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EX-32.2 - EX-32.2 - Community Choice Financial Inc.ccfi-20180331ex3224ad94a.htm
EX-32.1 - EX-32.1 - Community Choice Financial Inc.ccfi-20180331ex32156f8e4.htm
EX-31.2 - EX-31.2 - Community Choice Financial Inc.ccfi-20180331ex312bac83f.htm
EX-31.1 - EX-31.1 - Community Choice Financial Inc.ccfi-20180331ex31150843c.htm
EX-10.44 - EX-10.44 - Community Choice Financial Inc.ccfi-20180331ex1044ce9d3.htm
EX-10.43 - EX-10.43 - Community Choice Financial Inc.ccfi-20180331ex10431e649.htm
EX-10.42 - EX-10.42 - Community Choice Financial Inc.ccfi-20180331ex104254723.htm
EX-10.41 - EX-10.41 - Community Choice Financial Inc.ccfi-20180331ex104140c89.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10‑Q

(Mark One)

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

 

For the quarterly period ended March  31, 2018

 

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

 

For the transition period from to                  to                

 

Commission File Number: 001‑35537

COMMUNITY CHOICE FINANCIAL INC.

(Exact name of registrant as specified in its charter)

Ohio

(State or other jurisdiction of

incorporation or organization)

45‑1536453

(IRS Employer

Identification No.)

 

 

6785 Bobcat Way, Suite 200, Dublin, Ohio

(Address of principal executive offices)

43016

(Zip Code)

 

(888) 513‑9395

(Registrant’s telephone number, including area code)

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

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

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

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

 

 

 

 

Large accelerated filer 

Accelerated filer

 

 

Non-accelerated filer    

Smaller reporting company

(Do not check if a smaller reporting company)

Emerging growth company

 

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

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

There is no market for the registrant’s equity. As of March 31, 2018, there were 7,990,020 shares outstanding.

 

 


 

Community Choice Financial Inc. and Subsidiaries

 

Form 10-Q for the Quarterly Period Ended March  31, 2018

 

Table of Contents

 

 

 

 

 

 

Page

 

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017

3

 

 

 

 

Consolidated Statements of Operations for the three months ended March 31, 2018 (unaudited) and March 31, 2017 (unaudited)

4

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2018 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2018 (unaudited) and March 31, 2017 (unaudited)

6

 

 

 

 

Notes to unaudited Consolidated Financial Statements

7-26 

 

 

 

Item 2. 

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

27-39

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

39

 

 

 

Item 4. 

Controls and Procedures

39

 

 

 

Part II 

Other Information

41

 

 

 

Item 1. 

Legal Proceedings

41

 

 

 

Item 1A. 

Risk Factors

41

 

 

 

 

 

 

Item 6. 

Exhibits

41

 

 

 

 

Signatures

42

 

 

 

 

2


 

Community Choice Financial Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

March 31, 2018 and December 31, 2017

 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

85,274

 

$

66,627

 

Restricted cash

 

 

4,420

 

 

4,585

 

Finance receivables, net of allowance for loan losses of $12,293 and $13,517

 

 

68,286

 

 

89,707

 

Card related pre-funding and receivables

 

 

841

 

 

1,062

 

Other current assets

 

 

13,522

 

 

15,271

 

Total current assets

 

 

172,343

 

 

177,252

 

Noncurrent Assets

 

 

 

 

 

 

 

Finance receivables, net of allowance for loan losses of $2,510 and $2,810

 

 

3,626

 

 

4,632

 

Property, leasehold improvements and equipment, net

 

 

24,816

 

 

26,848

 

Other intangible assets

 

 

802

 

 

924

 

Security deposits

 

 

2,429

 

 

2,750

 

Total assets

 

$

204,016

 

$

212,406

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

31,803

 

$

39,566

 

Money orders payable

 

 

8,024

 

 

7,169

 

Accrued interest

 

 

11,942

 

 

5,145

 

Current portion of capital lease obligation

 

 

160

 

 

371

 

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

 

 

120

 

 

118

 

Deferred revenue

 

 

2,535

 

 

2,535

 

Total current liabilities

 

 

54,584

 

 

54,904

 

Noncurrent Liabilities

 

 

 

 

 

 

 

Lease termination payable

 

 

569

 

 

818

 

Line of credit, net of deferred issuance costs of $4,201 and $1,871

 

 

42,799

 

 

45,129

 

Subsidiary notes payable, net of deferred issuance costs of $2,207 and $762

 

 

59,600

 

 

61,077

 

Senior secured notes, net of deferred issuance costs of $1,365 and $1,664

 

 

248,425

 

 

248,126

 

Deferred revenue

 

 

6,887

 

 

7,520

 

Total liabilities

 

 

412,864

 

 

417,574

 

Commitments and Contingencies

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Common stock, par value $.01 per share, 300,000 authorized shares and 7,990 outstanding shares at March 31, 2018 and December 31, 2017

 

 

90

 

 

90

 

Additional paid-in capital

 

 

129,683

 

 

129,675

 

Retained deficit

 

 

(338,571)

 

 

(334,883)

 

Treasury stock

 

 

(50)

 

 

(50)

 

Total stockholders' deficit

 

 

(208,848)

 

 

(205,168)

 

Total liabilities and stockholders' equity

 

$

204,016

 

$

212,406

 

 

See Notes to Unaudited Consolidated Financial Statements.

3


 

Community Choice Financial Inc. and Subsidiaries

 

Consolidated Statements of Operations

 

Three Months Ended March  31, 2018 and 2017

 

(In thousands)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

    

2017

 

Revenues:

 

 

 

 

 

 

 

Finance receivable fees

 

$

50,932

 

$

49,051

 

Credit service fees

 

 

19,196

 

 

18,139

 

Check cashing fees

 

 

11,692

 

 

12,126

 

Card fees

 

 

1,948

 

 

2,007

 

Other

 

 

3,883

 

 

4,029

 

Total revenues

 

 

87,651

 

 

85,352

 

Operating expenses:

 

 

 

 

 

 

 

Salaries

 

 

17,132

 

 

17,273

 

Provision for loan losses

 

 

22,635

 

 

19,540

 

Occupancy

 

 

6,343

 

 

6,629

 

Advertising and marketing

 

 

1,011

 

 

814

 

Lease termination

 

 

97

 

 

47

 

Depreciation and amortization

 

 

2,223

 

 

2,538

 

Other

 

 

11,025

 

 

11,915

 

Total operating expenses

 

 

60,466

 

 

58,756

 

Operating gross profit

 

 

27,185

 

 

26,596

 

Corporate and other expenses:

 

 

 

 

 

 

 

Corporate expenses

 

 

17,602

 

 

20,186

 

Lease termination

 

 

 —

 

 

1,762

 

Depreciation and amortization

 

 

1,093

 

 

1,309

 

Interest expense, net

 

 

12,178

 

 

11,371

 

Total corporate and other expenses

 

 

30,873

 

 

34,628

 

Loss from continuing operations, before tax

 

 

(3,688)

 

 

(8,032)

 

Provision for income taxes

 

 

 —

 

 

333

 

Net loss

 

$

(3,688)

 

$

(8,365)

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

4


 

Community Choice Financial Inc. and Subsidiaries

 

Consolidated Statements of Stockholders’ Equity

 

Three Months Ended March  31, 2018 

 

(Dollars in thousands)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury

 

Paid-In

 

Retained

 

 

 

 

 

    

Shares

    

Amount

    

Stock

    

Capital

    

Deficit

    

Total

 

Balance, December 31, 2017

 

7,990,020

 

$

90

 

$

(50)

 

$

129,675

 

$

(334,883)

 

$

(205,168)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 8

 

 

 —

 

 

 8

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,688)

 

 

(3,688)

 

Balance, March 31, 2018

 

7,990,020

 

$

90

 

$

(50)

 

$

129,683

 

$

(338,571)

 

$

(208,848)

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

5


 

Community Choice Financial Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

Three Months Ended March  31, 2018 and 2017

 

(In thousands)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

    

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(3,688)

    

$

(8,365)

    

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Provision for loan losses

 

 

22,635

 

 

19,540

 

Loss on disposal of assets

 

 

113

 

 

1,042

 

Depreciation

 

 

3,193

 

 

3,723

 

Amortization of note discount and deferred debt issuance costs

 

 

908

 

 

728

 

Amortization of intangibles

 

 

123

 

 

124

 

Deferred income taxes

 

 

 —

 

 

211

 

Stock-based compensation

 

 

 8

 

 

32

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Short-term investments

 

 

 —

 

 

500

 

Card related pre-funding and receivables

 

 

221

 

 

(184)

 

Other assets

 

 

2,069

 

 

6,590

 

Deferred revenue

 

 

(633)

 

 

(475)

 

Accrued interest

 

 

6,797

 

 

6,793

 

Money orders payable

 

 

855

 

 

(378)

 

Lease termination payable

 

 

(249)

 

 

1,048

 

Accounts payable and accrued expenses

 

 

(7,763)

 

 

(8,729)

 

Net cash provided by operating activities

 

 

24,589

 

 

22,200

 

Cash flows from investing activities

 

 

 

 

 

 

 

Net receivables originated

 

 

(208)

 

 

(2,721)

 

Purchase of leasehold improvements and equipment

 

 

(1,274)

 

 

(1,001)

 

Net cash used in investing activities

 

 

(1,482)

 

 

(3,722)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Payments on subsidiary note

 

 

(30)

 

 

(29)

 

Payments on capital lease obligations

 

 

(211)

 

 

(248)

 

Net payments on lines of credit

 

 

 —

 

 

(2,250)

 

Debt issuance costs

 

 

(4,384)

 

 

 —

 

Net cash used in financing activities

 

 

(4,625)

 

 

(2,527)

 

Net increase in cash and cash equivalents and restricted cash

 

 

18,482

 

 

15,951

 

Cash and cash equivalents and restricted cash:

 

 

 

 

 

 

 

Beginning

 

 

71,212

 

 

109,348

 

Ending

 

$

89,694

 

$

125,299

 

 

 

 

 

 

 

 

 

The following table reconciles cash and cash equivalents and restricted cash from the

 

 

 

 

 

 

 

Consolidated Balance Sheets to the above statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2017

 

2016

 

Cash and cash equivalents

 

$

66,627

 

$

106,333

 

Restricted Cash

 

 

4,585

 

 

3,015

 

Total cash and cash equivalents and restricted cash

 

$

71,212

 

$

109,348

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

2018

 

2017

 

Cash and cash equivalents

 

$

85,274

 

$

121,784

 

Restricted Cash

 

 

4,420

 

 

3,515

 

Total cash and cash equivalents and restricted cash

 

$

89,694

 

$

125,299

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

6


 

Community Choice Financial Inc. and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

 

(Dollars in thousands, except per share data)

 

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

 

Nature of business:  Community Choice Financial Inc. (together with its consolidated subsidiaries, “CCFI” or “the Company”) owned and operated 484 retail locations in 12 states and was licensed to deliver similar financial services over the internet in 30 states as of March 31, 2018. Through its network of retail locations and over the internet, the Company provides customers a variety of financial products and services, including secured and unsecured, short and medium‑term consumer loans, check cashing, prepaid debit cards, and other services that address the specific needs of its individual customers.

 

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

 

Basis of presentation:  The accompanying interim unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10‑Q and accounting principles generally accepted in the United States (“GAAP”) for interim financial information. They do not include all information and footnotes required by GAAP for complete financial statements. Although management believes that the disclosures are adequate to prevent the information from being misleading, the interim unaudited consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10‑K filed with the Securities & Exchange Commission on April 2, 2018. All adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial condition, have been included. The results for any interim period are not necessarily indicative of results to be expected for the year ending December 31, 2018.

 

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

 

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

 

Equity method investments:    Entities and investments over which the Company exercises significant influence over the activities of the entity but which do not meet the requirements for consolidation are accounted for using the equity method of accounting pursuant to ASC 323, whereby the Company records its share of the underlying income or loss of these entities. Intercompany profit arising from transactions with affiliates is eliminated to the extent of its beneficial interest. Equity in losses of equity method investments is not recognized after the carrying value of an investment, including advances and loans, has been reduced to zero, unless guarantees or other funding obligations exist.

 

On September 30, 2017, the Company entered into a joint venture with a third party to offer insurance products through select retail locations in a certain market. The joint venture will be managed by the third party.

 

Revenue recognition:  Transactions include loans, credit service fees, check cashing, bill payment, money transfer, money order sales, and other miscellaneous products and services. The full amount of the check cashing fee is recognized as revenue at the time of the transaction. Fees and direct costs incurred for the origination of loans are deferred and amortized over the loan period using the interest method. The Company acts in an agency capacity regarding bill payment services, money transfers, card products, and money orders offered and sold at its retail locations.

7


 

The Company records the net amount retained as revenue because the supplier is the primary obligor in the arrangement, the amount earned by the Company is fixed, and the supplier is determined to have the ultimate credit risk. Revenue on loans determined to be troubled debt restructurings are recognized at the impaired loans’ original interest rates until the impaired loans are charged off or paid by the customer. Credit service organization (“CSO”) fees are recognized over the arranged credit service period.

 

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

 

Short-term consumer loans can be unsecured or secured with a maturity up to ninety days. Unsecured short-term loan products typically range in principal from $100 to $1,000, with a maturity between fourteen and thirty days, and include a written agreement to defer the presentment of the customer’s personal check or preauthorized debit for the aggregate amount of the advance plus fees. This form of lending is based on applicable laws and regulations, which vary by state. State statutes vary from charging fees of 15% to 20%, to charging interest at 25% per annum plus origination fees. The customers repay the cash advance by making cash payments or allowing a check or preauthorized debit to be presented. Secured consumer loans with a maturity of ninety days or less are included in this category and represented 14.0% and 14.5% of short-term consumer loans at March 31, 2018 and December 31, 2017, respectively.

 

Medium-term consumer loans can be unsecured or secured with a maturity greater than ninety days and up to thirty-six months. Unsecured medium-term products typically range from $100 to $5,000, and are evidenced by a promissory note with a maturity between three and thirty-six months. These consumer loans vary in structure depending upon the applicable laws and regulations where they are offered. The medium-term consumer loans are payable in installments or provide for a line of credit with periodic payments. Secured consumer loans with a maturity greater than ninety days are included in this category and represented 14.0% and 12.6% of medium-term consumer loans at March 31, 2018, and December 31, 2017, respectively.

 

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

 

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

 

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

 

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

 

8


 

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

 

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

 

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

 

·

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

 

·

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

 

·

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

 

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

 

In determining the appropriate levels, the Company performed a detailed analysis of the assets and liabilities that are subject to ASC 820-10. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The Company’s financial instruments consist primarily of cash and cash equivalents, finance receivables, restricted cash, and lines of credit. For all such instruments, other than senior secured notes and notes payable at March 31, 2018, and December 31, 2017, the carrying amounts in the consolidated financial statements approximate their fair values. Finance receivables are short term in nature and are originated at prevailing market rates and lines of credit bear interest at current market rates. The fair value of finance receivables at March 31, 2018 and December 31, 2017 approximates carrying value and is measured using internal valuation inputs including historical loan loss experience, delinquency, overall portfolio quality, and current economic conditions. 

 

9


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

Carrying

 

 

 

 

 

 

    

Amount

    

Fair Value

    

Level

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

85,274

 

$

85,274

 

1

 

Restricted cash

 

 

4,420

 

 

4,420

 

1

 

Finance receivables

 

 

71,912

 

 

71,912

 

3

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

10.75% Senior secured notes

 

 

237,290

 

 

222,103

 

1

 

12.75% Senior secured notes

 

 

12,500

 

 

11,479

 

2

 

Subsidiary Note payable

 

 

61,928

 

 

61,928

 

2

 

Line of Credit

 

 

47,000

 

 

47,000

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Carrying

 

 

 

 

 

 

    

Amount

    

Fair Value

    

Level

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,627

 

$

66,627

 

1

 

Restricted cash

 

 

4,585

 

 

4,585

 

1

 

Finance receivables

 

 

94,339

 

 

94,339

 

3

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

10.75% Senior secured notes

 

 

237,290

 

 

212,636

 

1

 

12.75% Senior secured notes

 

 

12,500

 

 

10,841

 

2

 

Subsidiary Note payable

 

 

61,958

 

 

61,958

 

2

 

Line of Credit

 

 

47,000

 

 

47,000

 

2

 

 

Treasury Stock:  Treasury stock is reported at cost and consists of one million common shares at March 31, 2018 and December 31, 2017.

 

Recent Accounting Pronouncements:  In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective method. The adoption of ASC 606 did not impact the Company’s revenue recognition for consumer loan fees as these revenue streams are outside of the scope of ASC 606. Further, the Company has not identified any impacts to its consolidated financial statements that were material as a result of the adoption of ASC 606 for its CSO fees. The Company has not changed the presentation of its consolidated financial statements for assets, liabilities, or revenues from contracts with customers, nor has the Company recognized any cumulative effect adjustment as a result of the adoption of ASC 606.

 

In November 2016, the FASB issued ASU No. 2016-18, “Restricted Cash”. GAAP currently does not include specific guidance to address how to classify and present changes in restricted cash or restricted cash equivalents that occur when there are transfers between cash, cash equivalents, and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents. The amendments in this update 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. Therefore, amounts generally described as restricted cash and restricted cash 

10


 

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. The amendments in this update do not provide a definition of restricted cash or restricted cash equivalents. For public business entities the amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted the new standard effective in 2018. As a result, the Company no longer reports the changes in restricted cash as an operating activity. Instead, restricted cash is included in the beginning and ending cash and cash equivalents balances on the consolidated statements of cash flows.

 

Subsequent events:  The Company has evaluated its subsequent events (events occurring after March 31, 2018) through the issuance date of May 14, 2018.

 

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

 

Finance receivables representing amounts due from customers for advances at March 31, 2018, and December 31, 2017, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

Short-term consumer loans

 

$

52,115

 

$

66,465

 

Medium-term consumer loans

 

 

36,860

 

 

46,903

 

Gross receivables

 

$

88,975

 

$

113,368

 

Unearned advance fees, net of deferred loan origination costs

 

 

(2,260)

 

 

(2,702)

 

Finance receivables before allowance for loan losses

 

 

86,715

 

 

110,666

 

Allowance for loan losses

 

 

(14,803)

 

 

(16,327)

 

Finance receivables, net

 

$

71,912

 

$

94,339

 

 

 

 

 

 

 

 

 

Finance receivables, net

 

 

 

 

 

 

 

Current portion

 

$

68,286

 

$

89,707

 

Non-current portion

 

 

3,626

 

 

4,632

 

Total finance receivables, net

 

$

71,912

 

$

94,339

 

 

Changes in the allowance for loan losses by product type for the three months ended March 31, 2018, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance as

 

 

 

Balance

 

 

 

 

 

 

 

 

 

 

Balance

 

Receivables

 

a percentage

 

 

    

1/1/2018

    

Provision

    

Charge-Offs

    

Recoveries

    

3/31/2018

    

3/31/2018

    

of receivables

 

Short-term consumer loans

 

$

2,697

 

$

8,159

 

$

(18,424)

 

$

9,886

 

$

2,318

 

$

52,115

 

4.45

%  

Medium-term consumer loans

 

 

13,630

 

 

8,397

 

 

(11,067)

 

 

1,525

 

 

12,485

 

 

36,860

 

33.87

%  

 

 

$

16,327

 

$

16,556

 

$

(29,491)

 

$

11,411

 

$

14,803

 

$

88,975

 

16.64

%  

 

The provision for loan losses for the three months ended March 31, 2018, also includes losses from returned items from check cashing of $1,062.

 

The provision for short-term consumer loans of $8,159 is net of debt sales of $412 for the three months ended March 31, 2018.

 

The provision for medium-term consumer loans of $8,397 is net of debt sales of $562 for the three months ended March 31, 2018.

 

The Company evaluates all short-term and medium-term consumer loans collectively for impairment, except for individually evaluating medium-term loans that have been modified and classified as troubled debt restructurings. In certain markets, the Company reduced interest rates and favorably changed payment terms for medium-term consumer loans to assist borrowers in avoiding default and to mitigate risk of loss. The provision and subsequent charge off related to these loans totaled $20 and is included in the provision for medium-term consumer loans for the three months ended

11


 

March 31, 2018. For these loans evaluated for impairment, there were $54 of payment defaults during the three months ended March 31, 2018. The troubled debt restructurings during the three months ended March 31, 2018 are subject to an allowance of $6 with a net carrying value of $14 at March 31, 2018.

 

Changes in the allowance for loan losses by product type for the three months ended March 31, 2017, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance as

 

 

 

Balance

 

 

 

 

 

 

 

 

 

 

Balance

 

Receivables

 

a percentage

 

 

    

1/1/2017

    

Provision

    

Charge-Offs

    

Recoveries

    

3/31/2017

    

3/31/2017

    

of receivables

 

Short-term consumer loans

 

$

2,223

 

$

6,433

 

$

(19,134)

 

$

12,324

 

$

1,846

 

$

51,325

 

3.60

%  

Medium-term consumer loans

 

 

13,996

 

 

7,221

 

 

(11,979)

 

 

1,925

 

 

11,163

 

 

41,185

 

27.10

%  

 

 

$

16,219

 

$

13,654

 

$

(31,113)

 

$

14,249

 

$

13,009

 

$

92,510

 

14.06

%  

 

The provision for loan losses for the three months ended March 31, 2017, also includes losses from returned items from check cashing of $1,399.

 

The provision for short-term consumer loans of $6,433 is net of debt sales of $89 for the three months ended March 31, 2017.

 

The provision for medium-term consumer loans of $7,221 is net of debt sales of $375 for the three months ended March 31, 2017.

 

The provision and subsequent charge off related to troubled debt restructurings totaled $13 and is included in the provision for medium-term consumer loans for the three months ended March 31, 2017. For these loans evaluated for impairment, there were no payment defaults during the three months ended March 31, 2017. The troubled debt restructurings during the three months ended March 31, 2017 are subject to an allowance of $5 with a net carrying value of $15 at March 31, 2017.

 

The Company has subsidiaries that facilitate third-party lender loans. Changes in the accrual for third-party lender losses for the three months ended March 31, 2018, and 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

    

2018

    

2017

    

 

 

 

 

 

 

 

 

 

 

Short-term balance, beginning of period

    

$

4,570

    

$

2,907

    

 

Provision for loan losses

 

 

4,938

 

 

4,428

 

 

Charge-offs, net

 

 

(5,928)

 

 

(4,764)

 

 

Short-term balance, end of period

 

$

3,580

 

$

2,571

 

 

 

 

 

 

 

 

 

 

 

Medium-term balance, beginning of period

    

$

248

    

$

192

    

 

Provision for loan losses

 

 

79

 

 

59

 

 

Charge-offs, net

 

 

(139)

 

 

(131)

 

 

Medium-term balance, end of period

 

$

188

 

$

120

 

 

 

 

 

 

 

 

 

 

 

Total balance, beginning of period

    

$

4,818

    

$

3,099

    

 

Provision for loan losses

 

 

5,017

 

 

4,487

 

 

Charge-offs, net

 

 

(6,067)

 

 

(4,895)

 

 

Total balance, end of period

 

$

3,768

 

$

2,691

 

 

 

Total gross finance receivables for which the Company has recorded an accrual for third‑party lender losses totaled $29,575 and $36,967 at March 31, 2018, and December 31, 2017, respectively, and the corresponding guaranteed consumer loans are disclosed as an off‑balance sheet arrangement.  The total gross finance receivables consist of $28,646 and $35,801 in short-term and $929 and $1,166 in medium-term loans at March 31, 2018 and December 31,2017, respectively. The provision for third party lender losses of $5,017 for the three months ending March 31, 2018 is net of

12


 

debt sales of $210. The provision for third party lender losses of $4,487 for the three months ending March 31, 2017 is net of debt sales of $181, respectively.

 

The Company was required to purchase $16,840 and $11,568 of short-term loans and $199 and $204 of medium-term loans as part of the CSO Program during the three months ended March 31, 2018 and 2017, respectively. As these loans were in default when purchased, they met the Company’s policy and were fully charged-off at acquisition. The Company recognized recoveries of $11,279 and $7,146 of short-term and $59 and $73 of medium-term collections on these loans    during the three months ended March 31, 2018 and 2017, respectively.

 

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

 

The aging of receivables at March 31, 2018, and December 31, 2017, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

Current finance receivables

    

$

81,847

    

92.0

%  

$

101,102

    

89.2

%  

Past due finance receivables (1 - 30 days)

 

 

 

 

 

 

 

 

 

 

 

Short-term consumer loans

 

 

1,280

 

1.4

%  

 

2,046

 

1.8

%  

Medium-term consumer loans

 

 

2,575

 

2.9

%  

 

6,502

 

5.7

%  

Total past due finance receivables (1 - 30 days)

 

 

3,855

 

4.3

%  

 

8,548

 

7.5

%  

Past due finance receivables (31 - 60 days)

 

 

 

 

 

 

 

 

 

 

 

Medium-term consumer loans

 

 

2,588

 

2.9

%  

 

3,130

 

2.8

%  

Total past due finance receivables (31 - 60 days)

 

 

2,588

 

2.9

%  

 

3,130

 

2.8

%  

Past due finance receivables (61 - 90 days)

 

 

 

 

 

 

 

 

 

 

 

Medium-term consumer loans

 

 

685

 

0.8

%  

 

588

 

0.5

%  

Total past due finance receivables (61 - 90 days)

 

 

685

 

0.8

%  

 

588

 

0.5

%  

Total delinquent

 

 

7,128

 

8.0

%  

 

12,266

 

10.8

%  

 

 

$

88,975

 

100.0

%  

$

113,368

 

100.0

%  

 

 

Note 3. Related Party Transactions and Balances

 

There were no new significant related party transactions, or material changes to existing related party transactions, during the three months ended March  31, 2018.

 

Note 4. Other Intangible Assets

 

Intangible amortization expense for the three months ended March  31, 2018, and 2017 was $123 and $124, respectively. There were no additional significant changes to other intangible assets during the three months ended March  31, 2018.  

 

13


 

Note 5. Pledged Assets and Debt

 

Lines of credit at March 31, 2018 and December 31, 2017, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

Issuance

 

Net

 

 

 

 

Issuance

 

Net

 

 

    

Principal

    

Costs

    

Principal

    

Principal

    

Costs

    

Principal

 

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

 

$

47,000

 

$

4,201

 

$

42,799

 

$

47,000

 

$

1,871

 

$

45,129

 

 

 

 

47,000

 

 

4,201

 

 

42,799

 

 

47,000

 

 

1,871

 

 

45,129

 

Less current maturities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Long-term portion

 

$

47,000

 

$

4,201

 

$

42,799

 

$

47,000

 

$

1,871

 

$

45,129

 

 

The interest rate is set at three-month LIBOR plus 11%, and there is an exit fee for early termination of the facility. The 3-month LIBOR was 2.31% and 1.69% at March 31, 2018 and December 31, 2017, respectively, and the prime rate was 4.75% and 4.50% at March 31, 2018 and December 31, 2017, respectively.

 

On March 30, 2018, the Company amended its revolving credit facility with Victory Park Management, LLC, as administrative agent, and certain of its affiliates as lenders, which we refer to collectively as VPC, to extend the maturity date to April 4, 2019. The amendment also waived certain events of default, eliminated the obligation to satisfy a quarterly fixed charge coverage test and added covenants addressing daily minimum liquidity and asset coverage tests, weekly operational reporting requirements and monthly EBITDA and borrowing base coverage tests. Additionally, the Company is required to use commercially reasonable efforts to obtain reasonably satisfactory modification of the 2019 and 2020 Notes.

 

Senior secured notes payable at March 31, 2018, and December 31, 2017, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

Issuance

 

Net

 

 

 

 

Issuance

 

Net

 

 

    

Principal

    

Costs

    

Principal

    

Principal

    

Costs

    

Principal

 

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

 

$

237,290

 

$

1,222

 

$

236,068

 

$

237,290

 

$

1,504

 

$

235,786

 

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

 

 

12,500

 

 

143

 

 

12,357

 

 

12,500

 

 

160

 

 

12,340

 

 

 

 

249,790

 

 

1,365

 

 

248,425

 

 

249,790

 

 

1,664

 

 

248,126

 

Less current maturities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Long-term portion

 

$

249,790

 

$

1,365

 

$

248,425

 

$

249,790

 

$

1,664

 

$

248,126

 

 

14


 

Subsidiary notes payable at March 31, 2018, and December 31, 2017, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

Issuance

 

Net

 

 

 

 

Issuance

 

Net

 

 

    

Principal

    

Costs

    

Principal

    

Principal

    

Costs

    

Principal

 

$60,000 Note, secured, 16.75%, collateralized by acquired loans, due April 2019

 

$

60,000

 

$

2,191

 

$

57,809

 

$

60,000

 

$

744

 

$

59,256

 

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

 

 

867

 

 

 4

 

 

863

 

 

882

 

 

 5

 

 

877

 

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

 

 

1,061

 

 

13

 

 

1,048

 

 

1,076

 

 

14

 

 

1,062

 

 

 

 

61,928

 

 

2,208

 

 

59,720

 

 

61,958

 

 

763

 

 

61,195

 

Less current maturities

 

 

121

 

 

 1

 

 

120

 

 

119

 

 

 1

 

 

118

 

Long-term portion

 

$

61,807

 

$

2,207

 

$

59,600

 

$

61,839

 

$

762

 

$

61,077

 

 

On March 30, 2018, the $60,000 Note was further amended to extend the maturity date to April 4, 2019. The amendment increases the administrative fee to 0.95% and permits an additional extension of the facility maturity date to April 2021 if certain conditions are met. The amendment allows for additional short term loans within the borrowing base and includes additional covenants addressing daily minimum cash and asset coverage tests, dividend limits, weekly operational reporting requirements, borrowing base reporting and a monthly consolidated EBITDA test.

 

Liquidity and Need for Additional Capital

 

The Company’s cash balance of $89,694 as of March 31, 2018, plus cash from operating activities, is expected to be sufficient to fund the Company’s operations through the first quarter of 2019. However, $237,290 of senior notes, $47,000 of revolving credit facility debt, and $60,000 in subsidiary notes are due in the second quarter of 2019. The Company’s expected cash position will not be sufficient to repay this indebtedness as it becomes due and the Company will need to restructure or refinance this indebtedness and there can be no assurances as to the ability of the Company to conclude such a restructuring or refinancing. These factors raise substantial doubt regarding the Company’s ability to meet its obligations and continue as a going concern for the period which extends one-year from the issuance of these financial statements.

 

While the Company is currently engaged in negotiations with its largest bondholders, the success of such negotiations cannot be assured.  Any inability to reach an agreement with existing debt holders, secure sufficient refinancing sources for our pending debt maturities and/or our inability to continue as a going concern could have a significant and material adverse effect on the Company, its operations and its investors and, in particular, could significantly impair recoveries by our investors under our existing indebtedness.  It is unlikely that the Company’s assets, in any event, would be sufficient to satisfy its current debt obligations.  See Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 for more information on how these contingences could negatively impact the Company and its debt holders.

 

15


 

Note 6. Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities at March  31, 2018, and December 31, 2017, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

Accounts payable

 

$

3,477

 

$

5,465

 

Accrued payroll and compensated absences

 

 

6,316

 

 

7,718

 

Wire transfers payable

 

 

1,502

 

 

2,238

 

Accrual for third-party losses

 

 

3,768

 

 

4,818

 

Unearned CSO Fees

 

 

6,620

 

 

8,029

 

Deferred rent

 

 

791

 

 

867

 

Bill payment service liability

 

 

2,036

 

 

2,604

 

Lease termination

 

 

1,727

 

 

1,978

 

Other

 

 

5,566

 

 

5,849

 

 

 

$

31,803

 

$

39,566

 

 

 

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

 

Rental expense, including common area maintenance and real estate tax expense, totaled $6,660 and $7,034 for the three months ended March  31, 2018, and 2017, respectively.

 

The Company closed its Utah facility during the three months ended March 31, 2017, resulting in lease termination expense of $1,762 which is disclosed on the consolidated statement of operations

 

There were no additional significant changes to operating and capital lease commitments during the three months ended March 31, 2018.

 

Note 8. Concentrations of Credit Risks

 

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

 

The following table summarizes the allocation of the portfolio balance by state at March 31, 2018, and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

Balance

 

Percentage of

 

Balance

 

Percentage of

 

State

    

Outstanding

    

Total Outstanding

    

Outstanding

    

Total Outstanding

 

Alabama

 

$

10,001

 

11.2

%  

$

12,808

 

11.3

%

Arizona

 

 

9,935

 

11.2

 

 

11,994

 

10.6

 

California

 

 

31,290

 

35.2

 

 

39,835

 

35.1

 

Mississippi

 

 

5,864

 

6.6

 

 

7,409

 

6.5

 

Virginia

 

 

10,152

 

11.4

 

 

12,018

 

10.6

 

Other retail segment states

 

 

14,685

 

16.5

 

 

19,696

 

17.4

 

Other internet segment states

 

 

7,048

 

7.9

 

 

9,608

 

8.5

 

Total

 

$

88,975

 

100.0

%  

$

113,368

 

100.0

%

 

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

 

16


 

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

 

The Company offers a CSO product in Ohio and Texas to assist consumers in obtaining credit with unaffiliated third-party lenders. Total gross finance receivables for which the Company has recorded an accrual for third-party lender losses totaled $29,575 and $36,967 at March 31, 2018, and December 31, 2017, respectively, and the corresponding guaranteed consumer loans are disclosed as an off-balance sheet arrangement. The total gross finance receivables consist of $28,646 and $35,801 in short-term and $929 and $1,166 in medium-term loans at March 31, 2018, and December 31, 2017, respectively.

 

Note 9. Contingencies

 

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

 

Note 10. Stock Based Compensation

 

During the three months ended March 31, 2018, the Company issued 76,559 options with a per share exercise price of $1.00 with the options vesting on specific dates defined in the award agreements.

 

The following weighted average assumptions were used by the Company for awards granted during the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

    

2018

 

Risk‑free interest rate

 

 

 

 

1.76%

 

Dividend yield

 

 

 

 

0.00%

 

Expected volatility

 

 

 

 

150.00%

 

Expected term (years)

 

 

 

 

1.00

 

Weighted average fair value of options granted

 

 

 

$

 —

 

 

Stock-based compensation costs for the three months ended March 31, 2018, and 2017 were $8 and $32, respectively. As of March 31, 2018, and December 31, 2017, unrecognized stock-based compensation costs to be recognized over future periods approximated $58 and $66, respectively. At March 31, 2018, the remaining unrecognized compensation expense was $58 for certain awards that vest over the requisite service period. The remaining compensation expense of $58 is expected to be recognized over a weighted-average period of 1.8 years. The total income tax benefit recognized in the income statement for the stock-based compensation arrangements was $2 and $9 for the three months ended March 31, 2018, and 2017, respectively.

 

17


 

Stock option activity for the three months ended March 31, 2018, is as follows (these amounts have not been rounded in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

Aggregate

 

 

 

 

 

Exercise Price

 

Weighted-Average

 

Intrinsic

 

 

 

 

 

(actual per

 

Remaining

 

Value

 

 

    

Shares

    

share price)

    

Contractual Term

    

(thousands)

 

Outstanding at December 31, 2017

 

1,332,632

 

$

2.25

 

 

8.5

 

 

N/A

 

Granted

 

76,559

 

 

1.00

 

 

8.3

 

 

N/A

 

Exercised

 

 —

 

 

 —

 

 

 —

 

 

N/A

 

Forfeited or expired

 

 —

 

 

 —

 

 

 —

 

 

N/A

 

Outstanding at March 31, 2018

 

1,409,191

 

$

2.18

 

 

8.3

 

 

N/A

 

Exercisable at March 31, 2018

 

1,277,737

 

$

2.25

 

 

8.2

 

$

 —

 

Vested or expected to vest at March 31, 2018

 

1,409,191

 

$

2.18

 

 

8.3

 

$

 —

 

 

Note 11. Business Segments

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended March 31, 2018

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

166,505

 

 

 

$

37,511

 

 

    

 

 

    

$

204,016

 

 

 

Other Intangible Assets

 

 

336

 

 

 

 

466

 

 

 

 

 

 

 

802

 

 

 

Total Revenues

 

$

72,797

 

100.0

%  

$

14,854

 

100.0

%  

 

 

 

$

87,651

 

100.0

%  

Provision for Loan Losses

 

 

15,620

 

21.4

%  

 

7,015

 

47.2

%  

 

 

 

 

22,635

 

25.8

%  

Other Operating Expenses

 

 

36,291

 

49.9

%  

 

1,540

 

10.4

%  

 

 

 

 

37,831

 

43.2

%  

Operating Gross Profit

 

 

20,886

 

28.7

%  

 

6,299

 

42.4

%  

 

 

 

 

27,185

 

31.0

%  

Interest Expense, net

 

 

9,479

 

13.0

%  

 

2,699

 

18.2

%  

 

 

 

 

12,178

 

13.9

%  

Depreciation and Amortization

 

 

1,000

 

1.4

%  

 

93

 

0.6

%  

 

 

 

 

1,093

 

1.3

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

17,602

 

 

17,602

 

20.1

%  

Income (Loss) from Continuing Operations, before tax

 

 

10,407

 

14.3

%  

 

3,507

 

23.6

%  

 

(17,602)

 

 

(3,688)

 

(4.2)

%  


(a)

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

 

18


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended March 31, 2017

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

309,595

 

 

 

$

57,106

 

 

 

 

 

 

$

366,701

 

 

 

Goodwill

 

 

113,256

 

 

 

 

 —

 

 

 

 

 

 

 

113,256

 

 

 

Other Intangible Assets

 

 

488

 

 

 

 

800

 

 

 

 

 

 

 

1,288

 

 

 

Total Revenues

 

$

68,691

 

100.0

%  

$

16,661

 

100.0

%  

 

 

 

$

85,352

 

100.0

%  

Provision for Loan Losses

 

 

12,058

 

17.6

%  

 

7,482

 

44.9

%  

 

 

 

 

19,540

 

22.9

%  

Other Operating Expenses

 

 

38,207

 

55.6

%  

 

1,009

 

6.1

%  

 

 

 

 

39,216

 

45.9

%  

Operating Gross Profit

 

 

18,426

 

26.8

%  

 

8,170

 

49.0

%  

 

 

 

 

26,596

 

31.2

%  

Interest Expense, net

 

 

7,366

 

10.7

%  

 

4,005

 

24.0

%  

 

 

 

 

11,371

 

13.3

%  

Depreciation and Amortization

 

 

1,129

 

1.6

%  

 

180

 

1.1

%  

 

 

 

 

1,309

 

1.5

%  

Lease termination Expenses

 

 

 —

 

 —

%  

 

1,762

 

10.6

%  

 

 

 

 

1,762

 

2.1

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

20,186

 

 

20,186

 

23.7

%  

Income (loss) from Continuing Operations, before tax

 

 

9,931

 

14.5

%  

 

2,223

 

13.3

%  

 

(20,186)

 

 

(8,032)

 

(9.4)

%  


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

 

Note 12. Income Taxes

 

The Company files a consolidated federal income tax return. The Company files consolidated or separate state income tax returns as permitted by the individual states in which it operates. The differences between our effective rate and the U.S. statutory rate is primarily due to non-deductible expenses, state taxes, and changes in valuation allowance. The Company had no liability recorded for unrecognized tax benefits at March  31, 2018, and December 31, 2017.

 

At March  31, 2018, the Company had gross deferred tax assets of $72,877 and a valuation allowance of $72,877. At December 31, 2017, the Company had gross deferred tax assets of $71,896 and a valuation allowance of $71,896. The Company maintains a full valuation allowance against its deferred tax assets as it is more likely than not that the deferred tax assets will not be realized. In evaluating whether a valuation allowance is needed for the deferred tax assets, the Company considered the ability to carry net operating losses back to prior periods, reversing taxable temporary differences, and estimates of future taxable income. There have been no credits or net operating losses that have expired. The projections were evaluated in light of past operating results and considered the risks associated with generating future taxable income due to macroeconomic conditions in the markets in which the Company operates, regulatory developments and cost containment. The Company will continue to evaluate the need for a valuation allowance against deferred tax assets in future periods and will adjust the allowance as necessary if it determines that it is more likely than not that some or all of the deferred tax assets will be realized.

 

Note 13. Transactions with Variable Interest Entities

 

The Company has limited agency agreements with unaffiliated third-party lenders. The agreements govern the terms by which the Company refers customers to that lender, on a non-exclusive basis, for a possible extension of credit, processes loan applications, and commits to reimburse the lender for any loans or related fees that were not collected from such customers. As of March 31, 2018, and December 31, 2017, the outstanding amount of active consumer loans guaranteed by the Company, which represents the Company’s maximum exposure, was $29,575 and $36,967, respectively. The outstanding amount of consumer loans with unaffiliated third-party lenders consist of $28,646 and $35,801 in short-term and $929 and $1,166 in installment loans at March 31, 2018, and December 31, 2017, respectively. The accrual for third party lender losses related to these obligations totaled $3,768 and $4,818 as of March  31, 2018, and December 31, 2017, respectively. This obligation is recorded as a current liability on the Company’s consolidated balance sheet. The Company has determined that the lenders are Variable Interest Entities (“VIEs”) but that the Company is not the primary beneficiary of the VIEs. Therefore, the Company has not consolidated either lender.

 

19


 

Note 14. Supplemental Guarantor Information

 

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

 

The 2019 notes and 2020 notes are guaranteed by all of the Company’s guarantor subsidiaries existing as of April 29, 2011 (the date the Company issued the 2019 notes) and any subsequent guarantor subsidiaries that guarantee the Company’s indebtedness or the indebtedness of any other subsidiary guarantor (the “Subsidiary Guarantors”), in accordance with the Indentures. The Company is a holding company and has no independent assets or operations of its own. The guarantees under the 2019 notes and 2020 notes are full, unconditional, and joint and several. There are no restrictions on the ability of the Company or any of the Subsidiary Guarantors to obtain funds from its restricted subsidiaries by dividend or loan, except for net worth requirements of certain states in which the Company operates. Certain Subsidiary Guarantors are required to maintain net worth ranging from $10 to $2,000. The total net worth requirements of these Subsidiary Guarantors is $4,610. The Indentures contain certain affirmative and negative covenants applicable to the Company and its Subsidiary Guarantors, including restrictions on their ability to incur additional indebtedness, consummate certain asset sales, make investments in certain entities that create liens on their assets, enter into certain affiliate transactions and make certain restricted payments, including restrictions on the Company’s ability to pay dividends on, or repurchase, its common stock.

 

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

 

The following presents the condensed consolidating guarantor financial information as of March 31, 2018, and December 31, 2017, and for the three months ended March 31, 2018, and 2017, for the subsidiaries of the Company that serve as guarantors of the 2019 notes and the 2020 notes, and for the subsidiaries that do not serve as a guarantor. As of March 31, 2018, the non-guarantor subsidiaries are CCFI Funding LLC and CCFI Funding II LLC. During or prior to the first quarter of 2017, the following non-guarantor subsidiaries were dissolved; Direct Financial Solutions of UK Limited and its subsidiary Cash Central UK Limited, Direct Financial Solutions of Canada, Inc and its subsidiaries DFS-CC Financial Services LLC, DFS-CC Financial Services (Calgary) LLC and DFS-CC Financial Services (Toronto) LLC,

and Direct Financial Solutions of Australia Pty Ltd and its subsidiary Cash Central of Australia Pty Ltd. The UK,

Canada, and Australia entities, and their subsidiaries. The Florida II non-guarantor subsidiary was sold on February 1,

2016. Each of the Company’s guarantor subsidiaries are 100% owned by the Company or its subsidiaries, and all guarantees are full, unconditional, and joint and several. 

 

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

 

20


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Balance Sheets (unaudited)

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

 

NonGuarantor

 

 

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

 

Subsidiaries

    

Eliminations

    

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

63,751

 

 

$

21,523

 

$

 —

 

$

85,274

 

Restricted cash

 

 

 —

 

 

4,420

 

 

 

 —

 

 

 —

 

 

4,420

 

Finance receivables, net

 

 

 —

 

 

20,859

 

 

 

47,427

 

 

 —

 

 

68,286

 

Card related pre-funding and receivables

 

 

 —

 

 

841

 

 

 

 —

 

 

 —

 

 

841

 

Other current assets

 

 

 —

 

 

22,161

 

 

 

9,655

 

 

(18,294)

 

 

13,522

 

Total current assets

 

 

 —

 

 

112,032

 

 

 

78,605

 

 

(18,294)

 

 

172,343

 

Noncurrent Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in Subsidiaries

 

 

365,365

 

 

 —

 

 

 

 —

 

 

(365,365)

 

 

 —

 

Finance receivables, net

 

 

 —

 

 

3,626

 

 

 

 —

 

 

 —

 

 

3,626

 

Property, leasehold improvements and equipment, net

 

 

 —

 

 

24,816

 

 

 

 —

 

 

 —

 

 

24,816

 

Other intangible assets

 

 

 —

 

 

802

 

 

 

 —

 

 

 —

 

 

802

 

Security deposits

 

 

 —

 

 

2,429

 

 

 

 —

 

 

 —

 

 

2,429

 

Total assets

 

$

365,365

 

$

143,705

 

 

$

78,605

 

$

(383,659)

 

$

204,016

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

 —

 

$

25,761

 

 

$

14,251

 

$

(8,209)

 

$

31,803

 

Money orders payable

 

 

 —

 

 

8,024

 

 

 

 —

 

 

 —

 

 

8,024

 

Accrued interest

 

 

11,937

 

 

 5

 

 

 

4,232

 

 

(4,232)

 

 

11,942

 

Current portion of capital lease obligation

 

 

 —

 

 

160

 

 

 

 —

 

 

 —

 

 

160

 

Current portion of subsidiary note payable

 

 

 —

 

 

120

 

 

 

 —

 

 

 —

 

 

120

 

CCFI Funding notes

 

 

 —

 

 

 —

 

 

 

5,853

 

 

(5,853)

 

 

 —

 

Deferred revenue

 

 

 —

 

 

2,535

 

 

 

 —

 

 

 —

 

 

2,535

 

Total current liabilities

 

 

11,937

 

 

36,605

 

 

 

24,336

 

 

(18,294)

 

 

54,584

 

Noncurrent Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease termination payable

 

 

 —

 

 

569

 

 

 

 —

 

 

 —

 

 

569

 

Lines of credit

 

 

42,799

 

 

 —

 

 

 

 —

 

 

 —

 

 

42,799

 

Subsidiary note payable

 

 

 —

 

 

1,791

 

 

 

57,809

 

 

 —

 

 

59,600

 

Senior secured notes

 

 

248,425

 

 

 —

 

 

 

 —

 

 

 —

 

 

248,425

 

   Deferred revenue

 

 

 —

 

 

6,887

 

 

 

 —

 

 

 —

 

 

6,887

 

Total liabilities

 

 

303,161

 

 

45,852

 

 

 

82,145

 

 

(18,294)

 

 

412,864

 

Stockholders' Equity (Deficit)

 

 

62,204

 

 

97,853

 

 

 

(3,540)

 

 

(365,365)

 

 

(208,848)

 

Total liabilities and stockholders' equity

 

$

365,365

 

$

143,705

 

 

$

78,605

 

$

(383,659)

 

$

204,016

 

 

21


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Balance Sheets

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

57,526

 

$

9,101

 

$

 —

 

$

66,627

 

Restricted cash

 

 

 —

 

 

4,585

 

 

 —

 

 

 —

 

 

4,585

 

Finance receivables, net

 

 

 —

 

 

47,221

 

 

42,486

 

 

 —

 

 

89,707

 

Card related pre-funding and receivables

 

 

 —

 

 

1,062

 

 

 —

 

 

 —

 

 

1,062

 

Other current assets

 

 

 —

 

 

39,604

 

 

17,951

 

 

(42,284)

 

 

15,271

 

Total current assets

 

 

 —

 

 

149,998

 

 

69,538

 

 

(42,284)

 

 

177,252

 

Noncurrent Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in Subsidiaries

 

 

360,599

 

 

 —

 

 

 —

 

 

(360,599)

 

 

 —

 

Finance receivables, net

 

 

 —

 

 

4,632

 

 

 —

 

 

 —

 

 

4,632

 

Property, leasehold improvements and equipment, net

 

 

 —

 

 

26,848

 

 

 —

 

 

 —

 

 

26,848

 

Other intangible assets

 

 

 —

 

 

924

 

 

 —

 

 

 —

 

 

924

 

Security deposits

 

 

 —

 

 

2,750

 

 

 —

 

 

 —

 

 

2,750

 

Total assets

 

$

360,599

 

$

185,152

 

$

69,538

 

$

(402,883)

 

$

212,406

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

 —

 

$

57,696

 

$

14,364

 

$

(32,494)

 

$

39,566

 

Money orders payable

 

 

 —

 

 

7,169

 

 

 —

 

 

 —

 

 

7,169

 

Accrued interest

 

 

5,140

 

 

 5

 

 

3,937

 

 

(3,937)

 

 

5,145

 

Current portion of capital lease obligation

 

 

 —

 

 

371

 

 

 —

 

 

 —

 

 

371

 

Current portion of subsidiary note payable

 

 

 —

 

 

118

 

 

 —

 

 

 —

 

 

118

 

CCFI Funding notes

 

 

 —

 

 

 —

 

 

5,853

 

 

(5,853)

 

 

 —

 

Deferred revenue

 

 

 —

 

 

2,535

 

 

 —

 

 

 —

 

 

2,535

 

Total current liabilities

 

 

5,140

 

 

67,894

 

 

24,154

 

 

(42,284)

 

 

54,904

 

Noncurrent Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease termination payable

 

 

 —

 

 

818

 

 

 —

 

 

 —

 

 

818

 

Lines of credit

 

 

45,129

 

 

 —

 

 

 —

 

 

 —

 

 

45,129

 

Subsidiary note payable

 

 

 —

 

 

1,821

 

 

59,256

 

 

 —

 

 

61,077

 

Senior secured notes

 

 

248,126

 

 

 —

 

 

 —

 

 

 —

 

 

248,126

 

Deferred Revenue

 

 

 —

 

 

7,520

 

 

 —

 

 

 —

 

 

7,520

 

Total liabilities

 

 

298,395

 

 

78,053

 

 

83,410

 

 

(42,284)

 

 

417,574

 

Stockholders' Equity (Deficit)

 

 

62,204

 

 

107,099

 

 

(13,872)

 

 

(360,599)

 

 

(205,168)

 

Total liabilities and stockholders' equity

 

$

360,599

 

$

185,152

 

$

69,538

 

$

(402,883)

 

$

212,406

 

 

22


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Statements of Income (unaudited)

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivable fees

 

$

 —

 

$

22,863

    

$

28,069

    

$

 —

 

$

50,932

 

Credit service fees

 

 

 —

 

 

19,196

 

 

 —

 

 

 —

 

 

19,196

 

Check cashing fees

 

 

 —

 

 

11,692

 

 

 —

 

 

 —

 

 

11,692

 

Card fees

 

 

 —

 

 

1,948

 

 

 —

 

 

 —

 

 

1,948

 

Other

 

 

 —

 

 

3,885

 

 

293

 

 

(295)

 

 

3,883

 

Total revenues

 

 

 —

 

 

59,584

 

 

28,362

 

 

(295)

 

 

87,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

 

 —

 

 

17,132

 

 

 —

 

 

 —

 

 

17,132

 

Provision for loan losses

 

 

 —

 

 

9,205

 

 

13,430

 

 

 —

 

 

22,635

 

Occupancy

 

 

 —

 

 

6,343

 

 

 —

 

 

 —

 

 

6,343

 

Advertising and marketing

 

 

 —

 

 

1,011

 

 

 —

 

 

 —

 

 

1,011

 

Lease termination costs

 

 

 —

 

 

97

 

 

 —

 

 

 —

 

 

97

 

Depreciation and amortization

 

 

 —

 

 

2,223

 

 

 —

 

 

 —

 

 

2,223

 

Other

 

 

 —

 

 

11,025

 

 

 —

 

 

 —

 

 

11,025

 

Total operating expenses

 

 

 —

 

 

47,036

 

 

13,430

 

 

 —

 

 

60,466

 

Operating gross profit

 

 

 —

 

 

12,548

 

 

14,932

 

 

(295)

 

 

27,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 —

 

 

17,490

 

 

112

 

 

 —

 

 

17,602

 

Intercompany management fee

 

 

 —

 

 

(1,385)

 

 

1,385

 

 

 —

 

 

 —

 

Depreciation and amortization

 

 

 —

 

 

1,093

 

 

 —

 

 

 —

 

 

1,093

 

Interest expense, net

 

 

9,367

 

 

124

 

 

2,982

 

 

(295)

 

 

12,178

 

Interest expense allocation

 

 

(9,367)

 

 

9,367

 

 

 —

 

 

 —

 

 

 —

 

Total corporate and other expenses

 

 

 —

 

 

26,689

 

 

4,479

 

 

(295)

 

 

30,873

 

Income (loss) before income taxes

 

 

 —

 

 

(14,141)

 

 

10,453

 

 

 —

 

 

(3,688)

 

Provision for income taxes

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net income (loss)

 

$

 —

 

$

(14,141)

 

$

10,453

 

$

 —

 

$

(3,688)

 

 

23


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Statements of Income (unaudited)

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivable fees

 

$

 —

 

$

39,830

    

$

9,221

    

$

 —

 

$

49,051

 

Credit service fees

 

 

 —

 

 

18,139

 

 

 —

 

 

 —

 

 

18,139

 

Check cashing fees

 

 

 —

 

 

12,126

 

 

 —

 

 

 —

 

 

12,126

 

Card fees

 

 

 —

 

 

2,007

 

 

 —

 

 

 —

 

 

2,007

 

Dividend

 

 

 —

 

 

3,000

 

 

 —

 

 

(3,000)

 

 

 —

 

Other

 

 

 —

 

 

4,275

 

 

49

 

 

(295)

 

 

4,029

 

Total revenues

 

 

 —

 

 

79,377

 

 

9,270

 

 

(3,295)

 

 

85,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

 

 —

 

 

17,273

 

 

 —

 

 

 —

 

 

17,273

 

Provision for loan losses

 

 

 —

 

 

16,458

 

 

3,082

 

 

 —

 

 

19,540

 

Occupancy

 

 

 —

 

 

6,629

 

 

 —

 

 

 —

 

 

6,629

 

Advertising and marketing

 

 

 —

 

 

814

 

 

 —

 

 

 —

 

 

814

 

Lease termination costs

 

 

 —

 

 

47

 

 

 —

 

 

 —

 

 

47

 

Depreciation and amortization

 

 

 —

 

 

2,538

 

 

 —

 

 

 —

 

 

2,538

 

Other

 

 

 —

 

 

11,914

 

 

1

 

 

 —

 

 

11,915

 

Total operating expenses

 

 

 —

 

 

55,673

 

 

3,083

 

 

 —

 

 

58,756

 

Operating gross profit

 

 

 —

 

 

23,704

 

 

6,187

 

 

(3,295)

 

 

26,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 —

 

 

20,095

 

 

91

 

 

 —

 

 

20,186

 

Intercompany management fee

 

 

 —

 

 

(427)

 

 

427

 

 

 —

 

 

 —

 

Lease termination

 

 

 —

 

 

1,762

 

 

 —

 

 

 —

 

 

1,762

 

Depreciation and amortization

 

 

 —

 

 

1,309

 

 

 —

 

 

 —

 

 

1,309

 

Interest expense, net

 

 

9,023

 

 

195

 

 

2,448

 

 

(295)

 

 

11,371

 

Interest expense allocation

 

 

(9,023)

 

 

9,023

 

 

 —

 

 

 —

 

 

 —

 

Total corporate and other expenses

 

 

 —

 

 

31,957

 

 

2,966

 

 

(295)

 

 

34,628

 

Income (loss) before income taxes

 

 

 —

 

 

(8,253)

 

 

3,221

 

 

(3,000)

 

 

(8,032)

 

Provision for (benefit from) income taxes

 

 

 —

 

 

342

 

 

(134)

 

 

125

 

 

333

 

Net income (loss)

 

$

 —

 

$

(8,595)

 

$

3,355

 

$

(3,125)

 

$

(8,365)

 

 

24


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Statements of Cash Flows (unaudited)

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

2,762

 

$

(10,588)

 

$

32,415

 

$

24,589

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net receivables repaid (originated)

 

 

 —

 

 

18,163

 

 

(18,371)

 

 

(208)

 

Purchase of leasehold improvements and equipment

 

 

 —

 

 

(1,274)

 

 

 —

 

 

(1,274)

 

Net cash provided by (used in) investing activities

 

 

 —

 

 

16,889

 

 

(18,371)

 

 

(1,482)

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments on subsidiary note

 

 

 —

 

 

(30)

 

 

 —

 

 

(30)

 

Payments on capital lease obligations

 

 

 —

 

 

(211)

 

 

 —

 

 

(211)

 

Debt issuance costs

 

 

(2,762)

 

 

 —

 

 

(1,622)

 

 

(4,384)

 

Net cash used in financing activities

 

 

(2,762)

 

 

(241)

 

 

(1,622)

 

 

(4,625)

 

Net increase in cash and cash equivalents and restricted cash

 

 

 —

 

 

6,060

 

 

12,422

 

 

18,482

 

Cash and cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning

 

 

 —

 

 

62,111

 

 

9,101

 

 

71,212

 

Ending

 

$

 —

 

$

68,171

 

$

21,523

 

$

89,694

 

 

25


 

Community Choice Financial Inc. and Subsidiaries

Condensed Consolidating Statements of Cash Flows (unaudited)

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community

 

Guarantor

 

NonGuarantor

 

 

 

 

    

Choice Financial

    

Subsidiaries

    

Subsidiaries

    

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

    

$

 —

 

$

16,121

    

$

6,079

    

$

22,200

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net receivables repaid (originated)

 

 

 —

 

 

(5,830)

 

 

3,109

 

 

(2,721)

 

Purchase of leasehold improvements and equipment

 

 

 —

 

 

(1,001)

 

 

 —

 

 

(1,001)

 

Net cash provided by (used in) investing activities

 

 

 —

 

 

(6,831)

 

 

3,109

 

 

(3,722)

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments on subsidiary note

 

 

 —

 

 

(29)

 

 

 —

 

 

(29)

 

Payments on capital lease obligations, net

 

 

 —

 

 

(248)

 

 

 —

 

 

(248)

 

Payments on lines of credit

 

 

 —

 

 

(2,250)

 

 

 —

 

 

(2,250)

 

Net cash used in financing activities

 

 

 —

 

 

(2,527)

 

 

 —

 

 

(2,527)

 

Net increase in cash and cash equivalents and restricted cash

 

 

 —

 

 

6,763

 

 

9,188

 

 

15,951

 

Cash and cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning

 

 

 —

 

 

74,792

 

 

34,556

 

 

109,348

 

Ending

 

$

 —

 

$

81,555

 

$

43,744

 

$

125,299

 

 

 

26


 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

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

 

Forward-looking statements that we make herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including, but not limited to, the ongoing impact of the economic and credit crisis, leveling demand for our products, our inability to successfully execute strategic initiatives, our ability to recognize the expected benefits from recently undertaken strategic initiatives, including those described under “Factors Affecting Our Results of Operations— Strategic Initiatives,” integration of acquired businesses, competitive pressures, economic pressures on our customers and us, regulatory and legislative changes, the impact of legislation, the risks discussed under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, and other factors discussed from time to time. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise.

 

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

 

Overview

 

We are a leading provider of alternative financial services to unbanked and under-banked consumers. We provide our customers a variety of financial products and services, including short-term and medium-term consumer loans, check cashing, prepaid debit cards, and other services that address the specific needs of our customers. Through our retail focused business model, we provide our customers immediate access to high quality financial services at competitive rates through the channel most convenient for them. As of March  31, 2018, we operated 484 retail locations across 12 states and were licensed to deliver similar financial services over the internet in 30 states.

 

Our retail business model provides a broad array of financial products and services whether through a retail location or over the internet, whichever distribution channel satisfies the target customer’s needs or desires. We want to achieve a superior level of customer satisfaction, resulting in increased market penetration and value creation. An

27


 

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

 

Factors Affecting Our Results of Operations

 

Closure of Utah Facility

 

In February 2017, the Company closed the Utah office that was acquired in 2012 when we purchased Direct Financial Solutions, our internet business. All call center operations were fully integrated into the Company’s primary headquarters in Dublin, Ohio at that time. During the three months ended March  31, 2017, the Company incurred $2.6 million in closure costs consisting of $1.8 million in lease termination expenses and $0.8 million in loss on disposal of assets associated with this consolidation.

 

Retail Platform

 

During the three months ended March  31, 2018, the Company closed five retail locations.

 

The chart below sets forth certain information regarding our retail presence and number of states served via the internet as of and for the year ended December 31, 2017, and the three months ended March  31, 2018.

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

 

 

Year Ended

 

Ended

 

 

 

December 31, 

 

March 31, 

 

 

    

2017

    

2018

 

# of Locations

 

 

 

 

 

Beginning of Period

 

518

 

489

 

Opened (a)

 

47

 

 —

 

Closed

 

76

 

 5

 

End of Period

 

489

 

484

 

 

 

 

 

 

 

Number of states licensed for our internet operations

 

30

 

30

 

 

 

 

 

 

 

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

 

 

The following table provides the geographic composition of our physical locations as of December 31, 2017, and March 31, 2018:

 

 

 

 

 

 

 

 

 

December 31, 

 

March 31, 

 

 

    

2017

    

2018

 

Alabama

 

39

 

39

 

Arizona

 

31

 

31

 

California

 

160

 

157

 

Florida

 

15

 

15

 

Indiana

 

21

 

21

 

Kentucky

 

15

 

15

 

Michigan

 

14

 

14

 

Mississippi

 

51

 

50

 

Ohio

 

91

 

91

 

Oregon

 

 2

 

 2

 

Tennessee

 

24

 

23

 

Virginia

 

26

 

26

 

 

 

489

 

484

 

 

28


 

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

 

Changes in Legislation & Regulation 

 

As previously disclosed in the Company’s Annual Report on Form 10-K, the CFPB Rule remains subject to potential override by congressional disapproval pursuant to the Congressional Review Act and a resolution to override the CFPB Rule was filed in the United States Senate on March 23, 2018, and remains pending. Further, the CFPB Rule is being challenged in a lawsuit filed by the Community Financial Services Association of America and Consumer Service Alliance of Texas on April 9, 2018, filed in the U.S. District Court for the Western District of Texas, Austin Division.  It is possible that the CFPB Rule will also be subject to legal challenge by other trade groups or other private parties.

 

On April 18, 2018, Ohio House Bill 123 (“HB 123”), passed out of the House of Representative’s Government Accountability and Oversight Committee.  It has not yet, however, come before the full house for a vote.  HB 123 amends the General Loan Law and Small Loan Law, under which one of the Company’s Ohio’s subsidiaries is licensed, to prohibit loans with a term of fewer than 180-days.  HB 123 also prohibits credit services organizations, such as the Company’s CSO subsidiary currently operating in Ohio, from brokering an extension of credit if that credit is in a principal amount of less than $5,000.00, with a term fewer than 180-days, and that has an annual percentage rate greater than 28%.  Whether HB 123 will ultimately pass both the House of Representatives and the Senate is unknown.

 

Product Characteristics and Mix

 

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

 

Expenses

 

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

 

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

 

Critical Accounting Policies

 

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

 

29


 

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

 

Finance Receivables, Net

 

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

 

Short-term consumer loans can be unsecured or secured with a maturity up to ninety days. Unsecured short-term products typically range in size from $100 to $1,000, with a maturity between fourteen and thirty days, and an agreement to defer the presentment of the customer’s personal check or preauthorized debit for the aggregate amount of the advance plus fees. This form of lending is based on applicable laws and regulations which vary by state. Statutes vary from state-to-state permitting charging fees of 15% to 20%, to charging interest at 25% per annum plus origination fees. The customers repay the cash advances by making cash payments or allowing the check or preauthorized debit to be presented. Secured short-term products typically range from $750 to $5,000, and are asset-based consumer loans whereby the customer obtains cash and grants a security interest in the collateral that may become a lien against that collateral. Secured consumer loans represented 14.5% and 14.0% of short-term consumer loans at December 31, 2017, and March  31, 2018, respectively.

 

Medium-term consumer loans can be unsecured or secured with a maturity of three months up to thirty-six months. Unsecured medium-term products typically range from $100 to $5,000. These consumer loans vary in structure depending upon the regulatory environment where they are offered. The consumer loans are due in installments or provide for a line of credit with periodic monthly payments. Secured medium-term products typically range from $750 to $5,000, and are asset-based consumer loans whereby the customer obtains cash and grants a security interest in the collateral that may become a lien against that collateral. Secured consumer loans represented 12.6% and 14.0% of medium-term consumer loans at December 31, 2017, and March  31, 2018, respectively.

 

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

 

Total finance receivables, net of unearned advance fees and allowance for loan losses on the consolidated balance sheet as of December 31, 2017, and March  31, 2018, were $94.3 million and $71.9 million, respectively. The allowance for loan losses as of December 31, 2017, and March  31, 2018, were $16.3 million and $14.8 million, respectively. At December 31, 2017, and March  31, 2018, the allowance for loan losses was 14.8% and 17.1%, respectively, of total finance receivables, net of unearned advance fees.

 

Finance receivables, net as of December 31, 2017, and March  31, 2018, are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

 

    

2017

    

2018

    

Finance Receivables, net of unearned advance fees

    

$

110,666

    

$

86,715

    

Less: Allowance for loan losses

 

 

16,327

 

 

14,803

 

Finance Receivables, Net

 

$

94,339

 

$

71,912

 

 

30


 

The total changes to the allowance for loan losses for the three months ended March  31, 2017 and 2018, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2018

    

Allowance for loan losses

 

 

 

 

 

 

 

Beginning of Period

 

$

16,219

 

$

16,327

 

Provisions for loan losses

 

 

13,654

 

 

16,556

 

Charge-offs, net

 

 

(16,864)

 

 

(18,080)

 

End of Period

 

$

13,009

 

$

14,803

 

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

 

 

14.4%

 

 

17.1%

 

 

The provision for loan losses for the three months ended March 31, 2017, and 2018 includes losses from returned items from check cashing of $1.4 million and $1.1 million, respectively, and third party lender losses of $4.5 million and $5.0 million, respectively.

 

In some instances the Company guarantees loans with third-party lenders. As of December 31, 2017, and March 31, 2018, the outstanding amount of active consumer loans were $37.0 million and $29.6 million, respectively, consisting of $35.8 million and $28.6 million in short-term, and $1.2 million and $1.0 million in installment loans, respectively. The Company accrues for these obligations through management’s estimation of anticipated purchases based on expected losses in the third-party lender’s portfolio. This obligation is recorded as a current liability on our balance sheet and was $4.8 million and $3.8 million as of December 31, 2017, and March 31, 2018, respectively.

 

Income Taxes 

 

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

 

As of December 31, 2017, the Company had a valuation allowance on its deferred tax assets as it was more likely than not that approximately $71.9 million of net deferred tax assets would not be realized in the foreseeable future. Based on a  pre-tax loss of $3.7 million for the three months ended March 31, 2018, and the projected reversal of temporary items, the Company continues to maintain a full valuation allowance against its deferred tax assets.

 

Non-Guarantor Subsidiaries and Unrestricted Subsidiaries

 

As described in more detail under Note 15 to the consolidated financial statements, we had two non-guarantor subsidiaries as of March 31, 2018. Certain information with respect to our Non-guarantor Subsidiaries is set out in the table below.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2018

 

Statement of Operations Data:

 

 

 

 

 

 

 

Total revenues

 

$

9,270

    

$

28,362

 

Total operating expenses

 

 

3,083

 

 

13,430

 

Income before income taxes

 

 

3,221

 

 

10,453

 

Balance Sheet Data:

 

 

 

 

 

 

 

Total assets

 

$

56,029

 

$

78,605

 

Total liabilities

 

 

55,897

 

 

82,145

 

 

31


 

As of March 31, 2018, of the entities classified as “Non-Guarantor Subsidiaries,” CCFI Funding, and CCFI  Funding II are “Unrestricted Subsidiaries” as defined in the indentures governing our senior notes. CCFI Funding was created on December 20, 2013, and CCFI Funding II was established on September 19, 2014. The remainder of the entities included under “Non-Guarantor Subsidiaries” are “Restricted Subsidiaries” as defined in the indentures governing our senior secured notes and do not have material assets, liabilities, revenue or expenses.

 

Results of Operations

 

Three Months Ended March  31, 2018, Compared to the Three Months Ended March  31, 2017

 

The following table sets forth key operating data for the three months ended March 31, 2017, and 2018 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2018

    

Increase (Decrease)

  

  

2017

    

2018

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

 

(Percent of Revenue)

 

Total Revenues

 

$

85,352

 

$

87,651

 

$

2,299

 

 

2.7%

 

 

100.0%

    

100.0%

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

 

17,273

 

 

17,132

 

 

(141)

 

 

(0.8%)

 

 

20.1%

 

19.5%

 

Provision for losses

 

 

19,540

 

 

22,635

 

 

3,095

 

 

15.8%

 

 

22.9%

 

25.8%

 

Occupancy

 

 

6,629

 

 

6,343

 

 

(286)

 

 

(4.3%)

 

 

7.7%

 

7.2%

 

Advertising and marketing

 

 

814

 

 

1,011

 

 

197

 

 

24.2%

 

 

1.0%

 

1.2%

 

Lease termination

 

 

47

 

 

97

 

 

50

 

 

106.4%

 

 

0.1%

 

0.1%

 

Depreciation and amortization

 

 

2,538

 

 

2,223

 

 

(315)

 

 

(12.4%)

 

 

3.0%

 

2.5%

 

Other operating expenses

 

 

11,915

 

 

11,025

 

 

(890)

 

 

(7.5%)

 

 

14.0%

 

12.6%

 

Total Operating Expenses

 

 

58,756

 

 

60,466

 

 

1,710

 

 

2.9%

 

 

68.8%

 

69.0%

 

Income from Operations

 

 

26,596

 

 

27,185

 

 

589

 

 

2.2%

 

 

31.2%

 

31.0%

 

Corporate and other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

20,024

 

 

17,452

 

 

(2,572)

 

 

(12.8%)

 

 

23.5%

 

19.9%

 

Lease termination

 

 

1,762

 

 

 —

 

 

(1,762)

 

 

(100.0%)

 

 

2.1%

 

 —

 

Depreciation and amortization

 

 

1,309

 

 

1,093

 

 

(216)

 

 

(16.5%)

 

 

1.6%

 

1.1%

 

Interest expense, net

 

 

11,371

 

 

12,178

 

 

807

 

 

7.1%

 

 

13.3%

 

13.9%

 

Income tax expense

 

 

333

 

 

 —

 

 

(333)

 

 

(100.0%)

 

 

0.3%

 

0.0%

 

Total corporate and other expenses

 

 

34,799

 

 

30,723

 

 

(4,076)

 

 

(11.7%)

 

 

40.8%

 

35.1%

 

Net loss before advisory fee

 

 

(8,203)

 

 

(3,538)

 

 

4,665

 

 

(56.9%)

 

 

(9.6%)

 

(4.0%)

 

Sponsor advisory fee

 

 

162

 

 

150

 

 

(12)

 

 

(7.4%)

 

 

0.2%

 

0.2%

 

Net loss

 

$

(8,365)

 

$

(3,688)

 

$

4,677

 

 

(55.9%)

 

 

(9.8%)

 

(4.2%)

 

 

32


 

Operating Metrics

 

The following tables set forth key loan and check cashing operating data as of and for the three months ended March  31, 2017, and 2018:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2018

 

Short-term Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Loan volume (originations and refinancing) (in thousands)

 

$

235,263

 

$

258,217

 

Number of loan transactions (in thousands)

 

 

632

 

 

707

 

Average new loan size

 

$

372

 

$

365

 

Average fee per new loan

 

$

49.16

 

$

48.49

 

Loan loss provision

 

$

6,433

 

$

8,159

 

Loan loss provision as a percentage of loan volume

 

 

2.7%

 

 

3.2%

 

Secured loans as percentage of total at March 31st

 

 

17.4%

 

 

14.0%

 

Medium-term Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Balance outstanding (in thousands)

 

$

41,185

 

$

36,860

 

Number of loans outstanding

 

 

36,819

 

 

34,486

 

Average balance outstanding

 

$

1,119

 

$

1,069

 

Weighted average monthly percentage rate

 

 

16.5%

 

 

16.6%

 

Allowance as a percentage of finance receivables

 

 

27.1%

 

 

33.9%

 

Loan loss provision

 

$

7,221

 

$

8,397

 

Secured loans as percentage of total at March 31st

 

 

10.1%

 

 

14.0%

 

Check Cashing Data (unaudited):

 

 

 

 

 

 

 

Face amount of checks cashed (in thousands)

 

$

465,856

 

$

454,573

 

Number of checks cashed (in thousands)

 

 

815

 

 

750

 

Face amount of average check

 

$

572

 

$

606

 

Average fee per check

 

$

14.88

 

$

15.59

 

Returned check expense

 

$

1,399

 

$

1,062

 

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

 

 

0.3%

 

 

0.2%

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2018

    

Decrease

    

2017

    

2018

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

(Percent of Revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Consumer Loan Fees and Interest

 

$

31,058

 

$

34,265

 

$

3,207

 

10.3%

 

36.4%

 

39.1%

 

Medium-term Consumer Loan Fees and Interest

 

 

17,993

 

 

16,667

 

 

(1,326)

 

(7.4%)

 

21.1%

 

19.0%

 

Credit Service Fees

 

 

18,139

 

 

19,196

 

 

1,057

 

5.8%

 

21.3%

 

21.9%

 

Check Cashing Fees

 

 

12,126

 

 

11,692

 

 

(434)

 

(3.6%)

 

14.2%

 

13.3%

 

Prepaid Debit Card Services

 

 

2,007

 

 

1,948

 

 

(59)

 

(2.9%)

 

2.4%

 

2.2%

 

Other Income

 

 

4,029

 

 

3,883

 

 

(146)

 

(3.6%)

 

4.6%

 

4.5%

 

Total Revenue

 

$

85,352

 

$

87,651

 

$

2,299

 

2.7%

 

100.0%

 

100.0%

 

 

Total revenue for the three months ended March 31, 2018, increased $2.3 million, or 2.7%, as compared to the same period in the prior year.  The increases in short-term consumer loan fees and credit service fees are in-line with the Company’s continuing strategy of growing its portfolios and increasing revenue.

 

Revenue from short-term consumer loan fees and interest for the three months ended March  31, 2018,  increased $3.2 million, or 10.3%, and increased as a percentage of total revenue from 36.4% to 39.1% compared to the same period in 2017.  The increase in short-term consumer loan revenue is primarily due to the Company’s focus on growing its short-term consumer loan portfolios.

 

33


 

Revenue from medium-term consumer loans for the three months ended March  31, 2018, decreased $1.3 million, or 7.4%, compared to the same period in 2017. However, medium-term consumer loan revenue for the Retail financial services segment increased by $1.3 million, or 15.1%, for the three months ended March 31, 2018 as compared to the prior year period. 

 

Revenue from credit service fees for the three months ended March  31, 2018,  increased $1.1 million, or 5.8%, compared to the same period in 2017, primarily the result of the Company growing its CSO portfolios in certain markets.

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2018

    

Increase (Decrease)

    

2017

    

2018

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

(Percent of Revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

$

17,273

 

$

17,132

 

$

(141)

 

(0.8%)

 

20.1%

 

19.5%

 

Provision for Loan Losses

 

 

19,540

 

 

22,635

 

 

3,095

 

15.8%

 

22.9%

 

25.8%

 

Occupancy

 

 

6,629

 

 

6,343

 

 

(286)

 

(4.3%)

 

7.7%

 

7.2%

 

Depreciation & Amortization

 

 

2,538

 

 

2,223

 

 

(315)

 

(12.4%)

 

3.0%

 

2.5%

 

Lease Termination Costs

 

 

47

 

 

97

 

 

50

 

106.4%

 

0.1%

 

0.1%

 

Advertising & Marketing

 

 

814

 

 

1,011

 

 

197

 

24.2%

 

1.0%

 

1.2%

 

Bank Charges

 

 

1,863

 

 

1,847

 

 

(16)

 

(0.9%)

 

2.2%

 

2.1%

 

Store Supplies

 

 

483

 

 

394

 

 

(89)

 

(18.4%)

 

0.6%

 

0.4%

 

Collection Expenses

 

 

509

 

 

633

 

 

124

 

24.4%

 

0.6%

 

0.7%

 

Telecommunications

 

 

2,251

 

 

1,384

 

 

(867)

 

(38.5%)

 

2.6%

 

1.6%

 

Security

 

 

436

 

 

645

 

 

209

 

47.9%

 

0.5%

 

0.7%

 

License & Other Taxes

 

 

361

 

 

360

 

 

(1)

 

(0.3%)

 

0.4%

 

0.4%

 

Loss on Asset Disposal

 

 

113

 

 

111

 

 

(2)

 

(1.8%)

 

0.1%

 

0.1%

 

Verification Processes

 

 

567

 

 

965

 

 

398

 

70.2%

 

0.7%

 

1.1%

 

Other Operating Expenses

 

 

5,332

 

 

4,686

 

 

(646)

 

(12.1%)

 

6.2%

 

5.3%

 

Total Operating Expenses

 

 

58,756

 

 

60,466

 

 

1,710

 

2.9%

 

68.8%

 

69.0%

 

Income from Operations

 

$

26,596

 

$

27,185

 

$

589

 

2.2%

 

31.2%

 

31.0%

 

 

Total operating expenses increased $1.7 million, or 2.9%, for the three months ended March  31, 2018, as compared to the same period in the prior year, primarily due to the increased provision related to growing loan portfolios, partially offset by the decrease in telecommunications and other operating expenses.

 

Salaries and occupancy expenses both decreased for the three months ended March 31, 2018, as compared to the prior period, primarily due to the consolidation of underperforming retail locations.

 

The provision for loan losses increased $3.1 million, or 15.8%, for the three months ended March  31, 2018, as compared to the same period in the prior year primarily related to growing loan portfolios in the Retail financial services segment. On the other hand, the provision for loan losses as a percentage of revenue for the current quarter was less than the comparable percentages for each of the preceding two fiscal quarters, for both short-term and medium-term consumer loans.

 

Telecommunications costs decreased by $0.9 million, or 38.5%, for the three months ended March  31, 2018, as compared to the prior period, primarily by implementing less expensive service providers.

 

Other operating expenses decreased by $0.6 million, or 12.1%, for the three months ended March  31, 2018, as compared to the prior period, primarily as a result of our cost containment initiatives.

 

34


 

Corporate and Other Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2018

    

Increase (Decrease)

    

2017

    

2018

 

 

 

 

 

 

 

 

 

 

 

    

(Percent)

 

(Percent of Revenue)

 

Corporate Expenses

 

$

20,024

 

$

17,452

 

$

(2,572)

 

(12.8%)

 

23.5%

 

19.9%

 

Depreciation & Amortization

 

 

1,309

 

 

1,093

 

 

(216)

 

(16.5%)

 

1.6%

 

1.2%

 

Sponsor Advisory Fee

 

 

162

 

 

150

 

 

(12)

 

(7.4%)

 

0.2%

 

0.2%

 

Interest expense, net

 

 

11,371

 

 

12,178

 

 

807

 

7.1%

 

13.3%

 

13.9%

 

Lease termination

 

 

1,762

 

 

 —

 

 

(1,762)

 

(100.0%)

 

2.1%

 

 —

 

Income tax expense (benefit)

 

 

333

 

 

 —

 

 

(333)

 

(100.0%)

 

0.3%

 

 —

 

Total Corporate and Other Expenses

 

$

34,961

 

$

30,873

 

$

(4,088)

 

(11.7%)

 

41.0%

 

35.2%

 

 

The decrease in corporate expenses from $20.0 million to $17.5 million, for the three months ended March 31, 2018, as compared to the prior year’s period, or a decrease of 12.8%, is primarily the result of compensation and headcount reductions.

 

Lease termination in the prior period is the result of closing the Company’s Utah facility.

 

There is no income tax expense in the current period due to the current net loss and the full impairment of goodwill taken in the fourth quarter of 2017.

 

Business Segment Results of Operations for the Three Months Ended March  31, 2018, and March 31, 2017

 

The following tables present summarized financial information for our segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended March 31, 2018

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

166,505

 

 

 

$

37,511

 

 

    

 

 

    

$

204,016

 

 

 

Other Intangible Assets

 

 

336

 

 

 

 

466

 

 

 

 

 

 

 

802

 

 

 

Total Revenues

 

$

72,797

 

100.0

%  

$

14,854

 

100.0

%  

 

 

 

$

87,651

 

100.0

%  

Provision for Loan Losses

 

 

15,620

 

21.4

%  

 

7,015

 

47.2

%  

 

 

 

 

22,635

 

25.8

%  

Other Operating Expenses

 

 

36,291

 

49.9

%  

 

1,540

 

10.4

%  

 

 

 

 

37,831

 

43.2

%  

Operating Gross Profit

 

 

20,886

 

28.7

%  

 

6,299

 

42.4

%  

 

 

 

 

27,185

 

31.0

%  

Interest Expense, net

 

 

9,479

 

13.0

%  

 

2,699

 

18.2

%  

 

 

 

 

12,178

 

13.9

%  

Depreciation and Amortization

 

 

1,000

 

1.4

%  

 

93

 

0.6

%  

 

 

 

 

1,093

 

1.3

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

17,602

 

 

17,602

 

20.1

%  

Income (Loss) from Continuing Operations, before tax

 

 

10,407

 

14.3

%  

 

3,507

 

23.6

%  

 

(17,602)

 

 

(3,688)

 

(4.2)

%  


(a)

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

 

35


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended March 31, 2017

 

 

 

Retail

 

 

 

Internet

 

 

 

Unallocated

 

 

 

 

 

 

 

Financial

 

% of

 

Financial

 

% of

 

(Income)

 

 

 

% of

 

 

    

Services

    

Revenue

 

Services

    

Revenue

    

Expenses

    

Consolidated

    

Revenue

 

Total Assets

 

$

309,595

 

 

 

$

57,106

 

 

 

 

 

 

$

366,701

 

 

 

Goodwill

 

 

113,256

 

 

 

 

 —

 

 

 

 

 

 

 

113,256

 

 

 

Other Intangible Assets

 

 

488

 

 

 

 

800

 

 

 

 

 

 

 

1,288

 

 

 

Total Revenues

 

$

68,691

 

100.0

%  

$

16,661

 

100.0

%  

 

 

 

$

85,352

 

100.0

%  

Provision for Loan Losses

 

 

12,058

 

17.6

%  

 

7,482

 

44.9

%  

 

 

 

 

19,540

 

22.9

%  

Other Operating Expenses

 

 

38,207

 

55.6

%  

 

1,009

 

6.1

%  

 

 

 

 

39,216

 

45.9

%  

Operating Gross Profit

 

 

18,426

 

26.8

%  

 

8,170

 

49.0

%  

 

 

 

 

26,596

 

31.2

%  

Interest Expense, net

 

 

7,366

 

10.7

%  

 

4,005

 

24.0

%  

 

 

 

 

11,371

 

13.3

%  

Depreciation and Amortization

 

 

1,129

 

1.6

%  

 

180

 

1.1

%  

 

 

 

 

1,309

 

1.5

%  

Lease termination Expenses

 

 

 —

 

 —

%  

 

1,762

 

10.6

%  

 

 

 

 

1,762

 

2.1

%  

Other Corporate Expenses (a)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

20,186

 

 

20,186

 

23.7

%  

Income (loss) from Continuing Operations, before tax

 

 

9,931

 

14.5

%  

 

2,223

 

13.3

%  

 

(20,186)

 

 

(8,032)

 

(9.4)

%  


(a)

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

 

Retail Financial Services

 

Retail financial services represented 83.1%, or $72.8 million, of consolidated revenues for the three months ended March  31, 2018, which was an increase of $4.1 million, or 6.0%, over the prior period. Retail financial services operating gross profit as a percentage of revenue increased to 28.7% from 26.8% for the three months ended March 31, 2018 as compared to the prior period.

 

Internet Financial Services

 

For the three months ended March  31, 2018, total revenues contributed by our Internet financial services segment was $14.9 million, a decrease of $1.8 million, or 10.8%, over the prior year comparable period due to medium-term portfolios decreasing throughout the prior year.  

 

Liquidity and Need for Additional Capital

 

We have historically funded our liquidity needs through cash flow from operations and borrowings under our revolving credit facilities and subsidiary notes. The Company’s cash balance of $89.7 million as of March 31, 2018, plus cash from operating activities, is expected to be sufficient to fund the Company’s operations through the first quarter of 2019. However, $237.3 million of senior notes, $47.0 million of revolving credit facility debt, and $60.0 million in subsidiary notes are due in the second quarter of 2019. The Company’s expected cash position will not be sufficient to repay this indebtedness as it becomes due and the Company will need to restructure or refinance this indebtedness and there can be no assurances as to the ability of the Company to conclude such a restructuring or refinancing. These factors raise substantial doubt regarding the Company’s ability to meet its obligations and continue as a going concern for the period which extends one-year from the issuance of these financial statements. Beyond that twelve-month period, funding capital expenditures, working capital and debt requirements will depend on our future financial performance, which is subject to many economic, commercial, regulatory, financial and other factors that are beyond our control.

 

While the Company is currently engaged in negotiations with its largest bondholders, the success of such negotiations cannot be assured.  Any inability to reach an agreement with existing debt holders, secure sufficient refinancing sources for our pending debt maturities and/or our inability to continue as a going concern could have a significant and material adverse effect on the Company, its operations and its investors and, in particular, could significantly impair recoveries by our investors under our existing indebtedness.  It is unlikely that the Company’s assets, in any event, would be sufficient to satisfy its current debt obligations.  See Item 1A “Risk Factors” in our Annual

36


 

Report on Form 10-K for the year ended December 31, 2017 for more information on how these contingences could negatively impact the Company and its debt holders.

 

Three Month Cash Flow Analysis

 

The table below summarizes our cash flows for the three months ended March  31, 2017, and 2018.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ending March 31,

 

(in thousands)

 

2017

 

2018

 

Net Cash Provided by Operating Activities

 

$

22,200

    

$

24,589

    

Net Cash Used in Investing Activities

 

 

(3,722)

 

 

(1,482)

 

Net Cash Used in Financing Activities

 

 

(2,527)

 

 

(4,625)

 

Net Increase in Cash and Cash Equivalents and Restricted Cash

 

$

15,951

 

$

18,482

 

 

Cash Flows from Operating Activities.    Net cash provided by operating activities for the three months ended March 31, 2018 and 2017, were $24.6 million and $22.2 million, respectively. Net income, net of the non-cash impact of the provision for loan losses was $18.9 million and $11.2 million for the three months ended March 31, 2018 and 2017, respectively.

 

Cash Flows from Investing Activities.    Net cash used in investing activities during 2018 was $1.5 million.  The primary use of cash was $1.3 million in purchases of leasehold improvements and equipment.  Net cash used in investing activities during 2017 was $3.7 million. The primary uses of cash were $2.7 million in loan originations and $1.0 million in purchases of leasehold improvements and equipment. 

 

Cash Flows from Financing Activities.    Net cash used in financing activities during 2018 was $4.6 million.  The primary use of cash was $4.4 million in debt issuance costs.  Net cash used in financing activities during 2017 was $2.5 million. The primary use of cash was $2.3 million in payments on a line of credit.

 

Financing Instruments

 

The Indentures governing our senior secured notes contain certain covenants and events of default that are customary with respect to non-investment grade debt securities, including limitations on our ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase our capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens, and sell certain assets, or merge with or into other companies. The agreement governing our $47.0 million revolving credit facility contains restrictive covenants that limit our ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase our capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens, and sell certain assets, or merge with or into other companies, in each case to the same extent as the indentures governing our notes. We were in compliance with these covenants as of March 31, 2018.

 

On March 30, 2018, the Company amended its revolving credit facility with Victory Park Management, LLC, as administrative agent, and certain of its affiliates as lenders, which we refer to collectively as VPC, to extend the maturity date to April 4, 2019. The amendment added covenants addressing daily minimum liquidity and asset coverage tests, weekly operational reporting requirements and monthly EBITDA and borrowing base coverage tests. Additionally, the Company is required to use commercially reasonable efforts to obtain reasonably satisfactory modification of the 2019 and 2020 Notes.

 

The non-guarantor and unrestricted subsidiaries, created to acquire loans from the retail and internet portfolios, amended its $60.0 million note on March 30, 2018 to extend the maturity date to April 4, 2019. The amendment increases the administrative fee to 0.95% and permits an additional extension of the facility maturity date to April 2021 if certain conditions are met. The amendment allows for additional short term loans within the borrowing base and includes additional covenants addressing daily minimum cash and asset coverage tests, dividend limits, weekly operational reporting requirements, borrowing base reporting, and a monthly consolidated EBITDA test.

37


 

 

Capital Expenditures

 

During the three months ended March 31, 2018, the Company spent $1.3 million on capital expenditures and $1.0 million during the comparable period in the prior year. The increase is primarily in our Mississippi market due to new stores added during the prior year.

 

Seasonality

 

Our business is seasonal based on the liquidity and cash flow needs of our customers. Customers cash tax refund checks primarily in the first calendar quarter of each year which is traditionally our strongest check cashing quarter. We typically see our loan portfolio decline in the first quarter as a result of the consumer liquidity created through income tax refunds. Following the first quarter, we typically see our loan portfolio expand through the remainder of the year with the third and fourth quarters showing the strongest loan demand due to the holiday season.

 

Contractual Obligations and Commitments

 

On December 20, 2013, and June 19, 2014, the Company created non-guarantor subsidiaries in order to acquire loans from the retail and internet portfolios. The non-guarantor subsidiaries funding were the proceeds from $40.0 million and $7.3 million installment notes, which were used to acquire loans from guarantor subsidiaries. On April 25, 2017, the Company’s non-guarantor and unrestricted subsidiary, CCFI Funding II, LLC and Ivy Funding Nine, LLC, amended and restated its existing $40.0 million note to increase the borrowing capacity up to $60.0 million. The $60.0 million note has a maturity date of January 2019 and an interest rate of 16.75% and a monthly administrative fee of 0.75% on the outstanding principal balance of the note. The note also has a cross-default to the Company’s revolving credit facility, dividend restrictions, borrowing base testing, and a cash flow coverage test. In addition, the note contains make-whole provisions in the event of a prepayment. The proceeds from the amended note were used to acquire loans from guarantor subsidiaries. In connection with the amendment, the other non-guarantor and unrestricted subsidiary’s $7.3 million note was satisfied in full.

 

On March 30, 2018, the April 25, 2017, note was further amended to extend the maturity date to April 4, 2019. The amendment increased the administrative fee to 0.95% and permits an additional extension of the facility maturity date to April 2021 if certain conditions are met. The amendment allows for additional short-term loans within the borrowing base and includes additional covenants addressing daily minimum cash and asset coverage tests, dividend limits, weekly operational reporting requirements, borrowing base reporting, and a monthly consolidated EBITDA test.

 

On July 19, 2014, a guarantor subsidiary of the Company entered in to a $1.4 million term note with a nonrelated entity for the acquisition of a share of an airplane. We recorded our $1.1 million share of the joint note, but both parties are joint and severally liable. The joint note had an outstanding balance of $1.2 million at March 31, 2018 and our share of the note was $0.9 million.

 

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

 

Impact of Inflation

 

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

 

Balance Sheet Variations

 

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

 

38


 

Loan Portfolio

 

As of March  31, 2018, we were licensed to offer loans in 33 states. We have established a loan loss allowance in respect of our loans receivable at a level that our management believes to be adequate to absorb known or probable losses from loans made by us and accruals for losses in respect of loans made by third parties that we guarantee. Our policy for determining the loan loss allowance is based on historical experience, as well as our management’s review and analysis of the payment and collection of the loans within prior periods. All loans and services, regardless of type, are made in accordance with state regulations, and, therefore, the terms of the loans and services may vary from state-to-state. Loan fees and interest are earned on loans. Products which allow for an upfront fee are recognized over the loan term. Other products’ interest is earned over the term of the loan.

 

As of March  31, 2018, and December 31, 2017, our total finance receivables net of unearned advance fees were approximately $86.7 million and $110.1 million, respectively.

 

Off-Balance Sheet Arrangements

 

In certain markets, we arrange for consumers to obtain consumer loan products from one of several independent third-party lenders whereby we act as a facilitator. For consumer loan products originated by third-party lenders under these programs, each lender is responsible for providing the criteria by which the consumer’s application is underwritten and, if approved, determining the amount of the consumer loan. The Company in turn is responsible for assessing whether or not the Company will guarantee such loans. When a consumer executes an agreement with the Company under these programs, the Company agrees, for a fee payable to the Company by the consumer, to provide certain services to the consumer, one of which is to guarantee the consumer’s obligation to repay the loan received by the consumer from the third-party lender if the consumer fails to do so. The guarantee represents an obligation to purchase specific loans that go into default. As of March 31, 2018, and December 31, 2017, the outstanding amount of active consumer loans guaranteed by the Company was $29.6 million and $37.0 million, respectively. The accrual for third party loan losses, which represents the estimated fair value of the liability for estimated losses on consumer loans guaranteed by the Company, was $3.8 million and $4.8 million as of March  31, 2018, and December 31, 2017, respectively.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

As of March  31, 2018, we have no material market risk sensitive instruments entered into for trading or other purposes, as defined by GAAP.

 

Interest rate risk

 

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

 

As of March  31, 2018, we had $358.9 million of indebtedness, of which, $47.0 million outstanding under our revolving credit facilities is subject to variable interest rates based on Prime and LIBOR rates.

 

ITEM 4.  CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures, as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management,

39


 

including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March  31, 2018.

 

Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting, as defined in Rule 15d-15(f) under the Exchange Act, during the quarter ended March  31, 2018, that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

40


 

PART II—OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS.

 

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

 

ITEM 1A.  RISK FACTORS.

 

There has been no material changes with respect to the risk factors disclosed under the “Item 1A Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

ITEM 6.  EXHIBITS. 

 

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

 

 

 

 

 

Exhibit No.

    

Description of Exhibit

 

 

 

10.41

 

Option Award Agreement (2011 Management Equity Incentive Plan, as amended), dated as of January 1, 2018 between Community Choice Financial, Inc. and William E. Saunders*

10.42

 

Option Award Agreement (2011 Management Equity Incentive Plan, as amended), dated as of January 1, 2018 between Community Choice Financial, Inc. and Kyle Hanson*

10.43

 

Option Award Agreement (2011 Management Equity Incentive Plan, as emended), dated as of January 1, 2018 between Community Choice Financial, Inc. and Michael Durbin*

10.44

 

Option Award Agreement (2011 Management Equity Incentive Plan, as amended), dated as of January 1, 2018 between Community Choice Financial, Inc. and Bridgette Roman*

31.1

 

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

31.2

 

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

32.1

 

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

32.2

 

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

101

 

Interactive Data File:

(i) Consolidated Balance Sheets as of March  31, 2018 (unaudited) and December 31, 2017; (ii) Consolidated Statements of Operations for the Three Months Ended March  31, 2018 (unaudited) and March  31, 2017 (unaudited); (iii) Consolidated Statements of Stockholders’ Equity for the Three Months Ended March  31, 2018 (unaudited); (iv) Consolidated Statements of Cash Flows for the Three Months Ended March  31, 2018 (unaudited) and March  31, 2017 (unaudited); and (v) Notes to Consolidated Financial Statements (unaudited)—submitted herewith pursuant to Rule 406T

*

 

Indicates a management contract or compensation plan or arrangement

 

 

41


 

SIGNATURES

 

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

 

Date: May 14, 2018

 

 

Community Choice Financial Inc. and Subsidiaries
(registrant)

 

 

 

 

 

/s/ MICHAEL DURBIN

 

Michael Durbin

 

Chief Financial Officer

 

Principal Financial and

 

Principal Accounting Officer

 

 

42