Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - CURO Group Holdings Corp. | ex-322cfo906cert10xka.htm |
| EX-32.1 - EXHIBIT 32.1 - CURO Group Holdings Corp. | ex-321ceo906cert10xka.htm |
| EX-31.2 - EXHIBIT 31.2 - CURO Group Holdings Corp. | ex-312cfo302cert10xka.htm |
| EX-31.1 - EXHIBIT 31.1 - CURO Group Holdings Corp. | ex-311ceo302cert10xka.htm |
| EX-23..1 - EXHIBIT 23..1 - CURO Group Holdings Corp. | ex-231consentofindependent.htm |
| EX-21.1 - EXHIBIT 21.1 - CURO Group Holdings Corp. | ex-211listofsubsidiaries.htm |
| EX-10.68 - EXHIBIT 10.68 - CURO Group Holdings Corp. | ex-1068cghc2017incentplans.htm |
| EX-10.67 - EXHIBIT 10.67 - CURO Group Holdings Corp. | ex-1067noticeofacceleratio.htm |
| EX-10.66 - EXHIBIT 10.66 - CURO Group Holdings Corp. | ex-1066cghc2017rsunotice.htm |
| EX-10.65 - EXHIBIT 10.65 - CURO Group Holdings Corp. | ex-1065cghc2017rsunoticexn.htm |
| EX-10.64 - EXHIBIT 10.64 - CURO Group Holdings Corp. | ex-10642018ltipawardcommun.htm |
| EX-10.63 - EXHIBIT 10.63 - CURO Group Holdings Corp. | ex-10632018corpincentiveco.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-38315
CURO GROUP HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
Delaware | 90-0934597 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3527 North Ridge Road, Wichita, KS | 67205 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (316) 425-1410
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $0.001 par value per share | New York Stock Exchange | |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | ☒ | (Do not check if a smaller reporting company) | ||
Smaller reporting company | ☐ | Emerging growth company | ☒ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of 6,666,667 shares of the registrant’s common stock, par value $0.001 per share, held by non-affiliates on December 31, 2017 was approximately $93,866,671.
At March 1, 2018 there were 45,561,419 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.
Documents incorporated by reference:
The information required by Part III of Form 10-K is incorporated herein by reference to the registrant's definitive Proxy Statement relating to its 2018 Annual Meeting of Shareholders, which will be filed with the Commission within 120 days after the end of the registrant's fiscal year.
Table of Contents
Explanatory Note
CURO GROUP HOLDINGS CORP. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (“Form 10-K/A”) to its Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on March 13, 2018 (the “Original Filing”) solely to amend Item 8 to correct the tenure date in Grant Thornton LLP’s report to indicate their tenure as our auditor of record since 2007 rather than the previously reported date of 2010, to update their report date to the date of the filing of the Form 10-K/A and to include their consent as an exhibit to the Form 10-K/A. Currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer are filed as Exhibits to this Form 10-K/A, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Except as expressly set forth above, this 10-K/A does not, and does not purport to, amend, update, or restate the information in any other item of the Original Filing. Nothing within this 10-K/A has re-stated or altered the financial statements contained in the Original Filing in any manner.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
CURO Group Holdings Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of CURO Group Holdings Corporation and subsidiaries (a Delaware corporation) (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.
Kansas City, Missouri
March 26, 2018
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2017 | December 31, 2016 | ||||||
ASSETS | |||||||
Cash | $ | 162,374 | $ | 193,525 | |||
Restricted cash (includes restricted cash of consolidated VIEs of $6,871 and $2,770 as of December 31, 2017 and 2016, respectively) | 12,117 | 7,828 | |||||
Gross loans receivable (includes loans of consolidated VIEs of $213,846 and $130,199 as of December 31, 2017 and 2016, respectively) | 432,837 | 286,196 | |||||
Less: allowance for loan losses (includes allowance for losses of consolidated VIEs of $46,140 and $22,134 as of December 31, 2017 and 2016, respectively) | (69,568 | ) | (39,192 | ) | |||
Loans receivable, net | 363,269 | 247,004 | |||||
Deferred income taxes | 772 | 12,635 | |||||
Income taxes receivable | 3,455 | 9,378 | |||||
Prepaid expenses and other | 42,512 | 39,248 | |||||
Property and equipment, net | 87,086 | 95,896 | |||||
Goodwill | 145,607 | 141,554 | |||||
Other intangibles, net of accumulated amortization of $41,156 and $36,985 | 32,769 | 30,901 | |||||
Other | 9,770 | 2,829 | |||||
Total Assets | $ | 859,731 | $ | 780,798 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Accounts payable and accrued liabilities | $ | 55,792 | $ | 42,663 | |||
Deferred revenue | 11,984 | 12,342 | |||||
Income taxes payable | 4,120 | 1,372 | |||||
Current maturities of long-term debt | — | 147,771 | |||||
Accrued interest (includes accrued interest of consolidated VIEs of $1,266 and $775 as of December 31, 2017 and 2016, respectively) | 25,467 | 8,183 | |||||
Credit services organization guarantee liability | 17,795 | 17,052 | |||||
Deferred rent | 11,577 | 11,868 | |||||
Long-term debt (includes long-term debt and issuance costs of consolidated VIEs of $124,590 and $4,188 and $68,311 and $5,257 as of December 31, 2017 and 2016, respectively) | 706,225 | 477,136 | |||||
Subordinated shareholder debt | 2,381 | 2,227 | |||||
Other long-term liabilities | 5,768 | 5,016 | |||||
Deferred tax liabilities | 11,486 | 14,313 | |||||
Total Liabilities | 852,595 | 739,943 | |||||
Commitments and contingencies | |||||||
Stockholders' Equity | |||||||
Preferred stock - $0.001 par value; 25,000,000 and no shares authorized, respectively, and no shares were issued at either period end | — | — | |||||
Common stock - $0.001 par value; 225,000,000 and 72,000,000 shares authorized, and 44,561,419 and 37,894,752 issued and outstanding at the respective period ends | 8 | 1 | |||||
Dividends in excess of paid-in capital | 46,079 | (35,996 | ) | ||||
Retained earnings | 3,988 | 136,835 | |||||
Accumulated other comprehensive loss | (42,939 | ) | (59,985 | ) | |||
Total Stockholders' Equity | 7,136 | 40,855 | |||||
Total Liabilities and Stockholders' Equity | $ | 859,731 | $ | 780,798 | |||
See the accompanying Notes to Consolidated Financial Statements
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Revenue | $ | 963,633 | $ | 828,596 | $ | 813,131 | |||||
Provision for losses | 326,226 | 258,289 | 281,210 | ||||||||
Net revenue | 637,407 | 570,307 | 531,921 | ||||||||
Cost of providing services | |||||||||||
Salaries and benefits | 105,196 | 104,541 | 107,059 | ||||||||
Occupancy | 54,612 | 54,509 | 53,288 | ||||||||
Office | 21,402 | 20,463 | 19,929 | ||||||||
Other costs of providing services | 54,902 | 53,617 | 47,380 | ||||||||
Advertising | 52,058 | 43,921 | 65,664 | ||||||||
Total cost of providing services | 288,170 | 277,051 | 293,320 | ||||||||
Gross margin | 349,237 | 293,256 | 238,601 | ||||||||
Operating (income) expense | |||||||||||
Corporate, district and other | 154,973 | 124,274 | 130,534 | ||||||||
Interest expense | 82,684 | 64,334 | 65,020 | ||||||||
Loss (Gain) on extinguishment of debt | 12,458 | (6,991 | ) | — | |||||||
Restructuring costs | 7,393 | 3,618 | 4,291 | ||||||||
Goodwill and intangible asset impairment charges | — | — | 2,882 | ||||||||
Total operating expense | 257,508 | 185,235 | 202,727 | ||||||||
Net income before income taxes | 91,729 | 108,021 | 35,874 | ||||||||
Provision for income taxes | 42,576 | 42,577 | 18,105 | ||||||||
Net income | $ | 49,153 | $ | 65,444 | $ | 17,769 | |||||
Weighted average common shares outstanding: | |||||||||||
Basic | 38,351 | 37,908 | 37,908 | ||||||||
Diluted | 39,277 | 38,803 | 38,895 | ||||||||
Net income per common share: | |||||||||||
Basic earnings per share | $ | 1.28 | $ | 1.73 | $ | 0.47 | |||||
Diluted earnings per share | $ | 1.25 | $ | 1.69 | $ | 0.46 | |||||
See the accompanying Notes to Consolidated Financial Statements
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Net income | $ | 49,153 | $ | 65,444 | $ | 17,769 | |||||
Other comprehensive income (loss): | |||||||||||
Cash flow hedges, net of $0 tax in all periods | 333 | (333 | ) | — | |||||||
Foreign currency translation adjustment, net of $0 tax in all periods | 16,713 | (6,022 | ) | (30,512 | ) | ||||||
Other comprehensive income (loss) | 17,046 | (6,355 | ) | (30,512 | ) | ||||||
Comprehensive income (loss) | $ | 66,199 | $ | 59,089 | $ | (12,743 | ) | ||||
See the accompanying Notes to Consolidated Financial Statements
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except share data)
Common Stock | Dividends in excess of paid-in capital | Retained Earnings | AOCI (1) | Total Stockholders' Equity | ||||||||||||||||||
Shares Outstanding | Par Value | |||||||||||||||||||||
Balances at December 31, 2014 | 37,894,752 | $ | 1 | $ | (38,044 | ) | $ | 53,622 | $ | (23,118 | ) | $ | (7,539 | ) | ||||||||
Net income | 17,769 | 17,769 | ||||||||||||||||||||
Foreign currency translation adjustment | (30,512 | ) | (30,512 | ) | ||||||||||||||||||
Repurchase of equity award | (371 | ) | (371 | ) | ||||||||||||||||||
Share based compensation expense | 1,271 | 1,271 | ||||||||||||||||||||
Balances at December 31, 2015 | 37,894,752 | 1 | (37,144 | ) | 71,391 | (53,630 | ) | (19,382 | ) | |||||||||||||
Net income | 65,444 | 65,444 | ||||||||||||||||||||
Foreign currency translation adjustment | (6,022 | ) | (6,022 | ) | ||||||||||||||||||
Cash flow hedge | (333 | ) | (333 | ) | ||||||||||||||||||
Share based compensation expense | 1,148 | 1,148 | ||||||||||||||||||||
Balances at December 31, 2016 | 37,894,752 | 1 | (35,996 | ) | 136,835 | (59,985 | ) | 40,855 | ||||||||||||||
Net income | 49,153 | 49,153 | ||||||||||||||||||||
Foreign currency translation adjustment | 16,713 | 16,713 | ||||||||||||||||||||
Cash flow hedge expiration | 333 | 333 | ||||||||||||||||||||
Initial Public Offering | 6,666,667 | 7 | 81,110 | 81,117 | ||||||||||||||||||
Dividends | — | (182,000 | ) | (182,000 | ) | |||||||||||||||||
Share based compensation expense | 965 | 965 | ||||||||||||||||||||
Balances at December 31, 2017 | 44,561,419 | $ | 8 | $ | 46,079 | $ | 3,988 | $ | (42,939 | ) | $ | 7,136 | ||||||||||
(1) Accumulated other comprehensive income (loss) | ||||||||||||||||||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Cash flows from operating activities | |||||||||||
Net income | $ | 49,153 | $ | 65,444 | $ | 17,769 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 18,837 | 18,905 | 19,112 | ||||||||
Provision for loan losses | 326,226 | 258,289 | 281,210 | ||||||||
Goodwill and intangible asset impairment charges | — | — | 2,882 | ||||||||
Restructuring costs | 3,161 | 523 | 2,249 | ||||||||
Amortization of debt issuance costs | 3,329 | 3,289 | 3,221 | ||||||||
Amortization of bond discount/(premium) | 1,225 | (1,541 | ) | (1,404 | ) | ||||||
Deferred income taxes | 9,036 | (680 | ) | (2,190 | ) | ||||||
Loss on disposal of property and equipment | 2,278 | 217 | 628 | ||||||||
Loss (gain) on extinguishment of debt | 12,458 | (6,991 | ) | — | |||||||
Increase in cash surrender value of life insurance | (1,308 | ) | (918 | ) | — | ||||||
Share-based compensation expense | 965 | 1,148 | 1,271 | ||||||||
Realized loss on cash flow hedge | 333 | — | — | ||||||||
Changes in operating assets and liabilities: | |||||||||||
Loans receivable | (435,458 | ) | (287,827 | ) | (301,581 | ) | |||||
Prepaid expenses and other assets | (3,264 | ) | (5,733 | ) | (3,152 | ) | |||||
Accounts payable and accrued liabilities | 8,896 | 2,010 | (2,168 | ) | |||||||
Deferred revenue | (752 | ) | (2,080 | ) | 4,644 | ||||||
Income taxes payable | 1,213 | 6,852 | (4,278 | ) | |||||||
Income taxes receivable | 3,486 | (7,154 | ) | (1,713 | ) | ||||||
Other assets and liabilities | 17,596 | 3,959 | 614 | ||||||||
Net cash provided by operating activities | 17,410 | 47,712 | 17,114 | ||||||||
Cash flows from investing activities | |||||||||||
Purchase of property, equipment and software | (9,757 | ) | (16,026 | ) | (19,832 | ) | |||||
Cash paid for Cognical Holdings preferred shares | (5,600 | ) | — | — | |||||||
Changes in restricted cash | (3,975 | ) | 3,104 | (6,423 | ) | ||||||
Net cash (used in) investing activities | (19,332 | ) | (12,922 | ) | (26,255 | ) | |||||
Cash flows from financing activities | |||||||||||
Net proceeds from issuance of common stock | 81,117 | — | — | ||||||||
Proceeds from Non-Recourse U.S. SPV facility and ABL facility | 60,130 | 91,717 | — | ||||||||
Payments on Non-Recourse U.S. SPV facility and ABL facility | (27,257 | ) | — | — | |||||||
Proceeds from issuance of 12.00% Senior Secured Notes | 601,054 | — | — | ||||||||
Payments on 10.75% Senior Secured Notes | (426,034 | ) | (18,939 | ) | — | ||||||
Payments on 12.00% Senior Cash Pay Notes | (125,000 | ) | — | — | |||||||
Debt issuance costs paid | (18,701 | ) | (5,346 | ) | — | ||||||
Proceeds from credit facilities | 43,084 | 30,000 | 57,050 | ||||||||
Payments on credit facilities | (43,084 | ) | (38,050 | ) | (69,000 | ) | |||||
Payment for cash settlement of equity award | — | — | (371 | ) | |||||||
Dividends paid to stockholders | (182,000 | ) | — | — | |||||||
Net cash (used in) provided by financing activities | (36,691 | ) | 59,382 | (12,321 | ) | ||||||
Effect of exchange rate changes on cash | 7,462 | (1,208 | ) | (8,064 | ) | ||||||
Net (decrease) increase in cash | (31,151 | ) | 92,964 | (29,526 | ) | ||||||
Cash at beginning of period | 193,525 | 100,561 | 130,087 | ||||||||
Cash at end of period | $ | 162,374 | $ | 193,525 | $ | 100,561 | |||||
See the accompanying Notes to Consolidated Financial Statements
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Basis of Presentation
The terms “CURO", "we,” “our,” “us,” and the “Company,” refer to CURO Group Holdings Corp. and its directly and indirectly owned subsidiaries as a consolidated entity, except where otherwise stated. The term "CFTC" refers to CURO Financial Technologies Corp., a subsidiary of CURO, and its directly and indirectly owned subsidiaries as a consolidated entity, except where otherwise stated.
We have prepared the accompanying audited Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
The Consolidated Financial Statements and the accompanying notes (the “Financial Statements”) reflect all adjustments which are, in the opinion of management, necessary to present fairly our results of operations, financial position and cash flows for the periods presented. The adjustments consist solely of normal recurring adjustments.
We completed our initial public offering ("IPO") on December 11, 2017, and our common stock is trading on the New York Stock Exchange ("NYSE") under the symbol "CURO." Prior to our IPO, on December 6, 2017, we filed a certificate of amendment to our certificate of incorporation on that effected a 36-for-1 split of our common stock. All share and per share data have been retroactively adjusted for all periods presented to reflect the stock split as if the stock split had occurred at the beginning of the earliest period presented. See Note 15 - "Stockholders' Equity" for additional information concerning our IPO and stock split.
As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.
An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise generally applicable to public companies. As an emerging growth company:
• | we are not required to present selected financial data for any period prior to the earliest audited period presented in our initial registration statement; |
• | we are not required to engage an auditor to report on the effectiveness of our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act; |
• | we are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); |
• | we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes”; |
• | we are not required to disclose certain executive compensation-related items, such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation, or to include a compensation committee report, provided we comply with the scaled compensation disclosure rules applicable to smaller reporting companies; and |
• | we may take advantage of an extended transition period for complying with new or revised accounting standards, allowing us to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. |
We have elected to take advantage of these reduced reporting and other requirements available to us as an emerging growth company.
We may take advantage of these provisions until we are no longer an emerging growth company. We could remain an emerging growth company until the last day of the fifth fiscal year after our IPO, or until the earliest of the following: (i) the last day of the first fiscal year in which our total annual gross revenues are at least $1.07
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
billion; (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur as of the end of the fiscal year in which, among other things, the market value of our voting and non-voting common equity securities held by non-affiliates is at least $700.0 million as of the last business day of our most recently completed second fiscal quarter; or (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt securities during the preceding three-year period.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of CURO and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods reported. Some of the significant estimates that we have made in the accompanying Consolidated Financial Statements include allowances for loan losses, certain assumptions related to goodwill and intangibles, accruals related to self-insurance, Credit Services Organization ("CSO") guarantee liability and estimated tax liabilities. Actual results may differ from those estimates.
Nature of Operations
We are a growth-oriented, technology-enabled, highly-diversified consumer finance company serving a wide range of underbanked consumers in the United States, the United Kingdom and Canada.
Cash
We currently maintain cash balances in the United States, Canada and the United Kingdom. At December 31, 2017 we have $117.5 million, $36.0 million and $8.9 million in our cash accounts in the United States, Canada and the United Kingdom, respectively.
Consumer Loans Receivable
Consumer loans receivable are net of the allowance for loan losses and are comprised of Single-Pay and Unsecured Installment, Secured Installment and Open-End Loans. Our Single-Pay Loans are primarily comprised of payday loans and auto title loans. A payday loan transaction consists of providing a customer cash in exchange for the customer’s personal check or Automated Clearing House (“ACH”) authorization (in the aggregate amount of that cash plus a service fee), with an agreement to defer the presentment or deposit of that check or scheduled ACH withdrawal until the customer’s next payday, which is typically either two weeks or a month from the loan’s origination date. An auto title loan allows a customer to obtain a loan using the customer’s car as collateral for the loan, with a typical loan term of 30 days.
Unsecured Installment, Secured Installment and Open-End Loans require periodic payments of principal and interest. Installment Loans are fully amortized loans with a fixed payment amount due each period during the term of the loan. Open-End Loans function much like a revolving line-of-credit, whereby the periodic payment is a set percentage of the customer’s outstanding loan balance, and there is no defined loan term. The loan terms for Installment Loans can range from 3 to 48 months, depending on state regulations. Installment and Open-End Loans are offered as both Secured auto title loans and as Unsecured Loan products. The product offerings differ by jurisdiction and are governed by the laws in each separate jurisdiction.
Current and Past-Due Loans Receivable
We classify our loans receivable as either current or past-due. Single-Pay and Open-End Loans are considered past-due when a customer misses a scheduled payment and charged-off to the allowance for loan losses. The
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
charge-off of Unsecured Installment and Secured Installment Loans was impacted by a change in accounting estimate in the first quarter of 2017.
Effective January 1, 2017, we modified the timeframe in which Installment Loans are charged-off and made related refinements to our loss provisioning methodology. Prior to January 1, 2017, we deemed all loans uncollectible and charged-off when a customer missed a scheduled payment and the loan was considered past-due. Because of our continuing shift from Single-Pay to Installment Loan products and our analysis of payment patterns on early-stage versus late-stage delinquencies, we have revised our estimates and now consider Installment Loans uncollectible when the loan has been past-due for 90 consecutive days. Consequently, past-due Installment Loans remain in loans receivable, with disclosure of past-due balances, for 90 days before being charged-off against the allowance for loan losses. We evaluate the adequacy of the allowance for loan losses compared to the related gross receivables balances that include accrued interest.
In the income statement, the provision for losses for Installment Loans is based on an assessment of the cumulative net losses inherent in the underlying loan portfolios, by vintage, and several other quantitative and qualitative factors. The resulting loss provision rate is applied to loan originations to determine the provision for losses. In addition to improving estimated collectability and loss recognition for Installment Loans, we also believe these refinements are better aligned with industry comparisons and practices.
The aforementioned change is treated as a change in accounting estimate that was applied prospectively effective January 1, 2017. As a result, some credit quality metrics in 2017 may not be comparable to historical periods. Throughout the remainder of this Annual Report, the change in estimate is referred to as “Q1 Loss Recognition Change.”
Installment Loans generally are considered past-due when a customer misses a scheduled payment. Loans zero to 90 days past-due are disclosed and included in gross loans receivable. We accrue interest on past-due loans until charged off. The amount of the resulting charge-off includes unpaid principal, accrued interest and any uncollected fees, if applicable. Consequently, net loss rates that include accrued interest will be higher than under the methodology applied prior to January 1, 2017.
The result of this change in estimate resulted in an approximately $61.0 million of Installment Loans at December 31, 2017 that remained on our balance sheet that were between 1 and 90 days delinquent, as compared to none in the prior year. Additionally, the installment allowance for loan losses as of December 31, 2017 of $69.6 million includes an estimated allowance of $38.7 million for the Installment Loans between 1 and 90 days delinquent, as compared to none in the prior year period.
For Single-Pay and Open-End Loans, past-due loans are charged-off upon payment default and do not return to current for any subsequent payment activity. For Installment Loans, customers with payment delinquency of 90 consecutive days are charged off. Charged-off loans are never returned to current or performing and all subsequent activity is accounted for within recoveries in the Allowance for loan losses. If a past-due Installment Loan customer makes payments sufficient to bring the account current for principal plus all accrued interest or fees pursuant to the original terms of the loan contract before becoming 90 consecutive days past due, the underlying loan balance returns to classification as current. Modifications to the original term of the loan agreement would not result in a loan returning to current classification and only loan customers that are current are eligible for refinancing.
Depending upon underlying state or provincial regulations, a borrower may be eligible for more than one outstanding loan.
Allowance for Loan Losses
The allowance for loan losses is primarily based on back-testing of subsequent collections history by product and cumulative aggregate net losses by product and by vintage. We do not specifically reserve for any individual loan but rather segregate loans into separate pools based upon loan portfolios containing similar risk characteristics. Additional quantitative factors, such as current default trends, past-due account roll rates and changes to underwriting and portfolio mix are also considered in evaluating the adequacy of the allowance and current provision rates. Qualitative factors such as the impact of new loan products, changes to underwriting criteria or
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions impact management’s judgment on the overall adequacy of the allowance for loan losses.
In addition to the effect on Unsecured and Secured Installment provision rates and loan balances, the Q1 Loss Recognition Change affected comparability of activity in the related allowance for loan losses. Specifically, no Unsecured or Secured Installment Loans were charged-off to the allowance for loan losses in the first quarter of 2017 because charge-off effectively occurs on day 91 under the revised methodology and no affected loans originated during the first quarter reached day 91 until April 2017. Actual charge-offs and recoveries on defaulted/charged-off loans from the first quarter of 2017 affected the allowance for loan losses in prospective periods. But, as discussed previously, the related net losses were recognized in the Consolidated Statements of Income for the year ended December 31, 2017 by applying expected net loss provision rates to the related loan originations.
Credit Services Organization
Through our CSO programs, we act as a credit services organization/credit access business on behalf of customers in accordance with applicable state laws. We currently offer loans through CSO programs in stores and online in the state of Texas and online in the state of Ohio. In Texas we offer Unsecured Installment Loans and Secured Installment Loans with a maximum term of 180 days. In Ohio we offer an Unsecured Installment Loan product with a maximum term of 18 months. As a CSO we earn revenue by charging the customer a fee (the “CSO fee”) for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with us under our CSO programs, we agree, for a CSO fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customer’s obligation to repay the loan the customer receives from the third-party lender. CSO fees are calculated based on the amount of the customer's outstanding loan. For CSO loans, each lender is responsible for providing the criteria by which the customer’s application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go in to default.
As of December 31, 2017, the maximum amount guaranteed by the Company was $65.2 million, compared to $59.6 million at December 31, 2016. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover some or the entire amount from the customers. We hold no collateral in respect of the guarantees.
These guarantees are performance guarantees as defined in ASC Topic 460. Performance guarantees are initially accounted for pursuant to ASC Topic 460 and recognized at fair value, and subsequently pursuant to ASC Topic 450 as contingent liabilities when we incur losses as the guarantor. The initial measurement of the guarantee liability is recorded at fair value and reported in the Credit services organization guarantee liability line in our Consolidated Balance Sheets. The initial fair value of the guarantee is the price we would pay to a third party market participant to assume the guarantee liability. There is no active market for transferring the guarantee liability. Accordingly, we determine the initial fair value of the guarantee by estimating the expected losses on the guaranteed loans. The expected losses on the guaranteed loans are estimated by assessing the nature of the loan products, the credit worthiness of the borrowers in the customer base, our historical loan default history for similar loans, industry loan default history, and historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. We review the factors that support estimates of expected losses and the guarantee liability monthly. In addition, because the majority of the underlying loan customers make bi-weekly payments, loan-pool payment performance is evaluated more frequently than monthly.
Our guarantee liability was $17.8 million and $17.1 million at December 31, 2017 and December 31, 2016, respectively. This liability represents the unamortized portion of the guarantee obligation required to be recognized at inception of the performance guarantee in accordance with ASC Topic 460 and a contingent liability for those performance guarantees where it is probable that we will be required to purchase the guaranteed loan from the lender in accordance with ASC Topic 450.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
CSO fees are calculated based on the amount of the customer’s outstanding loan. We comply with the applicable jurisdiction’s Credit Services Organization Act or a similar statue. These laws generally define the services that we can provide to consumers and require us to provide a contract to the customer outlining our services and the cost of those services to the customer. For services we provide under our CSO programs we receive payments from customers on their scheduled loan repayment due dates. The CSO fee is earned ratably over the term of the loan as the customers make payments. If a loan is paid off early, no additional CSO fees are due or collected. The maximum CSO loan term is six months and 18 months in Texas and Ohio, respectively. During the years ended December 31, 2017 and 2016, approximately 53.6% and 53.2%, respectively, of Unsecured Installment Loans, and 53.6% and 62.5%, respectively, of Secured Installment Loans originated under CSO programs were paid off prior to the original maturity date.
Since CSO loans are made by a third-party lender, we do not include them in our Consolidated Balance Sheets as loans receivable. CSO fees receivable are included in “Prepaid expense and other” in our Consolidated Balance Sheets. We receive cash from customers for these fees on their scheduled loan repayment due dates.
The impact of the Q1 Loss Recognition Change to the third-party loans we guarantee and the related CSO guarantee liability was approximately $13.0 million of Installment Loans we guaranteed at December 31, 2017 between 1 and 90 days delinquent, as compared to none in the prior year period. Additionally, the installment CSO guarantee liability as of December 31, 2017 of $17.8 million includes an estimated liability of $9.0 million for the Installment Loans guaranteed by us between 1 and 90 days delinquent, as compared to none in the prior year period.
Variable Interest Entity
As part of our funding strategy and as part of our efforts to support our liquidity from sources other than our traditional capital market sources, we established a securitization program through a U.S. SPV Facility. We transferred certain consumer loan receivables to a wholly-owned, bankruptcy-remote special purpose subsidiary (“VIE”), that issues term notes backed by the underlying consumer loan receivables and are serviced by another wholly-owned subsidiary.
We are required to evaluate this VIE for consolidation. We have the ability to direct the activities of the VIE that most significantly impact the economic performance of the entities as the servicer of the securitized loan receivables. Additionally, we have the right to receive residual payments, which expose us to potentially significant losses and returns. Accordingly, we determined that we are the primary beneficiary of the VIE and are required to consolidate them. See Note 5 —"Variable Interest Entities" for further discussion of our VIEs.
Cash Flow Hedge
We had a cash flow hedge in which the hedging instrument was a forward extra to sell GBP 4,800,000 that expired in May 2017. We performed an assessment that determined that all critical terms of the hedging instrument and the hedged transaction match and as such qualitatively concluded that changes in the hedge’s intrinsic value would completely offset the change in the expected cash flows based on changes in the spot rate. Since the effectiveness of this hedge was assessed based on changes in the hedge’s intrinsic value, the change in the time value of the contract would be excluded from the assessment of hedge effectiveness. We recorded the hedge’s fair value on the balance sheet in current liabilities.
Changes in the hedge’s intrinsic value, to the extent that they were effective as a hedge, were recorded in other comprehensive income in prior periods. Upon expiration of the hedge in May 2017 we recorded a realized loss of $0.3 million in our consolidated statement of income associated with this hedge.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and amortization, except for property and equipment accounted for as part of a business combination, which is carried at fair value as of the acquisition date less accumulated depreciation and amortization. Expenditures for major additions and improvements are capitalized. Maintenance repairs and renewals, which neither materially add to the value, nor appreciably prolong
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
its life, are charged to expense as incurred. Gains and losses on dispositions of property and equipment are included in operations.
The estimated useful lives for furniture, fixtures and equipment are five to seven years. The estimated useful lives for leasehold improvements are the shorter of the estimated useful life of the asset, or the term of the lease, and vary from one year to fifteen years.
Goodwill and Other Intangible Assets
Our impairment testing for goodwill and indefinite-lived intangible assets is performed annually during the fourth quarter. However, we test for impairment between our annual tests if an event occurs or if circumstances change that indicate that the asset would be impaired, or, in the case of goodwill, that the fair value of a reporting unit is below its carrying value. These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors.
Goodwill
Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair value of the acquired net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Intangible assets other than goodwill are initially valued at fair value. When appropriate, we utilize independent valuation experts to advise and assist us in determining the fair value of the identified intangible assets acquired in connection with a business acquisition and in determining appropriate amortization methods and periods for those intangible assets. Any contingent consideration included as part of the purchase is recognized at its fair value on the acquisition date.
Our annual impairment review for goodwill consists of performing a qualitative assessment to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount as a basis for determining whether or not further testing is required. We may elect to bypass the qualitative assessment and proceed directly to the two-step process, for any reporting unit, in any period. We can resume the qualitative assessment for any reporting unit in any subsequent period. If we determine, on the basis of qualitative factors, that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, we will then apply a two-step process of determining the fair value of the reporting unit and comparing it to the carrying value of the net assets allocated to the reporting unit. When performing the two-step process, if the fair value of the reporting unit exceeds it carrying value, no further analysis or write-down of goodwill is required. In the event the estimated fair value of a reporting unit is less than the carrying value, additional analysis is required. The additional analysis compares the carrying amount of the reporting unit’s goodwill with the implied fair value of the goodwill. The use of external independent valuation experts may be required to assist management in determining the fair value of the reporting unit. The implied fair value of the goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeds its implied fair value, an impairment loss equal to such excess is recognized, which could significantly and adversely impact reported results of operations and shareholders’ equity.
During the fourth quarter of 2017, we performed the qualitative assessment for our United States and Canada reporting units. Management concluded that the estimated fair values of these two reporting units were greater than their carrying values. As such, no further analysis was required for these reporting units. We performed the first step of the two-step process for our United Kingdom reporting unit and determined that its implied fair value exceeded its carrying value, and therefore, the second step was not performed and no further analysis or write-down of goodwill was required.
During the fourth quarter of 2016, we performed the first step of the two-step process and determined that the implied fair value of our reporting units exceed their carrying values, and therefore, the second step was not performed and no further analysis or write-down of goodwill was required.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
During the third quarter of 2015, due to the declines in our overall financial performance in the United Kingdom, we determined that a triggering event had occurred requiring an impairment evaluation of our goodwill and other intangible assets in the United Kingdom. As a result, during the third quarter of 2015, we recorded non-cash impairment charges of $2.9 million which were comprised of a $1.8 million charge related to the Wage Day trade name, a $0.2 million charge related to the customer relationships acquired as part of the Wage Day acquisition, and a $0.9 million non-cash goodwill impairment charge in our U.K. reporting segment.
For the U.K. reporting unit, the estimated fair value as determined by the Discounted Cash Flow (“DCF”) model was lower than the associated carrying value. As a result, management performed the second step of the impairment analysis in order to determine the implied fair value of the U.K.’s goodwill. The results of the second-step analysis indicated that the implied fair value of goodwill was £17.7 million. Therefore, in 2015, we recorded a non-cash goodwill impairment charge of £0.6 million ($0.9 million). The key assumptions used to determine the fair value of the U.K. reporting unit included the following: (a) the discount rate was 11%; (b) terminal period growth rate of 2.0%; and (c) effective combined tax rate of 20%.
During the 2015 annual review of goodwill, we performed the qualitative assessment for our United States and Canada reporting units. Management concluded that it was not more likely than not that the estimated fair values of these two reporting units were less than their carrying values. As such, no further analysis was required for these reporting units. As part of this annual impairment test in the fourth quarter, we reviewed our analysis done in the third quarter for the United Kingdom and updated projections as appropriate. Management concluded as a result of this analysis that it was not more likely than not that the estimated fair values of the reporting units were less than their carrying values.
The impairment of the goodwill on our U.K. reporting unit resulted primarily from changes to the regulatory environment in the United Kingdom that resulted in management’s downward revision of its cash flow projections for the U.K. reporting unit. The primary driver of decreased volumes in the United Kingdom was the direct result of regulatory changes, primarily the new Financial Conduct Authority (“FCA”) rules that took effect on July 1, 2014, which reduced loan refinancing transactions from three to two and reduced the number of continuous payment authority attempts from three to two. Additionally, the FCA implemented a rate cap on high-cost short-term credit products that took effect on January 2, 2015. This price cap includes three components: 1) an initial cap of 0.8% of the outstanding principal per day; 2) a default fee fixed rate of £15; and 3) a total cost of credit cap of 100% of the total amount borrowed applying to all interest, fees and charges. With the imposition of the new rate cap, we ceased offering any new Installment Loan products in the United Kingdom in favor of a new rate capped Single-Pay Loan product. Additionally, the increase in compliance requirements has driven up the administrative costs necessary to operate in the United Kingdom. We modeled the impact of all of these regulatory changes in the projections used in our second-step analysis.
Other Intangible Assets
Our identifiable intangible assets, which resulted from business combinations, consist of trade names, customer relationships, computer software, provincial licenses, franchise agreements and positive leasehold interests.
The “Wage Day” and “Cash Money” trade names were determined to be intangible assets with indefinite lives. Intangible assets with indefinite lives are not amortized and are tested annually for impairment and are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset might not be recoverable. Impairment of identifiable intangible assets with indefinite lives occurs when the fair value of the asset is less than its carrying amount. If impaired, the asset’s carrying amount is reduced to its fair value.
In the fourth quarters of 2017 and 2016, we tested these intangible assets with indefinite lives for impairment and concluded that no impairment exists as the fair value of these assets is greater than its carrying amounts.
In our interim analysis during the third quarter of 2015 mentioned above, we estimated the fair value of the Wage Day trade name using the relief-from-royalty method, which utilized several significant assumptions, including management projections of future revenue, a royalty rate, a long-term growth rate, and a discount rate. As these assumptions are largely unobservable, the estimate of fair value is considered to be unobservable within the fair value hierarchy. The significant unobservable inputs included projected revenues with annual growth rates, a
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
royalty rate, a growth rate of 2.0% in the terminal period, and a discount rate of 15%. The carrying value of the Wage Day trade name exceeded its estimated fair value by £1.2 million. Accordingly, we recorded an impairment charge of £1.2 million ($1.8 million) during 2015, which was included in Goodwill and intangible asset impairment charges in our Consolidated Statements of Income.
As part of the annual impairment test in the fourth quarter of 2015, we relied on our analysis done in the third quarter for the Wage Day trade name intangible asset. Management concluded as a result of this analysis that the fair value of the asset was equal to its carrying amount.
Our finite lived intangible assets are amortized over their estimated economic benefit period, generally from three to seven years. These finite lived intangible assets are reviewed for impairment whenever events or changes in circumstances have indicated that the carrying amount of these assets might not be recoverable. If we were to determine that events and circumstances warrant a change to the estimate of an identifiable intangible asset’s remaining useful life, then the remaining carrying amount of the identifiable intangible asset would be amortized prospectively over that revised remaining useful life. Additionally, information resulting from our annual assessment, or other events and circumstances, may indicate that the carrying value of one or more identifiable intangible assets is not recoverable which would result in recognition of an impairment charge. There were no changes in events or circumstances that would cause us to review our finite lived intangible assets for impairment in 2016 or 2017.
Business Combination Accounting
We have acquired businesses in the past, and we may acquire additional businesses in the future. Business combination accounting requires us to determine the fair value of all assets acquired, including identifiable intangible assets, liabilities assumed, and contingent consideration issued in a business combination. The cost of the acquisition is allocated to these assets and liabilities in amounts equal to the estimated fair value of each asset and liability, and any remaining acquisition cost is classified as goodwill. This allocation process requires extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets. We engage third-party appraisal firms to assist in fair value determination when appropriate. Our acquisitions may also include contingent consideration, or earn-out provisions, which provide for additional consideration to be paid to the seller if certain future conditions are met. These earn-out provisions are estimated and recognized at fair value at the acquisition date based on projected earnings or other financial metrics over specified periods after the acquisition date. These estimates are reviewed during each reporting period and adjusted based upon actual results. Acquisition-related costs for potential and completed acquisitions are expensed as incurred, and are included in corporate expense in the Consolidated Statements of Income.
Deferred Financing Costs
Deferred financing costs consist of debt issuance costs incurred in obtaining financing. These costs are presented in the balance sheet as a direct reduction from the carrying amount of associated debt, consistent with discounts or premiums. The effective interest rate method is used to amortize the deferred financing costs over the life of the notes and the straight-line method is used to amortize the deferred financing costs of the Non-Recourse U.S. SPV facility.
Financial Instruments
The carrying amounts reflected in the Consolidated Balance Sheets for cash, loans receivable, borrowings under credit facilities and accounts payable approximate fair value due to their short maturities and applicable interest rates. The outstanding borrowings under our credit facilities are variable interest rate debt instruments and their fair value approximates their carrying value due to the borrowing rates currently available to us for debt with similar terms.
Deferred Rent
We have entered into operating lease agreements for store locations and corporate offices, some of which contain provisions for future rent increases or periods in which rent payments are reduced (abated). In accordance with generally accepted accounting principles, we record monthly rent expense equal to the total of the payments due
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
over the lease term, divided by the number of months of the lease term. The difference between rent expense recorded and the amount paid is charged to Deferred rent which is reflected as a separate line item in the accompanying Consolidated Balance Sheets.
Advertising Costs
Advertising costs are expensed as incurred.
Revenue Recognition
We offer a broad range of consumer finance products including Unsecured Installment Loans, Secured Installment Loans, Open-End Loans and Single-Pay Loans. Revenue in the consolidated statements of income includes: interest income, finance charges, CSO fees, late fees and non-sufficient funds fees as permitted by applicable laws and pursuant to the agreement with the customer. Product offerings differ by jurisdiction and are governed by the laws in each separate jurisdiction. Installment Loans include Secured Installment Loans and Unsecured Installment Loans. These loans are fully amortizing, with a fixed payment amount, which includes principal and accrued interest, due each period during the term of the loan. The loan terms for Installment Loans can range up to 48 months depending on state or provincial regulations. We record revenue from Installment Loans on a simple-interest basis. Accrued interest and fees are included in gross loans receivable in the Consolidated Balance Sheets. CSO fees are recognized ratably over the term of the loan.
Open-End Loans function much like a revolving line-of-credit, whereby the periodic payment is a set percentage of the customer’s outstanding loan balance, and there is no defined loan term. We record revenue from Open-End Loans on a simple interest basis. Accrued interest and fees are included in gross loans receivable in the Consolidated Balance Sheets.
Single-Pay Loans are primarily unsecured, short-term, small denomination loans, with a very small portion being auto title loans, which allow a customer to obtain a loan using their car as collateral. Revenues from Single-Pay Loan products are recognized each period on a constant-yield basis ratably over the term of each loan. We defer recognition of the unearned fees we expect to collect based on the remaining term of the loan at the end of each reporting period.
Check cashing fees, money order fees and other fees from ancillary products and services are generally recognized at the point-of-sale when the transaction is completed. We also earn revenue from the sale of credit protection insurance in the Canadian market. Insurance revenues are recognized ratably over the term of the loan.
Share-Based Compensation
We account for share-based compensation expense for awards to our employees and directors at the estimated fair value on the grant date. The fair value of stock option grants is determined using the Black-Scholes option pricing model, which requires us to make several assumptions including, but not limited to, risk-free interest rate, and the expected volatility of publicly traded stocks from our industry section, which we have determined to include the alternative financial sector. Our expected option term is calculated using the average of the vesting period and the original contractual term. The estimated fair value of share-based awards is recognized as compensation expense on a straight-line basis over the vesting period.
Income Taxes
A deferred tax asset or liability is recognized for the anticipated future tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements and for operating loss and tax credit carryforwards. A valuation allowance is provided when, in the opinion of management, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Realization of the deferred tax assets is dependent on our ability to generate sufficient future taxable income and, if necessary, execution of our tax planning strategies. In the event we determine that future taxable income, taking into consideration tax planning strategies, may not generate sufficient taxable income to fully realize net deferred tax assets, we may be required to establish or increase valuation allowances by a charge to income tax expense
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
in the period such a determination is made, which may have a material impact on our Consolidated Statements of Income. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date and may have a material impact on our Consolidated Statements of Income.
We follow accounting guidance which prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under this guidance, tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Application of this guidance requires numerous estimates based on available information. We consider many factors when evaluating and estimating our tax positions and tax benefits, and our recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As we obtain additional information, we may need to periodically adjust our recognized tax positions and tax benefits. For additional information related to uncertain tax positions, see Note 13—"Income Taxes."
Foreign Currency Translation
The local currencies are considered the functional currencies for our operations in the United Kingdom and Canada. All balance sheet accounts are translated into U.S. dollars at the current exchange rate at each period end. The income statement is translated at the average rates of exchange for the period. We have determined that certain of our intercompany balances are long-term in nature, and therefore, currency translation adjustments related to those accounts are recorded as a component of accumulated other comprehensive income (loss) in the Statements of Stockholders’ Equity. For intercompany balances that are settled on a regular basis, currency translation adjustments related to those accounts are recorded as a component of Other, net in the Consolidated Statements of Income.
Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss at December 31, 2017 and 2016 were as follows:
December 31 | |||||||
(in thousands) | 2017 | 2016 | |||||
Foreign currency translation adjustment | $ | (42,939 | ) | $ | (59,652 | ) | |
Cash flow hedge | — | (333 | ) | ||||
Total | $ | (42,939 | ) | $ | (59,985 | ) | |
Recently Adopted Accounting Pronouncements
In October 2016, the FASB issued Accounting Standards Update (" ASU") 2016-17, “Consolidation (Topic 810): Interests Held Through Related Parties that are Under Common Control" (“ASU 2016-17”). The amendments affected the evaluation of whether to consolidate a Variable Interest Entity ("VIE") in certain situations involving entities under common control. Specifically, the amendments changed the evaluation of whether an entity is the primary beneficiary of a VIE for an entity that is a single decision maker of a variable interest by changing how an entity treats indirect interests in the VIE held through related parties that are under common control with the reporting entity. The guidance in ASU 2016-17 was required to be applied retrospectively to all relevant periods. ASU 2016-17 was effective for us beginning January 1, 2017. The adoption of this ASU did not have a material effect on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The amendments in ASU 2016-09 simplified several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 was effective for us beginning January 1, 2017. The adoption of this ASU did not have a material effect on our Consolidated Financial Statements.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”), which required an acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts were determined and eliminated the requirement to retrospectively account for those adjustments. The new standard became effective for us on January 1, 2017. The amendments in this update were applied prospectively to adjustments to provisional amounts that occurred after the effective date of this update. The adoption of this ASU did not have a material effect on our Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) (“ASU 2014-15”), which provided new guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements and was intended to enhance the timeliness, clarity and consistency of disclosure concerning such uncertainties. The new guidance required management to perform assessments on an interim and annual basis of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s interim or annual financial statements, as applicable. An entity must provide certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern. The guidance became effective for us on January 1, 2017. The adoption of ASU 2014-15 did not have a material effect on our Consolidated Financial Statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive income” (ASU 2018-02). Current US GAAP requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the period the change is enacted, including items of other comprehensive income for which the related tax effects are presented in other comprehensive income (“stranded tax effects”). ASU 2018-02 allows, but does not require, companies to reclassify stranded tax effects caused by the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. Additionally, the ASU requires new disclosures by all companies, whether they opt to do the reclassification or not. The provisions of ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Companies should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We do not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements.
In September 2017, the FASB issued ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments” (ASU 2017-13). This ASU amends the early adoption date option for public business entities related to the adoption of ASU No. 2014-09 and ASU No. 2016-02. We do not expect that the adoption of these amendments will have a material impact on our Consolidated Financial Statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). Under modification accounting, all entities are required to re-value their equity awards each time there is a modification to the terms of the awards. The provisions in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to account for the effects of a modification unless certain conditions are met. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. We do not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). The amendments in ASU 2017-04 simplified the goodwill impairment test by eliminating Step 2 of the test which requires an entity to compute the implied fair value of
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
goodwill. Instead, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, and is limited to the amount of total goodwill allocated to that reporting unit. Under this ASU, an entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The provisions of ASU 2017-04 are effective for a public entity's annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and effective for us, as an emerging growth company, in fiscal years beginning after December 15, 2021. We are currently assessing the impact the adoption of ASU 2017-04 will have on our Consolidated Financial Statements and footnote disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a Business ("ASU 2017-01"). The amendments in ASU 2017-01 narrow the definition of a business and provide a framework that gives an entity a basis for making reasonable judgments about whether a transaction involves an asset or a business and provide a screen to determine when a set (an integrated set of assets and activities) is not a business. The screen requires a determination that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. ASU 2017-01 is effective prospectively for public companies for annual periods beginning after December 15, 2017 including interim periods therein, and it will be effective for us, as an emerging growth company, for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019. We are currently assessing the impact the adoption of ASU 2017-01 will have on our Consolidated Financial Statements and footnote disclosures.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for public companies for fiscal years beginning after December 15, 2017 and interim periods therein, and it will be effective for us, as an emerging growth company, for fiscal years beginning after December 15, 2018 and interim periods beginning after December 15, 2019. The amendments should be applied using a retrospective transition method to each period presented. We are currently assessing the impact the adoption of ASU 2016-18 will have on our Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”). The amendments in ASU 2016-15 provide guidance on eight specific cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, distributions received from equity method investees and beneficial interests in securitization transactions. ASU 2016-15 will be effective for public companies for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and it will be effective for us, as an emerging growth company, for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. We are assessing the potential impact this ASU will have on our Consolidated Statements of Cash Flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” ("ASU 2016-13"). This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 will be effective for public companies for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and it will be effective for us, as an emerging growth company, for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payment arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged and lessees will no longer be provided with a source of off-balance sheet financing. ASU 2016-02 will be effective for public companies for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, and it will be effective for us, as an emerging growth company, for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) which requires (i) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (ii) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). This amendment eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 will be effective for public companies for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and it will be effective for us, as an emerging growth company, for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). This amendment eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. ASU 2015-17 will be effective for us, as an emerging growth company, for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018. We do not expect that the adoption of this amendment will have a material impact on our Consolidated Financial Statements.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) (“ASU 2015-14”), which deferred the effect date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), for public companies to fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and it will be effective for us, as an emerging growth company, for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. If we are no longer an emerging growth company as of December 31, 2018, we will be required to adopt the provision of this standard retroactively as of January 1, 2018. In May 2014, the FASB issued ASU 2014-09 which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. We do not expect that the adoption of this amendment will have a material impact on our Consolidated Financial Statements.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
NOTE 2 – PREPAID EXPENSES AND OTHER
Components of Prepaid expenses and other assets are as follows:
(dollars in thousands) | December 31, 2017 | December 31, 2016 | |||||
Settlements and collateral due from third-party lenders | $ | 17,943 | $ | 18,576 | |||
Fees receivable for third-party loans | 15,059 | 9,181 | |||||
Prepaid expenses | 6,728 | 5,892 | |||||
Other assets | 2,782 | 5,599 | |||||
Total | $ | 42,512 | $ | 39,248 | |||
NOTE 3 – PROPERTY AND EQUIPMENT
The classification of property and equipment is as follows:
(dollars in thousands) | December 31, 2017 | December 31, 2016 | |||||
Leasehold improvements | $ | 126,897 | $ | 122,419 | |||
Furniture, fixtures and equipment | 36,488 | 35,060 | |||||
Property and equipment, gross | 163,385 | 157,479 | |||||
Accumulated depreciation | (76,299 | ) | (61,583 | ) | |||
Property and equipment, net | $ | 87,086 | $ | 95,896 | |||
Depreciation expense was $16.7 million, $15.4 million and $14.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
NOTE 4 – GOODWILL AND INTANGIBLES
The change in the carrying amount of goodwill by operating segment for the years 2017 and 2016 were as follows:
(dollars in thousands) | U.S. | U.K. | Canada | Total | |||||||||||
Balance as of December 31, 2015 | $ | 91,131 | $ | 54,275 | $ | 27,707 | $ | 173,113 | |||||||
Accumulated Impairment Charges | — | (28,078 | ) | — | (28,078 | ) | |||||||||
Goodwill at December 31, 2015 | 91,131 | 26,197 | 27,707 | 145,035 | |||||||||||
Foreign currency translation - 2016 | — | (4,315 | ) | 834 | (3,481 | ) | |||||||||
Balance as of December 31, 2016 | 91,131 | 49,960 | 28,541 | 169,632 | |||||||||||
Accumulated Impairment Charges | — | (28,078 | ) | — | (28,078 | ) | |||||||||
Goodwill at December 31, 2016 | 91,131 | 21,882 | 28,541 | 141,554 | |||||||||||
Foreign currency translation - 2017 | — | 2,078 | 1,975 | 4,053 | |||||||||||
Balance as of December 31, 2017 | 91,131 | 52,038 | 30,516 | 173,685 | |||||||||||
Accumulated Impairment Charges | — | (28,078 | ) | — | (28,078 | ) | |||||||||
Goodwill at December 31, 2017 | 91,131 | 23,960 | 30,516 | 145,607 | |||||||||||
Identifiable intangible assets consisted of the following:
December 31, 2017 | December 31, 2016 | ||||||||||||||||
(dollars in thousands) | Weighted-Average Remaining Life (Years) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||
Trade name | 8.2 | $ | 26,872 | $ | (20 | ) | $ | 25,046 | $ | (12 | ) | ||||||
Customer relationships | 1.3 | 27,823 | (26,137 | ) | 26,411 | (23,603 | ) | ||||||||||
Computer software | 9.6 | 19,230 | (14,999 | ) | 16,429 | (13,370 | ) | ||||||||||
Balance, end of year | $ | 73,925 | $ | (41,156 | ) | $ | 67,886 | $ | (36,985 | ) | |||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Our identifiable intangible assets are amortized using the straight-line method over the estimated remaining useful lives, except for the Wage Day and Cash Money trade name intangible assets that have a combined carrying amount of $26.8 million, which were determined to have indefinite lives and are not amortized. The estimated useful lives for our other intangible assets range from 1 to 10 years. Aggregate amortization expense related to identifiable intangible assets was $2.4 million, $3.5 million and $4.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The following table outlines the estimated future amortization expense related to intangible assets held at December 31, 2017:
(dollars in thousands) | Year Ending December 31, | ||
2018 | $ | 2,641 | |
2019 | 1,889 | ||
2020 | 555 | ||
2021 | 128 | ||
2022 | 128 | ||
NOTE 5 - VARIABLE INTEREST ENTITIES
In 2016, we closed a financing facility whereby certain loan receivables were sold to wholly-owned, bankruptcy-remote special purpose subsidiaries (VIEs) and additional debt was incurred through the ABL facility and the Non-Recourse U.S. SPV facility (See Note 11 Long-Term Debt for further discussion) that was collateralized by these underlying loan receivables.
We have evaluated the VIEs for consolidation and we determined that we are the primary beneficiary of the VIEs and are required to consolidate them. The assets and liabilities related to the VIEs are included in our consolidated financial statements and are accounted for as secured borrowings. We parenthetically disclose on our consolidated balance sheets the VIEs’ assets that can only be used to settle the VIEs' obligations and the VIEs' liabilities if the VIEs’ creditors have no recourse against our general credit.
The carrying amounts of consolidated VIEs' assets and liabilities associated with our special purpose subsidiaries were as follows:
(in thousands) | December 31, 2017 | December 31, 2016 | |||||
Assets | |||||||
Restricted Cash | $ | 6,871 | $ | 2,770 | |||
Loans receivable less allowance for loan losses | 167,706 | 108,065 | |||||
Total Assets | $ | 174,577 | $ | 110,835 | |||
Liabilities | |||||||
Accounts payable and accrued liabilities | $ | 12 | $ | — | |||
Accrued interest | 1,266 | 775 | |||||
Long-term debt | 120,402 | 63,054 | |||||
Total Liabilities | $ | 121,680 | $ | 63,829 | |||
NOTE 6 – RESTRICTED CASH
At December 31, 2017 and December 31, 2016 we had $23.2 million and $23.8 million, respectively, on deposit in collateral accounts with financial institutions and third-party lenders. At December 31, 2017, approximately $5.2 million and $17.9 million were included as a component of Restricted cash and Prepaid expenses and other, respectively, in our Consolidated Balance Sheets. At December 31, 2016, approximately $5.1 million and $18.7 million were included as a component of Restricted cash and Prepaid expenses and other, respectively, in our Consolidated Balance Sheets.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
As a result of the loan facilities that commenced in December 2016 and disclosed in Note 5 - Variable Interest Entities, $6.9 million and $2.8 million were included as Restricted cash of consolidated VIE in our Consolidated Balance Sheets at December 31, 2017 and December 31, 2016, respectively.
NOTE 7 – LOANS RECEIVABLE AND REVENUE
Unsecured and Secured Installment revenue includes interest income and non-sufficient-funds or returned-items fees on late or defaulted payments on past-due loans (to which we refer collectively in this report as “late fees”). Late fees comprise less than one-half of one percent of Installment revenues.
Open-End revenues include interest income on outstanding revolving balances and other usage or maintenance fees as permitted by underlying statutes.
Single-Pay revenues represent deferred presentment or other fees as defined by the underlying state, provincial or national regulations.
The following table summarizes revenue by product:
Year Ended December 31, | |||||||||
(in thousands) | 2017 | 2016 | 2015 | ||||||
Unsecured Installment | $ | 480,243 | $ | 330,713 | $ | 314,383 | |||
Secured Installment | 100,981 | 81,453 | 86,325 | ||||||
Open-End | 73,496 | 66,948 | 51,311 | ||||||
Single-Pay | 268,794 | 313,276 | 321,597 | ||||||
Ancillary | 40,119 | 36,206 | 39,515 | ||||||
Total revenue | $ | 963,633 | $ | 828,596 | $ | 813,131 | |||
The following tables summarize Loans receivable by product and the related delinquent loans receivable at December 31, 2017:
December 31, 2017 | ||||||||||||||||
(in thousands) | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Total | |||||||||||
Current loans receivable | $ | 99,400 | $ | 151,343 | $ | 73,165 | $ | 47,949 | $ | 371,857 | ||||||
Delinquent loans receivable | — | 44,963 | 16,017 | — | 60,980 | |||||||||||
Total loans receivable | 99,400 | 196,306 | 89,182 | 47,949 | 432,837 | |||||||||||
Less: allowance for losses | (5,916 | ) | (43,754 | ) | (13,472 | ) | (6,426 | ) | (69,568 | ) | ||||||
Loans receivable, net | $ | 93,484 | $ | 152,552 | $ | 75,710 | $ | 41,523 | $ | 363,269 | ||||||
December 31, 2017 | ||||||||||
(in thousands) | Unsecured Installment | Secured Installment | Total | |||||||
Delinquent loans receivable | ||||||||||
0-30 days past due | $ | 18,358 | $ | 8,116 | $ | 26,474 | ||||
31-60 days past due | 12,836 | 3,628 | 16,464 | |||||||
61-90 days past due | 13,769 | 4,273 | 18,042 | |||||||
Total delinquent loans receivable | $ | 44,963 | $ | 16,017 | $ | 60,980 | ||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following tables summarize Loans receivable by product at December 31, 2016:
December 31, 2016 | ||||||||||||||||
(in thousands) | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Total | |||||||||||
Current loans receivable | $ | 90,487 | $ | 102,090 | $ | 63,157 | $ | 30,462 | $ | 286,196 | ||||||
Delinquent loans receivable | — | — | — | — | — | |||||||||||
Total loans receivable | 90,487 | 102,090 | 63,157 | 30,462 | 286,196 | |||||||||||
Less: allowance for losses | (5,501 | ) | (17,775 | ) | (10,737 | ) | (5,179 | ) | (39,192 | ) | ||||||
Loans receivable, net | $ | 84,986 | $ | 84,315 | $ | 52,420 | $ | 25,283 | $ | 247,004 | ||||||
Prior to January 1, 2017, we deemed all loans uncollectible and charged-off when a customer missed a scheduled payment and the loan was considered past-due. See Note 1 - "Summary of Significant Accounting Policies and Nature of Operations" for a discussion of the Q1 Loss Recognition Change. This change in estimate resulted in approximately $61.0 million of Installment Loans at December 31, 2017 that remained on our balance sheet that were between 1 and 90 days delinquent, as compared to none in the prior year period. Additionally, the installment allowance for loan losses as of December 31, 2017 of $69.6 million includes an estimated allowance of $38.7 million for the Installment Loans between 1 and 90 days delinquent, as compared to none in the prior year period.
The following tables summarize loans guaranteed by us under our CSO programs and the related delinquent receivables at December 31, 2017:
December 31, 2017 | ||||||||||
(in thousands) | Unsecured Installment | Secured Installment | Total | |||||||
Current loans receivable guaranteed by the Company | $ | 62,676 | $ | 3,098 | $ | 65,774 | ||||
Delinquent loans receivable guaranteed by the Company | 12,480 | 537 | 13,017 | |||||||
Total loans receivable guaranteed by the Company | 75,156 | 3,635 | 78,791 | |||||||
Less: CSO guarantee liability | (17,073 | ) | (722 | ) | (17,795 | ) | ||||
Loans receivable guaranteed by the Company, net | $ | 58,083 | $ | 2,913 | $ | 60,996 | ||||
December 31, 2017 | ||||||||||
(in thousands) | Unsecured Installment | Secured Installment | Total | |||||||
Delinquent loans receivable | ||||||||||
0-30 days past due | $ | 10,477 | $ | 459 | $ | 10,936 | ||||
31-60 days past due | 1,364 | 41 | 1,405 | |||||||
61-90 days past due | 639 | 37 | 676 | |||||||
Total delinquent loans receivable | $ | 12,480 | $ | 537 | $ | 13,017 | ||||
The following table summarizes loans guaranteed by us under our CSO programs at December 31, 2016:
December 31, 2016 | |||||||||||||
(in thousands) | Single-Pay | Unsecured Installment | Secured Installment | Total | |||||||||
Current loans receivable guaranteed by the Company | $ | 1,092 | $ | 62,360 | $ | 4,581 | $ | 68,033 | |||||
Delinquent loans receivable guaranteed by the Company | — | — | — | — | |||||||||
Total loans receivable guaranteed by the Company | 1,092 | 62,360 | 4,581 | 68,033 | |||||||||
Less: CSO guarantee liability | (274 | ) | (15,630 | ) | (1,148 | ) | (17,052 | ) | |||||
Loans receivable guaranteed by the Company, net | $ | 818 | $ | 46,730 | $ | 3,433 | $ | 50,981 | |||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following table summarizes activity in the allowance for loan losses during the year ended December 31, 2017:
Year Ended December 31, 2017 | ||||||||||||||||||
(in thousands) | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total | ||||||||||||
Balance, beginning of period | $ | 5,501 | $ | 17,775 | $ | 10,737 | $ | 5,179 | $ | — | $ | 39,192 | ||||||
Charge-offs | (190,623 | ) | (88,694 | ) | (30,005 | ) | (39,752 | ) | (5,254 | ) | (354,328 | ) | ||||||
Recoveries | 127,184 | 18,002 | 9,517 | 18,743 | 3,291 | 176,737 | ||||||||||||
Net charge-offs | (63,439 | ) | (70,692 | ) | (20,488 | ) | (21,009 | ) | (1,963 | ) | (177,591 | ) | ||||||
Provision for losses | 63,760 | 96,150 | 23,223 | 22,245 | 1,963 | 207,341 | ||||||||||||
Effect of foreign currency translation | 93 | 522 | — | 11 | — | 626 | ||||||||||||
Balance, end of period | $ | 5,915 | $ | 43,755 | $ | 13,472 | $ | 6,426 | $ | — | $ | 69,568 | ||||||
Allowance for loan losses as a percentage of gross loan receivables | 6.0 | % | 22.3 | % | 15.1 | % | 13.4 | % | N/A | 16.1 | % | |||||||
The following table summarizes activity in the CSO guarantee liability during the year ended December 31, 2017:
Year Ended December 31, 2017 | ||||||||||||
(in thousands) | Single-Pay | Unsecured Installment | Secured Installment | Total | ||||||||
Balance, beginning of period | $ | 274 | $ | 15,630 | $ | 1,148 | $ | 17,052 | ||||
Charge-offs | (2,121 | ) | (141,429 | ) | (10,551 | ) | (154,101 | ) | ||||
Recoveries | 1,335 | 30,230 | 4,394 | 35,959 | ||||||||
Net charge-offs | (786 | ) | (111,199 | ) | (6,157 | ) | (118,142 | ) | ||||
Provision for losses | 512 | 112,642 | 5,731 | 118,885 | ||||||||
Balance, end of period | $ | — | $ | 17,073 | $ | 722 | $ | 17,795 | ||||
The following table summarizes activity in the allowance for loan losses and the CSO guarantee liability, in total, during the year ended December 31, 2017:
Year Ended December 31, 2017 | ||||||||||||||||||
(in thousands) | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total | ||||||||||||
Balance, beginning of period | $ | 5,775 | $ | 33,405 | $ | 11,885 | $ | 5,179 | $ | — | $ | 56,244 | ||||||
Charge-offs | (192,744 | ) | (230,123 | ) | (40,556 | ) | (39,752 | ) | (5,254 | ) | (508,429 | ) | ||||||
Recoveries | 128,519 | 48,232 | 13,911 | 18,743 | 3,291 | 212,696 | ||||||||||||
Net charge-offs | (64,225 | ) | (181,891 | ) | (26,645 | ) | (21,009 | ) | (1,963 | ) | (295,733 | ) | ||||||
Provision for losses | 64,272 | 208,792 | 28,954 | 22,245 | 1,963 | 326,226 | ||||||||||||
Effect of foreign currency translation | 93 | 522 | — | 11 | — | 626 | ||||||||||||
Balance, end of period | $ | 5,915 | $ | 60,828 | $ | 14,194 | $ | 6,426 | $ | — | $ | 87,363 | ||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following table summarizes activity in the allowance for loan losses during the year ended December 31, 2016:
Year Ended December 31, 2016 | ||||||||||||||||||
(in thousands) | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total | ||||||||||||
Balance, beginning of period | $ | 8,313 | $ | 10,603 | $ | 9,209 | $ | 4,823 | $ | — | $ | 32,948 | ||||||
Charge-offs | (225,066 | ) | (165,843 | ) | (145,160 | ) | (86,586 | ) | (5,786 | ) | (628,441 | ) | ||||||
Recoveries | 157,398 | 120,446 | 128,886 | 62,859 | 3,671 | 473,260 | ||||||||||||
Net charge-offs | (67,668 | ) | (45,397 | ) | (16,274 | ) | (23,727 | ) | (2,115 | ) | (155,181 | ) | ||||||
Provision for losses | 64,919 | 52,776 | 17,802 | 24,083 | 2,115 | 161,695 | ||||||||||||
Effect of foreign currency translation | (63 | ) | (207 | ) | — | — | — | (270 | ) | |||||||||
Balance, end of period | $ | 5,501 | $ | 17,775 | $ | 10,737 | $ | 5,179 | $ | — | $ | 39,192 | ||||||
Allowance for loan losses as a percentage of gross loan receivables | 6.1 | % | 17.4 | % | 17.0 | % | 17.0 | % | N/A | 13.7 | % | |||||||
The following table summarizes activity in the CSO guarantee liability during the year ended December 31, 2016:
Year Ended December 31, 2016 | ||||||||||||
(in thousands) | Single-Pay | Unsecured Installment | Secured Installment | Total | ||||||||
Balance, beginning of period | $ | 334 | $ | 15,910 | $ | 1,507 | $ | 17,751 | ||||
Charge-offs | (17,379 | ) | (164,853 | ) | (16,930 | ) | (199,162 | ) | ||||
Recoveries | 4,807 | 83,112 | 13,950 | 101,869 | ||||||||
Net charge-offs | (12,572 | ) | (81,741 | ) | (2,980 | ) | (97,293 | ) | ||||
Provision for losses | 12,512 | 81,461 | 2,621 | 96,594 | ||||||||
Balance, end of period | $ | 274 | $ | 15,630 | $ | 1,148 | $ | 17,052 | ||||
The following table summarizes activity in the allowance for loan losses and the CSO guarantee liability, in total, during the year ended December 31, 2016:
Year Ended December 31, 2016 | ||||||||||||||||||
(in thousands) | Single-Pay | Unsecured Installment | Secured Installment | Open-End | Other | Total | ||||||||||||
Balance, beginning of period | $ | 8,647 | $ | 26,513 | $ | 10,716 | $ | 4,823 | $ | — | $ | 50,699 | ||||||
Charge-offs | (242,445 | ) | (330,696 | ) | (162,090 | ) | (86,586 | ) | (5,786 | ) | (827,603 | ) | ||||||
Recoveries | 162,205 | 203,558 | 142,836 | 62,859 | 3,671 | 575,129 | ||||||||||||
Net charge-offs | (80,240 | ) | (127,138 | ) | (19,254 | ) | (23,727 | ) | (2,115 | ) | (252,474 | ) | ||||||
Provision for losses | 77,431 | 134,237 | 20,423 | 24,083 | 2,115 | 258,289 | ||||||||||||
Effect of foreign currency translation | (63 | ) | (207 | ) | — | — | — | (270 | ) | |||||||||
Balance, end of period | $ | 5,775 | $ | 33,405 | $ | 11,885 | $ | 5,179 | $ | — | $ | 56,244 | ||||||
NOTE 8 – CREDIT SERVICES ORGANIZATION
The CSO fee receivable amounts under our CSO programs were $14.5 million and $9.2 million at December 31, 2017 and December 31, 2016, respectively. As noted, we bear the risk of loss through our guarantee to purchase any defaulted customer loans from the lenders. The terms of these loans range from six to eighteen months. This guarantee represents an obligation to purchase specific loans that go into default. (See Note 1 - "Significant Accounting Policies and Nature of Operations" for a description of our accounting policies). As of December 31, 2017 and December 31, 2016, the maximum amount payable under all such guarantees was $65.2 million and $59.6 million, respectively. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover some or the entire amount from the customers. We hold no collateral in respect of the guarantees. The initial measurement of this guarantee liability is recorded at fair value and reported in the Credit services organization guarantee liability line in our Consolidated Balance Sheets. The fair value of the guarantee is measured at origination when it is probably and estimable as to what likely collections are to be received over the expected life of the guarantee. The guarantee estimated by assessing the nature of the loan products, the credit worthiness of the borrowers in the customer base, our historical loan default history for similar
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
loans, industry loan default history, historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. Our guarantee liability was $17.8 million and $17.1 million at December 31, 2017 and December 31, 2016, respectively.
We have placed $17.9 million and $18.7 million in collateral accounts for the lenders at December 31, 2017 and December 31, 2016, respectively, which is reflected in Prepaid expenses and other in the Consolidated Balance Sheets. The balances required to be maintained in these collateral accounts vary based upon lender, but are typically based on a percentage of the outstanding loan balances held by the lender. The percentage of outstanding loan balances required for collateral is defined within the terms agreed to between us and each such lender.
NOTE 9 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Components of Accounts payable and accrued liabilities were are follows:
December 31, | December 31, | ||||||
(dollars in thousands) | 2017 | 2016 | |||||
Trade accounts payable | $ | 22,483 | $ | 18,588 | |||
Money orders payable | 8,131 | 7,356 | |||||
Accrued taxes, other than income taxes | 678 | 447 | |||||
Accrued payroll and fringe benefits | 18,890 | 14,621 | |||||
Reserve for store closure costs | 4,419 | 1,258 | |||||
Other accrued liabilities | 1,191 | 393 | |||||
Total | $ | 55,792 | $ | 42,663 | |||
NOTE 10 – RESTRUCTURING COSTS
In the third quarter of 2017, the Boards of Directors of us and our U.K. subsidiaries approved a plan to close the remaining 13 Speedy Cash branch locations in the United Kingdom. The affected branches closed during the third quarter and our financial results include $7.4 million of related charges primarily for the remaining net cash obligations for store leases and related costs ($5.9 million) and the write-off of fixed assets and leasehold improvements ($1.5 million).
During 2016, we eliminated certain corporate positions in our Canadian headquarters and closed six stores in Texas. These were all underperforming stores that were acquired as part of the Money Box acquisition. Our results for the year ended December 31, 2016 included charges related to these store closures primarily consisting of certain lease obligations and the write-down and loss on the disposal of fixed assets. We also determined that we will be unable to reopen one store in Missouri that was damaged by a fire.
In December 2015, we closed 10 branch locations in the U.K., incurring store closure costs of $4.3 million (£2.9 million) as part of an overall plan to reduce operating losses in the wake of ongoing regulatory and market changes in the U.K.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Impairments, store closure costs and severance costs for the years ended December 31, 2017, 2016 and 2015 were as follows:
Year Ended December 31, | |||||||||||
(dollars in thousands) | 2017 | 2016 | 2015 | ||||||||
Lease obligations and related costs | $ | 5,883 | 1,620 | 1,711 | |||||||
Write-down and loss on disposal of fixed assets | 1,510 | 772 | 2,253 | ||||||||
Severance costs | — | 1,226 | 327 | ||||||||
Total restructuring costs | $ | 7,393 | $ | 3,618 | $ | 4,291 | |||||
Activity for the restructuring reserve for the years ended December 31, 2017 and 2016 was as follows:
Year Ended December 31, | |||||||
(dollars in thousands) | 2017 | 2016 | |||||
Beginning balance - January 1 | $ | 1,258 | $ | 1,972 | |||
Additions and adjustments | 7,393 | 3,618 | |||||
Payments and write-downs | (4,232 | ) | (4,332 | ) | |||
Ending balance - December 31 | $ | 4,419 | $ | 1,258 | |||
Closed store reserves are included in the “Accounts payable and accrued liabilities” line item on the accompanying Consolidated Balance Sheets.
NOTE 11 – LONG-TERM DEBT
Long-term debt consisted of the following:
December 31, | December 31, | ||||||
(in thousands) | 2017 | 2016 | |||||
12.00% Senior Secured Notes (due 2022) | $ | 585,823 | $ | — | |||
May 2011 Senior Secured Notes (due 2018) | — | 223,164 | |||||
May 2012 Senior Secured Notes (due 2018) | — | 89,734 | |||||
February 2013 Senior Secured Notes (due 2018) | — | 101,184 | |||||
February 2013 Cash Pay Notes (due 2017) | — | 124,365 | |||||
Non-Recourse U.S. SPV Facility | 120,402 | 63,054 | |||||
ABL Facility | — | 23,406 | |||||
Senior Revolver | — | — | |||||
Total long-term debt, including current portion | 706,225 | 624,907 | |||||
Less: current maturities of long-term debt | — | 147,771 | |||||
Long-term debt | $ | 706,225 | $ | 477,136 | |||
12.00% Senior Secured Notes
On February 15, 2017 CFTC issued $470.0 million of 12.00% Senior Secured Notes due March 1, 2022. Interest on the notes is payable semiannually, in arrears, on March 1 and September 1 of each year, beginning on September 1, 2017. The proceeds from the Notes were used, together with available cash, to (i) redeem the outstanding 10.75% Senior Secured Notes due 2018 of our wholly-owned subsidiary, CURO Intermediate Holdings Corp. ("CURO Intermediate"), (ii) redeem the outstanding 12.00% Senior Cash Pay Notes due 2017, and (iii) pay fees, expenses, premiums and accrued interest in connection with the offering. Consequently, we received a $130.1 million dividend from CFTC in February 2017 to fund the redemption of the 12.00% Senior Cash Pay Notes. The extinguishment of the 10.75% Senior Secured Notes and the 12.00% Senior Cash Pay Notes resulted in a pretax loss of $12.5 million in the year ended December 31, 2017.
In connection with the February 2017 debt issuance we capitalized financing costs of approximately $14.0 million, the balance of which is included in the Consolidated Balance Sheets as a component of “Long-term debt,” and is being amortized over the term of the Senior Secured Notes and included as a component of interest expense.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
On November 2, 2017, CFTC issued $135.0 million aggregate principal amount of additional 12.00% Senior
Secured Notes in a private offering exempt from the registration requirements of the Securities Act, or the Additional Notes Offering. The proceeds from the Additional Notes Offering were used, together with available cash, to (i) pay a cash dividend, in an amount of $140.0 million to us, CFTC’s sole stockholder, and ultimately our stockholders and (ii) pay fees, expenses, premiums and accrued interest in connection with the Additional Notes Offering. CFTC received the consent of the holders holding a majority in the outstanding principal amount outstanding of the current 12.00% Senior Secured Notes to a one-time waiver with respect to the restrictions contained in Section 5.07(a) of the indenture governing the 12.00% Senior Secured Notes to permit the dividend.
In connection with the November 2017 debt issuance we capitalized financing costs of approximately $4.3 million, the balance of which is included in the Consolidated Balance Sheets as a component of “Long-term debt,” and is being amortized over the term of the Senior Secured Notes and included as a component of interest expense.
The Senior Secured Notes contain normal and customary affirmative and negative covenants. Certain of the more significant covenants are (a) limitations on our ability to pay dividends, (b) limitations on asset sales and (c) limitations on our ability to incur additional indebtedness. The Senior Secured Notes also contain various events of default, the occurrence of which could result in the acceleration of all obligations under the Senior Secured Notes. As of December 31, 2017, we were in full compliance with the covenants and other provisions of the Senior Secured Notes.
On March 7, 2018, we used a portion of the net proceeds from the IPO to redeem $77.5 million of the 12.00% Senior Secured Notes due 2022 and to pay related fees, expenses, premiums and accrued interest. See Note 25 - Subsequent Events of this Annual Report on Form 10-K for additional information about this transaction.
Non-Recourse U.S. SPV Facility
On November 17, 2016, CURO Receivables Finance I, LLC, a Delaware limited liability company (the “SPV Borrower”) and a wholly-owned subsidiary, entered into a five-year revolving credit facility with Victory Park Management, LLC and certain other lenders that provides for an $80.0 million term loan and $45.0 million of initial revolving borrowing capacity, with the ability to expand such revolving borrowing capacity over time and an automatic expansion to $70.0 million on the six month anniversary of the closing date, (our “Non-Recourse U.S. SPV Facility”). Our Non-Recourse U.S. SPV Facility is secured by a first lien against assets of the SPV Borrower, which is a special purpose vehicle holding certain receivables originated by the operating entities of Intermediate and CURO Receivables Holdings I, LLC, a Delaware limited liability company (“Holdings”) which is a holding company that owns the equity of the SPV Borrower. The lender advances to the SPV Borrower 80% of the principal balance of the eligible installment loans that we sell to the SPV Borrower, which serve as collateral for the lender. As customer loan payments come into the SPV Borrower, such payments are subjected to a conventional priority-of-payment waterfall provided the loan-to-value doesn’t exceed 80%. The loans will bear interest at an annual rate of up to 12.0% plus the greater of (x) 1.0% per annum and (y) the three-month LIBOR. The SPV Borrower also pays a 0.50% per annum commitment fee on the unused portion of the commitments. Revolving commitment terminations and voluntary prepayments of term loans made prior to the 30th month anniversary of the closing date are subject to a fee equal to 3.0% of the amount of revolving loans commitments terminated or term loans voluntarily prepaid.
The Non-Recourse U.S. SPV Facility contains various conditions to borrowing and affirmative, negative and financial maintenance covenants. Certain of the more significant covenants are (a) minimum monthly annualized net yield and (b) maximum average monthly net loss. The Non-Recourse U.S. SPV Facility also contains various events of default, the occurrence of which could result in termination of the lenders’ commitments to lend and the acceleration of all our obligations under the Non-Recourse U.S. SPV Facility. As of December 31, 2017, we were in full compliance with the covenants and other provisions of the Non-Recourse U.S. SPV Facility. This facility matures in 2021.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Senior Revolver
On September 1, 2017, we entered into a $25.0 million Senior Secured Revolving Loan Facility (the “Senior Revolver”). The terms of the Senior Revolver generally conform to the related provisions in the Indenture dated February 15, 2017 for our 12.00% Senior Secured Notes due 2022 and complements our other financing sources, while providing seasonal short-term liquidity. Under the Senior Revolver, there is $25.0 million maximum availability, including up to $5.0 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The Senior Revolver accrues interest at the one-month LIBOR plus 5.00% (subject to a 5% overall rate minimum) and is repayable on demand.
The terms of the Senior Revolver require that the outstanding balance be reduced to $0 for at least 30 consecutive days in each calendar year. The Senior Revolver is guaranteed by all subsidiaries of CURO that guarantee our 12.00% Senior Secured Notes due 2022 and is secured by a lien on substantially all assets of CURO and the guarantor subsidiaries that is senior to the lien securing our 12.00% Senior Secured Notes due 2022. The revolver was undrawn at December 31, 2017.
The Senior Revolver contains various conditions to borrowing and affirmative, negative and financial maintenance covenants. Certain of the more significant covenants are (a) minimum eligible collateral value, (b) consolidated interest coverage ratio and (c) consolidated leverage ratio. The Senior Revolver also contains various events of default, the occurrence of which could result in termination of the lenders’ commitments to lend and the acceleration of all our obligations under the Senior Revolver. As of December 31, 2017, we were in full compliance with the covenants and other provisions of our Senior Revolver.
In February 2018, the Senior Revolver capacity was increased to $29.0 million as permitted by the Indenture to the Senior Secured Notes based upon consolidated tangible assets. The Senior Revolver is now syndicated with participation by a second bank.
In connection with this facility we capitalized financing costs of approximately $0.1 million, the balance of which are included in the Consolidated Balance Sheets as a component of “Other assets,” and are being amortized over the term of the facility and included as a component of interest expense.
ABL Facility
On November 17, 2016, CURO Intermediate entered into a six-month recourse credit facility with Victory Park Management, LLC and certain other lenders which provides for $25.0 million of borrowing capacity, (our “ABL Facility”). Our ABL Facility is secured by a first lien against our assets and the assets of CURO Intermediate and its domestic subsidiaries. The lender advances to CURO Intermediate 80% of the principal balance of the eligible installment loans held by CURO Intermediate and its guarantor subsidiaries. As customer loan payments come into CURO Intermediate and its guarantor subsidiaries, such payments are subjected to a conventional priority-of-payment waterfall provided the loan-to-value doesn’t exceed 80%. The loans will bear interest at an annual rate of up to 8.0% plus the greater of (x) 1.0% per annum and (y) the three-month LIBOR. The ABL Facility provides that CURO Intermediate pays a 0.50% per annum commitment fee on the unused portion of the commitments and a 4.0% per annum monitoring fee on the loans outstanding. Commitment terminations and voluntary prepayments of loans made prior to the 30th month anniversary of the closing date of the Non-Recourse U.S. SPV Facility are subject to a fee equal to 3.0% of the amount of revolving loan commitments terminated or loans voluntarily prepaid. This facility matured in May 2017 and was fully converted to the Non-Recourse U.S. SPV Facility.
Cash Money Revolving Credit Facility
Cash Money Cheque Cashing, Inc., one of our Canadian subsidiaries, maintains a C$7.3 million revolving credit facility with Royal Bank of Canada. The Cash Money Revolving Credit Facility provides short-term liquidity required to meet the working capital needs of our Canadian operations. Aggregate draws under the revolving credit facility are limited to the lesser of: (i) the borrowing base, which is defined as a percentage of cash, deposits in transit and accounts receivable, and (ii) C$7.3 million. As of December 31, 2017, the borrowing capacity under our revolving credit facility was reduced by C$0.3 million in stand-by-letters of credit.
The Cash Money Revolving Credit Facility is collateralized by substantially all of Cash Money’s assets and contains various covenants that include, among other things, that the aggregate borrowings outstanding under the facility not exceed the borrowing base, restrictions on the encumbrance of assets and the creation of indebtedness.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Borrowings under the Cash Money Revolving Credit Facility bear interest (per annum) at the prime rate of a Canadian chartered bank plus 1.95%.
The Cash Money Revolving Credit Facility was undrawn at December 31, 2017 and December 31, 2016.
Subordinated Shareholder Debt
As part of the acquisition of Cash Money in 2011, we issued an Escrow Note to the Seller which provided us indemnification for certain claims. This note bears interest at 10.0% per annum, and quarterly interest payments are due until the note matures in May 2019. The balance of this note at December 31, 2017 and December 31, 2016 was $2.4 million and $2.2 million, respectively.
10.75% Senior Secured Notes
In May 2011, CURO Intermediate issued and sold $250.0 million of 10.75% Senior Secured Notes due May 2018. In connection with this borrowing, we incurred $9.6 million of financing costs that were included as a direct reduction of Long-term debt and amortized over the term of the notes as a component of interest expense. In September 2016, CURO Intermediate made an open-market purchase of $25.1 million of the outstanding May 2011 10.75% Senior Secured Notes at 71.25% of the principal plus accrued and unpaid interest of $1.0 million and recognized a gain on extinguishment of $7.0 million related to the discount on repurchase, net of unamortized deferred financing costs and fees.
In May 2012, CURO Intermediate issued and sold $90.0 million of 10.75% Senior Secured Notes under the same indenture. These notes were issued at 101.75% of their face value for total proceeds of $91.6 million, with an effective interest rate of 10.35%. The original issue premium of $1.6 million was included as a component of Long-term debt and amortized over the term of the notes as a component of interest expense. In connection with this debt offering and an increase to our U.S. Revolving Credit Facility in 2012, we incurred $3.5 million of financing costs, the balance of which are included in the Consolidated Balance Sheets as a direct reduction of Long-term debt. The deferred financing costs were being amortized over the term of the notes and included as a component of interest expense.
In February 2013, CURO Intermediate issued and sold $100.0 million of 10.75% Senior Secured Notes under the same indenture. These notes were issued at 106.25% of their face value for total proceeds of $106.2 million, with an effective interest rate of 9.24%. The original issue premium of $6.2 million was included as a component of Long-term debt and amortized over the term of the notes as a component of interest expense. In connection with this debt offering and an increase to our U.S. Revolving Credit Facility in 2012, we incurred $2.9 million of financing costs, the balance of which were included in the Consolidated Balance Sheets as a direct reduction of Long-term debt. The deferred financing costs were being amortized over the term of the notes and included as a component of interest expense.
Interest was paid semi-annually on each of the issuances of 10.75% Senior Secured Notes on May 15 and November 15 of each applicable year. As discussed above, proceeds from the February 2017 12.00% Senior Secured Notes were used, together with available cash, to redeem the outstanding 10.75% Senior Secured Notes due 2018.
12.00% Senior Cash Pay Notes
In February 2013, Speedy Group issued $125.0 million 12.00% Senior Cash Pay Notes due November 15, 2017. In connection with this borrowing, we incurred $3.4 million of financing costs that were recorded as a direct reduction of Long-term debt and amortized over the term of the notes as a component of interest expense. As discussed above, these notes were redeemed in February 2017 using proceeds from the February 2017 12.00% Senior Secured Notes, together with available cash.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Ranking and Guarantees
The 12.00% Senior Secured Notes due 2022 rank senior in right of payment to all of our and our guarantor entities’ existing and future subordinated indebtedness and equal in right of payment with all our and our guarantor entities’ existing and our future senior indebtedness, including borrowings under our revolving credit facilities. Pursuant to our Inter-creditor Agreement, the Notes and the guarantees will be effectively subordinated to our credit facilities and certain other indebtedness to the extent of the value of the assets securing such indebtedness and to liabilities of our subsidiaries that are not guarantors.
The Notes are secured by liens on substantially all of our and the guarantors’ assets, subject to certain exceptions. On or after March 1, 2019, we may redeem some or all of the Notes at a premium that will decrease over time, plus accrued and unpaid interest, if any to the applicable date of redemption. Prior to March 1, 2019, we will be able to redeem up to 40% of the Notes at a redemption price of 112.000% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the redemption date with the net cash proceeds of certain equity offerings. Prior to March 1, 2019, subject to certain terms and conditions, we will also be able to redeem the Notes at a redemption price of 100% of the principal amount of the Notes redeemed, plus the applicable premium and any accrued and unpaid interest to the redemption date.
Future Maturities of Long-Term Debt
Annual maturities of outstanding long-term debt (before deferred financing costs and premiums) for each of the five years after December 31, 2017 are as follows:
(in thousands) | Amount | ||
2018 | $ | — | |
2019 | — | ||
2020 | — | ||
2021 | 124,590 | ||
2022 | 605,000 | ||
$ | 729,590 | ||
NOTE 12 – SHARE-BASED COMPENSATION
The 2010 Equity Incentive Plan (the “Plan”) was originally approved by our shareholders in November 2010, and amended in December 2013. The Plan provides for the issuance of up to 2,160,000 shares, subject to certain adjustment provisions described in the Plan. The Plan provides for the granting of stock options, restricted stock, and stock grants. Awards may be granted to employees, consultants and our directors. The Plan provides that shares of Class B common stock subject to awards granted become available for issuance if such awards expire, terminate, are canceled for any reason, or are forfeited by the recipient. Pursuant to the formation of CURO, all of the rights and obligations under the stock option agreements were transferred from CFTC. Thus, the outstanding and unexercised options now represent an option to purchase the same number of shares of common stock of CURO at the same exercise price and on the same terms and conditions as provided in the original option agreement. In conjunction with approval of the 2017 Incentive Plan, no new awards will be granted under the plan.
The 2017 Incentive Plan was approved by our shareholders on November 8, 2017. The 2017 Incentive Plan provides for the issuance of up to 5,000,000 shares, subject to certain adjustment provisions described in the 2017 Incentive Plan, for the granting of stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance awards and other awards that may be settled in or based upon our common stock. Awards may be granted to certain officers, employees, consultants and directors of the Company. The 2017 Incentive Plan provides that shares of common stock subject to awards granted become available for issuance if such awards expire, terminate, are canceled for any reason, or are forfeited by the recipient.
Stock options are awards which allow the grantee to purchase shares of our common stock at prices equal to the fair value at the date of grant. The stock options that have been granted under the Plan thus far typically vest at a rate of 20% per year over a 5-year period, have a term of 10 years and are subject to limitations on transferability.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
During the first quarter of 2017, we granted an incremental 54,396 stock options at an exercise price of $8.86 per share. The options vest ratably over a three year period and are subject to limitations on transferability. We also granted an incremental 45,000 stock options at an exercise price of $8.86 per share. The options primarily vest ratably over a five year period and are subject to limitations on transferability. The fair value of the options granted was calculated at each grant date using a Black-Scholes option-pricing model which assumed the following weighted average assumptions: expected volatility of 45.3%, expected term of 6.1 years, risk-free interest rate of 2.2%, and expected dividend yield of 0%.
For the year ended December 31, 2016, the fair value of each stock option grant was estimated at the date of the grant using a Black-Scholes option pricing model based on the following assumptions: risk free interest rate of 1.9%, expected term of options of 6.0 years, expected volatility of 44.7% and no expected dividends. There were no awards granted in 2015.
Estimates of fair value are not intended to predict actual future events or the value ultimately realized by individuals who receive equity awards, and subsequent events are not indicative of the reasonableness of our original estimates of fair value. We have estimated the expected term of our stock options using a formula considering the weighted average vesting term and the original contract term. The expected volatility is estimated based upon the historical volatility of publicly traded stocks from our industry sector (the alternative financial services sector). The expected risk-free interest rate is based on an average of various U.S. Treasury rates. We estimate forfeitures at the grant date based on its historical forfeiture rates.
Share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period. See Note 1. "Summary of Significant Accounting Policies and Nature of Operations" for additional information on our share-based compensation.
The following table summarizes our stock option activity for the year ended December 31, 2017:
Stock Options | Weighted Average Exercise Price | Weighted Average Contractual Term (years) | Aggregate Intrinsic Value (in thousands) | ||||||||||
Outstanding at December 31, 2016 | 1,879,308 | $ | 2.73 | ||||||||||
Granted | 99,396 | $ | 8.86 | ||||||||||
Exercised | — | — | |||||||||||
Forfeited | (1,224 | ) | $ | 3.39 | |||||||||
Outstanding at December 31, 2017 | 1,977,480 | $ | 3.04 | 5.2 | $ | 21,831 | |||||||
Options exercisable at December 31, 2017 | 1,520,688 | $ | 2.52 | 4.2 | $ | 17,579 | |||||||
Grants of restricted stock currently consist of restricted stock units (“RSUs”). Grants of restricted stock are valued at the date of grant based on the value of our common stock and are expensed using the straight-line method over the service period. Grants of RSUs do not confer full stockholder rights such as voting rights and cash dividends, but provide for additional dividend equivalent RSU awards in lieu of cash dividends. Unvested shares of restricted stock may be forfeited upon termination of employment with the Company depending on the circumstances of the termination, or failure to achieve the required performance condition, if applicable.
A summary of the status of non-vested restricted stock as of December 31, 2017, and changes during the year is presented in the following table:
Non-vested Restricted Stock | Shares | Weighted Average Grant Date Fair Value | ||||
December 31, 2016 | — | — | ||||
Granted | 1,516,241 | $ | 14.00 | |||
Vested | — | — | ||||
Forfeited | — | — | ||||
December 31, 2017 | 1,516,241 | $ | 14.00 | |||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Share-based compensation expense included in the Consolidated Statements of Income as a component of Corporate expenses is summarized in the following table:
(dollars in thousands) | 2017 | 2016 | 2015 | ||||||||
Pre-tax share-based compensation expense | $ | 965 | $ | 1,148 | $ | 1,271 | |||||
Income tax benefit | (386 | ) | (459 | ) | (508 | ) | |||||
Total share-based compensation expense, net of tax | $ | 579 | $ | 689 | $ | 763 | |||||
As of December 31, 2017, there was $0.9 million of unrecognized compensation cost, net of estimated forfeitures, related to share-based awards, which will be recognized over a weighted-average period of 2.94 years.
NOTE 13 – INCOME TAXES
Income tax expense (benefit) is comprised of the following:
(in thousands) | 2017 | 2016 | 2015 | ||||||
Current tax provision | |||||||||
Federal | $ | 20,829 | $ | 24,508 | $ | 8,716 | |||
State | 2,445 | 5,495 | 486 | ||||||
Foreign | 10,542 | 13,254 | 11,146 | ||||||
Total current provision | 33,816 | 43,257 | 20,348 | ||||||
Deferred tax provision (benefit) | |||||||||
Federal | 6,283 | 186 | (1,167 | ) | |||||
State | 2,647 | (134 | ) | (221 | ) | ||||
Foreign | (170 | ) | (732 | ) | (855 | ) | |||
Total deferred tax provision (benefit) | 8,760 | (680 | ) | (2,243 | ) | ||||
Total provision for income taxes | $ | 42,576 | $ | 42,577 | $ | 18,105 | |||
On December 22, 2017, H.R. 1, commonly referred to as the Tax Cuts and Jobs Act of 2017 (“the TCJA”) was signed by the U.S. President, which enacted various changes to the U.S. corporate tax law. Some of the most significant provisions affecting the Company include a reduced U.S. corporate income tax rate from 35% to 21% effective in 2018 and a one-time “deemed repatriation” tax on unremitted earnings accumulated in non-U.S. jurisdictions. Pursuant to ASC 740, the Company is required to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities in the quarter the tax law change is enacted. Due to the complexities involved in accounting for the enactment of the TCJA, SEC Staff Accounting Bulletin (“SAB”) 118 allows taxpayers to provide a provisional estimate of the impacts of the TCJA in its earnings for the year ended December 31, 2017. Accordingly, based on the current information available, the Company recorded estimated provisional additional income tax of $3.9 million. This charge is comprised of expense of $8.1 million related to the deemed repatriation of unremitted earnings of foreign subsidiaries and a benefit of $4.2 million related to the remeasurement of the company’s net deferred tax liabilities arising from a lower U.S. corporate tax rate. The ultimate impact may differ from these provisional amounts, possibly materially, due to among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. We intend to complete our accounting under the Tax Act within the measurement period set forth in SAB 118. The incremental expense for the deemed repatriation of unremitted earnings of foreign subsidiaries will be paid in cash as follows:
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Tax Period | Payment Due (in thousands) | ||
2017 | $ | 644 | |
2018 | 644 | ||
2019 | 644 | ||
2020 | 644 | ||
2021 | 644 | ||
2022 | 1,208 | ||
2023 | 1,610 | ||
2024 | 2,013 | ||
Total | $ | 8,051 | |
The benefit associated with the remeasurement of the company's net deferred tax liabilities arising from a lower U.S corporate tax rate will be recognized as cash benefits at varying times as related assets and liabilities impact current tax expense.
Additional impacts from the enactment of the TCJA will be recorded as they are identified during the remeasurement period ending no later than December 22, 2018 as provided for in SAB 118. The charge recorded for the year represents the company’s best estimate of the impact of the TCJA.
As of December 31, 2017, we have estimated and provided U.S. net tax of $8.1 million on our cumulative undistributed earnings as part of the repatriation tax provision in the TCJA. We intend to reinvest our foreign earnings indefinitely in our non-U.S. operations and therefore have not provided for any non-U.S. withholding tax that would be assessed on dividend distributions. If the earnings of $154.8 million were distributed to the U.S., we would be subject to estimated Canadian withholding taxes of approximately $7.7 million. In the event the earnings were distributed to the U.S., we would adjust our income tax provision for the period and would determine the amount of foreign tax credit that would be available.
The sources of deferred income tax assets (liabilities) are summarized as follows:
(in thousands) | 2017 | 2016 | ||||
Deferred tax assets related to: | ||||||
Loans receivable | $ | 1,027 | $ | 8,142 | ||
Accrued expenses and other reserves | 3,668 | 8,630 | ||||
Compensation accruals | 3,921 | 4,387 | ||||
Deferred revenue | 86 | 247 | ||||
State and provincial net operating loss carryforwards | 822 | 516 | ||||
Foreign net operating loss and capital loss carryforwards | 15,847 | 12,953 | ||||
Tax credit carryforwards | — | 284 | ||||
Gross deferred tax assets | 25,371 | 35,159 | ||||
Less: Valuation allowance | (17,570 | ) | (14,072 | ) | ||
Net deferred tax assets | $ | 7,801 | $ | 21,087 | ||
Deferred tax liabilities related to: | ||||||
Property and equipment | $ | (2,776 | ) | $ | (5,564 | ) |
Goodwill and other intangible assets | (15,395 | ) | (17,015 | ) | ||
Prepaid expenses and other assets | (344 | ) | (186 | ) | ||
Gross deferred tax liabilities | (18,515 | ) | (22,765 | ) | ||
Net deferred tax liabilities | $ | (10,714 | ) | $ | (1,678 | ) |
Deferred tax assets and liabilities are included on the following line items in the Consolidated Balance Sheets:
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands) | 2017 | 2016 | ||||
Net current deferred tax assets | $ | 772 | $ | 12,635 | ||
Net long-term deferred tax liabilities | (11,486 | ) | (14,313 | ) | ||
Net deferred tax liabilities | $ | (10,714 | ) | $ | (1,678 | ) |
Differences between our effective tax rate computed on net earnings before income taxes and the statutory federal income tax rate are as follows:
(in thousands) | 2017 | 2016 | 2015 | ||||||
Income tax expense using the statutory federal rate in effect | $ | 32,105 | $ | 37,807 | $ | 12,556 | |||
Tax effect of: | |||||||||
State, local and provincial income taxes, net of federal benefit | 7,164 | 9,045 | 4,373 | ||||||
Tax credits | (450 | ) | (713 | ) | — | ||||
Nondeductible expenses | 536 | 521 | 263 | ||||||
Impact of goodwill impairment charges | — | — | 310 | ||||||
Nontaxable income | — | — | — | ||||||
Foreign exchange gain/loss on intercompany loan | 899 | — | (1,423 | ) | |||||
Valuation allowance for foreign and state net operating loss and capital loss carryforwards | 2,393 | 3,129 | 5,827 | ||||||
Effects of foreign rates different than U.S. statutory rate | (5,370 | ) | (7,569 | ) | (3,350 | ) | |||
Deferred remeasurement | 886 | 205 | 62 | ||||||
Repatriation tax | 8,100 | — | — | ||||||
Deferred remeasurement due to the TCJA | (4,162 | ) | — | — | |||||
Other | 476 | 152 | (513 | ) | |||||
Total provision for income taxes | $ | 42,577 | $ | 42,577 | $ | 18,105 | |||
Effective tax rate | 46.4 | % | 39.4 | % | 50.5 | % | |||
Statutory federal tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
At December 31, 2017 and December 31, 2016 we had no reserves related to uncertain tax positions.
The tax years 2014 through 2016 remain open to examination by the taxing authorities in the U.S. The tax years 2010 through 2016 remain open to examination by the taxing authorities in the UK. The tax years 2012 through 2016 remain open to examination by the taxing authorities in Canada. We expect no material change related to our current positions in recorded unrecognized income tax benefit liability in the next twelve months.
We file income tax returns in U.S. federal jurisdictions, the U.K., Canada (including provinces), and various state jurisdictions.
A summary of the valuation allowance is as follows:
(in thousands) | 2017 | 2016 | 2015 | ||||||
Balance at the beginning of year | $ | 14,072 | $ | 13,097 | $ | 5,447 | |||
Revaluation of valuation allowance due to change in statutory rates | — | (1,234 | ) | — | |||||
Increase to balance charged as expense | 2,393 | 3,129 | 5,827 | ||||||
(Decrease) increase to balance charged to Other Comprehensive Income | (101 | ) | 1,627 | 2,099 | |||||
Effect of foreign currency translation | 1,209 | (2,547 | ) | (276 | ) | ||||
Balance at end of year | $ | 17,573 | $ | 14,072 | $ | 13,097 | |||
As of December 31, 2017, we had as filed foreign operating loss carryforwards of $14.4 million and additional accrued foreign operating loss and capital loss carryforwards of $2.1 million. The UK net operating loss carryforwards do not expire and can be used at any time. The Canadian net operating loss carryforwards expire after 20 years. As of December 31, 2017, we have $0.9 million of deferred tax assets on foreign entities with foreign operating loss carryforwards. We are not expecting to have taxable income in the near future in these jurisdictions and have recorded a $16.5 million valuation allowance related to these foreign operating losses and a $0.9 million
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
valuation allowance related to the deferred tax assets. As of December 31, 2017, we had as filed state operating loss carryforwards of $0.2 million and accrued utilization of state operating loss carryforwards and additional state operating losses that are not material. These carryforwards expire in varying amounts in years 2018 through 2037 and are generated in states in which we may have taxable income in the near future. We have recorded a valuation allowance of $0.2 million related to these state operating losses. As of December 31, 2017 we have a state tax credit carryforward of $0.3 million. During 2017, 2016 and 2015 we did not record any estimated interest or penalties.
NOTE 14 – FINANCIAL INSTRUMENTS AND CONCENTRATIONS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We are required to use valuation techniques that are consistent with the market approach, income approach, and/or cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability based on observable market data obtained from independent sources, or unobservable, meaning those that reflect our own estimate about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are listed below.
Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have access to at the measurement date.
Level 2 – Inputs include quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 – Unobservable inputs reflecting our own judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. We develop these inputs based on the best information available, including our own data.
Financial Assets and Liabilities Not Measured at Fair Value
The table below presents the assets and liabilities that were not measured at fair value at December 31, 2017.
Estimated Fair Value | |||||||||||||||
(dollars in thousands) | Carrying Value December 31, 2017 | Level 1 | Level 2 | Level 3 | December 31, 2017 | ||||||||||
Financial assets: | |||||||||||||||
Cash | $ | 162,374 | $ | 162,374 | $ | — | $ | — | $ | 162,374 | |||||
Restricted cash | 12,117 | 12,117 | — | — | 12,117 | ||||||||||
Loans receivable, net | 363,269 | — | — | 363,269 | 363,269 | ||||||||||
Investment | 5,600 | — | — | 5,600 | 5,600 | ||||||||||
Financial liabilities: | |||||||||||||||
Credit services organization guarantee liability | $ | 17,795 | $ | — | $ | — | $ | 17,795 | $ | 17,795 | |||||
2017 Senior Secured Notes | 585,823 | — | — | 663,475 | 663,475 | ||||||||||
Non-Recourse U.S. SPV facility | 120,402 | — | — | 124,590 | 124,590 | ||||||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The table below presents the assets and liabilities that were not measured at fair value at December 31, 2016.
Estimated Fair Value | |||||||||||||||
(dollars in thousands) | Carrying Value December 31, 2016 | Level 1 | Level 2 | Level 3 | December 31, 2016 | ||||||||||
Financial assets: | |||||||||||||||
Cash | $ | 193,525 | $ | 193,525 | $ | — | $ | — | $ | 193,525 | |||||
Restricted cash | 7,828 | 7,828 | — | — | 7,828 | ||||||||||
Loans receivable, net | 247,004 | — | — | 247,004 | 247,004 | ||||||||||
Financial liabilities: | |||||||||||||||
Credit services organization guarantee liability | $ | 17,052 | $ | — | $ | — | $ | 17,052 | $ | 17,052 | |||||
May 2011 Senior Secured Notes | 223,164 | 216,449 | — | — | 216,449 | ||||||||||
May 2012 Senior Secured Notes | 89,734 | 86,625 | — | — | 86,625 | ||||||||||
February 2013 Senior Secured Notes | 101,184 | 96,250 | — | — | 96,250 | ||||||||||
February 2013 Cash Pay Notes | 124,365 | 118,301 | — | — | 118,301 | ||||||||||
Non-Recourse U.S. SPV facility | 63,054 | — | — | 68,311 | 68,311 | ||||||||||
ABL facility | 23,406 | — | — | 23,406 | 23,406 | ||||||||||
Loans receivable are carried on the Consolidated Balance Sheets net of the allowance for estimated loan losses, which is calculated primarily based upon models that back-test subsequent collections history for each type of loan product. The unobservable inputs used to calculate the carrying value include additional quantitative factors, such as current default trends and changes to the portfolio mix are also considered in evaluating the accuracy of the models; as well as additional qualitative factors such as the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. Loans generally have terms ranging from 1 day to 48 months. The carrying value of loans receivable approximates the fair value.
In connection with our CSO programs, the accounting for which is discussed in detail in Note 1, we guarantee consumer loan payment obligations to unrelated third-party lenders for loans that we arrange for consumers on the third-party lenders’ behalf. We are required to purchase from the lender defaulted loans we have guaranteed. The estimated fair value of the guarantee liability related to CSO loans we have guaranteed was $17.8 million and $17.1 million as of December 31, 2017 and December 31, 2016, respectively. The initial measurement of this guarantee liability is recorded at fair value using Level 3 inputs with subsequent measurement of the liability measured as a contingent loss. The unobservable inputs used to calculate fair value include the nature of the loan products, the creditworthiness of the borrowers in the customer base, our historical loan default history for similar loans, industry loan default history, historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions.
The fair value of our Senior Secured Notes was based on broker quotations. The fair values of the Non-Recourse U.S. SPV facility and the ABL facility were based on the cash needed for final settlement.
Derivative Financial Instrument
We had a cash flow hedge in which the hedging instrument was a forward extra to sell GBP 4,800,000 that expired in May 2017. We performed an assessment that determined that all critical terms of the hedging instrument and the hedged transaction match and as such qualitatively concluded that changes in the hedge’s intrinsic value would completely offset the change in the expected cash flows based on changes in the spot rate. Since the effectiveness of this hedge was assessed based on changes in the hedge’s intrinsic value, the change in the time value of the contract would be excluded from the assessment of hedge effectiveness.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Changes in the hedge’s intrinsic value, to the extent that they were effective as a hedge, were recorded in other comprehensive income. As of December 31, 2017 we have recorded a realized loss of $0.3 million, in our consolidated statement of income associated with this hedge.
Concentration Risk
We are subject to regulation by federal, state and provincial governmental authorities that affect the products and services that we provide, particularly Single-Pay loans. The level and type of regulation for payday advance loans varies greatly by jurisdiction, ranging from jurisdictions with moderate regulations or legislation, to other jurisdictions having very strict guidelines and requirements.
Revenues originated in Texas, Ontario, and California represented approximately 25.6%, 12.9%, and 17.7%, respectively, of our consolidated total revenues for the year ended December 31, 2017. Revenues originated in Texas, Ontario, and California represented approximately 26.1%, 14.4%, and 15.1%, respectively, of our consolidated total revenues for the year ended December 31, 2016.
To the extent that laws and regulations are passed that affect the manner in which we conduct business in any one of those markets, our financial position, results of operations and cash flows could be adversely affected. Additionally, our ability to meet our financial obligations could be negatively impacted.
We hold cash at major financial institutions that often exceed FDIC insured limits. We manage our concentration risk by placing our cash deposits in high quality financial institutions and by periodically evaluating the credit quality of the financial institutions holding such deposits. Historically, we have not experienced any losses due to such cash concentration.
Financial instruments that potentially subject us to concentrations of credit risk primarily consist of our loans receivable. Concentrations of credit risk with respect to loans receivable are limited due to the large number of customers comprising our customer base.
Purchase of Cognical Holdings Inc. Preferred Shares
In April 2017, we purchased 2,926,715 preferred shares of Cognical Holdings, Inc. ("Cognical") for $5.0 million and in October 2017 we purchased an additional 365,839 preferred shares for $0.6 million. As a result of these transactions, we own 9.4% of the equity of Cognical. Cognical has also awarded us warrants, subject to a certain vesting schedule, to purchase the common stock of Cognical in partial consideration of services provided by Cognical. These purchases are recorded in Other assets on our Consolidated Balance Sheets, and we have accounted for this investment and its related warrants using the fair value method of accounting.
Cognical operates under an online website, www.zibby.com. Zibby is a leasing platform for online, brick and mortar and omni-channel retailers. Customers can apply in 30 seconds in-store or via the Zibby button on a retailer’s website and be approved for $300 to $3,500. Zibby increases retailer sales by providing a fast and easy lease payment option for nonprime customers seeking to acquire furniture, appliances, electronics and other consumer durables.
NOTE 15 – STOCKHOLDERS' EQUITY
In connection with the formation of CURO Group in 2013, the stockholders entered into an Investor Rights Agreement. In connection with the completion of the Company's Initial Public offering, the Company entered into the Amended and Restated Investors Rights Agreement with certain of the company's existing shareholders, including the Founder Holders and the Freidman Fleisher & Lowe Capital Partners II, L.P. (and its affiliated funds, the “FFL Funds”), whom we collectively refer to as the principal holders. Pursuant to the amended and restated investors rights agreement, the Company has agreed to register the sale of shares of our common stock held by the principal holders under certain circumstances.
We filed an amendment to our certificate of incorporation on December 6, 2017, that effected a 36-for-1 split of our common stock. Additionally, we filed an amended and restated certificate of incorporation on December 11, 2017, that, among other things, changed the authorized number of shares of our common stock to 250,000,000, consisting of 225,000,000 shares of common stock, with a par value of $0.001 per share and 25,000,000 shares of preferred stock, with a par value of $0.001 per share. All share and per share data have been retroactively adjusted
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
for all periods presented to reflect the stock split as if the stock split had occurred at the beginning of the earliest period presented.
On December 7, 2017, our stock began trading on the New York Stock Exchange ("NYSE") under the symbol "CURO." We completed our initial public offering ("IPO") of 6,666,667 shares of common stock on December 11, 2017, at a price of $14.00 per share. In connection with the closing, the underwriters had a 30-day option to purchase up to an additional 1,000,000 shares at the initial public offering prices, less the underwriting discount to over-allotments, if any. The underwriters exercised this option on January 5, 2018.
Our net proceeds from the IPO, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, were $81.1 million. On March 7, 2018, we used the net proceeds to redeem portions of the 12.00% Senior Secured Notes due 2022 and to pay related fees, expenses, premiums and accrued interest. See Note 25 - Subsequent Events for additional information about this transaction.
As discussed in Note 11 Long-Term Debt, CFTC paid us a $130.1 million dividend in February 2017 to fund the redemption of the 12.00% Senior Cash Pay Notes. We paid dividends of $28.0 million and $8.5 million to our stockholders, in May 2017 and August 2017, respectively. On October 16, 2017, we declared a dividend of $5.5 million, which was paid to our stockholders on October 16, 2017. In connection with issuance of $135.0 million of additional 12.00% Senior Secured Notes on November 2, 2017, CFTC paid a cash dividend in the amount of $140.0 million to us, and we declared a dividend of $140.0 million, which was paid to our stockholders on November 2, 2017.
NOTE 16 – SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
Year Ended December 31, | |||||||||||
(dollars in thousands) | 2017 | 2016 | 2015 | ||||||||
Cash paid for: | |||||||||||
Interest | $ | 60,054 | $ | 61,019 | $ | 61,802 | |||||
Income taxes | 26,863 | 43,650 | 26,001 | ||||||||
Non-cash investing activities: | |||||||||||
Payment for repurchase of May 2011 Senior Secured Notes accrued in accounts payable | — | 18,939 | — | ||||||||
Property and equipment accrued in accounts payable | 1,631 | 3,338 | 4,758 | ||||||||
NOTE 17 – SEGMENT REPORTING
Segment information is prepared on the same basis that our chief operating decision maker reviews financial information for operational decision making purposes. We have three reportable operating segments: the U.S., Canada and the U.K.
U.S. - As of December 31, 2017, we operated a total of 214 U.S. retail locations and we have online presence in 27 states. We provide Single-Pay Loans, Installment Loans and Open-End Loans, vehicle title loans, check cashing, gold buying, money transfer services, reloadable prepaid debit cards and a number of other ancillary financial products and services to our customers in the United States.
Canada -We operate under the Cash Money and LendDirect brands in Canada. As of December 31, 2016 we operated a total of 193 stores across seven Canadian provinces and territories and we have online presence in five provinces. We provide Single-Pay Loans, Installment Loans, check cashing, money transfer services, foreign currency exchange, reloadable prepaid debit cards, and a number of other ancillary financial products and services to our customers in Canada.
U.K. -We operate under the Speedy Cash ®, WageDayAdvance and Juo Loans brands in the United Kingdom. During 2017, we closed our remaining 13 retail Speedy Cash locations in the United Kingdom as we moved to focus on our online loans to U.K. customers, offered as WageDayAdvance and Juo Loans.
Management’s evaluation of segment performance utilizes gross margin and operating profit before the allocation of interest expense and professional services. The following reporting segment results reflect this basis for evaluation
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
and were determined in accordance with the same accounting principles used in our consolidated financial statements.
The following table illustrates summarized financial information concerning our reportable segments:
Year Ended December 31, | |||||||||||
(dollars in thousands) | 2017 | 2016 | 2015 | ||||||||
Revenues by segment: | |||||||||||
U.S. | $ | 737,729 | $ | 606,798 | $ | 573,664 | |||||
Canada | 186,408 | 188,078 | 184,859 | ||||||||
U.K. | 39,496 | 33,720 | 54,608 | ||||||||
Consolidated revenue | $ | 963,633 | $ | 828,596 | $ | 813,131 | |||||
Gross margin by segment: | |||||||||||
U.S. | $ | 267,215 | $ | 204,328 | $ | 151,628 | |||||
Canada | 67,950 | 78,639 | 77,469 | ||||||||
U.K. | 14,072 | 10,289 | 9,504 | ||||||||
Consolidated gross margin | $ | 349,237 | $ | 293,256 | $ | 238,601 | |||||
Segment operating income (loss): | |||||||||||
U.S. | $ | 51,459 | $ | 56,778 | $ | 4,200 | |||||
Canada | 50,797 | 60,482 | 56,208 | ||||||||
U.K. | (10,527 | ) | (9,239 | ) | (24,534 | ) | |||||
Consolidated operating profit | $ | 91,729 | $ | 108,021 | $ | 35,874 | |||||
Expenditures for long-lived assets by segment: | |||||||||||
U.S. | $ | 7,405 | $ | 10,125 | $ | 8,642 | |||||
Canada | 1,309 | 5,872 | 11,062 | ||||||||
U.K. | 1,043 | 29 | 128 | ||||||||
Consolidated expenditures for long-lived assets | $ | 9,757 | $ | 16,026 | $ | 19,832 | |||||
The following table provides the proportion of gross loans receivable by segment:
(dollars in thousands) | December 31, 2017 | December 31, 2016 | |||||
U.S. | $ | 308,696 | $ | 206,215 | |||
Canada | 104,551 | 66,988 | |||||
U.K. | 19,590 | 12,993 | |||||
Total gross loans receivable | $ | 432,837 | $ | 286,196 | |||
The following table illustrates our net long-lived assets, comprised of property and equipment by segment. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located:
(dollars in thousands) | December 31, 2017 | December 31, 2016 | |||||
U.S. | $ | 52,627 | $ | 58,733 | |||
Canada | 32,924 | 34,310 | |||||
U.K. | 1,535 | 2,853 | |||||
Total | $ | 87,086 | $ | 95,896 | |||
Our chief operating decision maker does not review assets by segment for purposes of allocating resources or decision-making purposes; therefore, total assets by segment are not disclosed.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
NOTE 18 – CONTINGENT LIABILITIES
Harrison, et al v. Principal Investments, Inc. et al
During the period relevant to this class action litigation, we pursued in excess of 16,000 claims in the limited actions and jurisdiction court in Clark County, Nevada, seeking payment of loans on which customers had defaulted. We utilized outside counsel to file these debt collection lawsuits. On Scene Mediations, a process serving company, was employed to serve the summons and petitions in the majority of these cases. In an unrelated matter, the principal of On Scene Mediations was convicted of multiple accounts of perjury and filing false affidavits to obtain judgments on behalf of a Las Vegas collection agency. In September 2010, we were sued by four former customers in a proposed class action suit filed in the District Court in Clark County, Nevada. The plaintiffs in this case claimed that they, and others in the proposed class, were not properly served notice of the debt collection lawsuits by us.
On June 7, 2017, the parties reached a settlement in this matter. We have accrued approximately $2.3 million as a result of this settlement as of December 31, 2017. At a hearing before the District Court in Clark County, Nevada, on July 24, 2017 the court granted preliminary approval of the settlement. On October 30, 2017, the court issued final approval of the class settlement.
Reimbursement Offer; Possible Changes in Payment Practices
During 2017, it was determined that a limited universe of borrowers may have incurred bank overdraft or non-sufficient funds fees because of possible confusion about certain electronic payments we initiated on their loans. As a result, we have decided to reimburse such fees through payments or credits against outstanding loan balances, subject to per-customer dollar limitations, upon receipt of (1) claims from potentially affected borrowers stating that they were in fact confused by our practices and (2) bank statements from such borrowers showing that fees for which reimbursement is sought were incurred at a time that such borrowers might reasonably have been confused about our practices. Based on the terms of the reimbursement offer we are currently considering, we have recorded a $2.0 million liability for this matter as of December 31, 2017.
City of Austin
We were cited on July 5, 2016 by the City of Austin, Texas for alleged violations of the Austin, Texas ordinance addressing products offered by CSOs. The Texas ordinances regulate aspects of products offered under our Credit Access Business programs, including loan sizes and repayment terms. We believe that: (1) the Austin ordinance (like its counterparts elsewhere in the state) conflicts with Texas state law and (2) our product in any event complies with the ordinance, when it is properly construed. The Austin Municipal Court agreed with our position that the ordinance conflicts with Texas law and, accordingly, did not address our second argument. In September 2017, the Travis County Court reversed the Municipal Court’s decision and remanded the case for further proceedings. We appealed the County Court's decision in October 2017, and the appeal is currently pending. We will not have a final determination of the lawfulness of our CAB program under the Austin ordinance (and similar ordinances in other Texas cities) for some time. A final adverse decision could potentially result in material monetary liability in Austin and elsewhere and would force us to restructure the loans we arrange in Texas.
Other Legal Matters
We are also a defendant in certain routine litigation matters encountered in the ordinary course of our business. Certain of these matters may be covered to an extent by insurance. In the opinion of management, based upon the advice of legal counsel, the likelihood is remote that the impact of any pending legal proceedings and claims, either individually or in the aggregate, would have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
NOTE 19 – OPERATING LEASES
We entered into operating lease agreements for the buildings in which we operate that expire at various times through 2030. The majority of the leases have an original term of five years with two 5-year renewal options. Most of the leases have escalation clauses and several also require payment of certain period costs including maintenance, insurance and property taxes.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Some of the leases are with related parties and have terms similar to the non-related party leases previously described. Rent expense on unrelated third-party leases for the years ended December 31, 2017, 2016 and 2015 was $23.6 million, $23.1 million and $23.3 million, respectively; and for related party leases was $3.3 million, $3.3 million and $3.2 million, respectively.
The following table summarizes the future minimum lease payments that we are contractually obligated to make under operating leases as of December 31, 2017 (in thousands):
Third Party | Related Party | Total | |||||||||
2018 | $ | 22,920 | $ | 3,396 | $ | 26,316 | |||||
2019 | 20,046 | 3,241 | 23,286 | ||||||||
2020 | 16,335 | 3,242 | 19,578 | ||||||||
2021 | 13,212 | 3,278 | 16,489 | ||||||||
2022 | 10,665 | 3,266 | 13,931 | ||||||||
Thereafter | 18,532 | 784 | 19,316 | ||||||||
Total | $ | 101,709 | $ | 17,207 | $ | 118,916 | |||||
NOTE 20 – RELATED PARTY TRANSACTIONS
We employ the services of Ad Astra Recovery Services, Inc. (“Ad Astra”), which is owned by our founders. Ad Astra provides third party collection activities for our U.S. operations. Generally, once loans are between 91 and 121 days delinquent we refer them to Ad Astra for collections. Ad Astra earns a commission fee equal to 30% of any amounts successfully recovered. Payments collected by Ad Astra on our behalf and commissions payable to Ad Astra are net settled on a one month lag. The net amount receivable from Ad Astra at December 31, 2017, 2016 and 2015 was $0.7 million, $0.6 million, and $0.2 million, respectively. These amounts are included in “Prepaid expenses and other” in the Consolidated Balance Sheets. The commission expense paid to Ad Astra for the years ended December 31, 2017, 2016 and 2015 was $12.4 million, $12.1 million and $10.6 million, respectively, and is included in “Other costs of providing services” in the Consolidated Statements of Income.
We have entered into several operating lease agreements for our corporate office, collection office, and stores in which we operate, with several real estate entities that are related through common ownership. These operating leases are discussed in Note 19 - Operating Leases.
NOTE 21 – BENEFIT PLANS
In conjunction with our IPO we instituted the 2017 Employee Stock Purchase Plan ("ESPP") that provides certain of our employees the opportunity to purchase shares of our common stock through separate offerings that may vary in terms. We have provided for the issuance of up to 2,500,000 shares to be utilized in the ESPP.
In 2015 we instituted a nonqualified deferred compensation plan that provides certain of our employees with the opportunity to elect to defer his or her base salary and performance-based compensation, which upon such election, will be credited to the applicable participant’s deferred compensation account. Participant contributions are fully vested at all times. Each deferred compensation account will be invested in one or more investment funds made available by us and selected by the participant. We may make discretionary contributions to the individual deferred compensation accounts, with the amount, if any, determined annually by us. Our contributions vest over a term of three years. Each vested deferred compensation account will be paid out in a lump sum either upon a participant’s separation from service with us or a future date chosen by the participant at the time of enrollment. The amount deferred under this plan totaled $3.3 million, $1.4 million and $0.2 million as of December 31, 2017, 2016 and 2015, respectively, and was recorded in long-term liabilities.
In 2014 we instituted a pension plan which covers all U.K. employees. Employees are automatically enrolled at 1% of their compensation, and we will match the employee’s contribution up to 3% of the employee’s compensation. Our contributions to the plan were $0.2 million, $0.2 million and $0.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
In 2013 we instituted a Registered Retirement Savings Plan (“RRSP”) which covers all Canadian employees. We match the employee contribution at a rate of 50% of the first 6% of compensation contributed to the RRSP.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Employee contributions vest immediately. Employer contributions vest 50% after one year and 100% after two years. Our contributions to the RRSP were $0.2 million for each of the years ended December 31, 2017, 2016 and 2015.
In 2010 we instituted a 401(k) retirement savings plan which covers all U.S. employees. Employees may voluntarily contribute up to 90% of their compensation, as defined, to the plan. We match the employee contribution at a rate of 50% of the first 6% of compensation contributed to the plan. Employee contributions vest immediately. Employer contributions vest in full after three years of employment. Our contributions to the plan were $1.3 million, $1.1 million and $1.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
We own life insurance policies on plan beneficiaries as an informal funding vehicle to meet future benefit obligations. These policies are recorded at their cash surrender value and are included in other assets. Income generated from policies is recorded as other income.
NOTE 22 – EARNINGS PER SHARE
The following presents the computation of basic earnings per share (in thousands, except per share amounts):
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Basic: (1) | ||||||||||||
Net income | $ | 49,153 | $ | 65,444 | $ | 17,769 | ||||||
Weight average common shares | 38,351 | 37,908 | 37,908 | |||||||||
Basic earnings per share | $ | 1.28 | $ | 1.73 | $ | 0.47 | ||||||
(1) The per share information has been adjusted to give effect to the 36-to-1 stock split of our common stock which was effective December 6, 2017. | ||||||||||||
The following computation reconciles the differences between the basic and diluted earnings per share presentations (in thousands, except per share amounts):
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Diluted: (1) | ||||||||||||
Net income | $ | 49,153 | $ | 65,444 | 17,769 | |||||||
Weight average common shares (basic) | 38,351 | 37,908 | 37,908 | |||||||||
Dilutive effect of stock options | 926 | 895 | 987 | |||||||||
Weighted average common shares -- diluted | 39,277 | 38,803 | 38,895 | |||||||||
Diluted earnings per share | $ | 1.25 | $ | 1.69 | $ | 0.46 | ||||||
(1) The per share information has been adjusted to give effect to the 36-to-1 stock split of our common stock which was effective December 6, 2017. | ||||||||||||
Potential common shares that would have the effect of increasing diluted earnings per share or decreasing diluted loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted earnings per share. For the year ended December 31, 2016, there were 72,000 potential common shares not included in the calculation of diluted earnings per share because their effect was anti-dilutive. For the years ended December 31, 2017 and 2015, no potential common shares were excluded from the calculation of diluted earnings per share.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
NOTE 23 - SUPPLEMENTAL QUARTERLY FINANCIAL DATA (Unaudited)
The following table sets forth the quarterly financial data for the years ended December 31, 2017 and 2016 (in thousands, except per share amounts):
Year ended December 31, 2017 | March 31 | June 30 | September 30 | December 31 | Fiscal Year | ||||||||||||||
Net Revenue | $ | 162,844 | $ | 151,498 | $ | 155,778 | $ | 167,287 | $ | 637,407 | |||||||||
Gross Margin | 94,905 | 82,002 | 80,166 | 92,164 | 349,237 | ||||||||||||||
Net income before income taxes | 26,088 | 26,961 | 19,682 | 18,998 | 91,729 | ||||||||||||||
Net Income | 16,638 | 16,342 | 9,762 | 6,411 | 49,153 | ||||||||||||||
Net Income per share - Basic | $ | 0.44 | $ | 0.43 | $ | 0.26 | $ | 0.15 | $ | 1.28 | |||||||||
Net Income per share - Diluted | $ | 0.43 | $ | 0.42 | $ | 0.25 | $ | 0.15 | $ | 1.25 | |||||||||
Year ended December 31, 2016 | March 31 | June 30 | September 30 | December 31 | Fiscal Year | ||||||||||||||
Net Revenue | $ | 160,212 | $ | 136,278 | $ | 135,900 | $ | 137,917 | $ | 570,307 | |||||||||
Gross Margin | 94,173 | 68,851 | 67,035 | 63,197 | 293,256 | ||||||||||||||
Net income before income taxes | 44,006 | 21,034 | 25,860 | 17,121 | 108,021 | ||||||||||||||
Net Income | 26,910 | 13,172 | 15,777 | 9,585 | 65,444 | ||||||||||||||
Net Income per share - Basic | $ | 0.71 | $ | 0.35 | $ | 0.42 | $ | 0.25 | $ | 1.73 | |||||||||
Net Income per share - Diluted | $ | 0.70 | $ | 0.34 | $ | 0.41 | $ | 0.24 | $ | 1.69 | |||||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
NOTE 24 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On February 15, 2017, CFTC issued $470.0 million aggregate principal amount 12.00% senior secured notes due March 1, 2022, the proceeds of which were used together with available cash, to (i) redeem the outstanding 10.75% Senior Secured Notes due 2018 of our wholly owned subsidiary, CURO Intermediate, (ii) redeem our outstanding 12.00% Senior Cash Pay Notes due 2017, and (iii) pay fees, expenses, premiums and accrued interest in connection with the offering. The Senior Secured Notes were sold to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”); or outside the U.S. to non-U.S. Persons in compliance with Regulation S of the Securities Act.
On November 2, 2017, CFTC issued $135.0 million aggregate principal amount of additional 12.00% Senior
Secured Notes in a private offering exempt from the registration requirements of the Securities Act, or the Additional Notes Offering. The proceeds from the Additional Notes Offering were used, together with available cash, to (i) pay a cash dividend, in an amount of $140.0 million to us, CFTC’s sole stockholder, and ultimately our stockholders and (ii) pay fees, expenses, premiums and accrued interest in connection with the Additional Notes Offering. CFTC received the consent of the holders holding a majority in the outstanding principal amount outstanding of the current 12.00% Senior Secured Notes to a one-time waiver with respect to the restrictions contained in Section 5.07(a) of the indenture governing the 12.00% Senior Secured Notes to permit the dividend.
The following condensed consolidating financing information, which has been prepared in accordance with the requirements for presentation of Rule 3-10(d) of Regulation S-X promulgated under the Securities Act, presents the condensed consolidating financial information separately for:
(i) | CFTC as the issuer of the 12.00% senior secured notes; |
(ii) | CURO Intermediate as the issuer of the 10.75% senior secured notes that were redeemed in February 2017; |
(iii) | Our subsidiary guarantors, which are comprised of our domestic subsidiaries, excluding CFTC and CURO Intermediate (the “Subsidiary Guarantors”), on a consolidated basis, which are 100% owned by CURO, and which are guarantors of the 12.00% senior secured notes issued in February 2017 and the 10.75% senior secured notes redeemed in February 2017; |
(iv) | Our other subsidiaries on a consolidated basis, which are not guarantors of the 12.00% senior secured notes or the 10.75% senior secured notes (the “Subsidiary Non-Guarantors”) |
(v) | Consolidating and eliminating entries representing adjustments to: |
a. | eliminate intercompany transactions between or among us, the Subsidiary Guarantors and the Subsidiary Non-Guarantors; and |
b. | eliminate the investments in our subsidiaries; |
(vi) | Us and our subsidiaries on a consolidated basis. |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Condensed Consolidating Balance Sheets
December 31, 2017 | ||||||||||||||||||||||||||||||
(dollars in thousands) | CFTC | CURO Intermediate | Subsidiary Guarantors | Subsidiary Non-Guarantors | SPV Subs | Eliminations | Consolidated | CURO | Eliminations | CURO Consolidated | ||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||
Cash | $ | — | $ | — | $ | 117,379 | $ | 44,915 | $ | — | $ | — | $ | 162,294 | $ | 80 | $ | — | $ | 162,374 | ||||||||||
Restricted cash | — | — | 1,677 | 3,569 | 6,871 | — | 12,117 | — | — | $ | 12,117 | |||||||||||||||||||
Loans receivable, net | — | — | 84,912 | 110,651 | 167,706 | — | 363,269 | — | — | $ | 363,269 | |||||||||||||||||||
Deferred income taxes | — | 2,154 | (4,646 | ) | 3,502 | — | — | 1,010 | (238 | ) | — | $ | 772 | |||||||||||||||||
Income taxes receivable | — | — | — | — | — | — | — | 3,455 | — | $ | 3,455 | |||||||||||||||||||
Prepaid expenses and other | — | — | 38,277 | 3,353 | — | — | 41,630 | 882 | — | $ | 42,512 | |||||||||||||||||||
Property and equipment, net | — | — | 52,627 | 34,459 | — | — | 87,086 | — | — | $ | 87,086 | |||||||||||||||||||
Goodwill | — | — | 91,131 | 54,476 | — | — | 145,607 | — | — | $ | 145,607 | |||||||||||||||||||
Other intangibles, net | 16 | — | 5,418 | 27,335 | — | — | 32,769 | — | — | $ | 32,769 | |||||||||||||||||||
Intercompany receivable | — | 37,877 | 33,062 | (30,588 | ) | — | (40,351 | ) | — | — | — | $ | — | |||||||||||||||||
Investment in subsidiaries | (14,504 | ) | 899,371 | — | — | — | (884,867 | ) | — | (84,889 | ) | 84,889 | $ | — | ||||||||||||||||
Other | 5,713 | — | 3,017 | 1,040 | — | — | 9,770 | — | — | $ | 9,770 | |||||||||||||||||||
Total assets | $ | (8,775 | ) | $ | 939,402 | $ | 422,854 | $ | 252,712 | $ | 174,577 | $ | (925,218 | ) | $ | 855,552 | $ | (80,710 | ) | $ | 84,889 | $ | 859,731 | |||||||
Liabilities and Stockholders' equity: | ||||||||||||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 2,606 | $ | 13 | $ | 35,753 | $ | 15,954 | $ | 12 | $ | — | $ | 54,338 | $ | 1,454 | $ | — | $ | 55,792 | ||||||||||
Deferred revenue | — | — | 6,529 | 5,455 | — | — | 11,984 | — | — | 11,984 | ||||||||||||||||||||
Income taxes payable | (49,738 | ) | 70,231 | (18,450 | ) | 2,077 | — | — | 4,120 | — | — | 4,120 | ||||||||||||||||||
Accrued interest | 24,201 | — | — | — | 1,266 | — | 25,467 | — | — | 25,467 | ||||||||||||||||||||
Payable to CURO | 184,348 | — | (95,048 | ) | — | — | — | 89,300 | (89,300 | ) | — | — | ||||||||||||||||||
CSO guarantee liability | — | — | 17,795 | — | — | — | 17,795 | — | — | 17,795 | ||||||||||||||||||||
Deferred rent | — | — | 9,896 | 1,681 | — | — | 11,577 | — | — | 11,577 | ||||||||||||||||||||
Long-term debt (excluding current maturities) | 585,823 | — | — | — | 120,402 | — | 706,225 | — | — | 706,225 | ||||||||||||||||||||
Subordinated shareholder debt | — | — | — | 2,381 | — | — | 2,381 | — | — | 2,381 | ||||||||||||||||||||
Intercompany payable | (668,536 | ) | 876,869 | (124,332 | ) | 40,351 | (84,001 | ) | (40,351 | ) | — | — | — | — | ||||||||||||||||
Other long-term liabilities | — | — | 3,969 | 1,799 | — | — | 5,768 | — | — | 5,768 | ||||||||||||||||||||
Deferred tax liabilities | (2,590 | ) | 6,793 | (143 | ) | 7,426 | — | — | 11,486 | — | — | 11,486 | ||||||||||||||||||
Total liabilities | 76,114 | 953,906 | (164,031 | ) | 77,124 | 37,679 | (40,351 | ) | 940,441 | (87,846 | ) | — | 852,595 | |||||||||||||||||
Stockholders' equity | (84,889 | ) | (14,504 | ) | 586,885 | 175,588 | 136,898 | (884,867 | ) | (84,889 | ) | 7,136 | 84,889 | 7,136 | ||||||||||||||||
Total liabilities and stockholders' equity | $ | (8,775 | ) | $ | 939,402 | $ | 422,854 | $ | 252,712 | $ | 174,577 | $ | (925,218 | ) | $ | 855,552 | $ | (80,710 | ) | $ | 84,889 | $ | 859,731 | |||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
December 31, 2016 | ||||||||||||||||||||||||||||||
(dollars in thousands) | CFTC | CURO Intermediate | Subsidiary Guarantors | Subsidiary Non-Guarantors | SPV Subs | Eliminations | Consolidated | CURO | Eliminations | CURO Consolidated | ||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||
Cash | $ | — | $ | 1,954 | $ | 127,712 | $ | 63,779 | $ | — | $ | — | $ | 193,445 | $ | 80 | $ | — | $ | 193,525 | ||||||||||
Restricted cash | — | 459 | 1,223 | 3,376 | 2,770 | — | 7,828 | — | — | 7,828 | ||||||||||||||||||||
Loans receivable, net | — | — | 67,558 | 71,381 | 108,065 | — | 247,004 | — | — | 247,004 | ||||||||||||||||||||
Deferred income taxes | 2,833 | 8,802 | 2,925 | 2,768 | — | (4,693 | ) | 12,635 | — | — | 12,635 | |||||||||||||||||||
Income taxes receivable | 34,667 | — | — | 6,151 | — | (37,710 | ) | 3,108 | 6,270 | — | 9,378 | |||||||||||||||||||
Prepaid expenses and other | — | — | 32,964 | 4,205 | — | — | 37,169 | 4,735 | (2,656 | ) | 39,248 | |||||||||||||||||||
Property and equipment, net | — | — | 58,733 | 37,163 | — | — | 95,896 | — | — | 95,896 | ||||||||||||||||||||
Goodwill | — | — | 91,131 | 50,423 | — | — | 141,554 | — | — | 141,554 | ||||||||||||||||||||
Other intangibles, net | 19 | — | 5,616 | 25,266 | — | — | 30,901 | — | — | 30,901 | ||||||||||||||||||||
Intercompany receivable | — | 55,444 | 383,887 | — | — | (439,331 | ) | — | — | — | — | |||||||||||||||||||
Investment in subsidiaries | 187,473 | 830,443 | — | — | — | (1,017,916 | ) | — | 155,964 | (155,964 | ) | — | ||||||||||||||||||
Other | — | 1,745 | 1,084 | — | — | 2,829 | — | 2,829 | ||||||||||||||||||||||
Total assets | $ | 224,992 | $ | 897,102 | $ | 773,494 | $ | 265,596 | $ | 110,835 | $ | (1,499,650 | ) | $ | 772,369 | $ | 167,049 | $ | (158,620 | ) | $ | 780,798 | ||||||||
Liabilities and Stockholders' equity: | ||||||||||||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 253 | $ | 3 | $ | 32,528 | $ | 9,900 | $ | — | $ | — | $ | 42,684 | $ | (21 | ) | $ | — | $ | 42,663 | |||||||||
Deferred revenue | — | — | 6,520 | 5,822 | — | — | 12,342 | — | 12,342 | |||||||||||||||||||||
Income taxes payable | — | 23,087 | 12,952 | 3,043 | — | (37,710 | ) | 1,372 | — | 1,372 | ||||||||||||||||||||
Current maturities of long-term debt | — | 23,406 | — | — | — | — | 23,406 | 124,365 | — | 147,771 | ||||||||||||||||||||
Accrued interest | — | 5,575 | — | — | 775 | — | 6,350 | 1,833 | — | 8,183 | ||||||||||||||||||||
Payable to CURO | 2,656 | — | — | — | — | — | 2,656 | (2,656 | ) | — | ||||||||||||||||||||
CSO guarantee liability | — | — | 17,052 | — | — | — | 17,052 | — | 17,052 | |||||||||||||||||||||
Deferred rent | — | — | 10,006 | 1,862 | — | — | 11,868 | — | 11,868 | |||||||||||||||||||||
Long-term debt (excluding current maturities) | — | 414,082 | — | — | 63,054 | — | 477,136 | — | 477,136 | |||||||||||||||||||||
Subordinated shareholder debt | — | — | — | 2,227 | — | — | 2,227 | — | 2,227 | |||||||||||||||||||||
Intercompany payable | 65,822 | 233,537 | — | 85,346 | 54,626 | (439,331 | ) | — | — | — | ||||||||||||||||||||
Other long-term liabilities | 299 | — | 1,741 | 2,976 | — | — | 5,016 | — | 5,016 | |||||||||||||||||||||
Deferred tax liabilities | (2 | ) | 9,914 | 2,495 | 6,582 | — | (4,693 | ) | 14,296 | 17 | — | 14,313 | ||||||||||||||||||
Total liabilities | 69,028 | 709,604 | 83,294 | 117,758 | 118,455 | (481,734 | ) | 616,405 | 126,194 | (2,656 | ) | 739,943 | ||||||||||||||||||
Stockholders' equity | 155,964 | 187,498 | 690,200 | 147,838 | (7,620 | ) | (1,017,916 | ) | 155,964 | 40,855 | (155,964 | ) | 40,855 | |||||||||||||||||
Total liabilities and stockholders' equity | $ | 224,992 | $ | 897,102 | $ | 773,494 | $ | 265,596 | $ | 110,835 | $ | (1,499,650 | ) | $ | 772,369 | $ | 167,049 | $ | (158,620 | ) | $ | 780,798 | ||||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Condensed Consolidating Statements of Income
Year Ended December 31, 2017 | ||||||||||||||||||||||||||||||
(dollars in thousands) | CFTC | CURO Intermediate | Subsidiary Guarantors | Subsidiary Non-Guarantors | SPV Subs | Eliminations | CFTC Consolidated | CURO | Eliminations | CURO Consolidated | ||||||||||||||||||||
Revenue | $ | — | $ | — | $ | 465,170 | $ | 225,904 | $ | 272,559 | $ | — | $ | 963,633 | $ | — | $ | — | $ | 963,633 | ||||||||||
Provision for losses | — | — | 164,068 | 58,735 | 103,423 | — | 326,226 | — | — | 326,226 | ||||||||||||||||||||
Net revenue | — | — | 301,102 | 167,169 | 169,136 | — | 637,407 | — | — | 637,407 | ||||||||||||||||||||
Cost of providing services: | ||||||||||||||||||||||||||||||
Salaries and benefits | — | — | 69,927 | 35,269 | — | — | 105,196 | — | — | 105,196 | ||||||||||||||||||||
Occupancy | — | — | 31,393 | 23,219 | — | — | 54,612 | — | — | 54,612 | ||||||||||||||||||||
Office | — | — | 16,884 | 4,518 | — | — | 21,402 | — | — | 21,402 | ||||||||||||||||||||
Other store operating expenses | — | — | 48,163 | 6,231 | 508 | — | 54,902 | — | — | 54,902 | ||||||||||||||||||||
Advertising | — | — | 36,148 | 15,910 | — | — | 52,058 | — | — | 52,058 | ||||||||||||||||||||
Total cost of providing services | — | — | 202,515 | 85,147 | 508 | — | 288,170 | — | — | 288,170 | ||||||||||||||||||||
Gross Margin | — | — | 98,587 | 82,022 | 168,628 | — | 349,237 | — | — | 349,237 | ||||||||||||||||||||
Operating (income) expense: | ||||||||||||||||||||||||||||||
Corporate, district and other | 7,549 | (25 | ) | 108,901 | 34,170 | 451 | — | 151,046 | 3,927 | — | 154,973 | |||||||||||||||||||
Intercompany management fee | — | — | (23,741 | ) | 13,970 | 9,771 | — | — | — | — | — | |||||||||||||||||||
Interest expense | 55,809 | 9,613 | (124 | ) | 189 | 13,887 | — | 79,374 | 3,310 | — | 82,684 | |||||||||||||||||||
Loss on extinguishment of debt | — | 11,884 | — | — | — | — | 11,884 | 574 | — | 12,458 | ||||||||||||||||||||
Restructuring costs | — | — | — | 7,393 | — | — | 7,393 | — | — | 7,393 | ||||||||||||||||||||
Intercompany interest (income) expense | — | (4,216 | ) | (678 | ) | 4,894 | — | — | — | — | — | — | ||||||||||||||||||
Total operating expense | 63,358 | 17,256 | 84,358 | 60,616 | 24,109 | — | 249,697 | 7,811 | — | 257,508 | ||||||||||||||||||||
Net income (loss) before income taxes | (63,358 | ) | (17,256 | ) | 14,229 | 21,406 | 144,519 | — | 99,540 | (7,811 | ) | — | 91,729 | |||||||||||||||||
Provision for income tax expense (benefit) | (24,077 | ) | 73,218 | (13,752 | ) | 10,372 | — | — | 45,761 | (3,185 | ) | — | 42,576 | |||||||||||||||||
Net income (loss) | (39,281 | ) | (90,474 | ) | 27,981 | 11,034 | 144,519 | — | 53,779 | (4,626 | ) | — | 49,153 | |||||||||||||||||
Equity in net income (loss) of subsidiaries: | ||||||||||||||||||||||||||||||
CFTC | — | — | — | — | — | — | — | 53,779 | (53,779 | ) | — | |||||||||||||||||||
CURO Intermediate | (90,474 | ) | — | — | — | — | 90,474 | — | — | — | — | |||||||||||||||||||
Guarantor Subsidiaries | 27,981 | — | — | — | — | (27,981 | ) | — | — | — | — | |||||||||||||||||||
Non-Guarantor Subsidiaries | 11,034 | — | — | — | — | (11,034 | ) | — | — | — | — | |||||||||||||||||||
SPV Subs | 144,519 | — | — | — | — | (144,519 | ) | — | — | — | — | |||||||||||||||||||
Net income (loss) attributable to CURO | $ | 53,779 | $ | (90,474 | ) | $ | 27,981 | $ | 11,034 | $ | 144,519 | $ | (93,060 | ) | $ | 53,779 | $ | 49,153 | $ | (53,779 | ) | $ | 49,153 | |||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Year Ended December 31, 2016 | ||||||||||||||||||||||||||||||
(dollars in thousands) | CFTC | CURO Intermediate | Subsidiary Guarantors | Subsidiary Non-Guarantors | SPV Subs | Eliminations | CFTC Consolidated | CURO | Eliminations | CURO Consolidated | ||||||||||||||||||||
Revenue | $ | — | $ | — | $ | 581,820 | $ | 221,799 | $ | 24,977 | $ | — | $ | 828,596 | $ | — | $ | — | $ | 828,596 | ||||||||||
Provision for losses | — | — | 176,546 | 50,540 | 31,203 | — | 258,289 | — | — | 258,289 | ||||||||||||||||||||
Net revenue | — | — | 405,274 | 171,259 | (6,226 | ) | — | 570,307 | — | — | 570,307 | |||||||||||||||||||
Cost of providing services: | ||||||||||||||||||||||||||||||
Salaries and benefits | — | — | 69,549 | 34,992 | — | — | 104,541 | — | — | 104,541 | ||||||||||||||||||||
Occupancy | — | — | 31,451 | 23,058 | — | — | 54,509 | — | — | 54,509 | ||||||||||||||||||||
Office | — | — | 15,883 | 4,580 | — | — | 20,463 | — | — | 20,463 | ||||||||||||||||||||
Other store operating expenses | — | — | 47,491 | 6,120 | 6 | — | 53,617 | — | — | 53,617 | ||||||||||||||||||||
Advertising | — | — | 30,340 | 13,581 | — | — | 43,921 | — | — | 43,921 | ||||||||||||||||||||
Total cost of providing services | — | — | 194,714 | 82,331 | 6 | — | 277,051 | — | — | 277,051 | ||||||||||||||||||||
Gross Margin | — | — | 210,560 | 88,928 | (6,232 | ) | — | 293,256 | — | — | 293,256 | |||||||||||||||||||
Operating (income) expense: | ||||||||||||||||||||||||||||||
Corporate, district and other | 1,898 | 338 | 85,452 | 36,140 | — | — | 123,828 | 446 | — | 124,274 | ||||||||||||||||||||
Intercompany management fee | — | — | (12,632 | ) | 12,632 | — | — | — | — | |||||||||||||||||||||
Interest expense | — | 47,684 | 2 | 58 | 864 | — | 48,608 | 15,726 | — | 64,334 | ||||||||||||||||||||
Loss on extinguishment of debt | — | (4,961 | ) | (1,319 | ) | 5,741 | 539 | — | — | — | — | — | ||||||||||||||||||
Restructuring costs | — | (6,991 | ) | — | — | — | — | (6,991 | ) | — | — | (6,991 | ) | |||||||||||||||||
Intercompany interest (income) expense | — | — | 1,726 | 1,892 | — | — | 3,618 | — | — | 3,618 | ||||||||||||||||||||
Total operating expense | 1,898 | 36,070 | 73,229 | 56,463 | 1,403 | — | 169,063 | 16,172 | — | 185,235 | ||||||||||||||||||||
Net income (loss) before income taxes | (1,898 | ) | (36,070 | ) | 137,331 | 32,465 | (7,635 | ) | — | 124,193 | (16,172 | ) | — | 108,021 | ||||||||||||||||
Provision for income tax expense (benefit) | (682 | ) | 22,788 | 14,543 | 12,522 | — | — | 49,171 | (6,594 | ) | — | 42,577 | ||||||||||||||||||
Net income (loss) | (1,216 | ) | (58,858 | ) | 122,788 | 19,943 | (7,635 | ) | — | 75,022 | (9,578 | ) | — | 65,444 | ||||||||||||||||
Equity in net income (loss) of subsidiaries: | ||||||||||||||||||||||||||||||
CFTC | — | — | — | — | — | — | — | 75,022 | (75,022 | ) | — | |||||||||||||||||||
CURO Intermediate | (58,858 | ) | — | — | — | — | 58,858 | — | — | — | — | |||||||||||||||||||
Guarantor Subsidiaries | 122,788 | — | — | — | — | (122,788 | ) | — | — | — | — | |||||||||||||||||||
Non-Guarantor Subsidiaries | 19,943 | — | — | — | — | (19,943 | ) | — | — | — | — | |||||||||||||||||||
SPV Subs | (7,635 | ) | — | — | — | — | 7,635 | — | — | — | — | |||||||||||||||||||
Net income (loss) attributable to CURO | $ | 75,022 | $ | (58,858 | ) | $ | 122,788 | $ | 19,943 | $ | (7,635 | ) | $ | (76,238 | ) | $ | 75,022 | $ | 65,444 | $ | (75,022 | ) | $ | 65,444 | ||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Year Ended December 31, 2015 | |||||||||||||||||||||||||||
(dollars in thousands) | CFTC | CURO Intermediate | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | CFTC Consolidated | CURO | Eliminations | CURO Consolidated | ||||||||||||||||||
Revenue | $ | — | $ | — | $ | 573,664 | $ | 239,467 | $ | — | $ | 813,131 | $ | — | $ | — | $ | 813,131 | |||||||||
Provision for losses | — | — | 222,868 | 58,342 | — | 281,210 | — | — | 281,210 | ||||||||||||||||||
Net revenue | — | — | 350,796 | 181,125 | — | 531,921 | — | — | 531,921 | ||||||||||||||||||
Cost of providing services: | |||||||||||||||||||||||||||
Salaries and benefits | — | — | 68,928 | 38,131 | — | 107,059 | — | — | 107,059 | ||||||||||||||||||
Occupancy | — | — | 30,504 | 22,784 | — | 53,288 | — | — | 53,288 | ||||||||||||||||||
Office | — | — | 15,089 | 4,840 | — | 19,929 | — | — | 19,929 | ||||||||||||||||||
Other store operating expenses | — | — | 41,661 | 5,719 | — | 47,380 | — | — | 47,380 | ||||||||||||||||||
Advertising | — | — | 42,986 | 22,678 | — | 65,664 | — | — | 65,664 | ||||||||||||||||||
Total cost of providing services | — | — | 199,168 | 94,152 | — | 293,320 | — | — | 293,320 | ||||||||||||||||||
Gross Margin | — | — | 151,628 | 86,973 | — | 238,601 | — | — | 238,601 | ||||||||||||||||||
Operating (income) expense: | |||||||||||||||||||||||||||
Corporate, district and other | 2,035 | 178 | 79,155 | 48,017 | — | 129,385 | 1,149 | — | 130,534 | ||||||||||||||||||
Intercompany management fee | — | 1 | (13,064 | ) | 13,063 | — | — | — | — | — | |||||||||||||||||
Interest expense | — | 49,167 | 17 | 111 | — | 49,295 | 15,725 | — | 65,020 | ||||||||||||||||||
Intercompany interest (income) expense | — | (5,583 | ) | (265 | ) | 5,848 | — | — | — | — | — | ||||||||||||||||
Goodwill and intangible asset impairment charges | — | — | — | 2,882 | — | 2,882 | — | — | 2,882 | ||||||||||||||||||
Restructuring costs | — | — | — | 4,291 | — | 4,291 | — | — | 4,291 | ||||||||||||||||||
Total operating expense | 2,035 | 43,763 | 65,843 | 74,212 | — | 185,853 | 16,874 | — | 202,727 | ||||||||||||||||||
Net income (loss) before income taxes | (2,035 | ) | (43,763 | ) | 85,785 | 12,761 | — | 52,748 | (16,874 | ) | — | 35,874 | |||||||||||||||
Provision for income tax (benefit) expense | (673 | ) | 10,704 | 4,164 | 10,291 | — | 24,486 | (6,381 | ) | — | 18,105 | ||||||||||||||||
Net income (loss) | (1,362 | ) | (54,467 | ) | 81,621 | 2,470 | — | 28,262 | (10,493 | ) | — | 17,769 | |||||||||||||||
Equity in net income (loss) of subsidiaries: | |||||||||||||||||||||||||||
CFTC | — | — | — | — | — | — | 28,262 | (28,262 | ) | — | |||||||||||||||||
CURO Intermediate | (54,467 | ) | — | — | — | 54,467 | — | — | — | — | |||||||||||||||||
Guarantor Subsidiaries | 81,621 | — | — | — | (81,621 | ) | — | — | — | — | |||||||||||||||||
Non-Guarantor Subsidiaries | 2,470 | — | — | — | (2,470 | ) | — | — | — | — | |||||||||||||||||
Net income (loss) attributable to CURO | $ | 28,262 | $ | (54,467 | ) | $ | 81,621 | $ | 2,470 | $ | (29,624 | ) | $ | 28,262 | $ | 17,769 | $ | (28,262 | ) | $ | 17,769 | ||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 2017 | ||||||||||||||||||||||||||||||
(dollars in thousands) | CFTC | CURO Intermediate | Subsidiary Guarantors | Subsidiary Non-Guarantors | SPV Subs | Eliminations | CFTC Consolidated | CURO | Eliminations | CURO Consolidated | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||||
Net cash provided (used) | $ | (264,670 | ) | $ | 447,027 | $ | (2,472 | ) | $ | (20,583 | ) | $ | (52,178 | ) | $ | (3,514 | ) | 103,610 | (86,200 | ) | 17,410 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||
Purchase of property, equipment and software | — | — | (7,406 | ) | (2,351 | ) | — | — | (9,757 | ) | — | — | (9,757 | ) | ||||||||||||||||
Cash paid for Zibby Investment | (5,600 | ) | — | — | — | — | — | (5,600 | ) | — | — | (5,600 | ) | |||||||||||||||||
Change in restricted cash | — | 459 | (454 | ) | 121 | (4,101 | ) | — | (3,975 | ) | — | — | (3,975 | ) | ||||||||||||||||
Net cash provided (used) | (5,600 | ) | 459 | (7,860 | ) | (2,230 | ) | (4,101 | ) | — | (19,332 | ) | — | — | (19,332 | ) | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||
Proceeds from Non-Recourse U.S. SPV facility and ABL facility | — | 1,590 | — | — | 58,540 | — | 60,130 | — | — | 60,130 | ||||||||||||||||||||
Payments on Non-Recourse U.S. SPV facility and ABL facility | — | (24,996 | ) | — | — | (2,261 | ) | — | (27,257 | ) | — | — | (27,257 | ) | ||||||||||||||||
Proceeds from issuance of 12.00% Senior Secured Notes | 601,054 | — | — | — | — | — | 601,054 | — | — | 601,054 | ||||||||||||||||||||
Proceeds from revolving credit facilities | 35,000 | — | — | 8,084 | — | — | 43,084 | — | — | 43,084 | ||||||||||||||||||||
Payments on revolving credit facilities | (35,000 | ) | — | — | (8,084 | ) | — | — | (43,084 | ) | — | — | (43,084 | ) | ||||||||||||||||
Payments on 10.75% Senior Secured Notes | — | (426,034 | ) | — | — | — | — | (426,034 | ) | — | — | (426,034 | ) | |||||||||||||||||
Dividends (paid) received to/from CURO Group Holdings Corp. | (312,083 | ) | — | — | — | — | — | (312,083 | ) | 312,083 | — | — | ||||||||||||||||||
Payments on Cash Pay Senior Notes | — | — | — | — | — | — | — | (125,000 | ) | — | (125,000 | ) | ||||||||||||||||||
Dividends paid to stockholders | — | — | — | — | — | — | — | (182,000 | ) | — | (182,000 | ) | ||||||||||||||||||
Proceeds from issuance of common stock | — | — | — | — | — | — | — | 81,117 | — | 81,117 | ||||||||||||||||||||
Debt issuance costs paid | (18,701 | ) | — | — | — | — | — | (18,701 | ) | — | — | (18,701 | ) | |||||||||||||||||
Net cash provided (used) | 270,270 | (449,440 | ) | — | — | 56,279 | — | (122,891 | ) | 86,200 | — | (36,691 | ) | |||||||||||||||||
Effect of exchange rate changes on cash | — | — | — | 3,948 | — | 3,514 | 7,462 | — | — | 7,462 | ||||||||||||||||||||
Net increase (decrease) in cash | — | (1,954 | ) | (10,332 | ) | (18,865 | ) | — | — | (31,151 | ) | — | — | (31,151 | ) | |||||||||||||||
Cash at beginning of period | — | 1,954 | 127,712 | 63,779 | — | — | 193,445 | 80 | 193,525 | |||||||||||||||||||||
Cash at end of period | $ | — | $ | — | $ | 117,380 | $ | 44,914 | $ | — | $ | — | $ | 162,294 | $ | 80 | $ | — | $ | 162,374 | ||||||||||
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Year Ended December 31, 2016 | ||||||||||||||||||||||||||||||
(dollars in thousands) | CFTC | CURO Intermediate | Subsidiary Guarantors | Subsidiary Non-Guarantors | SPV Subs | Eliminations | CFTC Consolidated | CURO | Eliminations | CURO Consolidated | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||||
Net cash provided (used) | $ | 20 | $ | 29,400 | $ | 76,191 | $ | 27,731 | $ | (83,601 | ) | $ | (627 | ) | 49,114 | (1,402 | ) | — | 47,712 | |||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||
Purchase of property, equipment and software | (20 | ) | — | (10,105 | ) | (5,901 | ) | — | — | (16,026 | ) | — | — | (16,026 | ) | |||||||||||||||
Change in restricted cash | — | (459 | ) | 4,477 | 1,856 | (2,770 | ) | — | 3,104 | — | — | 3,104 | ||||||||||||||||||
Net cash used | (20 | ) | (459 | ) | (5,628 | ) | (4,045 | ) | (2,770 | ) | — | (12,922 | ) | — | — | (12,922 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||
Proceeds from credit facility | — | 30,000 | — | — | — | — | 30,000 | — | — | 30,000 | ||||||||||||||||||||
Payments on credit facility | — | (38,050 | ) | — | — | — | — | (38,050 | ) | — | — | (38,050 | ) | |||||||||||||||||
Deferred financing costs | — | — | — | — | (5,346 | ) | — | (5,346 | ) | — | — | (5,346 | ) | |||||||||||||||||
Proceeds from Non-Recourse U.S. SPV Facility and ABL facility | — | — | — | — | 91,717 | — | 91,717 | — | — | 91,717 | ||||||||||||||||||||
Purchase of May 2011 Senior Secured notes | — | (18,939 | ) | — | — | — | — | (18,939 | ) | — | — | (18,939 | ) | |||||||||||||||||
Net cash provided (used) | — | (26,989 | ) | — | — | 86,371 | — | 59,382 | — | — | 59,382 | |||||||||||||||||||
Effect of exchange rate changes on cash | — | — | — | (1,835 | ) | — | 627 | (1,208 | ) | — | — | (1,208 | ) | |||||||||||||||||
Net increase in cash | — | 1,952 | 70,563 | 21,851 | — | — | 94,366 | (1,402 | ) | — | 92,964 | |||||||||||||||||||
Cash at beginning of period | — | 2 | 57,149 | 41,928 | — | — | 99,079 | 1,482 | — | 100,561 | ||||||||||||||||||||
Cash at end of period | $ | — | $ | 1,954 | $ | 127,712 | $ | 63,779 | $ | — | $ | — | $ | 193,445 | $ | 80 | $ | — | $ | 193,525 | ||||||||||
Year Ended December 31, 2015 | |||||||||||||||||||||||||||
(dollars in thousands) | CFTC | CURO Intermediate | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | CFTC Consolidated | CURO | Eliminations | CURO Consolidated | ||||||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||||||||||
Net cash provided (used) | $ | — | $ | 11,950 | $ | 27,698 | $ | (6,345 | ) | $ | 1,048 | 34,351 | (17,237 | ) | — | 17,114 | |||||||||||
Cash flows from investing activities: | |||||||||||||||||||||||||||
Purchase of property, equipment and software | — | — | (8,642 | ) | (11,190 | ) | — | (19,832 | ) | — | — | (19,832 | ) | ||||||||||||||
Intercompany dividends | 18,471 | — | (18,471 | ) | — | — | — | — | |||||||||||||||||||
Change in restricted cash | — | — | (300 | ) | (6,123 | ) | — | (6,423 | ) | — | — | (6,423 | ) | ||||||||||||||
Net cash provided (used) | 18,471 | — | (27,413 | ) | (17,313 | ) | — | (26,255 | ) | — | — | (26,255 | ) | ||||||||||||||
Cash flows from financing activities: | |||||||||||||||||||||||||||
Proceeds from credit facility | — | 57,050 | — | — | — | 57,050 | — | — | 57,050 | ||||||||||||||||||
Payments on credit facility | — | (69,000 | ) | — | — | — | (69,000 | ) | — | — | (69,000 | ) | |||||||||||||||
Dividend paid to CGHC | (18,100 | ) | — | — | — | — | (18,100 | ) | 18,100 | — | — | ||||||||||||||||
Cash settlement of equity award | (371 | ) | — | — | — | — | (371 | ) | — | — | (371 | ) | |||||||||||||||
Net cash provided (used) | (18,471 | ) | (11,950 | ) | — | — | — | (30,421 | ) | 18,100 | — | (12,321 | ) | ||||||||||||||
Effect of exchange rate changes on cash | — | — | — | (7,016 | ) | (1,048 | ) | (8,064 | ) | — | — | (8,064 | ) | ||||||||||||||
Net increase in cash | — | — | 285 | (30,674 | ) | — | (30,389 | ) | 863 | — | (29,526 | ) | |||||||||||||||
Cash at beginning of period | — | 2 | 56,864 | 72,602 | — | 129,468 | 619 | — | 130,087 | ||||||||||||||||||
Cash at end of period | $ | — | $ | 2 | $ | 57,149 | $ | 41,928 | $ | — | $ | 99,079 | $ | 1,482 | $ | — | $ | 100,561 | |||||||||
NOTE 25 - SUBSEQUENT EVENTS
The Company evaluated subsequent events and determined there has been no material subsequent events that require recognition or disclosure in the consolidated financial statements, except as follows:
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
On January 5, 2018, the underwriters of our initial public offering exercised their option to purchase up to an additional 1,000,000 shares at the initial public offering price, less the underwriting discount to cover over-allotments. As a result of the closing of its initial public offering and the exercise of the option, we have issued a total of 7,666,667 shares of common stock at a price of $14.00 per share. Our net proceeds from the offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by CURO, are approximately $95.3 million.
On February 5, 2018 CURO Financial Technologies Corp. (“CFTC”), a wholly-owned subsidiary of the Company, issued a notice of redemption for $77,500,000 of its 12.00% Senior Secured Notes due 2022 (the “Notes,” and the transaction whereby the Notes are partially redeemed, the “Redemption”) that were issued by CFTC. The redemption was completed on March 7, 2018. The redemption price was equal to 112.00% of the principal amount of the Notes redeemed, plus accrued and unpaid interest paid thereon, to the date of redemption. Following the Redemption, $527,500,000 of the original outstanding principal amount of the Notes remain outstanding. The Redemption was conducted pursuant to the Indenture governing the Notes (the “Indenture”), dated as of February 15, 2017, by and among CFTC, the guarantors party thereto and TMI Trust Company, as trustee and collateral agent. Consistent with the terms of the Indenture, CFTC used a portion of the cash proceeds from the Company’s initial public offering, completed on December 11, 2017, to redeem such Notes.
In February 2018, the Senior Revolver capacity was increased to $29.0 million as permitted by the Indenture to the Senior Secured Notes based upon consolidated tangible assets. The Senior Revolver is now syndicated with participation by a second bank.
Item 15. Exhibits, Financial Statements, Schedules
(A) List of documents filed as part of this report
(1) | Consolidated Financial Statements |
The consolidated financial statements and related notes, together with the report of Grant Thornton LLP, appear in Item 8, Financial Statements and Supplementary Data, of this Form 10-K/A. The consolidated financial statements consist of the following: | |
Consolidated Balance Sheets as of December 31, 2017 and 2016 | |
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 | |
Notes to Consolidated Financial Statements | |
(2) | Consolidated Financial Statement Schedules |
All schedules have been omitted because they are not applicable, are insignificant or the required information is shown in the consolidated financial statements or notes thereto. | |
(3) | Exhibits |
The exhibits are listed on the Exhibit Index. | |
(B) Exhibits
Exhibit Number | Description | |
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
10.14 | ||
10.15 | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
10.20 | ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.25 | ||
10.26 | ||
10.27 | ||
10.28 | ||
10.29 | ||
10.30 | ||
10.31 | ||
10.32 | ||
10.33 | ||
10.34 | ||
10.35 | ||
10.36 | ||
10.37 | ||
10.38 | ||
10.39 | ||
10.40 | ||
10.41 | ||
10.42 | ||
10.43 | ||
10.44 | ||
10.45 | ||
10.46 | ||
10.47 | ||
10.48 | ||
10.49 | ||
10.50 | ||
10.51 | ||
10.52 | ||
10.53 | ||
10.54 | ||
10.55 | ||
10.56 | ||
10.57 | ||
10.58 | ||
10.59 | ||
10.60 | ||
10.61 | ||
10.62 | ||
10.63 | ||
10.64 | ||
10.65 | ||
10.66 | ||
10.67 | ||
10.68 | ||
21.1 | ||
23.1 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
* | Filed herewith. | |
** | Furnished herewith. | |
# | Previously filed. | |
+ | Indicates management contract or compensatory plan, contract or arrangement | |
¥ | Confidential treatment pursuant to Rule 406 under the Securities Act has been requested as to certain portions of this exhibit, which portions have been omitted and submitted separately to the Securities and Exchange Commission. | |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 2018 CURO Group Holdings Corp.
By: /s/ Don Gayhardt___________________________
Don Gayhardt
President, Chief Executive Officer and Director