrangements with us, 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 less profitable or unattractive. On July 7, 2020, the CFPB issued a final rule concerning small dollar lending in order to maintain consumer access to credit and competition in the marketplace. The final rule rescinds the mandatory underwriting provisions of the previously proposed 2017 rule after re-evaluating the legal and evidentiary bases for these provisions and finding them to be insufficient. The final rule does not rescind or alter the payments provisions of the 2017 rule. This, and other rules concerning providers of non-prime credit and service providers of non-prime lenders continue to impact the markets open to our products and services.

In order to serve our non-prime customers profitably we need to sufficiently price the risk of the transaction into the APR of our loans. If individual states or the federal government 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. For example, on January 1, 2020, California lending law changed to impose a rate cap of 36% plus the Federal Funds Rate set by the Federal Reserve Board for all consumer-purpose installment loans, including personal loans, car loans, and auto title loans, as well as open-end lines of credit made under its California Financing Law where the amount of credit is $2,500 or more but less than $10,000. Rise loans originated by Elevate were impacted by this law and as a result, as of January 1, 2020 through the second quarter of 2021, no new Rise loans have been originated in California.

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On March 23, 2021, a 36% "all in" APR rate cap on all consumer loans was signed into law in the state of Illinois. The law broadly defines “lender” to include any (i) affiliate or subsidiary of a lender or (ii) person or entity that buys a whole or partial interest in a loan, arranges a loan for a third party or acts as an agent for a third party in making a loan. The definition of “lender” also includes any other person or entity if the Department of Financial and Professional Regulation determines that the person or entity is engaged in a transaction that it is in substance a disguised loan or a subterfuge for the purpose of avoiding this legislation. Federal and state-chartered banks are exempted from the new law. The legislation includes a “no evasion” provision. Any loan made in excess of the "all in" 36% APR is considered null and void. Rise Credit of Illinois will no longer originate loans that are not in compliance with the new law.

On April 16, 2021, the North Dakota Governor signed a bill that amends the North Dakota Money Brokers Act to limit the annual interest rate that licensees may charge to 36%. The law is effective August 1, 2021. On or before that date, Rise Credit of North Dakota will no longer originate loans that are not in compliance with the new law.

At the national level, bills that would create a national interest rate cap of 36% on consumer loans have been proposed at various times, including in 2009, 2013, 2015, 2017 and 2019.

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 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.

OTHER RISKS RELATED TO COMPLIANCE AND REGULATION

The regulatory landscape in which we operate is continually changing due to new CFPB rules, regulations and interpretations, as well as various legal actions that have been brought against others in marketplace lending, including several lawsuits that have sought to re-characterize certain loans made by federally insured banks as loans made by third parties. If litigation on similar theories were brought against us when we work with a federally insured bank that makes loans, rather than making loans ourselves and were such an action to be successful, we could be subject to state usury limits and/or state licensing requirements, in addition to the state consumer protection laws to which we are already subject, in a greater number of states, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.

The case law involving whether an originating lender, on the one hand, or third party vendors, on the other hand, are the “true lenders” of a loan is still developing and courts have come to different conclusions and applied different analyses. The determination of whether a third-party service provider is the “true lender” is significant because third-parties risk having the loans they service becoming subject to a consumer’s state usury limits. A number of federal courts that have opined on the “true lender” issue have looked to who is the lender identified on the borrower’s loan documents and who funds the loan. A number of state courts and at least one federal district court have considered a number of other factors when analyzing whether the originating lender or a third party is the “true lender,” including looking at the economics of the transaction to determine, among other things, who has the predominant economic interest in the loan being made. If we were re-characterized as a “true lender” with respect to any bank or third party we work with, loans could be deemed to be void and unenforceable in some states, the right to collect finance charges could be affected, and we could be subject to fines and penalties from state and federal regulatory agencies as well as claims by borrowers, including class actions by private plaintiffs.

Even if we were not required to change our business practices to comply with potentially applicable state laws and regulations or cease doing business in some states, we could be required to register or obtain lending licenses or other regulatory approvals that could impose a substantial cost on us. If the banks we work with or any other third party were subject to such a lawsuit, they may elect to terminate their relationship with us voluntarily or at the direction of their regulators, and if they lost the lawsuit, they could be forced to modify or terminate the programs.

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On August 13, 2018, the California Supreme Court in Eduardo De La Torre, et al. v. CashCall, Inc., held that interest rates on consumer loans of $2,500 or more could be found unconscionable under section 22302 of the California Financial Code, despite not being subject to certain statutory interest rate caps and that such a finding requires a full unconscionability analysis, which is fact-intensive.  The California Supreme Court did not hold that any particular loan or loans were unconscionable. In its opinion, the California Supreme Court noted that the unconscionability determination is not an easy one, that high interest rates may indeed be justified for higher risk borrowers. As a result of the California Supreme Court’s ruling, the case was remanded to the Northern District of California. The Judge for the Northern District of California dismissed the case, on the basis that the unconscionability analysis and class action determination are matters of state law for evaluation by a state court. 

On April 13, 2021, a case was decided in the Northern District of California involving FinWise Bank and its non‑bank service provider, Opportunity Financial, LLC, challenging the validity of loans and business practices associated with a bank partnership program. The plaintiff, a California consumer, alleged that the defendants operated a “rent-a-bank” scheme to issue high-cost loans although the bank was listed as the lender on the loan. The plaintiff claimed the bank was lender in name only, with the service provider marketing the loan, purchasing the loan and then servicing and collecting the loan, which plaintiff alleged were to evade California interest rate restrictions.

Plaintiff claims were under both California and Utah law for unfair and unconscionable conduct. The defendants challenged all claims based on the doctrine of federal preemption and alternatively that if preemption failed that the action failed to state a cognizable claim under either state’s law.

The court found that all of the plaintiff’s claims failed on the merits. In part, the Court held that the plaintiff failed to show that the defendants were subject to the California Financial Code which contains wording that the California statute does not apply to any person doing business under any law of any state relating to banks. In that regard, the Court upheld existing precedent that as to usury, the court may look only to the face of the transaction and not to the intent of the parties, citing Beechum v. Navient Sols., Inc., 2016 WL 5340454 (C.D. Cal. 2016). On the face of the loan agreement, it was not subject to California law. The court noted that arguments as to evasion of California law are irrelevant since the bank is the lender on the documents. The court also reviewed the service provider’s website and found that it was not misleading as to who was the lender on the loans. The Court also dismissed claims under Utah law for unconscionability in that Utah law allows any rate of interest to be charged on a loan.

A claim was also made under the Electronic Funds Transfer Act ("EFTA") that a preauthorized transfer was required as a condition of the loan and therefore violated EFTA and Regulation E. The court found this claim to be insufficient based on language in the loan agreement allowing for alternative payment methods.

Similarly, on April 7, 2021, in Robinson and Spears v. Nat’l. Collegiate Student Loan Trust 2006-2, 2021 WL 1293707, Case No. 20-cv-10203 ADB (D. Mass. April 7, 2021),the court upheld the concept of “valid when made” and found that Section 85 of the National Bank Act preempts conflicting Pennsylvania law and national banks have the power to purchase and sell loans (citing 12 CFR 7.4008(a)). The Court ruled that the interest rate on the original loan was non-usurious and therefore could not become usurious upon assignment. As to the true lender challenge, the Court held that the plaintiffs had not identified any binding authority that would require it to apply the true lender doctrine. In addition, the Court saw that the bank was named as the lender on the loan document, funded the loan and could be required to hold the loan for an extended period of time.

On August 31, 2016, the United States District Court for the Central District of California ruled in CFPB v. CashCall, Inc. et. al. that CashCall was the “true lender” and consequently was engaged in deceptive practices by servicing and collecting on payday loans in certain states where the interest rate on the loans exceeded the state usury limit and/or where CashCall was not a licensed lender. In reaching its decision, the court adopted a “totality of the circumstances” test to determine which party to the transaction had the “predominant economic interest” in the transaction. Given the fact-intensive nature of a “totality of the circumstances” assessment, the particular and varied details of marketplace lending and other bank partner programs may lead to different outcomes to those reached in CashCall, even in those jurisdictions where courts adopt the “totality of the circumstances” approach. Although CashCall is appealing the decision in the Ninth Circuit, on January 26, 2018, the District Court ordered CashCall to pay approximately $10.2 million in civil money penalties, but no consumer restitution.  In issuing the judgment, which was significantly less than the $280 million the CFPB sought in penalties and consumer restitution, the Court found that CashCall had not knowingly or recklessly violated consumer protection laws, and that the CFPB had not demonstrated that consumer restitution was an appropriate remedy.

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In addition to true lender challenges, a question regarding the applicability of state usury rates may arise when a loan is sold from a bank to a non-bank entity. In Madden v. Midland Funding, LLC, the Court of Appeals for the Second Circuit held that the federal preemption of state usury laws did not extend to the purchaser of a loan issued by a national bank. In its brief urging the US Supreme Court to deny certiorari, the US Solicitor General, joined by the Office of the Comptroller of the Currency (“OCC”), noted that the Second Circuit (Connecticut, New York and Vermont) analysis was incorrect. On remand, the United States District Court for the Southern District of New York concluded on February 27, 2017 that New York’s state usury law, not Delaware's state usury law, was applicable and that the plaintiff’s claims under the FDCPA and state unfair and deceptive acts and practices could proceed. To that end, the court granted Madden’s motion for class certification. It is unknown whether Madden will be applied outside of the defaulted debt context in which it arose. To the extent that either the holdings in CashCall or Madden were broadened to cover circumstances applicable to our business, or if other ligation on related theories were brought against us and were successful, or we were otherwise found to be the "true lender," we could become subject to state usury limits and state licensing laws, in addition to the state consumer protection laws to which we are already subject, in a greater number of states, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.

In two New York cases, Petersen, et al. v. Chase Card Funding, LLC et al., Case 1:19-cv-00741-LJV (W.D.N.Y. filed June 6, 2019) and Cohen et al. v. Capital One Funding, LLC et al., No. 19-03479 (E.D.N.Y. filed June 12, 2019), class action status was sought against defendants affiliated with two national banks that acted as special purpose entities in credit card receivables securitization transactions sponsored by the banks. The actions alleged that the defendants’ acquisition, collection and enforcement of the banks’ credit card receivables violated New York usury laws and that the non-bank entities were not entitled to the benefits of federal preemption and must be limited to collecting interest under state usury limits. Both cases were dismissed in September 2020 because both banks held a continuing interest in the loans including retention of the account and the continuing right to change interest rates.

In response to the uncertainty Madden created as to the validity of interest rates of bank-originated loans, both the OCC and FDIC issued final rules to clarify that when a bank sells, assigns or otherwise transfers a loan, the interest permissible prior to the transfer continues to be permissible following the transfer. The OCC final rule was effective on August 3, 2020. The FDIC final rule was effective on August 21, 2020. On July 29, 2020, the attorneys general from California, Illinois and New York filed a lawsuit against the OCC challenging the rule. Then in August 2020, attorneys general from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina and D.C. sued the FDIC alleging the core of the rule-making "is beyond the FDIC's power to issue, is contrary to statute, and would facilitate predatory lending through sham 'rent-a-bank' partnerships designed to evade state law."

On October 27, 2020, the OCC issued its final rule to remove uncertainty and determine when a national bank or federal savings association makes a loan and is the "true lender" in the context of a partnership between a bank and a third party.The rule specified that a bank makes a loan and is the "true lender" if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan. The rule became effective December 29, 2020. However, this rule was rescinded through a Congressional Review Act resolution and on June 30, 2021, President Biden signed the resolution to overturn the rule. The repeal of this rule does not directly impact Elevate, as the banks it works with are state banks which are regulated by the FDIC.

On July 20, 2020, the FDIC announced that is seeking the public's input on the potential for a public/private standard-setting partnership and voluntary certification program to promote the efficient and effective adoption of innovative technologies at FDIC-supervised financial institutions. The Request for Information asks whether the proposed program might reduce the regulatory and operational uncertainty that may prevent financial institutions from deploying new technology or entering into partnerships with technology firms, including "fintechs." The deadline for comments was September 22, 2020. Further, FDiTech, a new organization within the FDIC, is dedicated to promoting innovative and transformative financial services technologies and exploring how innovation can help expand banking services to unbanked and under-banked consumers.

On January 1, 2021, the California Consumer Financial Protection Law ("CCFPL"), expanded the enforcement powers of the California Department of Financial Protection and Innovation (previously known as the California Department of Business Oversight). The new law extends state oversight of financial services providers not currently subject to state supervision.

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In 2017, the Colorado Attorney General filed complaints in state court against marketplace lenders Marlette Funding LLC and Avant of Colorado LLC on behalf of the administrator of Colorado’s Uniform Consumer Credit Code (“UCCC”), alleging violations of the UCCC based on “true lender” and loan assignment (Madden) cases with respect to lending programs sponsored by WebBank and Cross River Bank, respectively. After years of litigation, on August 7, 2020, all parties entered into a settlement of all claims comprising of a civil money penalty of $1,050,000 and a $500,000 contribution to a Colorado financial literacy program. The settlement provides a safe harbor for the marketplace lending programs at issue in the suits, as well as certain of the banks’ other marketplace lending programs if certain criteria related to oversight, disclosure, funding, licensing, consumer terms, and structure are followed. Only the parties to the litigation are bound by this settlement and further, it only applies to closed-end loans offered by banks in conjunction with non-bank partners or fintechs partnering with banks that involve origination of loans through an online platform. Another marketplace lender, Kabbage, Inc. and its bank, Celtic Bank, were sued in Massachusetts federal court in 2017, with the defendant alleging that Kabbage, not Celtic Bank, is the “true lender.” Kabbage, Inc. was successful in compelling arbitration in that case. In October 2019, Kabbage was sued in the Southern District of New York by several small businesses alleging violations of state usury laws (California, Massachusetts, Colorado, New York) and racketeering and conspiracy under federal RICO statutes. It also includes claims for violations of various state laws other than usury laws, including the California Financing Law Code ("CFLC"). This case was settled and dismissed in August 2020.

In the last few months, we have seen increased activity by some state regulatory authorities seeking to understand the services we provide to our Bank Partners. We cannot predict the final outcome of these inquiries or to what extent any obligations arising out of such final outcome will be applicable to our Company, business or officers, if at all. It is possible that some state regulators could conclude that we are subject to state laws, including licensing or registration in connection with services we provide to our Bank Partners. The recent and anticipated further clarifications of federal interest rate preemption by the OCC and FDIC should provide clarification to such conclusions.

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

Repurchases of Equity Securities

At June 30, 2021, we had an outstanding stock repurchase program authorized by our Board of Directors providing for the repurchase of up to $55 million of our common stock through July 31, 2024, inclusive of a $25 million increase to the plan authorized by the Board of Directors in January 2021. The Company purchased $3.3 million of common shares under its $10 million authorization during the second half of 2019 and during the year ended December 31, 2020, an additional 7,694,896 shares were repurchased at a total cost of $19.8 million, inclusive of any transactional fees or commissions. The share repurchase program, as amended, provides that up to a maximum aggregate amount of $25 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 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. All repurchased shares may potentially be withheld for the vesting of RSUs.

The following table provides information about our common stock repurchases during the quarter ended June 30, 2021.

Period						Total number of shares purchased (1)						Average price paid per share (2)						Total number of shares purchased as part of the publicly announced program						Approximate dollar value of shares that may yet be purchased under the program (2)
April 1, 2021 to April 30, 2021						1,086,242						$	2.97					1,048,996						$	17,795,954
May 1, 2021 to May 31, 2021						830,409						$	3.00					702,476						$	15,307,567
June 1, 2021 to June 30, 2021						587,613						$	3.81					587,613						$	13,070,288
Total						2,504,264						$	3.18					2,339,085

(1)During the quarter ended June 30, 2021, certain RSUs were net share-settled to cover the required withholding tax and the remaining amounts were converted into an equivalent number of shares of the Company's common stock. The Company withheld 165,179 shares for applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities during the quarter ended June 30, 2021.

(2)Includes fees and commissions associated with the shares repurchased.

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Item 6. Exhibits

Exhibit number			Description
10.1+#			Employment, Confidentiality and Non-Solicitation Agreement, dated May 1, 2014, by and between Sarah Fagin Cutrona and Elevate Credit Service, LLC (1)
10.2+#			First Amendment to Employment, Confidentiality and Non-Compete Agreement, dated December 11, 2015, by and between Sarah Fagin Cutrona and Elevate Credit Service, LLC (1)
10.3+#			Second Amendment to Employment, Confidentiality and Non-Compete Agreement, dated March 1, 2017, by and between Sarah Fagin Cutrona and Elevate Credit Service, LLC (1)
10.4+#			Third Amendment to Employment, Confidentiality and Non-Compete Agreement, dated January 24, 2019, by and between Sarah Fagin Cutrona and Elevate Credit Service, LLC (1)
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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH			Inline XBRL Taxonomy Extension Schema Document.
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB			Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104			XBRL for cover page of the Company's Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set.

#						Previously filed.
+						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.

(1) Filed as an exhibit to our Quarterly Report on Form 10-Q filed on May 7, 2021.

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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 6, 2021			By:			/s/ Jason Harvison
									Jason Harvison
									Chief Executive Officer (Principal Executive Officer)
Date:			August 6, 2021			By:			/s/ Christopher Lutes
									Christopher Lutes
									Chief Financial Officer (Principal Financial Officer)

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