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EX-31.1 - EX-31.1 - Community Choice Financial Inc.ccfi-20170630ex311cfbc52.htm

 

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, 2017

 

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

 

For the transition period from to                  to                

 

Commission File Number: 001‑35537                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

COMMUNITY CHOICE FINANCIAL INC.

(Exact name of registrant as specified in its charter)

Ohio

(State or other jurisdiction of

incorporation or organization)

45‑1536453

(IRS Employer

Identification No.)

 

 

6785 Bobcat Way, Suite 200, Dublin, Ohio

(Address of principal executive offices)

43016

(Zip Code)

 

(614) 798‑5900

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

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 

Accelerated filer

 

 

Non-accelerated filer    

Smaller reporting company

(Do not check if a 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 12‑b‑2 of the Act.) Yes ☐  No ☒

There is no market for the registrant’s equity. As of June 30, 2017, there were 7,990,020 shares outstanding.

 

 


 

Community Choice Financial Inc. and Subsidiaries

 

Form 10-Q for the Quarterly Period Ended June 30, 2017

 

Table of Contents

 

 

 

 

 

 

Page

 

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016

3

 

 

 

 

Consolidated Statements of Operations for the three months and six months ended June 30, 2017 (unaudited) and June 30, 2016 (unaudited)

4

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2017 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2017 (unaudited) and June 30, 2016 (unaudited)

6

 

 

 

 

Notes to unaudited Consolidated Financial Statements

7-27 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Result of Operations

28-47

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

47

 

 

 

Item 4. 

Controls and Procedures

47

 

 

 

Part II 

Other Information

 

 

 

 

Item 1. 

Legal Proceedings

48

 

 

 

Item 1A. 

Risk Factors

48-50

 

 

 

Item 6. 

Exhibits

51

 

 

 

 

Signatures

52

 

 

 

 

2


 

Community Choice Financial Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

June 30, 2017 and December 31, 2016

 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

110,573

 

$

106,333

 

Restricted cash

 

 

3,230

 

 

3,015

 

Finance receivables, net of allowance for loan losses of $10,947 and $13,373

 

 

85,431

 

 

87,960

 

Short-term investments, certificates of deposit

 

 

 —

 

 

500

 

Card related pre-funding and receivables

 

 

1,822

 

 

1,545

 

Other current assets

 

 

14,976

 

 

19,404

 

Total current assets

 

 

216,032

 

 

218,757

 

Noncurrent Assets

 

 

 

 

 

 

 

Finance receivables, net of allowance for loan losses of $2,005 and $2,846

 

 

4,393

 

 

5,859

 

Property, leasehold improvements and equipment, net

 

 

31,591

 

 

36,431

 

Goodwill

 

 

113,499

 

 

113,290

 

Other intangible assets

 

 

1,165

 

 

1,412

 

Security deposits

 

 

2,467

 

 

2,614

 

Total assets

 

$

369,147

 

$

378,363

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

34,769

 

$

37,002

 

Money orders payable

 

 

7,926

 

 

8,209

 

Accrued interest

 

 

4,538

 

 

4,727

 

Current portion of capital lease obligation

 

 

858

 

 

1,155

 

Current portion of line of credit, net of deferred issuance costs of $-0- and $14

 

 

 —

 

 

2,236

 

Current portion of subsidiary notes payable, net of deferred issuance costs of $1 and $7

 

 

116

 

 

7,407

 

Deferred revenue

 

 

3,982

 

 

2,753

 

Total current liabilities

 

 

52,189

 

 

63,489

 

Noncurrent Liabilities

 

 

 

 

 

 

 

Lease termination payable

 

 

2,178

 

 

1,066

 

Capital lease obligation

 

 

49

 

 

292

 

Line of credit, net of deferred issuance costs of $2,611 and $760

 

 

44,389

 

 

29,840

 

Subsidiary notes payable, net of deferred issuance costs of $1,003 and $617

 

 

55,896

 

 

41,341

 

Senior secured notes, net of deferred issuance costs of $2,263 and $2,861

 

 

247,527

 

 

246,929

 

Deferred revenue

 

 

7,688

 

 

10,055

 

Deferred tax liability, net

 

 

10,098

 

 

9,675

 

Total liabilities

 

 

420,014

 

 

402,687

 

Commitments and Contingencies

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

Preferred stock, par value $.01 per share, 3,000 shares authorized, no shares issued and outstanding

 

 

 —

 

 

 —

 

Common stock, par value $.01 per share, 300,000 authorized shares and 7,990 outstanding shares at June 30, 2017 and  7,982 outstanding shares at December 31, 2016

 

 

90

 

 

90

 

Additional paid-in capital

 

 

129,656

 

 

129,624

 

Retained deficit

 

 

(180,563)

 

 

(153,988)

 

Treasury stock

 

 

(50)

 

 

(50)

 

Total stockholders' deficit

 

 

(50,867)

 

 

(24,324)

 

Total liabilities and stockholders' equity

 

$

369,147

 

$

378,363

 

 

See Notes to Unaudited Consolidated Financial Statements.

3


 

Community Choice Financial Inc. and Subsidiaries

 

Consolidated Statements of Operations

 

Three Months and Six Months Ended June 30, 2017 and 2016

 

(In thousands)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivable fees

 

$

47,930

 

$

57,952

 

$

96,981

 

$

121,836

 

Credit service fees

 

 

15,146

 

 

21,170

 

 

33,285

 

 

43,273

 

Check cashing fees

 

 

11,779

 

 

11,975

 

 

23,905

 

 

25,330

 

Card fees

 

 

2,113

 

 

2,040

 

 

4,120

 

 

4,188

 

Other

 

 

4,200

 

 

5,192

 

 

8,229

 

 

11,259

 

Total revenues

 

 

81,168

 

 

98,329

 

 

166,520

 

 

205,886

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

 

17,516

 

 

17,069

 

 

34,789

 

 

35,348

 

Provision for loan losses

 

 

23,859

 

 

30,272

 

 

43,399

 

 

56,747

 

Occupancy

 

 

6,602

 

 

6,578

 

 

13,231

 

 

13,238

 

Advertising and marketing

 

 

1,544

 

 

2,539

 

 

2,358

 

 

5,217

 

Lease termination

 

 

944

 

 

1,101

 

 

991

 

 

1,101

 

Depreciation and amortization

 

 

2,327

 

 

2,540

 

 

4,865

 

 

5,274

 

Other

 

 

12,351

 

 

15,324

 

 

24,266

 

 

27,936

 

Total operating expenses

 

 

65,143

 

 

75,423

 

 

123,899

 

 

144,861

 

Operating gross profit

 

 

16,025

 

 

22,906

 

 

42,621

 

 

61,025

 

Corporate and other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

20,290

 

 

22,801

 

 

40,476

 

 

44,386

 

Lease termination

 

 

 —

 

 

 —

 

 

1,762

 

 

 —

 

Depreciation and amortization

 

 

1,181

 

 

1,222

 

 

2,490

 

 

2,431

 

Interest expense, net

 

 

12,431

 

 

10,847

 

 

23,802

 

 

22,310

 

Loss on sale of subsidiary

 

 

 —

 

 

 —

 

 

 —

 

 

1,569

 

Gain on debt extinguishment

 

 

 —

 

 

 —

 

 

 —

 

 

(62,852)

 

Total corporate and other expenses

 

 

33,902

 

 

34,870

 

 

68,530

 

 

7,844

 

Income (loss) from continuing operations, before tax

 

 

(17,877)

 

 

(11,964)

 

 

(25,909)

 

 

53,181

 

Provision (benefit) for income taxes

 

 

333

 

 

(3,024)

 

 

666

 

 

6,320

 

Net income (loss)

 

$

(18,210)

 

$

(8,940)

 

$

(26,575)

 

$

46,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

4


 

Community Choice Financial Inc. and Subsidiaries

 

Consolidated Statements of Stockholders’ Equity

 

Six Months Ended June 30, 2017

 

(Dollars in thousands)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury

 

Paid-In

 

Retained

 

 

 

 

 

    

Shares

    

Amount

    

Stock

    

Capital

    

Deficit

    

Total

 

Balance, December 31, 2016

 

7,981,536 

 

$

90

 

$

(50)

 

$

129,624

 

$

(153,988)

 

$

(24,324)

 

Issuance of common stock for settlement of restricted stock units

 

8,484 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

32

 

 

 —

 

 

32

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(26,575)

 

 

(26,575)

 

Balance, June 30, 2017

 

7,990,020 

 

$

90

 

$

(50)

 

$

129,656

 

$

(180,563)

 

$

(50,867)

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

5


 

Community Choice Financial Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

Six Months Ended June 30, 2017 and 2016

 

(In thousands)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30, 

 

    

2017

    

2016

Cash flows from operating activities

 

 

 

 

 

 

Net income (loss)

 

$

(26,575)

    

$

46,861

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Provision for loan losses

 

 

43,399

 

 

56,747

Loss on disposal of assets

 

 

1,829

 

 

1,283

Gain on debt extinguishment

 

 

 —

 

 

(62,852)

Loss on sale of subsidiary

 

 

 —

 

 

1,569

Depreciation

 

 

7,105

 

 

7,288

Amortization of note discount and deferred debt issuance costs

 

 

2,099

 

 

1,280

Amortization of intangibles

 

 

250

 

 

417

Deferred income taxes

 

 

423

 

 

3,741

Stock-based compensation

 

 

32

 

 

1,270

Changes in assets and liabilities:

 

 

 

 

 

 

Short-term investments

 

 

500

 

 

715

Card related pre-funding and receivables

 

 

(277)

 

 

(28)

Restricted cash

 

 

(215)

 

 

160

Other assets

 

 

4,572

 

 

(2,581)

Deferred revenue

 

 

(1,138)

 

 

9,505

Accrued interest

 

 

(189)

 

 

(1,779)

Money orders payable

 

 

(283)

 

 

(4,127)

Lease termination payable

 

 

1,112

 

 

78

Accounts payable and accrued expenses

 

 

(2,952)

 

 

(5,273)

Net cash provided by operating activities

 

 

29,692

 

 

54,274

Cash flows from investing activities

 

 

 

 

 

 

Net receivables originated

 

 

(39,370)

 

 

(42,058)

Net acquired assets, net of cash

 

 

(117)

 

 

(296)

Purchase of leasehold improvements and equipment

 

 

(3,501)

 

 

(4,904)

Net cash used in investing activities

 

 

(42,988)

 

 

(47,258)

Cash flows from financing activities

 

 

 

 

 

 

Repurchase of senior secured notes

 

 

 —

 

 

(36,437)

Proceeds from subsidiary note

 

 

15,000

 

 

13,765

Payments on subsidiary note

 

 

(7,356)

 

 

(192)

Payments on capital lease obligations

 

 

(540)

 

 

(717)

Net proceeds on lines of credit

 

 

14,150

 

 

6,750

Debt issuance costs

 

 

(3,718)

 

 

622

Net cash provided by (used in) financing activities

 

 

17,536

 

 

(16,209)

Net increase (decrease) in cash and cash equivalents

 

 

4,240

 

 

(9,193)

Cash and cash equivalents:

 

 

 

 

 

 

Beginning

 

 

106,333

 

 

98,941

Ending

 

$

110,573

 

$

89,748

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

6


 

Community Choice Financial Inc. and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

 

(Dollars in thousands, except per share data)

 

Note 1. Ownership, Nature of Business, and Significant Accounting Policies

 

Nature of business:  Community Choice Financial Inc. (together with its consolidated subsidiaries, “CCFI” or “the Company”) owned and operated 507 retail locations in 12 states and was licensed to deliver similar financial services over the internet in 32 states as of June 30, 2017. Through its network of retail locations and over the internet, the Company provides customers a variety of financial products and services, including secured and unsecured, short and medium‑term consumer loans, check cashing, prepaid debit cards, and other services that address the specific needs of its individual customers.

 

A summary of the Company’s significant accounting policies follows:

 

Basis of presentation:  The accompanying interim unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10‑Q and accounting principles generally accepted in the United States (“GAAP”) for interim financial information. They do not include all information and footnotes required by GAAP for complete financial statements. Although management believes that the disclosures are adequate to prevent the information from being misleading, the interim unaudited consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10‑K filed with the Securities & Exchange Commission on March 29, 2017. All adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial condition, have been included. The results for any interim period are not necessarily indicative of results to be expected for the year ending December 31, 2017.

 

Basis of consolidation:  The accompanying consolidated financial statements include the accounts of CCFI. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Business segments:  FASB Accounting Standards Codification (“ASC”) Topic 280 Segment Reporting requires that a public enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the way operating segments were determined and other items. The Company reports operating segments in accordance with FASB ASC Topic 280. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in determining how to allocate resources and assess performance. The Company operates in two segments: Retail financial services and Internet financial services.

 

Revenue recognition:  Transactions include loans, credit service fees, check cashing, bill payment, money transfer, money order sales, and other miscellaneous products and services. The full amount of the check cashing fee is recognized as revenue at the time of the transaction. Fees and direct costs incurred for the origination of loans are deferred and amortized over the loan period using the interest method. The Company acts in an agency capacity regarding bill payment services, money transfers, card products, and money orders offered and sold at its retail locations. The Company records the net amount retained as revenue because the supplier is the primary obligor in the arrangement, the amount earned by the Company is fixed, and the supplier is determined to have the ultimate credit risk. Revenue on loans determined to be troubled debt restructurings are recognized at the impaired loans’ original interest rates until the impaired loans are charged off or paid by the customer. Credit service organization (“CSO”) fees are recognized over the arranged credit service period.

 

 

 

 

 

7


 

Finance receivables:  Finance receivables consist of short term and medium‑term consumer loans.

 

Short-term consumer loans can be unsecured or secured with a maturity up to ninety days. Unsecured short-term loan products typically range in principal from $100 to $1,000, with a maturity between fourteen and thirty days, and include a written agreement to defer the presentment of the customer’s personal check or preauthorized debit for the aggregate amount of the advance plus fees. This form of lending is based on applicable laws and regulations, which vary by state. State statutes vary from charging fees of 15% to 20%, to charging interest at 25% per annum plus origination fees. The customers repay the cash advance by making cash payments or allowing a check or preauthorized debit to be presented. Secured consumer loans with a maturity of ninety days or less are included in this category and represented 15.0% and 18.2% of short-term consumer loans at June 30, 2017 and December 31, 2016, respectively.

 

Medium-term consumer loans can be unsecured or secured with a maturity greater than ninety days and up to thirty-six months. Unsecured medium-term products typically range from $100 to $5,000, and are evidenced by a promissory note with a maturity between three and thirty-six months. These consumer loans vary in structure depending upon the applicable laws and regulations where they are offered. The medium-term consumer loans are payable in installments or provide for a line of credit with periodic payments. Secured consumer loans with a maturity greater than ninety days are included in this category and represented 9.8% and 10.2% of medium-term consumer loans at June 30, 2017, and December 31, 2016, respectively.

 

Allowance for loan losses:  Provisions for loan losses are charged to income in amounts sufficient to maintain an adequate allowance for loan losses and an adequate accrual for losses related to guaranteed loans processed for third-party lenders under the CSO programs. The factors used in assessing the overall adequacy of the allowance for loan losses, the accrual for losses related to guaranteed loans made by third-party lenders and the resulting provision for loan losses include an evaluation by product by market based on historical loan loss experience and delinquency of certain medium-term consumer loans. The Company evaluates various qualitative factors that may or may not affect the computed initial estimate of the allowance for loan losses, by using internal valuation inputs including historical loan loss experience, delinquency, overall portfolio quality, and current economic conditions.

 

For short term unsecured consumer loans, the Company’s policy is to charge off loans when they become past due. The Company’s policy dictates that, where a customer has provided a check or ACH authorization for presentment upon the maturity of a loan, if the customer has not paid off the loan by the due date, the Company will deposit the customer’s check or draft the customer’s bank account for the amount due. If the check or draft is returned as unpaid, all accrued fees and outstanding principal are charged-off as uncollectible. For short term secured loans, the Company’s policy requires that balances be charged off when accounts are either thirty or sixty days past due depending on the product.

 

For medium term secured and unsecured consumer loans which have a term of one year or less, the Company’s policy requires that balances be charged off when accounts are sixty days past due. For medium term secured and unsecured consumer loans which have an initial maturity of greater than one year, the Company’s policy requires that balances be charged off when accounts are ninety-one days past due.

 

In certain markets, the Company reduced interest rates and favorably changed payment terms for medium-term consumer loans to assist borrowers in avoiding default and to mitigate risk of loss. These reduced interest rates and changed payment terms were limited to loans that the Company believed the customer had the ability to pay in the foreseeable future. These loans were accounted for as troubled debt restructurings and represent the only loans considered impaired due to the nature of the Company’s charge-off policy.

 

Recoveries of amounts previously charged off are recorded to the allowance for loan losses or the accrual for third‑party losses in the period in which they are received.

 

Lease termination payable:  The Company records a liability in the consolidated balance sheets for the remaining lease obligations with the corresponding lease termination expense for closed retail locations disclosed in the operating expenses section, and closed corporate locations disclosed in the corporate and other expenses section, of the consolidated statements of operations, respectively.

8


 

Fair value of financial instruments:  Financial assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:

 

·

Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

·

Level 2—Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less attractive.

 

·

Level 3—Unobservable inputs for assets and liabilities reflecting the reporting entity’s own assumptions.

 

The Company follows the provisions of ASC 820‑10, Fair Value Measurements and Disclosures, which applies to all assets and liabilities that are being measured and reported on a fair value basis. ASC 820‑10 requires a disclosure that establishes a framework for measuring fair value within GAAP and expands the disclosure about fair value measurements. This standard enables a reader of consolidated financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The standard requires that assets and liabilities carried at fair value be classified and disclosed in one of the three categories.

 

In determining the appropriate levels, the Company performed a detailed analysis of the assets and liabilities that are subject to ASC 820-10. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The Company’s financial instruments consist primarily of cash and cash equivalents, finance receivables, short-term investments, and lines of credit. For all such instruments, other than senior secured notes and notes payable at June 30, 2017, and December 31, 2016, the carrying amounts in the consolidated financial statements approximate their fair values. Finance receivables are short term in nature and are originated at prevailing market rates and lines of credit bear interest at current market rates. The fair value of finance receivables at June 30, 2017 and December 31, 2016 approximates carrying value and is measured using internal valuation inputs including historical loan loss experience, delinquency, overall portfolio quality, and current economic conditions. 

 

The fair value of the Company’s 10.75% senior secured notes due 2019 (the “2019 notes”) and the 12.75% senior secured notes due 2020 (the “2020 notes”) were determined based on market yield on trades of the 2019 notes at the end of the recent reporting period.

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

Carrying

 

 

 

 

 

 

    

Amount

    

Fair Value

    

Level

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

110,573

 

$

110,573

 

1

 

Restricted cash

 

 

3,230

 

 

3,230

 

1

 

Finance receivables

 

 

89,824

 

 

89,824

 

3

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

10.75% Senior secured notes

 

 

237,290

 

 

199,324

 

1

 

12.75% Senior secured notes

 

 

12,500

 

 

10,215

 

2

 

Subsidiary Note payable

 

 

57,016

 

 

57,016

 

2

 

Line of Credit

 

 

47,000

 

 

47,000

 

2

 

 

 

9


 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Carrying

 

 

 

 

 

 

    

Amount

    

Fair Value

    

Level

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,333

 

$

106,333

 

1

 

Restricted cash

 

 

3,015

 

 

3,015

 

1

 

Finance receivables

 

 

93,819

 

 

93,819

 

3

 

Short-term investments, certificates of deposit

 

 

500

 

 

500

 

2

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

10.75% Senior secured notes

 

 

237,290

 

 

195,503

 

1

 

12.75% Senior secured notes

 

 

12,500

 

 

10,221

 

2

 

Subsidiary Note payable

 

 

49,372

 

 

49,372

 

2

 

Line of Credit

 

 

32,850

 

 

32,850

 

2

 

 

 

Treasury Stock:  Treasury stock is reported at cost and consists of one million common shares at June 30, 2017 and December 31, 2016.

 

Subsequent events:  The Company has evaluated its subsequent events (events occurring after June 30, 2017) through the issuance date of August 11, 2017.

 

Note 2. Finance Receivables, Credit Quality Information and Allowance for Loan Losses

 

Finance receivables representing amounts due from customers for advances at June 30, 2017, and December 31, 2016, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

 

Short-term consumer loans

 

$

63,638

 

$

61,589

 

Medium-term consumer loans

 

 

42,119

 

 

51,431

 

Gross receivables

 

$

105,757

 

$

113,020

 

Unearned advance fees, net of deferred loan origination costs

 

 

(2,981)

 

 

(2,982)

 

Finance receivables before allowance for loan losses

 

 

102,776

 

 

110,038

 

Allowance for loan losses

 

 

(12,952)

 

 

(16,219)

 

Finance receivables, net

 

$

89,824

 

$

93,819

 

 

 

 

 

 

 

 

 

Finance receivables, net

 

 

 

 

 

 

 

Current portion

 

$

85,431

 

$

87,960

 

Non-current portion

 

 

4,393

 

 

5,859

 

Total finance receivables, net

 

$

89,824

 

$

93,819

 

 

 

Changes in the allowance for loan losses by product type for the three months ended June 30, 2017, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance as

 

 

 

Balance

 

 

 

 

 

 

 

 

 

 

Balance

 

Receivables

 

a percentage

 

 

    

4/1/2017

    

Provision

    

Charge-Offs

    

Recoveries

    

6/30/2017

    

6/30/2017

    

of receivable

 

Short-term consumer loans

 

$

1,846

 

$

9,393

 

$

(19,902)

 

$

11,219

 

$

2,556

 

$

63,638

 

4.02

%  

Medium-term consumer loans

 

 

11,163

 

 

8,007

 

 

(9,854)

 

 

1,080

 

 

10,396

 

 

42,119

 

24.68

%  

 

 

$

13,009

 

$

17,400

 

$

(29,756)

 

$

12,299

 

$

12,952

 

$

105,757

 

12.25

%  

 

The provision for loan losses for the three months ended June 30, 2017, also includes losses from returned items from check cashing of $1,695.

 

The provision for short-term consumer loans of $9,393 is net of debt sales of $347 for the three months ended June 30, 2017.

10


 

 

The provision for medium-term consumer loans of $8,007 is net of debt sales of $224 for the three months ended June 30, 2017.

 

The Company evaluates all short-term and medium-term consumer loans collectively for impairment, except for medium-term loans that have been modified and classified as troubled debt restructurings, which are individually evaluated for impairment. In certain markets, the Company reduced interest rates and favorably changed payment terms for medium-term consumer loans to assist borrowers in avoiding default and to mitigate risk of loss. The provision and subsequent charge off related to these loans totaled $21 and is included in the provision for medium-term consumer loans for the three months ended June 30, 2017. For these loans evaluated for impairment, there were $29 of payment defaults during the three months ended June 30, 2017. The troubled debt restructurings during the three months ended June 30, 2017 are subject to an allowance of $7 with a net carrying value of $22 at June 30, 2017.

 

Changes in the allowance for loan losses by product type for the six months ended June 30, 2017, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance as

 

 

 

Balance

 

 

 

 

 

 

 

 

 

 

Balance

 

Receivables

 

a percentage

 

 

    

1/1/2017

    

Provision

    

Charge-Offs

    

Recoveries

    

6/30/2017

    

6/30/2017

    

of receivable

 

Short-term consumer loans

 

$

2,223

 

$

15,826

 

$

(39,036)

 

$

23,543

 

$

2,556

 

$

63,638

 

4.02

%  

Medium-term consumer loans

 

 

13,996

 

 

15,228

 

 

(21,833)

 

 

3,005

 

 

10,396

 

 

42,119

 

24.68

%  

 

 

$

16,219

 

$

31,054

 

$

(60,869)

 

$

26,548

 

$

12,952

 

$

105,757

 

12.25

%  

 

The provision for loan losses for the six months ended June 30, 2017, also includes losses from returned items from check cashing of $3,094.

 

The provision for short-term consumer loans of $15,826 is net of debt sales of $437 for the six months ended June 30, 2017.

 

The provision for medium-term consumer loans of $15,228 is net of debt sales of $599 for the six months ended June 30, 2017.

 

The provision and subsequent charge off related to troubled debt restructurings totaled $34 and is included in the provision for medium-term consumer loans for the six months ended June 30, 2017. For these loans evaluated for impairment, there were $319 of payment defaults during the six months ended June 30, 2017. The troubled debt restructurings during the six months ended June 30, 2017 are subject to an allowance of $11 with a net carrying value of $37 at June 30, 2017.

 

Changes in the allowance for loan losses by product type for the three months ended June 30, 2016, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance as

 

 

 

Balance

 

 

 

 

 

 

 

 

 

 

Balance

 

Receivables

 

a percentage

 

 

    

4/1/2016

    

Provision

    

Charge-Offs

    

Recoveries

    

6/30/2016

    

6/30/2016

    

of receivable

 

Short-term consumer loans

 

$

2,838

 

$

10,968

 

$

(26,600)

 

$

15,555

 

$

2,761

 

$

64,479

 

4.28

%  

Medium-term consumer loans

 

 

16,444

 

 

10,357

 

 

(14,389)

 

 

3,129

 

 

15,541

 

 

65,210

 

23.83

%  

 

 

$

19,282

 

$

21,325

 

$

(40,989)

 

$

18,684

 

$

18,302

 

$

129,689

 

14.11

%  

 

The provision for loan losses for the three months ended June 30, 2016, also includes losses from returned items from check cashing of $1,412.

 

The provision for short-term consumer loans of $10,968 is net of debt sales of $527 for the three months ended June 30, 2016.

 

11


 

The provision for medium-term consumer loans of $10,357 is net of debt sales of $1,850 for the three months ended June 30, 2016.

 

The provision and subsequent charge off related to troubled debt restructurings totaled $33 and is included in the provision for medium-term consumer loans for the three months ended June 30, 2016. For these loans evaluated for impairment, there were $391 of payment defaults during the three months ended June 30, 2016. The troubled debt restructurings during the three months ended June 30, 2016 are subject to an allowance of $18 with a net carrying value of $47 at June 30, 2016.

 

Changes in the allowance for loan losses by product type for the six months ended June 30, 2016, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance as

 

 

 

Balance

 

 

 

 

 

 

 

 

 

 

Balance

 

Receivables

 

a percentage

 

 

    

1/1/2016

    

Provision

    

Charge-Offs

    

Recoveries

    

6/30/2016

    

6/30/2016

    

of receivable

 

Short-term consumer loans

 

$

3,676

 

$

18,699

 

$

(53,518)

 

$

33,904

 

$

2,761

 

$

64,479

 

4.28

%  

Medium-term consumer loans

 

 

20,216

 

 

22,335

 

 

(32,369)

 

 

5,359

 

 

15,541

 

 

65,210

 

23.83

%  

 

 

$

23,892

 

$

41,034

 

$

(85,887)

 

$

39,263

 

$

18,302

 

$

129,689

 

14.11

%  

 

The provision for loan losses for the six months ended June 30, 2016, also includes losses from returned items from check cashing of $2,977.

 

The provision for short-term consumer loans of $18,699 is net of debt sales of $944 for the six months ended June 30, 2016.

 

The provision for medium-term consumer loans of $22,335 is net of debt sales of $1,850 for the six months ended June 30, 2016.

 

The provision and subsequent charge off related to troubled debt restructurings totaled $389 and is included in the provision for medium-term consumer loans for the six months ended June 30, 2016. For these loans evaluated for impairment, there were $768 of payment defaults during the six months ended June 30, 2016. The troubled debt restructurings during the six months ended June 30, 2016 are subject to an allowance of $114 with a net carrying value of $335 at June 30, 2016.

 

The Company has subsidiaries that facilitate third-party lender loans. Changes in the accrual for third-party lender losses for the three months and six months ended June 30, 2017, and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

    

2017

    

2016

    

2017

    

2016

Balance, beginning of period

    

$

2,691

    

$

2,216

    

$

3,099

    

$

2,610

Provision for loan losses

 

 

4,764

 

 

7,535

 

 

9,251

 

 

12,736

Charge-offs, net

 

 

(4,354)

 

 

(6,477)

 

 

(9,249)

 

 

(12,072)

Balance, end of period

 

$

3,101

 

$

3,274

 

$

3,101

 

$

3,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross finance receivables for which the Company has recorded an accrual for third‑party lender losses totaled $30,459 and $36,927 at June 30, 2017, and December 31, 2016, respectively, and the corresponding guaranteed consumer loans are disclosed as an off‑balance sheet arrangement. The provision for third party lender losses of $4,764 and $9,251 for the three months and six months ending June 30, 2017 is net of debt sales of $62 and $243, respectively. The provision for third party lender losses of $7,535 and $12,736 for the three months and six months ending June 30, 2016 is net of debt sales of $109 and $460, respectively.

 

The Company was required to purchase $9,004 and $13,699 of loans as part of the CSO Program during the three months ended June 30, 2017 and 2016 and $20,776 and $28,618 during the six months ended June 30, 2017 and 2016, respectively. As these loans were in default when purchased, they met the Company’s charge-off policy and were

12


 

fully charged-off at acquisition. The Company recognized recoveries of $4,382 and $7,059 for collections on these loans during the three months ended June 30, 2017 and 2016 and $11,601 and $16,613 during the six months ended June 30, 2017 and 2016, respectively.

 

The Company considers the near term repayment performance of finance receivables as its primary credit quality indicator. The Company performs credit checks through consumer reporting agencies on certain borrowers. If a third-party lender provides the advance, the applicable third‑party lender decides whether to approve the loan and establishes all of the underwriting criteria and terms, conditions, and features of the customer’s loan agreement.

 

The aging of receivables at June 30, 2017, and December 31, 2016, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

Current finance receivables

    

$

97,394

    

92.0

%  

$

102,515

    

90.7

%  

Past due finance receivables (1 - 30 days)

 

 

 

 

 

 

 

 

 

 

 

Short-term consumer loans

 

 

628

 

0.6

%  

 

290

 

0.3

%  

Medium-term consumer loans

 

 

4,547

 

4.4

%  

 

6,096

 

5.4

%  

Total past due finance receivables (1 - 30 days)

 

 

5,175

 

5.0

%  

 

6,386

 

5.7

%  

Past due finance receivables (31 - 60 days)

 

 

 

 

 

 

 

 

 

 

 

Medium-term consumer loans

 

 

2,032

 

1.9

%  

 

2,668

 

2.4

%  

Total past due finance receivables (31 - 60 days)

 

 

2,032

 

1.9

%  

 

2,668

 

2.4

%  

Past due finance receivables (61 - 90 days)

 

 

 

 

 

 

 

 

 

 

 

Medium-term consumer loans

 

 

1,156

 

1.1

%  

 

1,451

 

1.2

%  

Total past due finance receivables (61 - 90 days)

 

 

1,156

 

1.1

%  

 

1,451

 

1.2

%  

Total delinquent

 

 

8,363

 

8.0

%  

 

10,505

 

9.3

%  

 

 

$

105,757

 

100.0

%  

$

113,020

 

100.0

%  

 

 

 

Note 3. Related Party Transactions and Balances

 

Certain senior members of management have an interest in a vendor from which the Company purchases telecommunications services. Hardware and services provided to the Company by the vendor at a reduced rate for the three months ended June 30, 2017 and 2016 were $2,089 and $958, and for the six months ended June 30, 2017 and 2016, were  $3,455 and $1,746, respectively. If the Company were to source the service from another vendor, the overall cost of the services may increase.

 

The Company has a consulting agreement with a related party for information technology consulting services. Consulting services provided to the Company for the three months ended June 30, 2017 and 2016, were $65 and $128, and for the six months ended June 30, 2017 and 2016, were $132 and $266, respectively.

 

There were no additional significant new, or changes to existing, related party transactions during the six months ended June 30, 2017.

 

Note 4. Goodwill and Other Intangible Assets

 

Intangible amortization expense for the three months ended June 30, 2017, and 2016 was $126 and $146, respectively, and for the six months ended June 30, 2017 and 2016 were $250, and 417, respectively. There were no additional significant changes to goodwill and other intangible assets during the six months ended June 30, 2017. 

 

13


 

Note 5. Pledged Assets and Debt

 

Lines of credit at June 30, 2017 and December 31, 2016, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

Issuance

 

Net

 

 

 

 

Issuance

 

Net

 

 

    

Principal

    

Costs

    

Principal

    

Principal

    

Costs

    

Principal

 

$7,000 Revolving credit, secured, prime plus 1.00% with 5.00% floor, collateralized by all of Insight Capital, LLC's assets, terminated June 2017

 

$

 —

 

$

 —

 

$

 —

 

$

2,250

 

$

14

 

$

2,236

 

$47,000 Revolving credit, secured, interest rate as defined below, due January 2019, collateralized by all Guarantor Company assets

 

 

47,000

 

 

2,611

 

 

44,389

 

 

30,600

 

 

760

 

 

29,840

 

 

 

 

47,000

 

 

2,611

 

 

44,389

 

 

32,850

 

 

774

 

 

32,076

 

Less current maturities

 

 

 —

 

 

 —

 

 

 —

 

 

2,250

 

 

14

 

 

2,236

 

Long-term portion

 

$

47,000

 

$

2,611

 

$

44,389

 

$

30,600

 

$

760

 

$

29,840

 

 

In June 2017, the Company closed on an amendment of its existing $30,600 revolving credit facility which included an increase and extension, together with a refinancing of a $7,000 subsidiary revolving credit facility, resulting in a $47,000 revolving credit facility with a January 2019 maturity. The interest rate is set at three-month LIBOR plus 11%, and there is an exit fee for early termination of the facility. The 3-month LIBOR was 1.30% and 1.00% at June 30, 2017 and December 31, 2016, respectively, and the prime rate was 4.25% and 3.75% at June 30, 2017 and December 31, 2016, respectively. 

 

Senior secured notes payable at June 30, 2017, and December 31, 2016, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

Issuance

 

Net

 

 

 

 

Issuance

 

Net

 

 

    

Principal

    

Costs

    

Principal

    

Principal

    

Costs

    

Principal

 

$395,000 Senior Note payable, 10.75 %, collateralized by all Guarantor Company assets, semi-annual interest payments with principal due April 2019

 

$

237,290

 

$

2,068

 

$

235,222

 

$

237,290

 

$

2,631

 

$

234,659

 

$25,000 Senior Note payable, 12.75 %, collateralized by all Guarantor Company assets, semi-annual interest payments with principal due May 2020

 

 

12,500

 

 

195

 

 

12,305

 

 

12,500

 

 

230

 

 

12,270

 

Long-term portion

 

$

249,790

 

$

2,263

 

$

247,527

 

$

249,790

 

$

2,861

 

$

246,929

 

 

 

 

14


 

Subsidiary notes payable at June 30, 2017, and December 31, 2016, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

Issuance

 

Net

 

 

 

 

Issuance

 

Net

 

 

    

Principal

    

Costs

    

Principal

    

Principal

    

Costs

    

Principal

 

$55,000 Note, secured, 16.75%, collateralized by acquired loans, due January 2019

 

$

55,000

 

$

981

 

$

54,019

 

$

40,000

 

$

593

 

$

39,407

 

$7,300 Term note, secured, 18.50% collateralized by acquired loans, due April 2017

 

 

 —

 

 

 —

 

 

 —

 

 

7,300

 

 

 5

 

 

7,295

 

$1,425 Term note, secured, 4.25%, collateralized by financed asset, due July 2019

 

 

911

 

 

 7

 

 

904

 

 

939

 

 

 8

 

 

931

 

$1,165 Term note, secured, 4.50%, collateralized by financed asset, due May 2021

 

 

1,105

 

 

16

 

 

1,089

 

 

1,133

 

 

18

 

 

1,115

 

 

 

 

57,016

 

 

1,004

 

 

56,012

 

 

49,372

 

 

624

 

 

48,748

 

Less current maturities

 

 

117

 

 

 1

 

 

116

 

 

7,414

 

 

 7

 

 

7,407

 

Long-term portion

 

$

56,899

 

$

1,003

 

$

55,896

 

$

41,958

 

$

617

 

$

41,341

 

 

 

In April 2017, the Company’s non-guarantor, or unrestricted subsidiary, amended and restated its existing $40,000 note to increase the borrowing capacity up to $55,000.  The $55,000 note has a maturity date of January 2019 and an interest rate of 16.75%. The proceeds from the amended note will be used to acquire loans from guarantor subsidiaries. In connection with the amendment, the other non-guarantor, or unrestricted subsidiary’s, $7,300 note was satisfied in full. The note was further amended in July 2017 to increase the credit facility to $60,000.

 

There were no additional significant changes to pledged assets or debt during the six months ended June 30, 2017.

 

Note 6. Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities at June 30, 2017, and December 31, 2016, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

 

Accounts payable

 

$

3,547

 

$

5,160

 

Accrued payroll and compensated absences

 

 

6,224

 

 

7,004

 

Wire transfers payable

 

 

1,303

 

 

2,089

 

Accrual for third-party losses

 

 

3,101

 

 

3,099

 

Unearned CSO Fees

 

 

7,321

 

 

7,388

 

Deferred rent

 

 

835

 

 

1,034

 

Bill payment service liability

 

 

1,366

 

 

2,868

 

Lease termination

 

 

2,278

 

 

1,595

 

Other

 

 

8,794

 

 

6,765

 

 

 

$

34,769

 

$

37,002

 

 

 

Note 7. Operating and Capital Lease Commitments and Total Rental Expense

 

Rental expense, including common area maintenance and real estate tax expense, totaled $6,908 and $6,997 for the three months ended June 30, 2017, and 2016,  and $13,942 and $14,051 for the six months ended June 30, 2017 and 2016,  respectively.

 

Lease termination costs of $944 and $1,101 were recognized for the three months, and $2,753 and $1,101 for the six months, ended June 30, 2017 and 2016, respectively, and the remaining operating lease obligation for closed retail locations was $4,456 and $2,661 at June 30, 2017 and December 31, 2016, respectively. The Company closed fifty three retail locations during the six months ended June 30, 2017.

15


 

 

 

Note 8. Concentrations of Credit Risks

 

The Company’s portfolio of finance receivables is comprised of loan agreements with customers living in thirty five states and consequently such customers’ ability to honor their contracts may be affected by economic conditions in those states. Additionally, the Company is subject to regulation by federal and state governments that affect the products and services provided by the Company. To the extent that laws and regulations are passed that affect the Company’s ability to offer loans or similar products in any of the states in which it operates, the Company’s financial position could be adversely affected.

 

The following table summarizes the allocation of the portfolio balance by state at June 30, 2017, and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

Balance

 

Percentage of

 

Balance

 

Percentage of

 

State

    

Outstanding

    

Total Outstanding

    

Outstanding

    

Total Outstanding

 

Alabama

 

$

11,442

 

10.8

%  

$

13,927

 

12.3

%

Arizona

 

 

9,296

 

8.8

 

 

10,353

 

9.2

 

California

 

 

38,981

 

36.9

 

 

48,644

 

43.0

 

Mississippi

 

 

5,761

 

5.4

 

 

1,879

 

1.7

 

Virginia

 

 

9,320

 

8.8

 

 

9,373

 

8.3

 

Other retail segment states

 

 

21,095

 

20.0

 

 

19,102

 

16.9

 

Other internet segment states

 

 

9,862

 

9.3

 

 

9,742

 

8.6

 

Total

 

$

105,757

 

100.0

%  

$

113,020

 

100.0

%

 

 

The other retail segment states are:  Florida, Indiana, Kentucky, Michigan, Ohio, Oregon, and Tennessee.

 

The other internet segment states are: Alabama, Alaska, California, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Maryland, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.

 

The Company offers a CSO product in Ohio and Texas to assist consumers in obtaining credit with unaffiliated third-party lenders. Total gross finance receivables for which the Company has recorded an accrual for third-party lender losses totaled $30,459 and $36,927 at June 30, 2017, and December 31, 2016, respectively, and the corresponding guaranteed consumer loans are disclosed as an off-balance sheet arrangement.

 

Note 9. Contingencies

 

From time‑to‑time the Company is a defendant in various lawsuits and administrative proceedings wherein certain amounts are claimed or violations of law or regulations are asserted. In the opinion of the Company’s management, these claims are without substantial merit and should not result in judgments which in the aggregate would have a material adverse effect on the Company’s financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

16


 

Note 10. Stock Based Compensation

 

During the three months ended June 30, 2017, a retired Board member settled 8,484 restricted stock units as shares of common stock. 

 

Restricted stock unit activity for the six months ended June 30, 2017, is as follows (these amounts have not been rounded in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

Aggregate

 

 

 

 

 

Exercise Price

 

Weighted-Average

 

Intrinsic

 

 

 

 

 

(actual per

 

Remaining

 

Value

 

 

    

Shares

    

share price)

    

Contractual Term

    

(thousands)

 

Outstanding at December 31, 2016

 

48,872

 

$

10.77

 

 

 —

 

 

N/A

 

Granted

 

 —

 

 

 —

 

 

 —

 

 

N/A

 

Exercised

 

8,484

 

 

 —

 

 

 —

 

 

N/A

 

Repurchased

 

 —

 

 

 —

 

 

 —

 

 

N/A

 

Outstanding at June 30, 2017

 

40,388

 

$

11.30

 

 

 —

 

 

N/A

 

Exercisable at June 30, 2017

 

40,388

 

$

11.30

 

 

 —

 

$

 —

 

Vested or expected to vest at June 30, 2017

 

40,388

 

$

11.30

 

 

 —

 

$

 —

 

 

Stock-based compensation costs for the six months ended June 30, 2017, and 2016 were $32 and $1,270, respectively. As of June 30, 2017, and December 31, 2016, unrecognized stock-based compensation costs to be recognized over future periods approximated $99 and $42, respectively. At June 30, 2017, the remaining unrecognized compensation expense was $99 for certain awards that vest over the requisite service period. The remaining compensation expense of $99 is expected to be recognized over a weighted-average period of 2.51 years. The total income tax benefit recognized in the income statement for the stock-based compensation arrangements was $13 and $508 for the six months ended June 30, 2017 and 2016, respectively.

 

 

 

 

 

 

17


 

Note 11. Business Segments

 

The Company has elected to organize and report on its operations as two operating segments: Retail financial services and Internet financial services.

 

The following tables present summarized financial information for the Company’s segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended June 30, 2017

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

333,345

 

 

 

$

35,802

 

 

    

 

 

    

$

369,147

 

 

 

Goodwill

 

 

113,499

 

 

 

 

 —

 

 

 

 

 

 

 

113,499

 

 

 

Other Intangible Assets

 

 

449

 

 

 

 

716

 

 

 

 

 

 

 

1,165

 

 

 

Total Revenues

 

$

65,726

 

100.0

%  

$

15,442

 

100.0

%  

 

 

 

$

81,168

 

100.0

%  

Provision for Loan Losses

 

 

15,402

 

23.4

%  

 

8,457

 

54.8

%  

 

 

 

 

23,859

 

29.4

%  

Other Operating Expenses

 

 

39,358

 

59.9

%  

 

1,926

 

12.4

%  

 

 

 

 

41,284

 

50.9

%  

Operating Gross Profit

 

 

10,966

 

16.7

%  

 

5,059

 

32.8

%  

 

 

 

 

16,025

 

19.7

%  

Interest Expense, net

 

 

8,687

 

13.2

%  

 

3,744

 

24.2

%  

 

 

 

 

12,431

 

15.3

%  

Depreciation and Amortization

 

 

1,093

 

1.7

%  

 

88

 

0.6

%  

 

 

 

 

1,181

 

1.5

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

20,290

 

 

20,290

 

25.0

%  

Income (loss) from Continuing Operations, before tax

 

 

1,186

 

1.8

%  

 

1,227

 

7.9

%  

 

(20,290)

 

 

(17,877)

 

(22.0)

%  


(a)

Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose other corporate expenses as unallocated.

 

There were no intersegment revenues for the three months ended June 30, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the six months ended June 30, 2017

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

333,345

 

 

 

$

35,802

 

 

    

 

 

    

$

369,147

 

 

 

Goodwill

 

 

113,499

 

 

 

 

 —

 

 

 

 

 

 

 

113,499

 

 

 

Other Intangible Assets

 

 

449

 

 

 

 

716

 

 

 

 

 

 

 

1,165

 

 

 

Total Revenues

 

$

134,417

 

100.0

%  

$

32,103

 

100.0

%  

 

 

 

$

166,520

 

100.0

%  

Provision for Loan Losses

 

 

27,460

 

20.4

%  

 

15,939

 

49.6

%  

 

 

 

 

43,399

 

26.1

%  

Other Operating Expenses

 

 

77,564

 

57.7

%  

 

2,936

 

9.2

%  

 

 

 

 

80,500

 

48.3

%  

Operating Gross Profit

 

 

29,393

 

21.9

%  

 

13,228

 

41.2

%  

 

 

 

 

42,621

 

25.6

%  

Interest Expense, net

 

 

16,053

 

11.9

%  

 

7,749

 

24.1

%  

 

 

 

 

23,802

 

14.3

%  

Depreciation and Amortization

 

 

2,222

 

1.7

%  

 

268

 

0.8

%  

 

 

 

 

2,490

 

1.5

%  

Lease Termination Expenses

 

 

 —

 

 —

 

 

1,762

 

5.5

%  

 

 

 

 

1,762

 

1.1

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

40,476

 

 

40,476

 

24.3

%  

Income (loss) from Continuing Operations, before tax

 

 

11,118

 

8.3

%  

 

3,449

 

10.7

%  

 

(40,476)

 

 

(25,909)

 

(15.6)

%  


(a)Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose other corporate expenses as unallocated.

 

There were no intersegment revenues for the six months ended June 30, 2017.

 

 

18


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended June 30, 2016

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

336,767

 

 

 

$

77,691

 

 

 

 

 

 

$

414,458

 

 

 

Goodwill

 

 

146,877

 

 

 

 

 —

 

 

 

 

 

 

 

146,877

 

 

 

Other Intangible Assets

 

 

286

 

 

 

 

1,050

 

 

 

 

 

 

 

1,336

 

 

 

Total Revenues

 

$

74,326

 

100.0

%  

$

24,003

 

100.0

%  

 

 

 

$

98,329

 

100.0

%  

Provision for Loan Losses

 

 

17,112

 

23.0

%  

 

13,160

 

54.8

%  

 

 

 

 

30,272

 

30.8

%  

Other Operating Expenses

 

 

41,316

 

55.6

%  

 

3,835

 

16.0

%  

 

 

 

 

45,151

 

45.9

%  

Operating Gross Profit

 

 

15,898

 

21.4

%  

 

7,008

 

29.2

%  

 

 

 

 

22,906

 

23.3

%  

Interest Expense, net

 

 

6,720

 

9.0

%  

 

4,127

 

17.2

%  

 

 

 

 

10,847

 

11.0

%  

Depreciation and Amortization

 

 

1,008

 

1.4

%  

 

214

 

0.9

%  

 

 

 

 

1,222

 

1.2

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

22,801

 

 

22,801

 

23.2

%  

Income (loss) from Continuing Operations, before tax

 

 

8,170

 

11.0

%  

 

2,667

 

11.1

%  

 

(22,801)

 

 

(11,964)

 

(12.2)

%  

________________________________________

(a)Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose other corporate expenses as unallocated.

 

There were no intersegment revenues for the three months ended June 30, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the six months ended June 30, 2016

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

336,767

 

 

 

$

77,691

 

 

 

 

 

 

$

414,458

 

 

 

Goodwill

 

 

146,877

 

 

 

 

 —

 

 

 

 

 

 

 

146,877

 

 

 

Other Intangible Assets

 

 

286

 

 

 

 

1,050

 

 

 

 

 

 

 

1,336

 

 

 

Total Revenues

 

$

155,695

 

100.0

%  

$

50,191

 

100.0

%  

 

 

 

$

205,886

 

100.0

%  

Provision for Loan Losses

 

 

29,677

 

19.1

%  

 

27,070

 

53.9

%  

 

 

 

 

56,747

 

27.6

%  

Other Operating Expenses

 

 

80,054

 

51.4

%  

 

8,060

 

16.1

%  

 

 

 

 

88,114

 

42.8

%  

Operating Gross Profit

 

 

45,964

 

29.5

%  

 

15,061

 

30.0

%  

 

 

 

 

61,025

 

29.6

%  

Interest Expense, net

 

 

14,034

 

9.0

%  

 

8,276

 

16.5

%  

 

 

 

 

22,310

 

10.8

%  

Depreciation and Amortization

 

 

1,975

 

1.3

%  

 

456

 

0.9

%  

 

 

 

 

2,431

 

1.2

%  

Loss on sale of subsidiary

 

 

1,569

 

1.0

%  

 

 —

 

 —

 

 

 

 

 

1,569

 

0.8

%  

Gain on Debt Extinguishment (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

(62,852)

 

 

(62,852)

 

(30.5)

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

44,386

 

 

44,386

 

21.6

%  

Income from Continuing Operations, before tax

 

 

28,386

 

18.2

%  

 

6,329

 

12.6

%  

 

18,466

 

 

53,181

 

25.8

%  


(a)

Represents income and expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose the gain on debt extinguishment and other corporate expenses as unallocated.

 

There were no intersegment revenues for the six months ended June 30, 2016.

 

Note 12. Income Taxes

 

The Company files a consolidated federal income tax return. The Company files consolidated or separate state income tax returns as permitted by the individual states in which it operates. The differences between our effective rate

19


 

and  the U.S. statutory rate is primarily due to non-deductible expenses, state taxes and changes in valuation allowance. The Company had no liability recorded for unrecognized tax benefits at June 30, 2017, and December 31, 2016.

 

At June 30, 2017, the Company had gross deferred tax assets of $40,392 and a net deferred tax liability of $10,098. At December 31, 2016, the Company had gross deferred tax assets of $40,037 and a net deferred tax liability of $9,675. A valuation allowance of $50,490 and $49,712 was recognized at June 30, 2017 and December 31, 2016, respectively, to reduce the deferred tax assets to the amount that was more likely than not expected to be realized. In evaluating whether a valuation allowance was needed for the deferred tax assets, the Company considered the ability to carry net operating losses back to prior periods, reversing taxable temporary differences, and estimates of future taxable income. There have been no credits or net operating losses that have expired. The projections were evaluated in light of past operating results and considered the risks associated with generating future taxable income due to macroeconomic conditions in the markets in which the Company operates, regulatory developments and cost containment. The Company will continue to evaluate the need for a valuation allowance against deferred tax assets in future periods and will adjust the allowance as necessary if it determines that it is more likely than not that some or all of the deferred tax assets will be realized.

 

Note 13. Transactions with Variable Interest Entities

 

The Company has limited agency agreements with unaffiliated third-party lenders. The agreements govern the terms by which the Company refers customers to that lender, on a non-exclusive basis, for a possible extension of credit, processes loan applications and commits to reimburse the lender for any loans or related fees that were not collected from such customers. As of June 30, 2017, and December 31, 2016, the outstanding amount of active consumer loans guaranteed by the Company, which represents the Company’s maximum exposure, was $30,459 and $36,927, respectively. This obligation is recorded as a current liability on the Company’s consolidated balance sheet. The accrual for third party lender losses related to these obligations totaled $3,101 and $3,099 as of June 30, 2017 and December 31, 2016, respectively. The Company has determined that the lenders are Variable Interest Entities (“VIEs”) but that the Company is not the primary beneficiary of the VIEs. Therefore, the Company has not consolidated either lender.

 

 

Note 14. Supplemental Guarantor Information

 

The 2019 notes and the 2020 notes contain various covenants that, subject to certain exceptions defined in the indentures governing the notes (the “Indentures”), limit the Company’s ability to, among other things, engage in certain transactions with affiliates, pay dividends or distributions, redeem or repurchase capital stock, incur or assume liens or additional debt, and consolidate or merge with or into another entity or sell substantially all of its assets. The Company has optional redemption features on the 2019 notes and the 2020 notes prior to their maturity which, depending on the date of the redemption, would require premiums to be paid in addition to all principal and interest due.

 

The 2019 notes and 2020 notes are guaranteed by all of the Company’s guarantor subsidiaries existing as of April 29, 2011 (the date the Company issued the 2019 notes) and any subsequent guarantor subsidiaries that guarantee the Company’s indebtedness or the indebtedness of any other subsidiary guarantor (the “Subsidiary Guarantors”), in accordance with the Indentures. The Company is a holding company and has no independent assets or operations of its own. The guarantees under the 2019 notes and 2020 notes are full, unconditional, and joint and several. There are no restrictions on the ability of the Company or any of the Subsidiary Guarantors to obtain funds from its restricted subsidiaries by dividend or loan, except for net worth requirements of certain states in which the Company operates. Certain Subsidiary Guarantors are required to maintain net worth ranging from $10 to $2,000. The total net worth requirements of these Subsidiary Guarantors is $5,700. The Indentures contain certain affirmative and negative covenants applicable to the Company and its Subsidiary Guarantors, including restrictions on their ability to incur additional indebtedness, consummate certain asset sales, make investments in certain entities that create liens on their assets, enter into certain affiliate transactions and make certain restricted payments, including restrictions on the Company’s ability to pay dividends on, or repurchase, its common stock.

 

 

20


 

Note 15. Supplemental Condensed Consolidating Guarantor and Non‑ Guarantor Financial Information

 

The following presents the condensed consolidating guarantor financial information as of June 30, 2017, and December 31, 2016, and for the six months ended June 30, 2017, and 2016, for the subsidiaries of the Company that serve as guarantors of the 2019 notes and the 2020 notes, and for the subsidiaries that do not serve as a guarantor. The non-guarantor subsidiaries are Florida II, which was sold on February 1, 2016, CCFI Funding LLC, CCFI Funding II LLC, Direct Financial Solutions of UK Limited and its subsidiary Cash Central UK Limited, Direct Financial Solutions of Canada, Inc and its subsidiaries DFS-CSSC Financial Services LLC, DFS-CC Financial Services (Calgary) LLC and DFS-CC Financial Services (Toronto) LLC, and Direct Financial Solutions of Australia Pty Ltd and its subsidiary Cash Central of Australia Pty Ltd. The UK, Canada, and Australia entities, and their subsidiaries, were dissolved during or prior to the first quarter of 2017. Each of the Company’s guarantor subsidiaries are 100% owned by the Company or its subsidiaries, and all guarantees are full, unconditional, and joint and several.

 

Of the entities under “Non-Guarantor Subsidiaries” in the tables below, Florida II, CCFI Funding, and CCFI Funding II are “Unrestricted Subsidiaries” as defined in the Indentures. Buckeye Check Cashing of Florida II, LLC was acquired on July 31, 2012, and was sold on February 1, 2016, CCFI Funding was created on December 20, 2013, and CCFI Funding II was established on September 19, 2014. Refer to the “Non-Guarantor Subsidiaries” columns in the following condensed consolidating schedules. Florida II is not included in the Balance Sheets as the entity was sold on February 1, 2016, and is included in the Statement of Operations for only the month ended January 31, 2016. The remainder of the entities included under “Non-Guarantor Subsidiaries” in the tables below are “Restricted Subsidiaries” as defined in the Indentures governing the 2019 notes and the 2020 notes and, for the periods specified, did not have material assets, liabilities, revenue or expenses.

 

The supplemental guarantor information required by GAAP distinguishes between non-guarantor and guarantor financial information based on the legal entities and the guarantor requirements contained in the Indentures governing the 2019 notes, 2020 notes, and the Company’s revolving credit agreement. ASC 350-20, Intangibles - Goodwill and Other, however, requires that goodwill be allocated to reporting units irrespective of which legal entity the goodwill is associated with.  When a portion of a reporting unit is sold, goodwill is allocated to the business disposed of based on the relative fair values of the business sold and the retained portion of the reporting unit. The sale of Florida II on February 1, 2016, resulted in a reduction of goodwill of $5,691 for the Company’s Retail services segment, with the remaining goodwill of approximately $25,344 allocated to Florida II’s guarantor parent. The book loss on the sale of Florida II is $1,569 whereas the tax loss on the sale of Florida II is $24,062. For tax purposes, all of the goodwill associated with the original Florida II acquisition is written off, which reflects the difference in the book and tax treatment of goodwill associated with an individual acquisition. 

 

21


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Balance Sheet (unaudited)

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

98,435

 

$

12,138

 

$

 —

 

$

110,573

 

Restricted cash

 

 

 —

 

 

3,230

 

 

 —

 

 

 —

 

 

3,230

 

Finance receivables, net

 

 

 —

 

 

40,546

 

 

44,885

 

 

 —

 

 

85,431

 

Card related pre-funding and receivables

 

 

 —

 

 

1,822

 

 

 —

 

 

 —

 

 

1,822

 

Other current assets

 

 

 —

 

 

24,111

 

 

52

 

 

(9,187)

 

 

14,976

 

Total current assets

 

 

 —

 

 

168,144

 

 

57,075

 

 

(9,187)

 

 

216,032

 

Noncurrent Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in subsidiaries

 

 

358,654

 

 

 —

 

 

 —

 

 

(358,654)

 

 

 —

 

Finance receivables, net

 

 

 —

 

 

4,393

 

 

 —

 

 

 —

 

 

4,393

 

Leasehold improvements and equipment, net

 

 

 —

 

 

31,591

 

 

 —

 

 

 —

 

 

31,591

 

Goodwill

 

 

 —

 

 

113,499

 

 

 —

 

 

 —

 

 

113,499

 

Other intangible assets

 

 

 —

 

 

1,165

 

 

 —

 

 

 —

 

 

1,165

 

Security deposits

 

 

 —

 

 

2,467

 

 

 —

 

 

 —

 

 

2,467

 

Total assets

 

$

358,654

 

$

321,259

 

$

57,075

 

$

(367,841)

 

$

369,147

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

 —

 

$

34,769

 

$

 —

 

$

 —

 

$

34,769

 

Money orders payable

 

 

 —

 

 

7,926

 

 

 —

 

 

 —

 

 

7,926

 

Accrued interest

 

 

4,533

 

 

 4

 

 

3,335

 

 

(3,334)

 

 

4,538

 

Current portion of capital lease obligation

 

 

 —

 

 

858

 

 

 —

 

 

 —

 

 

858

 

Current portion of subsidiary note payable

 

 

 —

 

 

116

 

 

 —

 

 

 —

 

 

116

 

CCFI funding notes

 

 

 —

 

 

 —

 

 

5,853

 

 

(5,853)

 

 

 —

 

Deferred revenue

 

 

 —

 

 

3,982

 

 

 —

 

 

 —

 

 

3,982

 

Total current liabilities

 

 

4,533

 

 

47,655

 

 

9,188

 

 

(9,187)

 

 

52,189

 

Noncurrent Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease termination payable

 

 

 —

 

 

2,178

 

 

 —

 

 

 —

 

 

2,178

 

Capital lease obligation

 

 

 —

 

 

49

 

 

 —

 

 

 —

 

 

49

 

Lines of credit

 

 

44,389

 

 

 —

 

 

 —

 

 

 —

 

 

44,389

 

Subsidiary note payable

 

 

 —

 

 

1,878

 

 

54,018

 

 

 —

 

 

55,896

 

Senior secured notes

 

 

247,527

 

 

 —

 

 

 —

 

 

 —

 

 

247,527

 

   Deferred revenue

 

 

 —

 

 

7,688

 

 

 —

 

 

 —

 

 

7,688

 

   Deferred tax liability

 

 

 —

 

 

10,098

 

 

 —

 

 

 —

 

 

10,098

 

Total liabilities

 

 

296,449

 

 

69,546

 

 

63,206

 

 

(9,187)

 

 

420,014

 

Stockholders' Equity (Deficit)

 

 

62,205

 

 

251,713

 

 

(6,131)

 

 

(358,654)

 

 

(50,867)

 

Total liabilities and stockholders' equity

 

$

358,654

 

$

321,259

 

$

57,075

 

$

(367,841)

 

$

369,147

 

 

22


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Balance Sheet

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

71,777

 

$

34,556

 

$

 —

 

$

106,333

 

Restricted cash

 

 

 —

 

 

3,015

 

 

 —

 

 

 —

 

 

3,015

 

Finance receivables, net

 

 

 —

 

 

71,603

 

 

16,357

 

 

 —

 

 

87,960

 

Short-term investments, certificates of deposit

 

 

 —

 

 

500

 

 

 —

 

 

 —

 

 

500

 

Card related pre-funding and receivables

 

 

 —

 

 

1,545

 

 

 —

 

 

 —

 

 

1,545

 

Other current assets

 

 

 —

 

 

28,438

 

 

3,192

 

 

(12,226)

 

 

19,404

 

Total current assets

 

 

 —

 

 

176,878

 

 

54,105

 

 

(12,226)

 

 

218,757

 

Noncurrent Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in subsidiaries

 

 

343,638

 

 

 —

 

 

 —

 

 

(343,638)

 

 

 —

 

Finance receivables, net

 

 

 —

 

 

5,859

 

 

 —

 

 

 —

 

 

5,859

 

Leasehold improvements and equipment, net

 

 

 —

 

 

36,431

 

 

 —

 

 

 —

 

 

36,431

 

Goodwill

 

 

 —

 

 

113,290

 

 

 —

 

 

 —

 

 

113,290

 

Other intangible assets

 

 

 —

 

 

1,412

 

 

 —

 

 

 —

 

 

1,412

 

Security deposits

 

 

 —

 

 

2,614

 

 

 —

 

 

 —

 

 

2,614

 

Total assets

 

$

343,638

 

$

336,484

 

$

54,105

 

$

(355,864)

 

$

378,363

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

 —

 

$

40,208

 

$

428

 

$

(3,634)

 

$

37,002

 

Money orders payable

 

 

 —

 

 

8,209

 

 

 —

 

 

 —

 

 

8,209

 

Accrued interest

 

 

4,517

 

 

10

 

 

2,939

 

 

(2,739)

 

 

4,727

 

Current portion of capital lease obligation

 

 

 —

 

 

1,155

 

 

 —

 

 

 —

 

 

1,155

 

Current portion of lines of credit

 

 

 —

 

 

2,236

 

 

 —

 

 

          —

 

 

2,236

 

Current portion of subsidiary note payable

 

 

 —

 

 

112

 

 

7,295

 

 

 —

 

 

7,407

 

CCFI funding notes

 

 

 —

 

 

 —

 

 

5,853

 

 

(5,853)

 

 

 —

 

Deferred revenue

 

 

 —

 

 

2,753

 

 

 —

 

 

 —

 

 

2,753

 

Total current liabilities

 

 

4,517

 

 

54,683

 

 

16,515

 

 

(12,226)

 

 

63,489

 

Noncurrent Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease termination payable

 

 

 —

 

 

1,066

 

 

 —

 

 

 —

 

 

1,066

 

Capital lease obligation

 

 

 —

 

 

292

 

 

 —

 

 

 —

 

 

292

 

Lines of credit

 

 

29,840

 

 

 —

 

 

 —

 

 

 —

 

 

29,840

 

Subsidiary note payable

 

 

 —

 

 

1,934

 

 

39,407

 

 

 —

 

 

41,341

 

Senior secured notes

 

 

246,929

 

 

 —

 

 

 —

 

 

 —

 

 

246,929

 

Deferred revenue

 

 

 —

 

 

10,055

 

 

 —

 

 

 —

 

 

10,055

 

Deferred tax liability

 

 

 

 

 

9,675

 

 

 —

 

 

 —

 

 

9,675

 

Total liabilities

 

 

281,286

 

 

77,705

 

 

55,922

 

 

(12,226)

 

 

402,687

 

Stockholders' Equity (Deficit)

 

 

62,352

 

 

258,779

 

 

(1,817)

 

 

(343,638)

 

 

(24,324)

 

Total liabilities and stockholders' equity

 

$

343,638

 

$

336,484

 

$

54,105

 

$

(355,864)

 

$

378,363

 

 

23


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Statements of Income (unaudited)

Six Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivable fees

 

$

 —

 

$

71,671

    

$

25,310

    

$

 —

 

$

96,981

 

Credit service fees

 

 

 —

 

 

33,285

 

 

 —

 

 

 —

 

 

33,285

 

Check cashing fees

 

 

 —

 

 

23,905

 

 

 —

 

 

 —

 

 

23,905

 

Card fees

 

 

 —

 

 

4,120

 

 

 —

 

 

 —

 

 

4,120

 

Dividend

 

 

 —

 

 

11,000

 

 

 —

 

 

(11,000)

 

 

 —

 

Other

 

 

 —

 

 

8,686

 

 

136

 

 

(593)

 

 

8,229

 

Total revenues

 

 

 —

 

 

152,667

 

 

25,446

 

 

(11,593)

 

 

166,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

 

 —

 

 

34,789

 

 

 —

 

 

 —

 

 

34,789

 

Provision for loan losses

 

 

 —

 

 

30,935

 

 

12,464

 

 

 —

 

 

43,399

 

Occupancy

 

 

 —

 

 

13,231

 

 

 —

 

 

 —

 

 

13,231

 

Advertising and marketing

 

 

 —

 

 

2,358

 

 

 —

 

 

 —

 

 

2,358

 

Lease termination costs

 

 

 —

 

 

991

 

 

 —

 

 

 —

 

 

991

 

Depreciation and amortization

 

 

 —

 

 

4,865

 

 

 —

 

 

 —

 

 

4,865

 

Other

 

 

 —

 

 

24,266

 

 

 —

 

 

 —

 

 

24,266

 

Total operating expenses

 

 

 —

 

 

111,435

 

 

12,464

 

 

 —

 

 

123,899

 

Operating gross profit

 

 

 —

 

 

41,232

 

 

12,982

 

 

(11,593)

 

 

42,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 —

 

 

40,293

 

 

183

 

 

 —

 

 

40,476

 

Intercompany management fee

 

 

 —

 

 

(1,023)

 

 

1,023

 

 

 —

 

 

 —

 

Lease termination costs

 

 

 —

 

 

1,762

 

 

 —

 

 

 —

 

 

1,762

 

Depreciation and amortization

 

 

 —

 

 

2,490

 

 

 —

 

 

 —

 

 

2,490

 

Interest expense, net

 

 

18,471

 

 

403

 

 

5,521

 

 

(593)

 

 

23,802

 

Interest expense allocation

 

 

(18,471)

 

 

18,471

 

 

 —

 

 

 —

 

 

 —

 

Total corporate and other expenses

 

 

 —

 

 

62,396

 

 

6,727

 

 

(593)

 

 

68,530

 

Income (loss) before income taxes

 

 

 —

 

 

(21,164)

 

 

6,255

 

 

(11,000)

 

 

(25,909)

 

Provision (benefit) for income taxes

 

 

 —

 

 

544

 

 

(162)

 

 

284

 

 

666

 

Net income (loss)

 

$

 —

 

$

(21,708)

 

$

6,417

 

$

(11,284)

 

$

(26,575)

 

 

24


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Statements of Income (unaudited)

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivable fees

 

$

 —

 

$

93,282

    

$

28,554

    

$

 —

 

$

121,836

 

Credit service fees

 

 

 —

 

 

43,273

 

 

 —

 

 

 —

 

 

43,273

 

Check cashing fees

 

 

 —

 

 

24,785

 

 

545

 

 

 —

 

 

25,330

 

Card fees

 

 

 —

 

 

4,150

 

 

38

 

 

 —

 

 

4,188

 

Dividend

 

 

 —

 

 

3,000

 

 

 —

 

 

(3,000)

 

 

 —

 

Other

 

 

 —

 

 

11,541

 

 

297

 

 

(579)

 

 

11,259

 

Total revenues

 

 

 —

 

 

180,031

 

 

29,434

 

 

(3,579)

 

 

205,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

 

 —

 

 

34,735

 

 

613

 

 

 —

 

 

35,348

 

Provision for loan losses

 

 

 —

 

 

39,337

 

 

17,410

 

 

 —

 

 

56,747

 

Occupancy

 

 

 —

 

 

12,998

 

 

251

 

 

(11)

 

 

13,238

 

Advertising and marketing

 

 

 —

 

 

5,213

 

 

4

 

 

 —

 

 

5,217

 

Lease termination costs

 

 

 —

 

 

1,097

 

 

4

 

 

 —

 

 

1,101

 

Depreciation and amortization

 

 

 —

 

 

5,196

 

 

78

 

 

 —

 

 

5,274

 

Other

 

 

 —

 

 

27,436

 

 

500

 

 

 —

 

 

27,936

 

Total operating expenses

 

 

 —

 

 

126,012

 

 

18,860

 

 

(11)

 

 

144,861

 

Operating gross profit

 

 

 —

 

 

54,019

 

 

10,574

 

 

(3,568)

 

 

61,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 —

 

 

44,061

 

 

325

 

 

 —

 

 

44,386

 

Intercompany management fee

 

 

 —

 

 

(1,381)

 

 

1,381

 

 

 —

 

 

 —

 

Depreciation and amortization

 

 

 —

 

 

2,423

 

 

8

 

 

 —

 

 

2,431

 

Interest expense, net

 

 

17,996

 

 

442

 

 

4,440

 

 

(568)

 

 

22,310

 

Interest expense allocation

 

 

(17,996)

 

 

17,996

 

 

 —

 

 

 —

 

 

 —

 

Loss on sale of subsidiary

 

 

 —

 

 

1,569

 

 

 —

 

 

 —

 

 

1,569

 

Gain on debt extinguishment

 

 

(62,852)

 

 

 —

 

 

 —

 

 

 —

 

 

(62,852)

 

Total corporate and other expenses

 

 

(62,852)

 

 

65,110

 

 

6,154

 

 

(568)

 

 

7,844

 

Income (loss) before income taxes

 

 

62,852

 

 

(11,091)

 

 

4,420

 

 

(3,000)

 

 

53,181

 

Provision (benefit) for income taxes

 

 

7,469

 

 

(1,318)

 

 

525

 

 

(356)

 

 

6,320

 

Net income (loss) 

 

$

55,383

 

$

(9,773)

 

$

3,895

 

$

(2,644)

 

$

46,861

 

 

25


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows (unaudited)

Six Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

(13,789)

 

$

31,500

 

$

11,981

 

$

29,692

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net receivables originated

 

 

 —

 

 

1,623

 

 

(40,993)

 

 

(39,370)

 

Net acquired assets, net of cash

 

 

 —

 

 

(117)

 

 

 —

 

 

(117)

 

Purchase of leasehold improvements and equipment

 

 

 —

 

 

(3,501)

 

 

 —

 

 

(3,501)

 

Net cash used in investing activities

 

 

 —

 

 

(1,995)

 

 

(40,993)

 

 

(42,988)

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from subsidiary note

 

 

 —

 

 

 —

 

 

15,000

 

 

15,000

 

Payments on subsidiary note

 

 

 —

 

 

(56)

 

 

(7,300)

 

 

(7,356)

 

Payments on capital lease obligations

 

 

 —

 

 

(540)

 

 

 —

 

 

(540)

 

Net proceeds (payments) on lines of credit

 

 

16,400

 

 

(2,250)

 

 

 —

 

 

14,150

 

Debt issuance costs

 

 

(2,611)

 

 

(1)

 

 

(1,106)

 

 

(3,718)

 

Net cash provided by (used in) financing activities

 

 

13,789

 

 

(2,847)

 

 

6,594

 

 

17,536

 

Net increase in cash and cash equivalents

 

 

 —

 

 

26,658

 

 

(22,418)

 

 

4,240

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning

 

 

 —

 

 

71,777

 

 

34,556

 

 

106,333

 

Ending

 

$

 —

 

$

98,435

 

$

12,138

 

$

110,573

 

 

26


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows (unaudited)

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

    

$

30,283

 

$

3,252

    

$

20,739

    

$

54,274

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net receivables originated

 

 

 —

 

 

(20,100)

 

 

(21,958)

 

 

(42,058)

 

Net acquired assets, net of cash

 

 

 —

 

 

(296)

 

 

 —

 

 

(296)

 

Purchase of leasehold improvements and equipment

 

 

 —

 

 

(4,895)

 

 

(9)

 

 

(4,904)

 

Net cash used in investing activities

 

 

 —

 

 

(25,291)

 

 

(21,967)

 

 

(47,258)

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of senior secured notes

 

 

(36,437)

 

 

 —

 

 

 —

 

 

(36,437)

 

Proceeds from subsidiary note

 

 

 —

 

 

1,165

 

 

12,600

 

 

13,765

 

Payments on subsidiary note

 

 

 —

 

 

(192)

 

 

 —

 

 

(192)

 

Proceeds on CCFI Funding Notes

 

 

 —

 

 

(500)

 

 

500

 

 

 —

 

Payments on capital lease obligations, net

 

 

 —

 

 

(707)

 

 

(10)

 

 

(717)

 

Proceeds on lines of credit

 

 

4,500

 

 

2,250

 

 

 —

 

 

6,750

 

Debt issuance costs

 

 

1,654

 

 

(46)

 

 

(986)

 

 

622

 

Net cash provided by (used in) financing activities

 

 

(30,283)

 

 

1,970

 

 

12,104

 

 

(16,209)

 

Net increase (decrease) in cash and cash equivalents

 

 

 —

 

 

(20,069)

 

 

10,876

 

 

(9,193)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning

 

 

 —

 

 

69,986

 

 

28,955

 

 

98,941

 

Ending

 

$

 —

 

$

49,917

 

$

39,831

 

$

89,748

 

 

 

 

 

27


 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion contains management’s discussion and analysis of Community Choice Financial Inc’s financial condition and results of operations. References to “CCFI”, “the company”, “us”, “we”, “our” and “ours” refer to Community Choice Financial Inc, together with its subsidiaries. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements.

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

The Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor for forward-looking statements. Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words “anticipate,” “estimate,” “expect,” “objective,” “goal,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “may,” “target,” “forecast,” “guidance,” “outlook,” and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected revenues, earnings, capital expenditures and business strategy. Forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Forward-looking statements are and will be based upon management’s then current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although we believe the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.

 

Forward-looking statements that we make herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including, but not limited to, the ongoing impact of the economic and credit crisis, leveling demand for our products, our inability to successfully execute strategic initiatives, our ability to recognize the expected benefits from recently undertaken strategic initiatives, including those described under “Factors Affecting Our Results of Operations— Strategic Initiatives,” integration of acquired businesses, competitive pressures, economic pressures on our customers and us, regulatory and legislative changes, the impact of legislation, the risks discussed under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, and other factors discussed from time to time. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise.

 

Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements, releases, and reports.

 

Overview

 

We are a leading provider of alternative financial services to unbanked and under banked consumers. We provide our customers a variety of financial products and services, including short-term and medium-term consumer loans, check cashing, prepaid debit cards, and other services that address the specific needs of our customers. Through our retail focused business model, we provide our customers immediate access to high quality financial services at competitive rates through the channel most convenient for them. As of June 30, 2017, we operated 507 retail locations across 12 states and were licensed to deliver similar financial services over the internet in 32 states.

 

Our retail business model provides a broad array of financial products and services whether through a retail location or over the internet, whichever distribution channel satisfies the target customer’s needs or desires. We want to

28


 

achieve a superior level of customer satisfaction, resulting in increased market penetration and value creation. An important part of our retail model is investing in and creating a premier brand presence, supported by a well-trained and motivated workforce with the aim of enhancing the customer’s experience, generating increased traffic and introducing our customers to our diversified set of products.

 

Factors Affecting Our Results of Operations

 

Closure of Utah Facility

 

In February 2017, the Company closed the Utah office that was acquired in 2012 when we purchased, Direct Financial Solutions, our internet business. All call center operations have been fully integrated in to the Company’s primary headquarters in Dublin, Ohio. During the six months ended June 30, 2017, the Company incurred $2.6 million in closure costs consisting of $1.8 million in lease termination expenses and $0.8 million in loss on disposal of assets associated with this consolidation.

 

Retail Platform

 

During the six months ended June 30, 2017, the Company opened forty-two retail locations and closed fifty-three retail locations. The closed retail locations had direct costs of $4.4 million for the prior twelve months.

 

The chart below sets forth certain information regarding our retail presence and number of states served via the internet as of and for the year ended December 31, 2016, and the six months ended June 30, 2017.

 

 

 

 

 

 

 

 

 

 

 

Six Months

 

 

 

Year Ended

 

Ended

 

 

 

December 31, 

 

June 30, 

 

 

    

2016

    

2017

 

# of Locations

 

 

 

 

 

Beginning of Period

 

525

 

518

 

Acquired (a)

 

120

 

 —

 

Opened (b)

 

 —

 

42

 

Sold (a)

 

76

 

 -

 

Closed

 

51

 

53

 

End of Period

 

518

 

507

 

 

 

 

 

 

 

Number of states served by our internet operations

 

32

 

32

 

 

 

 

 

 

 

(a) Amounts include the 98 locations acquired and 33 locations sold as part of the swap transaction with QC Holdings in 2016, which we refer to as the QC transaction.

 

(b) Includes leases assumed from an unrelated Mississippi entity that terminated its business operations in June 2017.

29


 

The following table provides the geographic composition of our physical locations as of December 31, 2016, and June 30, 2017:

 

 

 

 

 

 

 

 

 

December 31, 

 

June 30, 

 

 

    

2016

    

2017

 

Alabama

 

46

 

42

 

Arizona

 

38

 

32

 

California

 

191

 

161

 

Florida

 

16

 

15

 

Indiana

 

21

 

21

 

Kentucky

 

15

 

15

 

Michigan

 

14

 

14

 

Mississippi

 

24

 

63

 

Ohio

 

99

 

92

 

Oregon

 

 2

 

 2

 

Tennessee

 

25

 

24

 

Virginia

 

27

 

26

 

 

 

518

 

507

 

 

In addition, the Company is licensed to provide internet financial services in the following states: Alabama, Alaska, California, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Maryland, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.

 

Changes in Legislation

 

On July 21, 2010, the Dodd-Frank Act was signed into law. Among other things, this act created the Consumer Financial Protection Bureau (“CFPB”) and granted it the authority to regulate companies that provide consumer financial services. The CFPB has examined both our retail and internet operations. The findings from these exams did not result in any material change to our business practices. We expect to be periodically examined in the future by the CFPB as well as other regulatory agencies. On June 2, 2016, the CFPB released its proposed rules addressing payday, vehicle title and certain high-cost installment loans.  The CFPB accepted comments on the proposed rules through October 7, 2016.  The CFPB proposal anticipates that the final rules will become effective fifteen months after publication in the Federal Register.  When publication will occur in the Federal Register will be determined by a number of factors including the number and substance of the comments that the CFPB received on the proposed rules.  At this time, we are unable to predict what the final version of these rules will be or their impact on our business.

 

Product Characteristics and Mix

 

As the Company expands its product offerings to meet customers’ needs, the characteristics of our overall loan portfolio shift to reflect the terms of these new products. Our various lending products have different terms. Our prepaid debit card direct deposit offering may reduce our check cashing fees, however, the availability of direct deposit to the Insight prepaid card as an alternative to check cashing may extend the customer relationship.

 

Expenses

 

Our operating expenses relate primarily to the operation of our retail locations and internet presence, including salaries and benefits, retail location occupancy costs, call center costs, advertising, loan loss provisions, and depreciation of assets. We also incur corporate and other expenses on a company-wide basis, including interest expense and other financing costs related to our indebtedness, insurance, salaries, benefits, occupancy costs, professional expenses and management fees paid to our majority stockholders.

 

30


 

We view our compliance, collections and information technology groups as core competencies. We have invested in each of these areas and believe we will benefit from increased economies of scale and satisfy the increased regulatory scrutiny of the CFPB.

 

Strategic Initiatives

 

On June 2, 2016, the CFPB released its proposed rules addressing payday, vehicle title and certain high-cost installment loans. At that time, the Company expected these rules to be final in late 2018 or in early 2019. In anticipation of these rules, the Company enacted several strategic initiatives focused on consolidating underperforming locations and rationalizing headcount, expenses, and portfolios. The objectives of these strategic initiatives along with ongoing investments in compliance, risk, and information technology was to position the Company for maximum value following the effective date of the CFPB rules. These changes, while undertaken in the long term interest of all of our stakeholders, negatively impacted the Company’s financial performance in the near term. Based on the growing uncertainty regarding the timing and content of the eventual rules, the Company recently resumed expanding its portfolios.

 

Critical Accounting Policies

 

Consistent with accounting principles generally accepted in the United States of America, our management makes certain estimates and assumptions to determine the reported amounts of assets, liabilities, revenue and expenses in the process of preparing our financial statements. These estimates and assumptions  are based on the best information available to management at the time the estimates or assumptions are made. The most significant estimates made by our management include allowance for loan losses, goodwill, stock based compensation, and our determination for recording the amount of deferred income tax assets and liabilities, because these estimates and assumptions could change materially as a result of conditions both within and beyond management’s control.

 

Management believes that among our significant accounting policies, the following involve a higher degree of judgment:

 

Finance Receivables, Net

 

Finance receivables consist of short-term and medium-term consumer loans.

 

Short-term consumer loans can be unsecured or secured with a maturity up to ninety days. Unsecured short-term products typically range in size from $100 to $1,000, with a maturity between fourteen and thirty days, and an agreement to defer the presentment of the customer’s personal check or preauthorized debit for the aggregate amount of the advance plus fees. This form of lending is based on applicable laws and regulations which vary by state. Statutes vary from charging fees of 15% to 20%, to charging interest at 25% per annum plus origination fees. The customers repay the cash advances by making cash payments or allowing the check or preauthorized debit to be presented. Secured short-term products typically range from $750 to $5,000, and are asset-based consumer loans whereby the customer obtains cash and grants a security interest in the collateral that may become a lien against that collateral. Secured consumer loans represented 18.2% and 15.0% of short-term consumer loans at December 31, 2016, and June 30, 2017, respectively.

 

Medium-term consumer loans can be unsecured or secured with a maturity of three months up to thirty-six months. Unsecured medium-term products typically range from $100 to $5,000. These consumer loans vary in structure depending upon the regulatory environment where they are offered. The consumer loans are due in installments or provide for a line of credit with periodic monthly payments. Secured medium-term products typically range from $750 to $5,000, and are asset-based consumer loans whereby the customer obtains cash and grants a security interest in the collateral that may become a lien against that collateral. Secured consumer loans represented 10.2% and 9.8% of medium-term consumer loans at December 31, 2016, and June 30, 2017, respectively.

 

In some instances, the Company maintains debt-purchasing arrangements with third-party lenders. The Company accrues for these obligations through management’s estimation of anticipated purchases based on expected losses in the third-party lender’s portfolio. This obligation is recorded as a current liability on our balance sheet.

 

31


 

 

Total finance receivables, net of unearned advance fees and allowance for loan losses on the consolidated balance sheet as of December 31, 2016, and June 30, 2017, were $93.8 million and $89.8 million, respectively. The allowance for loan losses as of December 31, 2016, and June 30, 2017, were $16.2 million and $13.0 million, respectively. At December 31, 2016, and June 30, 2017, the allowance for loan losses was 14.7% and 12.6%, respectively, of total finance receivables, net of unearned advance fees.

 

Finance receivables, net as of December 31, 2016, and June 30, 2017, are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

June 30, 

 

 

    

2016

    

2017

 

Finance Receivables, net of unearned advance fees

 

$

110,038

 

$

102,776

 

Less: Allowance for loan losses

 

 

16,219

 

 

12,952

 

Finance Receivables, Net

 

$

93,819

 

$

89,824

 

 

The total changes to the allowance for loan losses for the three months ended June 30, 2016 and 2017, and the six months ended June 30, 2016 and 2017, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2017

    

2016

    

2017

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

$

19,282

 

$

13,009

 

$

23,892

 

$

16,219

 

Provisions for loan losses

 

 

21,325

 

 

17,400

 

 

41,034

 

 

31,054

 

Charge-offs, net

 

 

(22,305)

 

 

(17,457)

 

 

(46,624)

 

 

(34,321)

 

End of Period

 

$

18,302

 

$

12,952

 

$

18,302

 

$

12,952

 

Allowance as a percentage of finance receivables, net of unearned advance fees

 

 

14.4%

 

 

12.6%

 

 

14.4%

 

 

12.6%

 

 

The provision for loan losses for the three months ended June 30, 2016, and 2017 includes losses from returned items from check cashing of $1.4 million and $1.7 million, respectively, and third party lender losses of $7.5 million and $4.8 million, respectively. The provision for loan losses for the six months ended June 30, 2016, and 2017 includes losses from returned items from check cashing of $3.0 million and $3.0 million, respectively, and third party lender losses of $12.7 million and $9.3 million, respectively.

 

 

Goodwill

 

Management evaluates all long-lived assets for impairment annually as of December 31, or whenever events or changes in business circumstances indicate an asset might be impaired, including goodwill and equity method investments. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets at the date of the acquisition and the excess of purchase price over identified net assets acquired.

 

One of the methods that management employs in the review of such assets uses estimates of future cash flows. If the carrying value is considered impaired, an impairment charge is recorded for the amount by which the carrying value exceeds its fair value. For equity method investments, an impairment charge is recorded if the decline in value is other than temporary. Management believes that its estimates of future cash flows and fair value are reasonable. Changes in estimates of such cash flows and fair value, however, could impact the estimated value of such assets.

 

There was no impairment loss charged to operations for goodwill for the Retail services segment during the three months and six months ended June 30, 2016 and 2017.   The goodwill for the Internet services segment was fully impaired in 2014.

 

32


 

Income Taxes

 

We record income taxes as applicable under generally accepted accounting standards. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded to reduce the deferred tax asset if it is more likely than not that some portion of the asset will not be realized.

 

As of December 31, 2016, the Company had a valuation allowance on its deferred tax assets as it was more likely than not that approximately $49.7 million of net deferred tax assets would not be realized in the foreseeable future.  Based on pre-tax loss of $25.9 million for the six months ended June 30, 2017, and the projected reversal of temporary items, the Company continues to maintain a valuation allowance against its deferred tax assets. In addition, due to the tax amortization of goodwill during the six months ended June 30, 2017, the Company has additional book basis goodwill in excess of tax basis goodwill. As a result, the Company recorded $0.4 million of deferred tax expense and has increased its deferred tax liabilities as of June 30, 2017 to $10.1 million. 

 

Non-Guarantor Subsidiaries and Unrestricted Subsidiaries

 

As described in more detail under Note 15 to the unaudited financial statements for the quarterly period ended June 30, 2017, of the entities classified as “Non-Guarantor Subsidiaries” as of June 30, 2017, CCFI Funding, and CCFI Funding II are “Unrestricted Subsidiaries” as defined in the indentures governing the 2019 notes and 2020 notes.  CCFI Funding was created on December 20, 2013, and CCFI Funding II was established on September 19, 2014. As of June 30, 2017 and December 31, 2016, these unrestricted subsidiaries had total assets of $57.1 million and $54.1 million and total liabilities of $63.2 million and $55.9 million, respectively. For the six months ended June 30, 2017 and 2016, they had total revenues of $25.4 million and $29.4 million, total operating expenses of $12.5 million and $18.9 million, and income before income taxes of $6.3 million and $4.4 million, respectively. Florida II was sold on February 1, 2016, and is included in the Statement of Operations for only the month ended January 31, 2016.

 

The remainder of the entities included under “non-Guarantor Subsidiaries” are “Restricted Subsidiaries” as defined in the indentures governing the 2019 notes and the 2020 notes and did not have material assets, liabilities, revenue or expenses during the period presented.

 

33


 

Results of Operations

 

Three Months Ended June 30, 2017, Compared to the Three Months Ended June 30, 2016

 

The following table sets forth key operating data for the three months ended June 30, 2016, and 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

    

2016

    

2017

    

Increase (Decrease)

  

  

2016

    

2017

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

 

(Percent of Revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

98,329

 

$

81,168

 

$

(17,161)

 

 

(17.5%)

 

 

100.0%

    

100.0%

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

 

17,069

 

 

17,516

 

 

447

 

 

2.6%

 

 

17.4%

 

21.6%

 

Provision for losses

 

 

30,272

 

 

23,859

 

 

(6,413)

 

 

(21.2%)

 

 

30.8%

 

29.4%

 

Occupancy

 

 

6,578

 

 

6,602

 

 

24

 

 

0.4%

 

 

6.7%

 

8.1%

 

Advertising and marketing

 

 

2,539

 

 

1,544

 

 

(995)

 

 

(39.2%)

 

 

2.6%

 

1.9%

 

Lease termination

 

 

1,101

 

 

944

 

 

(157)

 

 

(14.3%)

 

 

1.1%

 

1.2%

 

Depreciation and amortization

 

 

2,540

 

 

2,327

 

 

(213)

 

 

(8.4%)

 

 

2.6%

 

2.9%

 

Other operating expenses

 

 

15,324

 

 

12,351

 

 

(2,973)

 

 

(19.4%)

 

 

15.5%

 

15.2%

 

Total Operating Expenses

 

 

75,423

 

 

65,143

 

 

(10,280)

 

 

(13.6%)

 

 

76.7%

 

80.3%

 

Income from Operations

 

 

22,906

 

 

16,025

 

 

(6,881)

 

 

(30.0%)

 

 

23.3%

 

19.7%

 

Corporate and other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

22,617

 

 

20,137

 

 

(2,480)

 

 

(11.0%)

 

 

23.1%

 

24.8%

 

Depreciation and amortization

 

 

1,222

 

 

1,181

 

 

(41)

 

 

(3.4%)

 

 

1.2%

 

1.6%

 

Interest expense, net

 

 

10,847

 

 

12,431

 

 

1,584

 

 

14.6%

 

 

11.0%

 

15.3%

 

Income tax expense (benefit)

 

 

(3,024)

 

 

333

 

 

3,357

 

 

111.0%

 

 

(3.1%)

 

0.3%

 

Total corporate and other expenses

 

 

31,662

 

 

34,082

 

 

2,420

 

 

7.6%

 

 

32.2%

 

42.0%

 

Net loss before management fee

 

 

(8,756)

 

 

(18,057)

 

 

(9,301)

 

 

106.2%

 

 

(8.9%)

 

(22.2%)

 

Sponsor management fee

 

 

184

 

 

153

 

 

(31)

 

 

(16.8%)

 

 

0.2%

 

0.2%

 

Net loss after management fee

 

$

(8,940)

 

$

(18,210)

 

$

(9,270)

 

 

103.7%

 

 

(9.2%)

 

(22.4%)

 

 

34


 

Operating Metrics

 

The following tables set forth key loan and check cashing operating data as of and for the three months ended June 30, 2016, and 2017:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30, 

 

 

    

2016

    

2017

 

Short-term Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Loan volume (originations and refinancing) (in thousands)

 

$

251,644

 

$

246,259

 

Number of loan transactions (in thousands)

 

 

718

 

 

663

 

Average new loan size

 

$

350

 

$

371

 

Average fee per new loan

 

$

47.25

 

$

47.59

 

Loan loss provision

 

$

10,968

 

$

9,393

 

Loan loss provision as a percentage of loan volume

 

 

4.4%

 

 

3.8%

 

Secured loans as percentage of total at June 30th

 

 

17.8%

 

 

15.0%

 

Medium-term Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Balance outstanding (in thousands)

 

$

65,210

 

$

42,119

 

Number of loans outstanding

 

 

52,262

 

 

33,729

 

Average balance outstanding

 

$

1,235

 

$

1,249

 

Weighted average monthly percentage rate

 

 

17.0%

 

 

16.2%

 

Allowance as a percentage of finance receivables

 

 

23.8%

 

 

24.7%

 

Loan loss provision

 

$

10,357

 

$

8,007

 

Secured loans as percentage of total at June 30th

 

 

13.2%

 

 

9.8%

 

Check Cashing Data (unaudited):

 

 

 

 

 

 

 

Face amount of checks cashed (in thousands)

 

$

526,263

 

$

459,948

 

Number of checks cashed (in thousands)

 

 

1,037

 

 

838

 

Face amount of average check

 

$

507

 

$

549

 

Average fee per check

 

$

11.54

 

$

14.05

 

Returned check expense

 

$

1,412

 

$

1,695

 

Returned check expense as a percent of face amount of checks cashed

 

 

0.3%

 

 

0.4%

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

(dollars in thousands)

    

2016

    

2017

    

Increase (Decrease)

    

2016

    

2017

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

(Percent of Revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Consumer Loan Fees and Interest

 

$

33,946

 

$

31,572

 

$

(2,374)

 

(7.0%)

 

34.5%

 

38.9%

 

Medium-term Consumer Loan Fees and Interest

 

 

24,006

 

 

16,358

 

 

(7,648)

 

(31.9%)

 

24.4%

 

20.2%

 

Credit Service Fees

 

 

21,170

 

 

15,146

 

 

(6,024)

 

(28.5%)

 

21.5%

 

18.7%

 

Check Cashing Fees

 

 

11,975

 

 

11,779

 

 

(196)

 

(1.6%)

 

12.2%

 

14.5%

 

Prepaid Debit Card Services

 

 

2,040

 

 

2,113

 

 

73

 

3.6%

 

2.1%

 

2.6%

 

Other Income

 

 

5,192

 

 

4,200

 

 

(992)

 

(19.1%)

 

5.3%

 

5.1%

 

Total Revenue

 

$

98,329

 

$

81,168

 

$

(17,161)

 

(17.5%)

 

100.0%

 

100.0%

 

 

For the three months ended June 30, 2017, total revenue decreased $17.2 million, or 17.5%, compared to the same period in 2016.  The decrease is primarily due to a heightened focus on portfolio performance including more restrictive underwriting standards, the consolidation of underperforming retail locations.  

 

Revenue from short-term consumer loan fees and interest for the three months ended June 30, 2017, decreased $2.4 million, or 7.0%, but increased as a percentage of total revenue from 34.5% to 38.9%  compared to the same period in 2016. The decrease in revenue is primarily due to the consolidation of underperforming retail locations.

 

35


 

Revenue from medium-term consumer loans for the three months ended June 30, 2017, decreased $7.6 million, or 31.9%, compared to the same period in 2016.  The decrease is primarily due to a heightened focus on on-line portfolio performance and rationalization resulting in more restrictive underwriting standards.   

 

Revenue from credit service fees for the three months ended June 30, 2017, decreased $6.0 million, or 28.5%, compared to the same period in 2016. Credit service fee revenue decreased as the result of a strategic emphasis on portfolio performance and rationalization.

 

Revenue from check cashing fees for the three months ended June 30, 2017, decreased $0.2 million, or 1.6%, but increased as a percentage of total revenue from 12.2% to 14.5%, compared to the same period in 2016. The decrease is primarily due to the consolidation of underperforming retail locations.

 

Revenue from other income for the three months ended June 30, 2017, decreased $1.0 million, or 19.1%, compared to the same period in 2016. The decrease is primarily the result of our heightened underwriting standards improving the credit quality of our loan portfolios and decreasing our collections-related fees.

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

(dollars in thousands)

    

2016

    

2017

    

Increase (Decrease)

    

2016

    

2017

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

    

(Percent of Revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

$

17,069

 

$

17,516

 

$

447

 

2.6%

 

17.4%

 

21.6%

 

Provision for Loan Losses

 

 

30,272

 

 

23,859

 

 

(6,413)

 

(21.2%)

 

30.8%

 

29.4%

 

Occupancy

 

 

6,578

 

 

6,602

 

 

24

 

0.4%

 

6.7%

 

8.1%

 

Depreciation & Amortization

 

 

2,540

 

 

2,327

 

 

(213)

 

(8.4%)

 

2.6%

 

2.9%

 

Advertising & Marketing

 

 

2,539

 

 

1,544

 

 

(995)

 

(39.2%)

 

2.6%

 

1.9%

 

Lease Termination Costs

 

 

1,101

 

 

944

 

 

(157)

 

(14.3%)

 

1.1%

 

1.2%

 

Bank Charges (a)

 

 

2,398

 

 

1,812

 

 

(586)

 

(24.4%)

 

2.4%

 

2.2%

 

Store Supplies

 

 

465

 

 

337

 

 

(128)

 

(27.5%)

 

0.5%

 

0.4%

 

Collection Expenses

 

 

680

 

 

374

 

 

(306)

 

(45.0%)

 

0.7%

 

0.5%

 

Telecommunications

 

 

2,435

 

 

2,305

 

 

(130)

 

(5.3%)

 

2.5%

 

2.8%

 

Security

 

 

633

 

 

603

 

 

(30)

 

(4.7%)

 

0.6%

 

0.7%

 

License & Other Taxes

 

 

375

 

 

443

 

 

68

 

18.1%

 

0.4%

 

0.5%

 

Loss on Asset Disposal

 

 

1,255

 

 

761

 

 

(494)

 

(39.4%)

 

1.3%

 

0.9%

 

Verification Processes

 

 

1,042

 

 

868

 

 

(174)

 

(16.7%)

 

1.1%

 

1.1%

 

Other Operating Expenses

 

 

6,041

 

 

4,848

 

 

(1,193)

 

(19.7%)

 

6.0%

 

6.1%

 

Total Operating Expenses

 

 

75,423

 

 

65,143

 

 

(10,280)

 

(13.6%)

 

76.7%

 

80.3%

 

Income from Operations

 

$

22,906

 

$

16,025

 

$

(6,881)

 

(30.0%)

 

23.3%

 

19.7%

 

(a)

Bank charges include credit card fees previously included in other operating expenses.

Total operating expenses decreased $10.3 million, or 13.6%, for the three months ended June 30, 2017, as compared to the same period in the prior year, primarily due to portfolio rationalization, a reduced focus on marketing, and the consolidation of underperforming retail locations. 

 

The provision for loan losses decreased $6.4 million, or 21.2%, for the three months ended June 30, 2017 as compared to the same period in the prior year primarily related to portfolio rationalization and more restrictive underwriting. 

 

Advertising and marketing expense decreased by $1.0 million, or 39.2%, for the three months ended June 30, 2017, as compared to the prior period, reflecting a reduced focus on market share expansion.

 

36


 

Other operating expenses decreased by $1.2 million, or 19.7%, for the three months ended June 30, 2017, as compared to the prior period, primarily as a result of our cost containment initiatives.

 

Corporate and Other Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

(dollars in thousands)

    

2016

    

2017

    

Increase (Decrease)

    

2016

    

2017

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

(Percent of Revenue)

 

Corporate Expenses

 

$

22,617

 

$

20,137

 

$

(2,480)

 

(11.0%)

 

23.1%

 

24.8%

 

Depreciation & Amortization

 

 

1,222

 

 

1,181

 

 

(41)

 

(3.4%)

 

1.2%

 

1.6%

 

Sponsor Management Fee

 

 

184

 

 

153

 

 

(31)

 

(16.8%)

 

0.2%

 

0.2%

 

Interest expense, net

 

 

10,847

 

 

12,431

 

 

1,584

 

14.6%

 

11.0%

 

15.3%

 

Income tax expense (benefit)

 

 

(3,024)

 

 

333

 

 

3,357

 

111.0%

 

(3.1%)

 

0.3%

 

Total Corporate and Other Expenses

 

$

31,846

 

$

34,235

 

$

2,389

 

7.5%

 

32.4%

 

42.2%

 

 

The decrease in corporate expenses for the three months ended June 30, 2017, as compared to the prior year period is primarily the result of our cost containment initiatives, including the strategic initiatives described above and the closure of the Utah facility.  

 

Interest expense increased by $1.6 million for the three months ended June 30, 2017, as compared to the prior year due to an increase in the Company’s indebtedness.

 

Income tax expense increased by $3.4 million for the three months ended June 30, 2017, as compared to the prior year due to the loss in operations in the current period, offset by the valuation allowance. The current period expense relates to the tax effect of amortization on indefinite lived intangibles.

 

Business Segment Results of Operations for the Three Months Ended June 30, 2017, and June 30, 2016

 

The following tables present summarized financial information for our segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended June 30, 2017

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

333,345

 

 

 

$

35,802

 

 

    

 

 

    

$

369,147

 

 

 

Goodwill

 

 

113,499

 

 

 

 

 —

 

 

 

 

 

 

 

113,499

 

 

 

Other Intangible Assets

 

 

449

 

 

 

 

716

 

 

 

 

 

 

 

1,165

 

 

 

Total Revenues

 

$

65,726

 

100.0

%  

$

15,442

 

100.0

%  

 

 

 

$

81,168

 

100.0

%  

Provision for Loan Losses

 

 

15,402

 

23.4

%  

 

8,457

 

54.8

%  

 

 

 

 

23,859

 

29.4

%  

Other Operating Expenses

 

 

39,358

 

59.9

%  

 

1,926

 

12.4

%  

 

 

 

 

41,284

 

50.9

%  

Operating Gross Profit

 

 

10,966

 

16.7

%  

 

5,059

 

32.8

%  

 

 

 

 

16,025

 

19.7

%  

Interest Expense, net

 

 

8,687

 

13.2

%  

 

3,744

 

24.2

%  

 

 

 

 

12,431

 

15.3

%  

Depreciation and Amortization

 

 

1,093

 

1.7

%  

 

88

 

0.6

%  

 

 

 

 

1,181

 

1.5

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

20,290

 

 

20,290

 

25.0

%  

Income (loss) from Continuing Operations, before tax

 

 

1,186

 

1.8

%  

 

1,227

 

7.9

%  

 

(20,290)

 

 

(17,877)

 

(22.0)

%  


(a)

Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose other corporate expenses as unallocated. 

 

There were no intersegment revenues for the three months ended June 30, 2017.

 

37


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended June 30, 2016

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

336,767

 

 

 

$

77,691

 

 

 

 

 

 

$

414,458

 

 

 

Goodwill

 

 

146,877

 

 

 

 

 —

 

 

 

 

 

 

 

146,877

 

 

 

Other Intangible Assets

 

 

286

 

 

 

 

1,050

 

 

 

 

 

 

 

1,336

 

 

 

Total Revenues

 

$

74,326

 

100.0

%  

$

24,003

 

100.0

%  

 

 

 

$

98,329

 

100.0

%  

Provision for Loan Losses

 

 

17,112

 

23.0

%  

 

13,160

 

54.8

%  

 

 

 

 

30,272

 

30.8

%  

Other Operating Expenses

 

 

41,316

 

55.6

%  

 

3,835

 

16.0

%  

 

 

 

 

45,151

 

45.9

%  

Operating Gross Profit

 

 

15,898

 

21.4

%  

 

7,008

 

29.2

%  

 

 

 

 

22,906

 

23.3

%  

Interest Expense, net

 

 

6,720

 

9.0

%  

 

4,127

 

17.2

%  

 

 

 

 

10,847

 

11.0

%  

Depreciation and Amortization

 

 

1,008

 

1.4

%  

 

214

 

0.9

%  

 

 

 

 

1,222

 

1.2

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

22,801

 

 

22,801

 

23.2

%  

Income (loss) from Continuing Operations, before tax

 

 

8,170

 

11.0

%  

 

2,667

 

11.1

%  

 

(22,801)

 

 

(11,964)

 

(12.2)

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Represents income and expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose the gain on debt extinguishment and all other corporate expenses as unallocated.

 

There were no intersegment revenues for the three months ended June 30, 2016.

 

Retail Financial Services

 

Retail financial services represented 81.0%, or $65.7 million, of consolidated revenues for the three months ended June 30,  2017, which was a decrease of $8.6 million, or 11.6%, over the prior period, primarily due to the portfolio rationalization initiatives.  

 

Internet Financial Services

 

For the three months ended June 30, 2017, total revenues contributed by our Internet financial services segment was $15.4 million, a decrease of $8.6 million, or 35.7%, over the prior year comparable period. The provision for loan losses remained at 54.8% as a percentage of revenue and operating gross profit increased as a percentage of revenue from 29.2% to 32.8% for the three months ended June 30, 2017, over the prior period reflecting the benefits of our heightened underwriting standards and a rationalization of our internet portfolios.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38


 

Six Months Ended June 30, 2017, Compared to the Six Months Ended June 30, 2016

 

The following table sets forth key operating data for the six months ended June 30, 2016, and 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2016

    

2017

    

Increase (Decrease)

  

  

2016

    

2017

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

 

(Percent of Revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

    

$

205,886

 

$

166,520

 

$

(39,366)

 

 

(19.1%)

 

 

100.0%

    

100.0%

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

35,348

 

 

34,789

 

 

(559)

 

 

(1.6%)

 

 

17.2%

 

20.9%

 

Provision for losses

 

 

56,747

 

 

43,399

 

 

(13,348)

 

 

(23.5%)

 

 

27.6%

 

26.1%

 

Occupancy

 

 

13,238

 

 

13,231

 

 

(7)

 

 

(0.1%)

 

 

6.4%

 

7.9%

 

Advertising and marketing

 

 

5,217

 

 

2,358

 

 

(2,859)

 

 

(54.8%)

 

 

2.5%

 

1.4%

 

Lease termination

 

 

1,101

 

 

991

 

 

(110)

 

 

(10.0%)

 

 

0.5%

 

0.6%

 

Depreciation and amortization

 

 

5,274

 

 

4,865

 

 

(409)

 

 

(7.8%)

 

 

2.6%

 

2.9%

 

Other operating expenses

 

 

27,936

 

 

24,266

 

 

(3,670)

 

 

(13.1%)

 

 

13.6%

 

14.6%

 

Total Operating Expenses

 

 

144,861

 

 

123,899

 

 

(20,962)

 

 

(14.5%)

 

 

70.4%

 

74.4%

 

Income from Operations

 

 

61,025

 

 

42,621

 

 

(18,404)

 

 

(30.2%)

 

 

29.6%

 

25.6%

 

Corporate and other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

44,021

 

 

40,161

 

 

(3,860)

 

 

(8.8%)

 

 

21.3%

 

24.1%

 

Lease termination

 

 

 —

 

 

1,762

 

 

1,762

 

 

100.0%

 

 

0.0%

 

1.1%

 

Depreciation and amortization

 

 

2,431

 

 

2,490

 

 

59

 

 

2.4%

 

 

1.2%

 

1.5%

 

Interest expense, net

 

 

22,310

 

 

23,802

 

 

1,492

 

 

6.7%

 

 

10.8%

 

14.3%

 

Loss on sale of subsidiaries

 

 

1,569

 

 

 —

 

 

(1,569)

 

 

(100.0%)

 

 

0.8%

 

0.0%

 

Gain on debt extinguishment

 

 

(62,852)

 

 

 —

 

 

62,852

 

 

100.0%

 

 

(30.5%)

 

0.0%

 

Income tax expense

 

 

6,320

 

 

666

 

 

(5,654)

 

 

(89.5%)

 

 

3.1%

 

0.4%

 

Total corporate and other expenses

 

 

13,799

 

 

68,881

 

 

55,082

 

 

399.2%

 

 

6.7%

 

41.4%

 

Net income (loss) before management fee

 

 

47,226

 

 

(26,260)

 

 

(73,486)

 

 

(155.6%)

 

 

23.0%

 

(15.8%)

 

Sponsor management fee

 

 

365

 

 

315

 

 

(50)

 

 

(13.7%)

 

 

0.2%

 

0.2%

 

Net Income (Loss)

 

$

46,861

 

$

(26,575)

 

$

(73,436)

 

 

156.7%

 

 

22.8%

 

(16.0%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39


 

Operating Metrics

 

The following tables set forth key loan and check cashing operating data as of and for the six months ended June 30, 2016, and 2017:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2016

    

2017

 

Short-term Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Loan volume (originations and refinancing) (in thousands)

 

$

516,829

 

$

481,523

 

Number of loan transactions (in thousands)

 

 

1,408

 

 

1,295

 

Average new loan size

 

$

367

 

$

372

 

Average fee per new loan

 

$

49.88

 

$

48.36

 

Loan loss provision

 

$

18,699

 

$

15,826

 

Loan loss provision as a percentage of loan volume

 

 

3.6%

 

 

3.3%

 

Secured loans as percentage of total at June 30th

 

 

17.8%

 

 

15.0%

 

Medium-term Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Balance outstanding (in thousands)

 

$

65,210

 

$

42,119

 

Number of loans outstanding

 

 

52,262

 

 

33,729

 

Average balance outstanding

 

$

1,235

 

$

1,249

 

Weighted average monthly percentage rate

 

 

17.0%

 

 

16.2%

 

Allowance as a percentage of finance receivables

 

 

23.8%

 

 

24.7%

 

Loan loss provision

 

$

22,335

 

$

15,228

 

Secured loans as percentage of total at June 30th

 

 

13.2%

 

 

9.8%

 

Check Cashing Data (unaudited):

 

 

 

 

 

 

 

Face amount of checks cashed (in thousands)

 

$

1,090,360

 

$

925,804

 

Number of checks cashed (in thousands)

 

 

2,067

 

 

1,653

 

Face amount of average check

 

$

527

 

$

560

 

Average fee per check

 

$

12.25

 

$

14.46

 

Returned check expense

 

$

2,977

 

$

3,094

 

Returned check expense as a percent of face amount of checks cashed

 

 

0.3%

 

 

0.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40


 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

    

2016

    

2017

    

Decrease

    

2016

    

2017

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

(Percent of Revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Consumer Loan Fees and Interest

 

$

70,253

 

$

62,629

 

$

(7,624)

 

(10.9%)

 

34.1%

 

37.6%

 

Medium-term Consumer Loan Fees and Interest

 

 

51,583

 

 

34,352

 

 

(17,231)

 

(33.4%)

 

25.1%

 

20.6%

 

Credit Service Fees

 

 

43,273

 

 

33,285

 

 

(9,988)

 

(23.1%)

 

21.0%

 

20.0%

 

Check Cashing Fees

 

 

25,330

 

 

23,905

 

 

(1,425)

 

(5.6%)

 

12.3%

 

14.4%

 

Prepaid Debit Card Services

 

 

4,188

 

 

4,120

 

 

(68)

 

(1.6%)

 

2.0%

 

2.5%

 

Other Income

 

 

11,259

 

 

8,229

 

 

(3,030)

 

(26.9%)

 

5.5%

 

4.9%

 

Total Revenue

 

$

205,886

 

$

166,520

 

$

(39,366)

 

(19.1%)

 

100.0%

 

100.0%

 

 

For the six months ended June 30, 2017, total revenue decreased $39.4 million, or 19.1%, compared to the same period in 2016. The decrease is primarily due to a heightened focus on portfolio performance including more restrictive underwriting standards and the consolidation of underperforming retail locations.

 

Revenue from short-term consumer loan fees and interest for the six months ended June 30, 2017, decreased $7.6 million, or 10.9%, but increased as a percentage of total revenue from 34.1% to 37.6% compared to the same period in 2016. The decrease in revenue is primarily due to the consolidation of underperforming retail locations, and the changes to regulations and products offered in a certain market in the prior year.

 

Revenue from medium-term consumer loans for the six months ended June 30, 2017, decreased $17.2 million, or 33.4%, compared to the same period in 2016. The decrease is primarily due to a heightened focus on on-line portfolio performance and rationalization resulting in more restrictive underwriting standards.   

 

Revenue from credit service fees for the six months ended June 30, 2017, decreased $10.0 million, or 23.1%, compared to the same period in 2016. Credit service fee revenue decreased as the result of a strategic emphasis on portfolio performance and rationalization.

 

Revenue from check cashing fees for the six months ended June 30, 2017, decreased $1.4 million, or 5.6%, but increased as a percentage of total revenue from 12.3% to 14.4%, compared to the same period in 2016. The decrease is primarily due to the sale of Florida II and the consolidation of underperforming retail locations.

 

Revenue from other income for the six months ended June 30, 2017, decreased $3.0 million, or 26.9%, compared to the same period in 2016. The decrease is primarily the result of our heightened underwriting standards improving the credit quality of our loan portfolios and decreasing our collections-related fees.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41


 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

    

2016

    

2017

    

Increase (Decrease)

    

2016

    

2017

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

(Percent of Revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

$

35,348

 

$

34,789

 

$

(559)

 

(1.6%)

 

17.2%

 

20.9%

 

Provision for Loan Losses

 

 

56,747

 

 

43,399

 

 

(13,348)

 

(23.5%)

 

27.6%

 

26.1%

 

Occupancy

 

 

13,238

 

 

13,231

 

 

(7)

 

(0.1%)

 

6.4%

 

7.9%

 

Depreciation & Amortization

 

 

5,274

 

 

4,865

 

 

(409)

 

(7.8%)

 

2.6%

 

2.9%

 

Lease Termination Costs

 

 

1,101

 

 

991

 

 

(110)

 

(10.0%)

 

0.5%

 

0.6%

 

Advertising & Marketing

 

 

5,217

 

 

2,358

 

 

(2,859)

 

(54.8%)

 

2.5%

 

1.4%

 

Bank Charges (a)

 

 

5,179

 

 

3,675

 

 

(1,504)

 

(29.0%)

 

2.5%

 

2.2%

 

Store Supplies

 

 

1,002

 

 

821

 

 

(181)

 

(18.1%)

 

0.5%

 

0.5%

 

Collection Expenses

 

 

1,451

 

 

884

 

 

(567)

 

(39.1%)

 

0.7%

 

0.5%

 

Telecommunications

 

 

4,418

 

 

4,707

 

 

289

 

6.5%

 

2.1%

 

2.8%

 

Security

 

 

1,128

 

 

1,039

 

 

(89)

 

(7.9%)

 

0.5%

 

0.6%

 

License & Other Taxes

 

 

870

 

 

803

 

 

(67)

 

(7.7%)

 

0.4%

 

0.5%

 

Loss on Asset Disposal

 

 

1,410

 

 

874

 

 

(536)

 

(38.0%)

 

0.7%

 

0.5%

 

Verification Processes

 

 

1,988

 

 

1,434

 

 

(554)

 

(27.9%)

 

1.0%

 

0.9%

 

Other Operating Expenses

 

 

10,490

 

 

10,029

 

 

(461)

 

(4.4%)

 

5.2%

 

6.1%

 

Total Operating Expenses

 

 

144,861

 

 

123,899

 

 

(20,962)

 

(14.5%)

 

70.4%

 

74.4%

 

Income from Operations

 

$

61,025

 

$

42,621

 

$

(18,404)

 

(30.2%)

 

29.6%

 

25.6%

 

(a)

Bank charges include credit card fees previously included in other operating expenses.

Total operating expenses decreased $21.0 million, or 14.5%, for the six months ended June 30, 2017, as compared to the same period in the prior year, primarily due to portfolio rationalization, a reduced focus on marketing, and the consolidation of underperforming retail locations.  

 

The provision for loan losses decreased $13.3 million, or 23.5%, and decreased as a percentage of revenue, for the six months ended June 30, 2017 as compared to the same period in the prior year primarily related to portfolio rationalization and more restrictive underwriting.

 

Advertising and marketing expense decreased by $2.9 million, or 54.8%, for the six months ended June 30, 2017, as compared to the prior period, reflecting a reduced focus on market share expansion.

 

Other operating expenses decreased by $0.5 million, or 4.4%, for the six months ended June 30, 2017, as compared to the prior period, primarily as a result of our cost containment initiatives.

 

 

Corporate and Other Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2016

    

2017

    

Increase (Decrease)

    

2016

    

2017

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

(Percent of Revenue)

 

Corporate Expenses

 

$

44,021

 

$

40,161

 

$

(3,860)

 

(8.8%)

 

21.3%

 

24.1%

 

Lease termination costs

 

 

 —

 

 

1,762

 

 

1,762

 

100.0%

 

0.0%

 

1.1%

 

Depreciation & Amortization

 

 

2,431

 

 

2,490

 

 

59

 

2.4%

 

1.2%

 

1.5%

 

Sponsor Management Fee

 

 

365

 

 

315

 

 

(50)

 

(13.7%)

 

0.2%

 

0.2%

 

Interest expense, net

 

 

22,310

 

 

23,802

 

 

1,492

 

6.7%

 

10.8%

 

14.3%

 

Loss on Sale of Subsidiaries

 

 

1,569

 

 

 —

 

 

(1,569)

 

(100.0%)

 

0.8%

 

0.0%

 

Gain on Debt Extinguishment

 

 

(62,852)

 

 

 —

 

 

62,852

 

100.0%

 

(30.5%)

 

0.0%

 

Income tax expense

 

 

6,320

 

 

666

 

 

(5,654)

 

89.5%

 

3.1%

 

0.4%

 

Total Corporate and Other Expenses

 

$

14,164

 

$

69,196

 

$

55,032

 

388.5%

 

6.9%

 

41.6%

 

 

42


 

The decrease in corporate expenses for the six months ended June 30, 2017, as compared to the prior year period is primarily the result of our cost containment initiatives, including the strategic initiatives described above and the closure of the Utah facility.

 

The increase in lease termination costs for the six months ended June 30, 2017, as compared to the prior year period is the result of the closure of the Company’s Utah facility.

 

The $1.6 million loss on sale of a subsidiary is the result of the sale of Florida II in the prior year.

 

The $62.9 million gain on debt extinguishment is the result of the Company repurchasing $99.3 million of its outstanding senior secured notes during the six months ended June 30, 2016.

 

Income tax expense decreased by $5.7 million for the six months ended June 30, 2017, as compared to the prior year due to the loss in operations in the current period, offset by the valuation allowance. The current period expense relates to the tax effect of amortization on indefinite lived intangibles.

 

Business Segment Results of Operations for the Six Months Ended June 30, 2017, and June 30, 2016

 

The following tables present summarized financial information for our segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the six months ended June 30, 2017

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

333,345

 

 

 

$

35,802

 

 

    

 

 

    

$

369,147

 

 

 

Goodwill

 

 

113,499

 

 

 

 

 —

 

 

 

 

 

 

 

113,499

 

 

 

Other Intangible Assets

 

 

449

 

 

 

 

716

 

 

 

 

 

 

 

1,165

 

 

 

Total Revenues

 

$

134,417

 

100.0

%  

$

32,103

 

100.0

%  

 

 

 

$

166,520

 

100.0

%  

Provision for Loan Losses

 

 

27,460

 

20.4

%  

 

15,939

 

49.6

%  

 

 

 

 

43,399

 

26.1

%  

Other Operating Expenses

 

 

77,564

 

57.7

%  

 

2,936

 

9.2

%  

 

 

 

 

80,500

 

48.3

%  

Operating Gross Profit

 

 

29,393

 

21.9

%  

 

13,228

 

41.2

%  

 

 

 

 

42,621

 

25.6

%  

Interest Expense, net

 

 

16,053

 

11.9

%  

 

7,749

 

24.1

%  

 

 

 

 

23,802

 

14.3

%  

Depreciation and Amortization

 

 

2,222

 

1.7

%  

 

268

 

0.8

%  

 

 

 

 

2,490

 

1.5

%  

Lease Termination Expenses

 

 

 —

 

 —

 

 

1,762

 

5.5

%  

 

 

 

 

1,762

 

1.1

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

40,476

 

 

40,476

 

24.3

%  

Income (loss) from Continuing Operations, before tax

 

 

11,118

 

8.3

%  

 

3,449

 

10.7

%  

 

(40,476)

 

 

(25,909)

 

(15.6)

%  

________________________________________

(a)

Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose other corporate expenses as unallocated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the six months ended June 30, 2016

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

336,767

 

 

 

$

77,691

 

 

 

 

 

 

$

414,458

 

 

 

Goodwill

 

 

146,877

 

 

 

 

 —

 

 

 

 

 

 

 

146,877

 

 

 

Other Intangible Assets

 

 

286

 

 

 

 

1,050

 

 

 

 

 

 

 

1,336

 

 

 

Total Revenues

 

$

155,695

 

100.0

%  

$

50,191

 

100.0

%  

 

 

 

$

205,886

 

100.0

%  

Provision for Loan Losses

 

 

29,677

 

19.1

%  

 

27,070

 

53.9

%  

 

 

 

 

56,747

 

27.6

%  

Other Operating Expenses

 

 

80,054

 

51.4

%  

 

8,060

 

16.1

%  

 

 

 

 

88,114

 

42.8

%  

Operating Gross Profit

 

 

45,964

 

29.5

%  

 

15,061

 

30.0

%  

 

 

 

 

61,025

 

29.6

%  

Interest Expense, net

 

 

14,034

 

9.0

%  

 

8,276

 

16.5

%  

 

 

 

 

22,310

 

10.8

%  

Depreciation and Amortization

 

 

1,975

 

1.3

%  

 

456

 

0.9

%  

 

 

 

 

2,431

 

1.2

%  

Loss on sale of subsidiary

 

 

1,569

 

1.0

%  

 

 —

 

 —

 

 

 

 

 

1,569

 

0.8

%  

Gain on Debt Extinguishment (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

(62,852)

 

 

(62,852)

 

(30.5)

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

44,386

 

 

44,386

 

21.6

%  

Income from Continuing Operations, before tax

 

 

28,386

 

18.2

%  

 

6,329

 

12.6

%  

 

18,466

 

 

53,181

 

25.8

%  

________________________________________

(a)Represents income and expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose the gain on debt extinguishment and all other corporate expenses as unallocated.

 

Retail Financial Services

 

Retail financial services represented 80.7%, or $134.4 million, of consolidated revenues for the six months ended June 30, 2017, which was a decrease of $21.3 million, or 13.7%, over the prior period, primarily due to the portfolio rationalization initiatives.  

 

Internet Financial Services

 

For the six months ended June 30, 2017, total revenues contributed by our Internet financial services segment was $32.1 million, a decrease of $18.0 million, or 36.0%, over the prior year comparable period. The provision for loan losses decreased as a percentage of revenue from 53.9% to 49.6% and operating gross profit increased as a percentage of revenue from 30.0% to 41.2% for the six months ended June 30, 2017 over the prior period reflecting the benefits of our heightened underwriting standards and a rationalization of our internet portfolios.

 

Liquidity and Capital Resources

 

We have historically funded our liquidity needs through cash flow from operations and borrowings under our revolving credit facilities and subsidiary notes. We believe that cash flow from operations and available cash, together with availability of existing and future credit facilities, will be adequate to meet our liquidity needs for the foreseeable future. Beyond the immediate future, funding capital expenditures, working capital and debt requirements will depend on our future financial performance, which is subject to many economic, commercial, regulatory, financial and other factors that are beyond our control. In addition, these factors may require us to pursue alternative sources of capital such as asset-specific financing, incurrence of additional indebtedness, or asset sales.

 

44


 

Six Month Cash Flow Analysis

 

The table below summarizes our cash flows for the three months ended June 30, 2016, and 2017.

 

 

 

 

 

 

 

 

 

 

 

Six Months Ending June 30,

 

(in thousands)

 

2016

 

2017

 

Net Cash Provided by Operating Activities

 

$

54,274

    

$

29,692

 

Net Cash Used in Investing Activities

 

 

(47,258)

 

 

(42,988)

 

Net Cash Provided by (Used in) Financing Activities

 

 

(16,209)

 

 

17,536

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

$

(9,193)

 

$

4,240

 

 

Cash Flows from Operating Activities.  During the six months ended June 30, 2017, net cash provided by operating activities was $29.7 million compared to $54.3 million during the prior year comparable period, a decrease of $24.6 million. Cash flows from operating activities decreased primarily due to the decline in net income, net of the non-cash impact of gain on debt extinguishment.

 

Cash Flows from Investing Activities.  During the six months ended June 30, 2017, net cash used in investing activities was $43.0 million. The primary uses of cash were loan originations of $39.4 million and $3.5 million in capital expenditures. During the six months ended June 30, 2016, net cash used in investing activities was $47.3 million, primarily attributable to loan originations and capital expenditures.

 

Cash Flows from Financing Activities.  During the six months ended June 30, 2017, net cash provided by financing activities was $17.5 million. The primary sources of cash were  $15.0 million in proceeds from a subsidiary note and $14.2 million in net proceeds from lines of credit. During the six months ended June 30, 2016, net cash used in financing activities was $16.2 million, primarily due to repurchases of senior secured notes partially offset by proceeds from subsidiary notes and draws on lines of credit.

 

Financing Instruments

 

The Indentures governing our senior secured notes contain certain covenants and events of default that are customary with respect to non-investment grade debt securities, including limitations on our ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase our capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens and sell certain assets or merge with or into other companies. The agreement governing our $47.0 million revolving credit facility contains restrictive covenants that limit our ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase our capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens and sell certain assets or merge with or into other companies, in each case to the same extent as the indentures governing our notes. As of June 30, 2017, and December 31, 2016, we were in compliance with these covenants.

 

For the six months ended June 30, 2016, we repurchased $99.3 million of our senior secured notes resulting in a $62.9 million gain on debt extinguishment. We may continue to repurchase our outstanding debt, including in the open market through privately negotiated transactions, by exercising redemption rights or otherwise and any such repurchases may be material.

 

Capital Expenditures

 

During the six months ended June 30, 2017, the Company spent $3.5 million on capital expenditures and $4.9 million during the comparable period in the prior year. The decrease is primarily due to the Company’s cost containment initiatives. 

 

Seasonality

 

Our business is seasonal based on the liquidity and cash flow needs of our customers. Customers cash tax refund checks primarily in the first calendar quarter of each year which is traditionally our strongest check cashing quarter. We typically see our loan portfolio decline in the first quarter as a result of the consumer liquidity created

45


 

through income tax refunds. Following the first quarter, we typically see our loan portfolio expand through the remainder of the year with the third and fourth quarters showing the strongest loan demand due to the holiday season.

 

Contractual Obligations and Commitments

 

On December 20, 2013, and September 19, 2014, the Company created non-guarantor subsidiaries in order to acquire loans from the retail and internet portfolios. The proceeds from the $40.0 million and $7.3 million notes were used by the non-guarantor subsidiaries to acquire loans from the guarantor subsidiaries. The $40.0 million subsidiary note was amended in June 2016 to extend the maturity date to January 2018. The $7.3 million subsidiary note was amended in March 2017 to extend the maturity to April 2017.

 

In April 2017, the Company’s non-guarantor and unrestricted subsidiary amended and restated its existing $40.0 million note to increase the borrowing capacity up to $55.0 million. The $55.0 million note has a maturity date of January 2019 and an interest rate of 16.75%. The proceeds from the amended note will be used to acquire loans from guarantor subsidiaries. In connection with the amendment, the other non-guarantor and unrestricted subsidiary’s $7.3 million note was satisfied in full. In July 2017, the note was further amended to increase the capacity to $60.0 million.

 

On July 19, 2014, a guarantor subsidiary of ours entered in to a $1.4 million term note with a non-related entity for the acquisition of a share of an airplane. We recorded our $1.1 million share of the joint note, but both parties are jointly and severally liable. The joint note had an outstanding balance of $1.2 million at June 30, 2017, and our share of the note was $0.9 million.

 

On May 24, 2016, a guarantor subsidiary of the Company entered in to a $1.2 million term note for a fractional share of an airplane.

 

Impact of Inflation

 

Our results of operations are not materially impacted by fluctuations in inflation.

 

Balance Sheet Variations

 

Cash and cash equivalents, accounts payable, accrued liabilities, money orders payable and revolving advances vary because of seasonal and day-to-day requirements resulting primarily from maintaining cash for cashing checks and making loans, and the receipt and remittance of cash from the sale of prepaid debit cards, wire transfers, money orders and the processing of bill payments.

 

Loan Portfolio

 

As of June 30, 2017, we offered loans in 35 states.  We have established a loan loss allowance in respect of our loans receivable at a level that our management believes to be adequate to absorb known or probable losses from loans made by us and accruals for losses in respect of loans made by third parties. Our policy for determining the loan loss allowance is based on historical experience, as well as our management’s review and analysis of the payment and collection of the loans within prior periods. All loans and services, regardless of type, are made in accordance with state regulations, and, therefore, the terms of the loans and services may vary from state to state. Loan fees and interest are earned on loans. Products which allow for an upfront fee are recognized over the loan term. Other products’ interest is earned over the term of the loan.

 

As of June 30, 2017, and December 31, 2016, our total finance receivables net of unearned advance fees were approximately $102.8 million and $110.0 million, respectively.

 

Off-Balance Sheet Arrangements

 

In certain markets, we arrange for consumers to obtain consumer loan products from one of several independent third-party lenders whereby we act as a facilitator. For consumer loan products originated by third-party lenders under these programs, each lender is responsible for providing the criteria by which the consumer’s application is underwritten

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and, if approved, determining the amount of the consumer loan. The Company in turn is responsible for assessing whether or not the Company will guarantee such loans. When a consumer executes an agreement with the Company under these programs, the Company agrees, for a fee payable to the Company by the consumer, to provide certain services to the consumer, one of which is to guarantee the consumer’s obligation to repay the loan received by the consumer from the third-party lender if the consumer fails to do so. The guarantee represents an obligation to purchase specific loans that go into default. As of June 30, 2017, and December 31, 2016, the outstanding amount of active consumer loans guaranteed by the Company  was $30.5 million and $36.9 million, respectively. The accrual for third party loan losses, which represents the estimated fair value of the liability for estimated losses on consumer loans guaranteed by the Company, was $3.1 million and $3.1 million as of June 30, 2017, and December 31, 2016, respectively.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

As of June 30, 2017, we have no material market risk sensitive instruments entered into for trading or other purposes, as defined by GAAP.

 

Interest rate risk

 

The cash and cash equivalents reflected on our balance sheet represent largely uninvested cash in our branches and cash-in-transit. The amount of interest income we earn on these funds will decline with a decline in interest rates. However, due to the short-term nature of short-term investment grade securities and money market accounts, an immediate decline in interest rates would not have a material impact on our financial position, results of operations or cash flows.

 

As of June 30, 2017, we had $354.7 million of indebtedness, of which, $47.0 million outstanding under our revolving credit facilities is subject to variable interest rates based on Prime and LIBOR rates.

 

ITEM 4.  CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures, as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2017.

 

Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting, as defined in Rule 15d-15(f) under the Exchange Act, during the quarter ended June 30, 2017, that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS.

 

We and our subsidiaries are party to a variety of legal, administrative, regulatory and government proceedings, claims and inquiries arising in the normal course of business. While the results of these proceedings, claims and inquiries cannot be predicted with certainty, we believe that the final outcome of the foregoing will not have a material adverse effect on our financial condition, results of operations or cash flows. Further, legal proceedings have and may in the future be instituted against us that purport to be class actions or multiparty litigation. In most of these instances, we believe that these actions are subject to arbitration agreements and that the plaintiffs are compelled to arbitrate with us on an individual basis. In the event that a lawsuit purporting to be a class action is certified as such, the amount of damages for which we might be responsible is uncertain. In addition, any such amount would depend upon proof of the allegations and on the number of persons who constitute the class of affected persons.

 

ITEM 1A.  RISK FACTORS.

 

With the exception of the following risk factors, there has been no material changes with respect to the risk factors disclosed under the “Item 1A Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Covenants in our debt agreements restrict our business in many ways

 

Upon the occurrence of an event of default under our revolving credit facility or our senior notes, the lenders or the holders of our senior notes, as the case may be, could elect to declare all amounts outstanding under the applicable indebtedness to be immediately due and payable and the lenders could terminate all commitments to extend further credit under our revolving credit facility. If we were unable to repay those amounts, the lenders and holders of our senior notes could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets as collateral under the revolving credit facility and as security for our senior notes. If we are unable to repay or refinance any amounts outstanding under the revolving credit facility at maturity and the lenders proceed against the collateral, if the lenders under our revolving credit facility accelerate the repayment of borrowings or the holders of our senior notes accelerate repayment of our senior notes, we may not have sufficient assets to repay the amounts outstanding under our indebtedness.

 

The Dodd-Frank Act authorizes the CFPB to adopt rules that could potentially have a serious impact on our ability to offer short-term consumer loans or on our credit facilities, and it also empowers the CFPB and state officials to bring enforcement actions against companies that violate federal consumer financial laws.

 

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or Dodd-Frank or the Dodd-Frank Act, created the CFPB. The CFPB became operational in July 2011. On January 4, 2012, Richard Cordray was installed as its director through a recess appointment and in July 2013, was confirmed by the U.S. Senate. Because of Director Cordray’s recess appointment, there is uncertainty between the date of his recess appointment and the date of his confirmation as to the CFPB’s authority to exercise regulatory, supervisory and enforcement powers over providers of non-depository consumer financial products and services, including its power to exercise supervisory authority to examine and require registration of payday lenders. Additional uncertainty about the CFPB and its director’s authority arises from a lawsuit currently awaiting review from the full United States Court of Appeals for the District of Columbia Circuit. The court of appeals, in a decision issued on October 11, 2016, found that the single director structure of the CFPB, which had no supervision or direction by or from the president, was unconstitutional. Whether this decision will be upheld on subsequent review is uncertain.   

 

Although it has not yet done so, the CFPB now has the authority to adopt rules describing specified acts and practices as being “unfair”, “deceptive” or “abusive,” and hence unlawful. On June 2, 2016, the CFPB issued its Notice of Proposed Rule Making on Payday, Vehicle Title and Certain High-Cost Installment Loans or the Proposed Rules. The Proposed Rules impose a series of new requirements on two categories of loans: (1) those with a term of 45 days or less and (2) those that have a term of greater than 45 days provided that: (i) they have a total cost of credit of greater than 36

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percent and (ii) are either repaid directly from the borrower's bank accounts or income or are secured by the borrower's vehicle. With respect to both categories of covered loans, the Proposed Rule would generally require the lender to make a reasonable determination that the borrower has the ability to repay the loan; limit a lender's ability to collect on covered loans through the use of certain tools that directly withdraw payments from a borrower's bank account; and require lenders to furnish information concerning origination practices to registered information systems as defined by the Proposed Rules. Although the Proposed Rules provide certain exemptions to the so-called ability-to-repay determination, the exemptions are very limited. Hundreds of thousands of comments letters were submitted in response to the Proposed Rules. The CFPB is obligated to review and consider all of the comment letters that were submitted prior to publication of its final rules. It is possible that the CFPB could issue a final rule or rules at some point in 2017.

 

In addition, the CFPB has issued examination procedures for, and has begun conducting examinations of, payday lenders. The CFPB conducted an initial examination of certain of our retail operations in late April 2012, and we received our examination report in October of 2013, and an examination of our internet operations in February of 2015, and we received our examination report in August of 2015. We anticipate additional examinations of our operations by the CFPB from time-to-time. With respect to these CFPB examinations and reports, we undertook various improvements in our operating and compliance procedures, controls and systems, but did not make material changes to our business.

 

Because of the uncertainty of CFPB’s powers under Title X of the Dodd-Frank Act, the relative newness of the examination process and the confidentiality of that process, we can provide no assurances as to how the CFPB’s examinations or rulemaking will impact us in the future. Some consumer advocacy groups have suggested that short-term, medium-term consumer loans, and secured lending should be a regulatory priority. In addition, some consumer advocacy groups have suggested that aspects of payday loans are “abusive” and therefore such loans should be declared unlawful. If the CFPB’s Proposed Rules are adopted substantially as proposed, these rules would make our lending services materially less profitable, impractical and impossible, may result in a default under our revolving credit facility and acceleration of the repayment of borrowings, or may force us to modify or terminate certain product offerings, including short-term and medium-term consumer loans. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to our other lines of business. Any of these potential rules discussed in this paragraph could have a material adverse effect on our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

In addition to Dodd-Frank’s grant of regulatory and supervisory powers to the CFPB, Dodd-Frank gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws (including the CFPB’s own rules). In these proceedings, the CFPB may be able to obtain cease and desist orders (which may include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. Also, where a company has violated Title X of Dodd Frank or CFPB regulations under Title X, Dodd-Frank empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties). If the CFPB or one or more state officials believe we have violated the foregoing laws or regulations, they may be able to exercise their enforcement powers in ways that would have a material adverse effect on us.

 

Judicial decisions, CFPB rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements we use illegal or unenforceable.

 

We include pre-dispute arbitration provisions in our consumer loan agreements. These provisions are designed to allow us to resolve any customer disputes through individual arbitration rather than in court. Our arbitration agreements contain certain consumer-friendly features, including terms that require in-person arbitration to take place in locations convenient for the consumer and provide consumers the option to pursue a claim in small claims court, provide for recovery of certain of the consumer’s attorney’s fees, require us to pay certain arbitration fees and allow for limited appellate review. However, our arbitration provisions explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, our arbitration agreements, if enforced, have the effect of shielding us from class action liability. They do not generally have any impact on regulatory enforcement proceedings.

 

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We take the position that the Federal Arbitration Act requires the enforcement in accordance with the terms of arbitration agreements containing class action waivers of the type we use. While many courts, particularly federal courts, have agreed with this argument in cases involving other parties, an increasing number of courts, including courts in California, Missouri, Washington, New Jersey, and a number of other states, have concluded that arbitration agreements with class action waivers are “unconscionable” and hence unenforceable, particularly where a small dollar amount is in controversy on an individual basis.

 

In April 2011, the U.S. Supreme Court ruled in the AT&T Mobility v. Concepcion case that consumer arbitration agreements meeting certain specifications are enforceable. Because our arbitration agreements differ in several respects from the agreement at issue in that case, this potentially limits the precedential effect of the decision on our business. In addition, Congress has considered legislation that would generally limit or prohibit mandatory pre-dispute arbitration in consumer contracts and has adopted such a prohibition with respect to certain mortgage loans and also certain consumer loans to members of the military on active duty and their dependents. Further, Dodd-Frank directs the CFPB to study consumer arbitration and report to Congress, and it authorizes the CFPB to adopt rules limiting or prohibiting consumer arbitration, consistent with the results of its study. In 2013, the CFPB released a preliminary report on consumer arbitration provisions and in March of 2015, released its final study. This study concluded that arbitration clauses restrict consumers’ relief in disputes with financial service providers because companies are using them to block class proceedings thereby negatively impacting consumers’ access to justice. The CFPB’s report suggests that arbitration clauses severely limit consumers’ options to pursue a just resolution of their disputes, to their detriment and without their knowledge.

 

On May 5, 2016, the CFPB announced proposed rules to regulate the use of arbitration agreements in consumer financial products or services. The Dodd-Frank Act authorized the CFPB to conduct a formal study of arbitration agreements and, if certain conditions were met, regulate the use of arbitration agreements through a rulemaking. The final rule was issued by the CFPB on July 10, 2017, and published in the Federal Register on July 19, 2017.  As a result, the effective compliance date is January 15, 2018, but the rule applies only to agreements entered into 180-days after the effective date.  Whether the final rule will ultimately become effective and when it will ultimately become effective will depend on whether there are judicial or congressional challenges to it.  The House of Representatives passed a bill to invalidate the final arbitration rule under the Congressional Review Act (the CRA) and the matter is now before the Senate. Under the CRA, Congress has sixty legislative days to pass a joint resolution disapproving the final rule. Such a resolution of disapproval is not subject to a filibuster in the Senate, but would require Presidential approval (or a veto override).  If the final arbitration rule is invalidated under the CRA, the CFPB is not permitted to promulgate a “substantially similar” rule.   There may also be a challenge to the final arbitration rule based on Dodd-Frank’s requirement that that it be consistent with the findings of the CFPB’s arbitration study.  Such a challenge to the final arbitration rule may be premised on the portion of the CFPB’s arbitration study showing that consumers receive more redress in arbitration than in court, and that consumers receive that redress faster and with less expense in arbitration.

 

The final rule affects arbitration in two primary ways. First, it requires any arbitration agreement subject to the rule to provide explicitly that the arbitration agreement is inapplicable to cases filed in court on behalf of a class unless and until class certification is denied or the class claims are dismissed. Second, the final rule requires persons subject to the rule who continue to use arbitration agreements, to submit information on initial claim filings and awards to the CFPB. Such claims or awards information could ultimately be published by the CFPB. It is unknown at this time whether there will be challenges to the arbitration rules. The Company does not believe that the final rule will have a material impact on the Company's existing operations, although it will require modification of consumer contracts to conform to the rule. Such a change could lead to increased legal costs and litigation risk, and increased exposure to class action litigation, but it should not otherwise materially affect the business of making loans.

 

Any judicial decisions, legislation or other rules or regulations that impair our ability to enter into and enforce pre-dispute consumer arbitration agreements or class action waivers would significantly increase our exposure to class action litigation as well as litigation in plaintiff-friendly jurisdictions and significantly increase our litigation expenses.  Such litigation could have a material adverse effect on our business, results of operations and financial condition.

 

 

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ITEM 6.  EXHIBITS.

 

The following exhibits are filed or furnished as part of this report:

 

 

 

 

 

Exhibit No.

    

Description of Exhibit

 

 

 

 

 

 

10.1

 

Third Amendment to Revolving Credit Agreement, dated June 30, 2017 (incorporated by reference from Exhibit 10.1 filed with the Company’s Current Report on Form 8-K, filed on July 6, 2017)

31.1

 

Certification Pursuant to Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer

31.2

 

Certification Pursuant to Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer

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Interactive Data File:

(i) Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016; (ii) Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2017 (unaudited) and June 30, 2016 (unaudited); (iii) Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2017 (unaudited); (iv) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 (unaudited) and June 30, 2016 (unaudited); and (v) Notes to Consolidated Financial Statements (unaudited)—submitted herewith pursuant to Rule 406T

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: August  11, 2017

 

 

Community Choice Financial Inc. and Subsidiaries
(registrant)

 

 

 

 

 

/s/ MICHAEL DURBIN

 

Michael Durbin

 

Chief Financial Officer

 

Principal Financial and

 

Principal Accounting Officer

 

 

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