ELVT Elevate Credit, Inc. - 10-K

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. A summary of material risks include those set forth below. You should carefully consider the following risks and all other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones we face but include the most significant factors currently known by us that make investing in our securities speculative or risky. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risk Factor Summary

Risks Related to Our Business and Industry

• The COVID-19 pandemic has had and will likely continue to have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

• Fluctuations in interest rates could negatively affect transaction volume and our finance charges.

• We operate in an industry that is rapidly evolving. Failure to keep up with changes and developments in the non-prime lending industry could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

• Our most recent annual revenue declined from the prior year and we may not be able to maintain consistent profitability or grow in the future.

• Regulators and payment processors are scrutinizing certain online lenders’ access to the Automated Clearing House system to disburse and collect loan proceeds and repayments, and any interruption or limitation on our ability to access this critical system would have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

• Failure to effectively identify, manage, monitor and mitigate fraud risk on a large scale from incomplete or incorrect information provided to us by customers or other third parties could cause us to incur substantial losses, and our operating results, brand and reputation could be harmed.

• Because of the non-prime nature of our customers, we have historically experienced a high rate of net charge-offs as a percentage of revenues, and our ability to price appropriately in response to this and other factors is essential. We rely on our proprietary credit and fraud scoring models in the forecasting of loss rates. If we are unable to effectively forecast loss rates, it may have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

• We depend on debt financing and our business could be adversely affected by a lack of sufficient financing at acceptable prices or disruptions in the credit markets, which could reduce our access to credit.

• We rely on relationships, which are generally non-exclusive and subject to termination, with marketing affiliates and other third parties to identify potential customers for our loans, and the growth of our customer base could be adversely affected if any such relationships are terminated or the number of referrals we receive is reduced.

• Our success and future growth depend on our successful marketing efforts, and if such efforts are not successful, our business, prospects, results of operations, financial condition or cash flows may be harmed.

• The failure of third parties to continue to provide certain key services to us in the current manner and at the current rates may have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

• The profitability of our Bank-Originated Products could be adversely affected by policy or pricing decisions made by the originating lenders.

• A decline in economic conditions could result in decreased demand for our loans or cause our customers’ default rates to increase, harming our operating results.

• We operate in a highly competitive environment and face competition from a variety of traditional and new lending institutions, including other online lending companies, and such competition could adversely affect our business, prospects, results of operations, financial condition or cash flows.

• Our business depends on the uninterrupted operation of our systems and business functions, including our information technology, as well as the ability of such systems to support compliance with legal and regulatory requirements.

• We are subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents, and we may experience harm to our reputation and liability exposure from security breaches.

• To date, we have derived our revenues from a limited number of products and markets. Our efforts to expand our market reach and product portfolio may not succeed or may put pressure on our margins.

• Our allowance for loan losses may not be adequate to absorb such losses, and if we experience rising credit or fraud losses, our results of operations would be adversely affected.

• The determination of the fair values of our loan and credit card receivables portfolio involves unobservable inputs that can be highly subjective and may prove to be materially different that the actual economic outcome.

• Increased customer acquisition costs and/or data costs would reduce our margins.

• If we are not able to attract and retain qualified officers and key employees, or if such officers or employees are temporarily unable to fully contribute to our operations, our business could be materially adversely affected.

• Our loan business is seasonal in nature, which causes our revenues and earnings to fluctuate.

• We may be unable to protect our proprietary technology and analytics or keep up with that of our competitors.

• We are subject to intellectual property disputes from time to time, and such disputes may be costly to defend.

• Current and future litigation or settlements or regulatory proceedings could cause management distraction, harm our reputation and have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

• We may be unable to use some or all of our net operating loss carryforward, which could have a material adverse effect on our results of operations, financial condition or cash flows.

Other Risks Related to Compliance and Regulation

• We, our marketing affiliates, our third-party service providers, and our bank partners are subject to complex federal, state and local lending and consumer protection laws, and if we fail to comply with applicable laws, regulations, rules and guidance, our business could be adversely affected.

• The regulatory landscape in which we operate is continually changing due to new CFPB rules, regulations and interpretations, as well as various legal actions that have been brought against others in marketplace lending. If litigation on similar theories were brought against us when we work with a federally insured bank that makes loans, rather than making loans ourselves and were such an action to be successful, our business, prospects, results of operations, financial condition or cash flows will be materially adversely affected.

• We use third-party collection agencies to assist us with debt collection. Their failure to comply with applicable debt collection regulations could subject us to fines and other liabilities, which could harm our reputation and business.

• Our business is subject to complex and evolving laws and regulations regarding privacy, data protection, and other matters, which could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.

Risks Related to the Securities Markets and Ownership of Our Common Stock

• The price of our common stock may be volatile, and the value of your investment could decline.

• We do not intend to pay dividends for the foreseeable future.

• Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of us.

• Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

We attempt to mitigate the foregoing risks. However, if we are unable to effectively manage the impact of these and other risks, our ability to meet our objectives would be substantially impaired and any of the foregoing risks could materially adversely affect our financial condition, results of operations, cash flows, our ability to make distributions to our stockholders, or the market price of our common stock.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

The COVID-19 pandemic has had and will likely continue to have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

The COVID-19 pandemic and the governmental responses to the pandemic have resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the U.S. and globally, including the markets that we serve. Governmental responses to the pandemic have included orders closing businesses not deemed essential and shelter in place orders. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, rapid increases in unemployment, market downturns and volatility, disruptions to global supply chains and changes to consumer's behavior.

The effects of the pandemic on us could be exacerbated given that the pandemic, and preventative measures taken to contain or mitigate COVID-19 and any future variants, may increasingly have significant negative effects on consumer discretionary spending and demand for and repayment of our products. Further, many of our customers are experiencing layoffs, slowdowns, work stoppages and other changes in work and financial circumstances, diminishing their demand for loans, eligibility for loans and ability to repay loans. In addition, efforts we took in response to the pandemic, such as expanding our payment flexibility programs, or to mitigate the effects of the pandemic, such as implementing underwriting changes to address credit risk associated with originations during the economic crisis created by the COVID-19 pandemic, have had and may continue to have other effects on our business and results of operations, such as by reducing loan origination volume, or may not be successful or may have other effects on our business and results of operations such as, for example, decreasing the average annual percentage rate ("APR") of our products or an adverse impact on the fair value of the loan portfolio.

Additionally, while we have successfully transitioned our employee base to a remote working environment, normal operations may be difficult to maintain, and our resources may be constrained. Similarly, the operations of our business partners and third-party service providers may be constrained, reducing the effectiveness of collections, credit bureau reporting, marketing or other aspects of our operations.

The extent to which the COVID-19 pandemic will continue to impact our business will depend on future developments that are highly uncertain and cannot be predicted at this time, including, but not limited to, the actions taken and restrictions imposed to prevent the spread of COVID-19 and any future variants, the availability, acceptance, and effectiveness of vaccines, the duration and severity of any future outbreaks and the impacts on consumers, businesses and the global economy. An extended period of economic disruption as a result of the COVID-19 pandemic could have a material negative impact on our business, financial condition and results of operations, though the full extent and duration is uncertain. To the extent the COVID-19 pandemic continues to adversely affect our business and financial results, it is likely to also have the effect of heightening many of the other risks described in this "Risk Factors" section.

Fluctuations in interest rates could negatively affect transaction volume and our finance charges.

Our funding facilities are variable rate in nature and tied to either a base rate of the greater of the 3-month LIBOR rate, the five-year LIBOR swap rate or 1% at the borrowing date for Rise and Elastic, or for the Today Card facility, the Wall Street Journal ("WSJ") Prime Rate with a floor of 3.25%. Thus, any increase in the 3-month LIBOR rate or the WSJ Prime Rate could result in an increase in our net interest expense. Interest rate changes may also adversely affect our business forecasts and expectations and are highly sensitive to many macroeconomic factors beyond our control, such as inflation, recession, the state of the credit markets, changes in market interest rates, global economic disruptions, unemployment and the fiscal and monetary policies of the federal government and its agencies. This would reduce profit margins unless there was a commensurate reduction in losses. Any material reduction in our interest rate spread could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows. In the event that the spread between the rate at which we lend to our customers and the rate at which we borrow from our lenders decreases our business, prospects, results of operations, financial condition or cash flows will be harmed.

We operate in an industry that is rapidly evolving. Failure to keep up with changes and developments in the non-prime lending industry could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Although our management team has many years of experience in the non-prime lending industry, we operate in an evolving industry that may not develop as expected. Assessing the future prospects of our business is challenging in light of both known and unknown risks and difficulties we may encounter. Growth prospects in non-prime lending can be affected by a wide variety of factors including:

• Competition from other online and traditional lenders and credit card providers;

• Regulatory limitations that impact the non-prime lending products we can offer and the markets we can serve;

• An evolving regulatory and legislative landscape;

• Developing and implementing new technology-driven products and services;

• Access to important marketing channels;

• Changes in consumer behavior;

• Access to adequate financing;

• Increasingly sophisticated fraudulent borrowing and online theft;

• Challenges with new products and new markets;

• Dependence on our proprietary technology infrastructure and security systems;

• Dependence on our personnel and certain third parties with whom we do business;

• Risks to our business if our systems are hacked or otherwise compromised;

• Evolving industry standards;

• Recruiting and retention of qualified personnel necessary to operate our business;

• Risks to our business relating to natural or man-made catastrophes, such as fires, hurricanes and tornadoes, floods, earthquakes, or other natural disasters, terrorist attacks, computer viruses and telecommunications failures; and

• Fluctuations in the credit markets and demand for credit.

We may not be able to successfully address these factors, which could negatively impact our business, prospects, results of operations, financial condition or cash flows.

Our most recent annual revenue declined from the prior year and we may not be able to maintain consistent profitability or grow in the future .

Our revenue growth rate has fluctuated over the past few years and it is possible that, in the future, even if our revenues continue to increase, our rate of revenue growth could decline, either because of external factors affecting the growth of our business, such as the COVID-19 pandemic, or because we are not able to scale effectively as we grow. In addition, we will need to generate and sustain increased revenues in future periods in order to remain profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. If we cannot manage our growth effectively, it could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Regulators and payment processors are scrutinizing certain online lenders’ access to the Automated Clearing House system to disburse and collect loan proceeds and repayments, and any interruption or limitation on our ability to access this critical system would have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

When making loans in the US, we typically use the Automated Clearing House (“ACH”) system to deposit loan proceeds into our customer accounts and to withdraw authorized payments from those accounts. ACH transactions are processed by banks. It has been reported that US federal regulators have taken or threatened actions, commonly referred to as "Operation Choke Point," intended to discourage banks and other financial services providers from providing access to banking and third-party payment processing services to lenders in our industry. These actions have reduced the number of banks and payment processors who provide ACH payment processing services and could conceivably make it increasingly difficult to find banking partners and payment processors in the future and/or lead to significantly increased costs for these services. If we lost access to the ACH system because our payment processor was unable or unwilling to access the ACH system on our behalf, we would experience a significant reduction in customer loan payments. Although we would notify consumers that they would need to make their loan payments via physical check, debit card or other method of payment a large number of customers would likely go into default because they are expecting automated payment processing. Any interruption or limitation on our ability to access the ACH system would have a material adverse effect on our business, financial condition and results of operations.

Failure to effectively identify, manage, monitor and mitigate fraud risk on a large scale from incomplete or incorrect information provided to us by customers or other third parties could cause us to incur substantial losses, and our operating results, brand and reputation could be harmed.

For the loans we originate through Rise, our growth depends on effective loan underwriting resulting in acceptable customer profitability. This is equally important for the Rise loans, Elastic lines of credit and Today Card credit card receivables originated by third-party banks. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Our Results of Operations—Revenues.” Lending decisions by our originating lenders are made using our proprietary credit and fraud scoring models, which we license to them. Lending decisions are based on information provided by loan applicants and on information provided by consumer reporting agencies, including third-party data providers. Data provided by third-party sources is a significant component of our decision methodology. To the extent that applicants provide inaccurate or unverifiable information or data from third-party providers is incomplete or inaccurate, the credit score delivered by our proprietary scoring methodology may not accurately reflect the associated risk. Additionally, a credit score assigned to a borrower may not reflect that borrower's actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data, and we do not verify the information obtained from the borrower's credit report.

Additionally, there is a risk that, following the date of the credit report that we obtain and review, a borrower may have:

• become past due in the payment of an outstanding obligation;

• defaulted on a pre-existing debt obligation;

• taken on additional debt; or

• sustained other adverse financial events.

Our resources, technologies and fraud prevention tools, which are used to originate or facilitate the origination of loans or lines of credit may be insufficient to accurately detect and prevent fraud. Inaccurate analysis of credit data that could result from false loan application information could harm our reputation, business and operating results. If credit and/or fraud losses increased significantly due to inadequacies in underwriting or new fraud trends, new customer originations may need to be reduced until credit and fraud losses returned to target levels, and business could contract.

In addition, our proprietary credit and fraud scoring models use identity and fraud checks analyzing data provided by external databases to authenticate each customer’s identity. The level of our fraud charge-offs and results of operations could be materially adversely affected if fraudulent activity were to significantly increase. Online lenders are particularly subject to fraud because of the lack of face-to-face interactions and document review. If applicants assume false identities to defraud us the related portfolio of loans will exhibit higher loan losses. We have in the past and may in the future incur substantial losses and our business operations could be disrupted if we, or the originating lenders, are unable to effectively identify, manage, monitor and mitigate fraud risk using our proprietary credit and fraud scoring models.

It may be difficult or impossible to recoup funds underlying loans made in connection with inaccurate statements, omissions of fact or fraud. Loan losses are currently the largest cost as a percentage of revenues across our products. High profile fraudulent activity could also lead to regulatory intervention, negatively impact our operating results, brand and reputation and require us, and the originating lenders, to take steps to reduce fraud risk, which could increase our costs.

Any of the above risks could have a material adverse effect on our business, financial condition and results of operations.

Because of the non-prime nature of our customers, we have historically experienced a high rate of net charge-offs as a percentage of revenues, and our ability to price appropriately in response to this and other factors is essential. We rely on our proprietary credit and fraud scoring models in the forecasting of loss rates. If we are unable to effectively forecast loss rates, it may have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our net charge-offs as a percentage of revenues for the years ended December 31, 2021 and 2020 were 39% and 41%, respectively. Because of the non-prime nature of our customers, it is essential that our products are appropriately priced, taking this and all other relevant factors into account. In making a decision whether to extend credit to prospective customers we and the originating lenders rely heavily on our proprietary credit and fraud scoring models. Our proprietary credit and fraud scoring models are based on previous historical experience. Typically, however, our models will become less effective over time and need to be rebuilt regularly to perform optimally. This is particularly true in the context of our preapproved direct mail campaigns. If we are unable to rebuild our proprietary credit and fraud scoring models, or if they do not perform up to target standards the products will experience increasing defaults or higher customer acquisition costs. In addition, any upgrades or planned improvements to our technology and credit models may not be implemented on the timeline that we expect or may not drive improvements in credit quality for our products as anticipated, which may have a material adverse effect on our business, financial condition and results of operations.

Any failure in our proprietary credit and fraud scoring models to adequately predict the creditworthiness of customers, assess prospective customers’ financial ability to repay their loans, or any or all of the other components of the credit decision process described herein fails, higher than forecasted losses may result. Furthermore, if we are unable to access the third-party data used in our proprietary credit and fraud scoring models, or access to such data is limited, the ability to accurately evaluate potential customers using our proprietary credit and fraud scoring models will be compromised. As a result, we may be unable to effectively predict probable credit losses inherent in the resulting loan portfolio, and we, and the originating lender, may consequently experience higher defaults or customer acquisition costs, which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Additionally, any errors in the development and validation of any of the models or tools used to underwrite loans, such loans may result in higher delinquencies and losses. Moreover, if future performance of customer loans differs from past experience, which experience has informed the development of our proprietary credit and fraud scoring models, delinquency rates and losses could increase.

If our proprietary credit and fraud scoring models were unable to effectively price credit to the risk of the customer, lower margins would result. Either our losses would be higher than anticipated due to “underpricing” products or customers may refuse to accept the loan if products are perceived as “overpriced.” Additionally, an inability to effectively forecast loss rates could also inhibit our ability to borrow from our debt facilities, which could further hinder our growth and have a material adverse effect on our business, financial condition and results of operations.

We depend on debt financing and our business could be adversely affected by a lack of sufficient financing at acceptable prices or disruptions in the credit markets, which could reduce our access to credit.

We depend in part on debt financing primarily from Victory Park Management, LLC (“VPC”), an affiliate of Victory Park Capital and Park Cities Asset Management, LLC ("PCAM"). If VPC or PCAM became unwilling or unable to provide debt financing to us at prices acceptable to us, we would need to secure additional debt financing or potentially reduce loan originations. The availability of these financing sources depends on many factors, some of which are outside of our control.

The Elastic product, which is originated by a third-party lender, has a loan participation interest sold to Elastic SPV, Ltd. (“Elastic SPV”), a Cayman Islands entity. Elastic SPV has a loan facility with VPC in order to fund the loan participation purchases, for which we provide credit support, and we have entered into a credit default protection agreement with Elastic SPV that provides protection for loan losses. Similarly, the Rise loans originated by FinWise and CCB, have a loan participation interest sold to EF SPV, Ltd. (“EF SPV”) and EC SPV, Ltd. ("EC SPV"), both Cayman Islands entities. EF SPV and EC SPV have a loan facility with VPC in order to fund the loan participation purchases, for which we provide credit support, and we have entered into credit default protection agreements with both EF SPV and EC SPV that provide protection for loan losses. The Today Card product, which is originated by CCB, has a participation interest sold to Today SPV, LLC ("TSPV"). The TSPV Facility, which was entered into among TSPV and Today Card, LLC ("TC LLC"), both wholly-owned subsidiaries of the Company, and PCAM, is used to fund the loan participation purchases. Any voluntary or involuntary halt to these existing programs could result in the originating lenders halting further loan originations until an additional financing partner could be identified.

We may also experience the occurrence of events of default or breaches of financial or performance covenants under our debt agreements, which are currently secured by all our assets. Any such occurrence or breach could result in the reduction or termination of our access to institutional funding or increase our cost of funding. Certain of these covenants are tied to our customer default rates, which may be significantly affected by factors, such as economic downturns or general economic conditions beyond our control and beyond the control of individual customers. In particular, loss rates on customer loans may increase due to factors such as prevailing interest rates, the rate of unemployment, the level of consumer and business confidence, commercial real estate values, energy prices, changes in consumer and business spending, the number of personal bankruptcies, disruptions in the credit markets and other factors. We have covenants that are tied to our available cash and cash equivalents. We have cash commitments in 2022, as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Commitments and Contractual Obligations", that may decrease our cash and cash equivalents during the year. If we breach any such covenant, we likely would seek to obtain a waiver from the applicable lender. While we have received such waivers in the past, we can provide no assurance that an affected lender would provide a waiver in the future. A reduction or termination of funding from our existing lenders could result in increases in our cost of capital, which would reduce our net profit margins.

In the future, we may seek to access the debt capital markets to obtain capital to finance growth. However, our future access to the debt capital markets could be restricted due to a variety of factors, including a deterioration of our earnings, cash flows, balance sheet quality, or overall business or industry prospects, adverse regulatory changes, a disruption to or deterioration in the state of the capital markets or a negative bias toward our industry by market participants. If adequate funds are not available, or are not available on acceptable terms, we may not have sufficient liquidity to fund our operations, make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges and this, in turn, could have a material adverse effect on our business, financial condition and results of operations.

We rely on relationships, which are generally non-exclusive and subject to termination, with marketing affiliates and other third parties to identify potential customers for our loans and the growth of our customer base could be adversely affected if any such relationships are terminated or the number of referrals we receive is reduced.

We rely on strategic marketing affiliate relationships with certain companies for referrals of some of the customers to whom we issue loans, and our growth depends in part on the growth of these referrals. Additionally, we rely on preapproved marketing lists purchased from credit bureaus for our direct mailings and electronic offers. Many of our marketing affiliate relationships do not contain exclusivity provisions that would prevent such marketing affiliates from providing customer referrals to competing companies. In addition, the agreements governing these partnerships, generally, contain termination provisions, including provisions that in certain circumstances would allow our partners to terminate if convenient, that, if exercised, would terminate our relationship with these partners. These agreements do not contain a requirement that a marketing affiliate refer us any minimum number of customers. There can be no assurance that these marketing affiliates and other third parties will not terminate our relationship or continue referring business to us in the future, and a termination of any of these relationships or reduction in customer referrals to us could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our success and future growth depend on our successful marketing efforts, and if such efforts are not successful, our business, prospects, results of operations, financial condition or cash flows may be harmed.

We intend to continue to dedicate significant resources to marketing efforts. Our ability to attract qualified borrowers depends in large part on the success of these marketing efforts and the success of the marketing channels we use to promote our products. Our marketing channels include social media and the press, online affiliations, search engine optimization, search engine marketing, offline partnerships, preapproved direct mailings and television advertising. If any of our current marketing channels become less effective, if we are unable to continue to use any of these channels, if the cost of using these channels were to significantly increase or if we are not successful in generating new channels, we may not be able to attract new borrowers in a cost-effective manner or convert potential borrowers into active borrowers. If we are unable to recover our marketing costs through increases in website traffic and in the number of loans made by visitors to product websites, or if we discontinue our broad marketing campaigns, it could have a material adverse effect on our business, financial condition and results of operations.

The failure of third parties to continue to provide certain key services to us in the current manner and at the current rates may have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We are dependent on third parties to provide services to facilitate lending, loan underwriting, payment processing, customer service, collections and recoveries, as well as to support and maintain certain of our communication and information systems.

The loss of the relationship with any of these third parties, an inability to replace them or develop new relationships, or the failure of any of these third parties to provide its products or services, to maintain its quality and consistency or to have the ability to provide its products and services, could have a material adverse effect on our business, financial condition and results of operations. Our revenues and earnings could also be adversely affected if any of those third-party providers make material changes to the products or services that we rely on or increase the price of their products or services.

The profitability of our Bank-Originated Products could be adversely affected by policy or pricing decisions made by the originating lenders.

We do not originate and do not ultimately control the pricing or functionality of our products originated by our bank partners (collectively the "Bank-Originated Products"). Each bank partner has licensed our technology and underwriting services and makes all key decisions regarding the marketing, underwriting, product features and pricing. We generate revenues from these products through marketing and technology licensing fees paid by the bank partners, and through our credit default protection agreements. If the bank partners were to change their pricing, underwriting or marketing of our Bank-Originated Products in a way that decreases revenues or increases losses, then the profitability of each loan, line of credit or credit card issued could be reduced. Although this would not reduce the revenues that we receive for marketing and technology licensing services, it would reduce the revenues that we receive from our credit default protection agreements with the bank partners and could have a material adverse effect on our business, financial condition and results of operations.

A decline in economic conditions could result in decreased demand for our loans or cause our customers’ default rates to increase, harming our operating results.

Uncertainty and negative trends in general economic conditions in the US and abroad, including significant tightening of credit markets and a general decline in the value of real property, historically have created a difficult environment for companies in the lending industry. Many factors, including factors that are beyond our control, may impact our consolidated results of operations or financial condition or affect our borrowers’ willingness or capacity to make payments on their loans. These factors include: unemployment levels, housing markets, rising living expenses, inflation, energy costs and interest rates, as well as major medical expenses, divorce or death that affect our borrowers. If the US economy experiences a downturn, or if we become affected by other events beyond our control, we may experience a significant reduction in revenues, earnings and cash flows, difficulties accessing capital and a deterioration in the value of our investments.

Credit quality is driven by the ability and willingness of customers to make their loan payments. If customers face rising unemployment or reduced wages, defaults may increase. Similarly, if customers experience rising living expenses (for instance due to rising gas, energy, or food costs) they may be unable to make loan payments. An economic slowdown could also result in a decreased number of loans being made to customers due to higher unemployment or an increase in loan defaults in our loan products. The underwriting standards used for our products may need to be tightened in response to such conditions, which could reduce loan balances, and collecting defaulted loans could become more difficult, which could lead to an increase in loan losses. If a customer defaults on a loan, the loan enters a collections process where, including as a result of contractual agreements with the originating lenders, our systems and collections teams initiate contact with the customer for payments owed. If a loan is subsequently charged off, the loan is generally sold to a third-party collection agency and the resulting proceeds from such sales comprise only a small fraction of the remaining amount payable on the loan.

There can be no assurance that economic conditions will remain favorable for our business or that demand for loans or default rates by customers will remain at current levels. Reduced demand for loans would negatively impact our growth and revenues, while increased default rates by customers may inhibit our access to capital, hinder the growth of the loan portfolio attributable to our products and negatively impact our profitability. Either such result could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We operate in a highly competitive environment and face competition from a variety of traditional and new lending institutions, including other online lending companies and such competition could adversely affect our business, prospects, results of operations, financial condition or cash flows.

We have many competitors. Our principal competitors are consumer loan companies, Credit Services Organizations ("CSO"), online lenders, credit card companies, consumer finance companies, pawnshops and other financial institutions that offer similar financial services. Other financial institutions or other businesses that do not now offer products or services directed toward our traditional customer base could begin doing so. Significant increases in the number and size of competitors for our business could result in a decrease in the number of loans that we fund, resulting in lower levels of revenues and earnings in these categories. Many of these competitors are larger than us, have significantly more resources and greater brand recognition than we do, and may be able to attract customers more effectively than we do.

Competitors of our business may operate, or begin to operate, under business models less focused on legal and regulatory compliance, which could put us at a competitive disadvantage. Additionally, negative perceptions about these models could cause legislators or regulators to pursue additional industry restrictions that could affect the business model under which we operate. To the extent that these models gain acceptance among consumers, small businesses and investors or face less onerous regulatory restrictions than we do, we may be unable to replicate their business practices or otherwise compete with them effectively, which could cause demand for the products we currently offer to decline substantially.

We may be unable to compete successfully against any or all of our current or future competitors. As a result, our products could lose market share and our revenues could decline, thereby affecting our ability to generate sufficient cash flow to service our indebtedness and fund our operations. Any such changes in our competition could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our business depends on the uninterrupted operation of our systems and business functions, including our information technology, as well as the ability of such systems to support compliance with legal and regulatory requirements.

Our business is highly dependent upon customers’ ability to access our website and the ability of our employees and those of the originating lenders, as well as third-party service providers, to perform, in an efficient and uninterrupted fashion, necessary business functions, such as internet support, call center activities and processing and servicing of loans. Problems or errors with the technology platform and software of our systems, or a shut-down of or inability to access the facilities in which our internet operations and other technology infrastructure are based, such as a power outage, a failure of one or more of our information technology, telecommunications or other systems, cyber-attacks on, or sustained or repeated disruptions of, such systems could significantly impair our ability to perform such functions on a timely basis and could result in a deterioration of our ability to underwrite, approve and process loans, provide customer service, perform collections activities, or perform other necessary business functions. Any such interruption could reduce new customer acquisition and negatively impact growth, which would have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

In addition, our systems and those of third parties on whom we rely must consistently be capable of compliance with applicable legal and regulatory requirements and timely modification to comply with new or amended requirements. Any systems problems going forward could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We are subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents, and we may experience harm to our reputation and liability exposure from security breaches.

Our business involves the storage and transmission of consumers’ proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. We are entirely dependent on the secure operation of our websites and systems as well as the operation of the internet generally. While we have incurred no material losses from cyber-attacks or security breaches to date, a number of other companies have disclosed significant cyber-attacks and security breaches, some of which have involved intentional attacks. Attacks may be targeted at us, our customers, or both. Although we devote significant resources to maintain and regularly upgrade our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to us and our customers, our security measures may not provide absolute security.

Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including third parties outside the Company such as persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. These risks may increase in the future as we continue to increase our mobile and other internet-based product offerings and expand our internal usage of web-based products and applications, expand into new countries, or continue to allow our employee base to work remotely. If an actual or perceived breach of security occurs, customer and/or supplier perception of the effectiveness of our security measures could be harmed and could result in the loss of customers, suppliers or both. Actual or anticipated attacks and risks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants.

A successful penetration or circumvention of the security of our systems could cause serious negative consequences, including significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage to our computers or systems or those of our customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. In addition, our applicants provide personal information, including bank account information when applying for loans. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including customer bank account and other personal information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Data breaches can also occur as a result of non-technical issues.

Our servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, including “denial-of-service” type attacks. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach of our systems or by persons with whom we have commercial relationships that result in the unauthorized release of consumers’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. In addition, many of the third parties who provide products, services or support to us could also experience any of the above cyber risks or security breaches, which could impact our customers and our business and could result in a loss of customers, suppliers or revenues.

In addition, federal and some state regulators are considering promulgating rules and standards to address cybersecurity risks and many US states have already enacted laws requiring companies to notify individuals of data security breaches involving their personal data. In addition, federal regulators, such as the Federal Reserve, OCC and FDIC are considering rules that would require companies to notify their primary federal regulatory of significant cybersecurity incidents immediately. These mandatory disclosures or potentially mandatory disclosures regarding a security breach are costly to implement and may lead to widespread negative publicity, which may cause customers to lose confidence in the effectiveness of our data security measures.

Any of these events could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

To date, we have derived our revenues from a limited number of products and markets. Our efforts to expand our market reach and product portfolio may not succeed or may put pressure on our margins.

We frequently explore paths to expand our market reach and product portfolio. For example, we have launched or are in the process of launching other non-prime products like bank-originated installment loans, lines of credit and credit cards through our bank partners and the Today Card, a bank-originated credit card. In the future, we may elect to pursue new products, channels, or markets. However, there is always risk that these new products, channels, or markets will be unprofitable, will increase costs, decrease margins, or take longer to generate target margins than anticipated. Additional costs could include those related to the need to hire more staff, invest in technology, develop and support new third-party partnerships or other costs, which would increase operating expenses. In particular, growth may require additional technology staff, analysts in risk management, compliance personnel and customer support and collections staff. Although we outsource most of our customer support and collections staff, additional volumes would lead to increased costs in these areas.

We may elect to pursue aggressive growth over margin expansion in order to increase market share and long-term revenue opportunities. There also can be no guarantee that we will be successful with respect to any new product initiatives or any further expansion beyond the US if we decide to attempt such expansion, which may inhibit the growth of our business and have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our allowance for loan losses may not be adequate to absorb such losses and if we experience rising credit or fraud losses, our results of operations would be adversely affected.

We face the risk that customers will fail to repay their loans in full. We reserve for such losses by establishing an allowance for loan losses, the increase of which results in a charge to our earnings as a provision for loan losses. We have established a methodology designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the forecasts and establishment of loan losses are also dependent on our subjective assessment based upon our experience and judgment. Actual losses are difficult to forecast, especially if such losses stem from factors beyond our historical experience. As a result, there can be no assurance that our allowance for loan losses will be sufficient to absorb losses or prevent a material adverse effect on our business, financial condition and results of operations. Losses are the largest cost as a percentage of revenues across all of our products.

Fraud and customers not being able to repay their loans are both significant drivers of loss rates. If we experienced rising credit or fraud losses this would significantly reduce our earnings and profit margins and could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

In June 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 is intended to replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates to improve the quality of information available to financial statement users about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. As of January 1, 2022, we have adopted ASU 2016-13 and its related amendments. As a result of the adoption of ASU 2016-13, our loans receivable will be carried at fair value with changes in fair value recognized directly in earnings going forward. We anticipate that adoption of this new methodology may have a material impact on our financial statements. We also expect that the internal financial controls processes in place for our loan loss reserve process will be impacted. In addition, if we fail to accurately forecast the collectability of our loans under this new methodology, we could be required to absorb such additional losses, which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

The determination of the fair values of our loan and credit card receivables portfolio involves unobservable inputs that can be highly subjective and may prove to be materially different than the actual economic outcome.

As disclosed in Note 1 to the Consolidated Financial Statements, we began utilizing the fair value option for our loan and finance receivables portfolio effective January 1, 2022. The fair values of our loans and credit card receivables are determined using Level 3 inputs for which changes could significantly impact our fair value measurements. Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of our valuation methodologies. A variety of factors including, but not limited to, estimated customer default rates, the timing of expected payments, utilization rates on our line of credit accounts, estimated costs to service the portfolio, discount rates, and valuations of comparable portfolios may ultimately affect the fair values of our loans and finance receivables. Modifications to our assumptions due to the passage of time and more information becoming available could result in material changes to our fair value calculations. These changes to fair value could adversely affect our results of operations. Additionally, under the fair value option, these changes are generally recorded directly to statements of operations, which may make our financial statements less comparable to others in the industry that do not record their loan balances under the fair value option.

Increased customer acquisition costs and/or data costs would reduce our margins.

If customer acquisition costs or other servicing costs increased, it would reduce our profit margins. Marketing costs would be negatively affected by increased competition or stricter credit standards that would reduce customer fund rates. We could also experience increased marketing costs due to higher fees from credit bureaus for preapproved direct mail lists, search engines for search engine marketing, or fees for affiliates, and these increased costs would reduce our profit margins. Other costs, such as legal costs, may increase as we pursue various company strategic initiatives, which could further reduce our profit margins.

We purchase significant amounts of data to facilitate our proprietary credit and fraud scoring models. If there was an increase in the cost of data, or if we elected to purchase from new data providers, there would be a reduction in our profit margins.

Any such reduction in our profit margins could result in a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

If we are not able to attract and retain qualified officers and key employees, or if such officers or employees are temporarily unable to fully contribute to our operations, our business could be materially adversely affected.

Our success depends, in part, on our officers, which comprise a relatively small group of individuals. Many members of the senior management team have significant industry experience, and we believe that our senior management would be difficult to replace, if necessary. Because the market for qualified individuals is highly competitive, we may not be able to attract and retain qualified officers or candidates. In addition, increasing regulations on, and negative publicity about, the consumer financial services industry could affect our ability to attract and retain qualified officers.

Our future success also depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The loss of any of our senior management or key employees could materially adversely affect our ability to execute our business plan and strategy, and we may not be able to find adequate replacements on a timely basis, or at all. We cannot ensure that we will be able retain the services of any members of our senior management or other key employees. Our officers and key employees may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. While all key employees have signed non-disclosure, non-solicitation and non-compete agreements, they may still elect to leave us or even retire any time. Loss of key employees could result in delays to critical initiatives and the loss of certain capabilities and poorly documented intellectual property.

If we do not succeed in attracting and retaining our officers and key employees, our business could be materially and adversely affected.

Our loan business is seasonal in nature, which causes our revenues and earnings to fluctuate.

Our loan business is affected by fluctuating demand for the products and services we offer and fluctuating collection rates throughout the year. Demand for our consumer loan products in the US has historically been highest in the third and fourth quarters of each year, corresponding to the holiday season, and lowest in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds. This results in significant increases and decreases in portfolio size and profit margins from quarter to quarter. In particular, we typically experience a reduction in our credit portfolios and an increase in profit margins in the first quarter of the year. When we experience higher growth in the second quarter through fourth quarters, portfolio balances tend to grow and profit margins are compressed. Our cost of sales for the non-prime loan products we offer in the US, which represents our provision for loan losses, was historically lowest as a percentage of revenues in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds, and increased as a percentage of revenues for the remainder of each year. This seasonality requires us to manage our cash flows over the course of the year. With the adoption of ASU 2016-13, the seasonality of our profit margins may be materially different than our historical experience under the prior guidance. If our revenues or collections were to fall substantially below what we would normally expect during certain periods, our ability to service debt and meet our other liquidity requirements may be adversely affected, which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We may be unable to protect our proprietary technology and analytics or keep up with that of our competitors.

The success of our business depends to a significant degree upon the protection of our proprietary technology, including our proprietary credit and fraud scoring models. We protect our intellectual property with non-disclosure agreements and through standard measures to protect trade secrets. However, we may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. If competitors learn our trade secrets (especially with regard to marketing and risk management capabilities), it could be difficult to successfully prosecute to recover damages. A third party may attempt to reverse engineer or otherwise obtain and use our proprietary technology without our consent. The pursuit of a claim against a third party for infringement of our intellectual property could be costly, and there can be no guarantee that any such efforts would be successful. Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as our competitors could put us at a disadvantage relative to our competitors. Any such failures could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We are subject to intellectual property disputes from time to time, and such disputes may be costly to defend.

We have faced and may continue to face allegations that we have infringed the trademarks, copyrights, patents or other intellectual property rights of third parties, including from our competitors or non-practicing entities. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop offering certain products or product features, acquire licenses, which may not be available at a commercially reasonable price or at all, or modify such products, product features, processes or websites while we develop non-infringing substitutes.

In addition, we use open source software in our technology platform and plan to use open source software in the future. From time to time, we may face claims from parties claiming ownership of, or demanding release of, the source code, potentially including our valuable proprietary code, or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our platform, any of which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Current and future litigation or settlements or regulatory proceedings could cause management distraction, harm our reputation and have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We, our officers and certain of our subsidiaries have been and may become subject to lawsuits that could cause us to incur substantial expenditures, generate adverse publicity and could significantly impair our business, force us to cease doing business in one or more jurisdictions or cause us to cease offering or alter one or more products. We are currently the subject of several pending lawsuits and class action claims with respect to the services we provide to the banks we work with and our lending practices under relevant state law. For more information, including a discussion of our pending legal proceedings see Item 3 — Legal Proceedings and Note 1 4 —Commitments, Contingencies and Guarantees in the Notes to the Consolidated Financial Statements included in this report.

While we disagree that we have violated any state laws and regulations and intend to vigorously defend our position, there can be no assurance that we will be successful or that any relief granted will not be material. A future adverse ruling in or a settlement of any such litigation against us, our executive officers or another lender, could result in significant legal fees that could become material, could harm our reputation, create obligations, forego collection of the principal amount of loans, pay treble or other multiple damages, pay monetary penalties and/or modify or terminate our operations in particular jurisdictions. In accordance with applicable accounting guidance, we establish an accrued liability for litigation, regulatory matters and other legal proceedings when those matters present material loss contingencies that are both probable and reasonably estimable. Even when an accrual is recorded, however, we may be exposed to loss in excess of any amounts accrued.

Additionally, we include arbitration provisions in our consumer loan agreements. We take the position that the arbitration provisions in our consumer loan agreements, including class action waivers, are valid and enforceable; however, the enforceability of arbitration provisions is often challenged in court. If those challenges are successful, our arbitration and class action waiver provisions could be unenforceable, which could subject us to additional litigation, including additional class action litigation.

Defense of any lawsuit, even if successful, could require substantial time and attention of our management and could require the expenditure of significant amounts for legal fees, expenditures related to indemnification agreements and other related costs. We and others are also subject to regulatory proceedings, and we could suffer losses as a result of interpretations of applicable laws, rules and regulations in those regulatory proceedings, even if we are not a party to those proceedings. Any of these events could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We may be unable to use some or all of our net operating loss carryforward, which could have a material adverse effect on our results of operations, financial condition or cash flows.

At December 31, 2021, our net operating loss carryforward ("NOL") was approximately $84.1 million. We expect that our results from future operations will fully utilize the NOL carryforward. If not utilized, the NOL will begin to expire in 2036. If we do not generate sufficient taxable income, we may not be able to utilize a material portion of our NOL. If we are limited in our ability to use our NOL in future years in which we have taxable income, we will pay more taxes than if we were able to fully utilize our NOL. This could have a material adverse effect on business, prospects, results of operations, financial condition or cash flows.

Under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), our ability to utilize the NOL or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders, who own at least 5% of our stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply u nder state tax laws. We have not completed a Section 382 analysis through December 31, 2021. If we have previously had, or have in the future, one or more Section 382 “ownership changes,” including in connection with our IPO, we may not be able to utilize a material portion of our NOL.

We may be subject to changes in our tax rates, new tax legislation or exposed to additional tax liabilities.

The federal, state, and local tax laws applicable to our business are subject to interpretation and may be subject to significant change. Changes in existing laws, the interpretation of existing laws, or introduction of new laws could have a material impact on our financial condition, results of operations or cash flows. The determination of our provision for income taxes and other tax liabilities involves significant judgment by management and there may be uncertainties regarding the ultimate tax determination. Our tax returns and positions are subject to review and audit by federal, state and local authorities. While we believe that our provisions and accrued liabilities are adequate to cover reasonably expected tax risk, there can be no assurance of any final outcome regarding any tax issue. An unfavorable outcome could have a material adverse impact on our effective tax rate, our financial condition, results of operations or cash flows.

OTHER RISKS RELATED TO COMPLIANCE AND REGULATION

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

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

Furthermore, legislative or regulatory actions may be influenced by negative perceptions of us and our industry, even if such negative perceptions are inaccurate, attributable to conduct by third parties not affiliated with us (such as other industry members) or attributable to matters not specific to our industry. Any of these or other legislative or regulatory actions that affect our consumer loan business at the national, state and local level could, if enacted or interpreted differently, have a material adverse effect on our business, financial condition and results of operations and prohibit or directly or indirectly impair our ability to continue current operations. For a discussion of our regulatory environment, see “Item 1. Business—Our Regulatory Environment”.

We, our marketing affiliates, our third-party service providers and our bank partners are subject to complex federal, state and local lending and consumer protection laws, and if we fail to comply with applicable laws, regulations, rules and guidance, our business could be adversely affected.

We, our marketing affiliates, our third-party service providers and our bank partners must comply with US federal, state and local regulatory regimes, including those applicable to consumer credit transactions. Certain US federal and state laws generally regulate interest rates and other charges and require certain disclosures. In particular, we may be subject to laws such as:

• local regulations and ordinances that impose requirements or restrictions related to certain loan product offerings and collection practices;

• state laws and regulations that impose requirements related to loan or credit service disclosures and terms, credit discrimination, credit reporting, debt servicing, privacy and collection;

• the Truth in Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms and conditions of their loans and credit transactions and other substantive consumer protections with respect to credit cards, such as an assessment of a borrower's ability to repay obligations and penalty fee limitations;

• Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, Section 1031 of the Dodd-Frank Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service, and similar state laws that prohibit unfair and deceptive acts or practices;

• the Equal Credit Opportunity Act and Regulation B promulgated thereunder and state non-discrimination laws, which generally prohibit creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act;

• the Fair Credit Reporting Act (the “FCRA”) as amended by the Fair and Accurate Credit Transactions Act, and similar state laws, which promote the accuracy, fairness and privacy of information in the files of consumer reporting agencies;

• the Fair Debt Collection Practices Act (the “FDCPA”) and similar state and local debt collection laws, which provide guidelines and limitations on the conduct of third-party debt collectors and creditors in connection with the collection of consumer debts;

• the Gramm-Leach-Bliley Act and Regulation P promulgated thereunder and similar state privacy laws, which include limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances require financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and require financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;

• the Bankruptcy Code and similar state insolvency laws, which limit the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;

• the Servicemembers Civil Relief Act (the "SCRA") and similar state laws, which allow military members and certain dependents to suspend or postpone certain civil obligations, as well as limit applicable rates, so that the military member can devote his or her full attention to military duties;

• the Military Lending Act (the "MLA") and Department of Defense rules, which limit the interest rate and fees that may be charged to military members and their dependents, requires certain disclosures and prohibits certain mandatory clauses among other restrictions;

• the Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers’ asset accounts;

• the Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures and, with consumer consent, permits required disclosures to be provided electronically;

• the Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures; and

• the Telephone Consumer Protection Act (the "TCPA") and the regulations of the Federal Communications Commission (the "FCC"), which regulations include limitations on telemarketing calls, auto-dialed calls, prerecorded calls, text messages and unsolicited faxes.

While it is our intention to always be in compliance with these laws, it is possible that we may currently be, or at some time have been, inadvertently out of compliance with some or any such laws. Further, all applicable laws are subject to evolving regulatory and judicial interpretations, which further complicate real-time compliance. Lastly, compliance with these laws is costly, time-consuming and limits our operational flexibility.

Failure to comply with these laws and regulatory requirements applicable to our business may, among other things, limit our or a collection agency’s ability to collect all or part of the principal of or interest on loans. As a result, we may not be able to collect on unpaid principal or interest. In addition, non-compliance could subject us to damages, revocation of required licenses, class action lawsuits, administrative enforcement actions, rescission rights held by investors in securities offerings and civil and criminal liability, which may harm our business and may result in borrowers rescinding their loans.

Where applicable, we seek to comply with state installment, CSO, servicing and similar statutes. In all jurisdictions with licensing or other requirements that we believe may be applicable to us, we comply with the relevant requirements by acquiring the necessary licenses or authorization and submitting appropriate registrations in connection therewith. Nevertheless, if we are found to not have complied with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions or penalties or be required to obtain other licenses or authorizations in such jurisdiction, which may have an adverse effect on our ability to perform our servicing obligations or make products or services available to borrowers in particular states, which may harm our business.

Our products currently have usage caps and limitations on lending based on internally developed “responsible lending guidelines.” If those policies become more restrictive due to legislative or regulatory changes at the local, state, or federal regulatory level these products would experience declining revenues per customer. In some cases, legislative or regulatory changes at the local, state or federal regulatory level may require us to discontinue offering certain of our products in certain jurisdictions.

The CFPB may have examination authority over our consumer lending business that could have a significant impact on our business.

The CFPB is currently considering rules to define larger participants in markets for consumer installment loans for purposes of supervision. Once this rule and corresponding examination rules are established, we anticipate the CFPB will examine us. The CFPB’s examination authority permits CFPB examiners to inspect the books and records of providers and ask questions about their business practices. The examination procedures include specific modules for examining marketing activities, loan application and origination activities, payment processing activities and sustained use by consumers, collections, accounts in default, consumer reporting activities and third-party relationships. As a result of these examinations, we could be required to change our products, our services or our practices, whether as a result of another party being examined or as a result of an examination of us, or we could be subject to monetary penalties, which could reduce our profit margins or otherwise materially adversely affect us.

Furthermore, the CFPB’s practices and procedures regarding civil investigations, examination, enforcement and other matters relevant to us and other CFPB-regulated entities are subject to further development and change. Where the CFPB holds powers previously assigned to other regulators or may interpret laws previously interpreted by other regulators, the CFPB may not continue to apply such powers or interpret relevant concepts consistent with previous regulators’ practice. This may adversely affect our ability to anticipate the CFPB’s expectations or interpretations in our interaction with the CFPB.

The CFPB also has broad authority to prohibit unfair, deceptive and abusive acts and practices and to investigate and penalize financial institutions that violate this prohibition. In addition to having the authority to obtain monetary penalties for violations of applicable federal consumer financial laws (including the CFPB’s own rules), the CFPB can require remediation of practices, pursue administrative proceedings or litigation and obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief). Also, where a company is believed to have violated Title X of the Dodd-Frank Act or CFPB regulations implemented thereunder, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy such violations after consulting with the CFPB. If the CFPB or one or more state attorneys general or state regulators believe that we have violated any of the applicable laws or regulations, they could exercise their enforcement powers in ways that could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Many states, including California, Massachusetts, Maryland and New York, have taken steps to actively enforce consumer protection laws, including through the creation of so-called “mini-CFPBs.”

The FDIC has issued examination guidance affecting our bank partners and these or subsequent new rules and regulations could have a significant impact on our products originated by bank partners.

The Bank-Originated Products are offered by our bank partners using our technology, underwriting and marketing services. The bank partners are supervised and examined by both the states that charter them and the FDIC. If the FDIC or a state supervisory body considers any aspect of the products originated by bank partners to be inconsistent with its guidance, the bank partners may be required to alter the product.

On July 29, 2016, the board of directors of the FDIC released examination guidance relating to third-party lending as part of a package of materials designed to “improve the transparency and clarity of the FDIC’s supervisory policies and practices” and consumer compliance measures that FDIC-supervised institutions should follow when lending through a business relationship with a third party. The proposed guidance, if finalized, would apply to all FDIC-supervised institutions that engage in third-party lending programs, including certain bank products.

If adopted as proposed, the guidance would result in increased supervisory attention of institutions that engage in significant lending activities through third parties, including at least one examination every 12 months, as well as supervisory expectations for a third-party lending risk management program and third-party lending policies that contain certain minimum requirements, such as self-imposed limits as a percentage of total capital for each third-party lending relationship and for the overall loan program, relative to origination volumes, credit exposures (including pipeline risk), growth, loan types, and acceptable credit quality. Comments on the guidance were due October 27, 2016. While the guidance has never formally been adopted, it is our understanding that the FDIC has relied upon it in its examination of third-party lending arrangements.

On July 20, 2020, the FDIC announced that it is seeking the public's input on the potential for a public/private standard-setting partnership and voluntary certification program to promote the effective adoption of innovative technologies at FDIC-supervised financial institutions. Released as part of the FDiTech initiative, the request asks whether the proposed program might reduce the regulatory and operational uncertainty that may prevent financial institutions from deploying new technology or entering into partnerships with technology firms, including "fintechs." For financial institutions that choose to use the system, a voluntary certification program could help standardize due diligence practices and reduce associated costs. At this time, it is unclear what impact this request and potential proposal will have on our operations.

On July 13, 2021, the Federal Reserve, Office of the Comptroller of the Currency, and the FDIC issued proposed guidance on managing risks associated with third-party relationships, including relationships with fintech entities and bank/fintech sponsorship arrangements. The guidance sets forth expectations for managing risk throughout the life cycle of such arrangements, including planning, due diligence and contract negotiation, oversight and accountability, ongoing monitoring, and termination. We will continue to monitor this guidance as it potentially becomes final.

The regulatory landscape in which we operate is continually changing due to new CFPB rules, regulations and interpretations, as well as various legal actions that have been brought against others in marketplace lending. If litigation on similar theories were brought against us when we work with a federally insured bank that makes loans, rather than making loans ourselves and were such an action to be successful our business, prospects, results of operations, financial condition or cash flows will be materially adversely affected.

The case law involving whether an originating lender, on the one hand, or third party vendors, on the other hand, are the “true lenders” of a loan is still developing and courts have come to different conclusions and applied different analyses. The determination of whether a third-party service provider is the “true lender” is significant because third-parties risk having the loans they service becoming subject to a consumer’s state usury limits. If we were re-characterized as a “true lender” with respect to any bank or third party we work with, loans could be deemed to be void and unenforceable in some states, the right to collect finance charges could be affected, and we could be subject to fines and penalties from state and federal regulatory agencies as well as claims by borrowers, including class actions by private plaintiffs.

In 2017, the Colorado Administrator of the Uniform Consumer Credit Code filed complaints in state court against marketplace lenders Marlette Funding LLC and Avant of Colorado LLC. The Administrator asserted that loans to Colorado residents facilitated through the platform were required to comply with Colorado laws regarding interest rates and fees, and that those laws were not preempted by federal laws that apply to loans originated by WebBank, the federally regulated issuing bank who originated loans through Avant’s platform. The matter ultimately settled without a determination of which entity is the “true lender” but created certain safe-harbor transactional structures that the regulator would find indicative of the bank being the “true lender.” The settlement provides a safe harbor for the marketplace lending programs if certain criteria related to oversight, disclosure, funding, licensing, consumer terms, and structure are followed. Only the parties to the litigation are bound by this settlement and further, it only applies to closed-end loans offered by banks in conjunction with non-bank partners or fintechs partnering with banks that involve origination of loans through an online platform.

Additionally, in May 2015, the U.S. Court of Appeals for the Second Circuit issued its decision in Madden v. Midland Funding, LLC, where the court interpreted the scope of federal preemption under the National Bank Act (“NBA”) and held that a nonbank assignee of a loan originated by a national bank was not entitled to the benefits of federal preemption of claims of usury. The Second Circuit’s decision is binding on federal courts located in Connecticut, New York, and Vermont, but the decision could also be adopted by other courts. The Madden decision created some uncertainty as to whether non-bank entities purchasing loans originated by a bank may rely on federal preemption of state usury laws, which created an increased risk of litigation by plaintiffs challenging the interest rates charged in accordance with the terms of loans. The Madden decision, and any decisions with similar findings, may substantially reduce our operating efficiency and/or attractiveness to investors, possibly resulting in a decline in our operating results.

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

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

In August 2020, eight state attorneys general - from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia - filed an action in the U.S. District Court for the Northern District of California challenging the FDIC's valid-when-made rule. The FDIC's final rule clarifies that, under the Federal Deposit Insurance Act, whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan. On February 8, 2022, the court ruled that the FDIC did not violate the Administrative Procedures Act in issuing the rule, and granted summary judgment in favor of the FDIC. The court also issued a similar ruling in favor of a challenge by the same state attorneys general to the OCC's valid-when-made rule. This is a positive development for the concept of valid-when-made as it relates to bank-issued loans.

If we are deemed to be the “true lender,” then we could be subject to claims by borrowers, as well as enforcement actions by regulators. If a borrower or regulator were to successfully bring claims for violations of state consumer lending laws, including usury and licensing requirements, we could be subject to fines and penalties, including the voiding of loans and repayment of principal and interest to borrowers and investors. We might decide to, among other actions, limit the maximum interest rate and terms on certain loans, might decide to not offer certain products, might decide to not offer products in certain geographic locations, and some regulators could conclude we are subject to state laws, including licensing or registration in connection with services we provide to our bank partners . These actions may substantially reduce our operating efficiency and/or attractiveness to investors, possibly resulting in a decline in operating results, which could in turn adversely affect our business, financial condition and results of operations.

We use third-party collection agencies to assist us with debt collection. Their failure to comply with applicable debt collection regulations could subject us to fines and other liabilities, which could harm our reputation and business.

The FDCPA regulates persons who regularly collect or attempt to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. Many states impose additional requirements on debt collection communications, and some of those requirements may be more stringent than the federal requirements. Moreover, regulations governing debt collection are subject to changing interpretations that differ from jurisdiction to jurisdiction. We use third-party collections agencies to collect on debts incurred by consumers of our credit products. Regulatory changes could make it more difficult for collections agencies to effectively collect on the loans we originate.

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

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

A number of proposals have recently been implemented or are pending before federal and state legislative and regulatory bodies that could impose obligations in areas such as privacy. For example, the California Consumer Privacy Act (the “CCPA”) came into effect on January 1, 2020. The CCPA broadly defines personal information and provides California consumers increased privacy rights and protections. In August 2020, final implementing regulations were approved to guide covered businesses' implementation of the CCPA, and since that time, the California Attorney General has proposed four sets of modifications to these regulations. With the passage of the California Privacy Rights Act (the “CPRA”) on November 3, 2020, we expect privacy rights of Californians will expand significantly and become more restrictive for companies that do business in California.

Additionally, on October 22, 2020, under the direction of CFPB Director Kraninger, the CFPB issued an advance notice of proposed rulemaking (“ANPR”) soliciting feedback on how the CFPB should develop regulations to implement Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Subject to rules prescribed by the CFPB, Section 1033 requires “covered persons” to make available to a consumer, upon request, information in the control or possession of the covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including information related to any transaction, series of transactions or to the account, including costs, charges and usage data. On July 19, 2021, President Biden issued Executive Order 14036, which called on the CFPB to finalize rules under Section 1033 of the Dodd-Frank Act. At this time, it is difficult to accurately assess the likelihood of the impact that this and any future legislation or rules and regulations implementing Section 1033 could have on our business.

RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK

The price of our common stock may be volatile, and the value of your investment could decline.

Technology stocks have historically experienced high levels of volatility. The trading price of our common stock may fluctuate substantially depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

• announcements of new products, services or technologies, relationships with strategic partners or acquisitions or changes in the timing of such anticipated events; of the termination of, or material changes to, material agreements; or of other events by us or our competitors;

• changes in economic conditions;

• changes in prevailing interest rates;

• price and volume fluctuations in the overall stock market from time to time;

• significant volatility in the market price and trading volume of technology companies in general and of companies in the financial services industry;

• fluctuations in the trading volume of our shares or the size of our public float;

• actual or anticipated changes in our operating results or fluctuations in our operating results;

• quarterly fluctuations in demand for our loans;

• whether our operating results meet the expectations of securities analysts or investors;

• actual or anticipated changes in the expectations of investors or securities analysts;

• regulatory developments in the US, foreign countries or both and our ability to comply with applicable regulations;

• material litigation, including class action lawsuits;

• major catastrophic events;

• sales of large blocks of our stock;

• entry into, modification of or termination of a material agreement; or

• departures of key personnel or directors.

In addition, if the market for technology and financial services stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, operating results and financial condition.

We may not pay dividends for the foreseeable future.

We have never declared or paid any dividends on our common stock. In addition, pursuant to our financing agreements, we are prohibited from paying cash dividends in certain circumstances, and we may be further restricted in the future by debt or other agreements we enter into. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.

Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of us.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. The provisions, among other things:

• establish a classified Board of Directors so that not all members of our Board of Directors are elected at one time;

• permit only our Board of Directors to establish the number of directors and fill vacancies on the Board;

• provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders;

• require two-thirds approval to amend some provisions in our restated certificate of incorporation and restated bylaws;

• authorize the issuance of “blank check” preferred stock that our Board of Directors could use to implement a stockholder rights plan, or a “poison pill;”

• eliminate the ability of our stockholders to call special meetings of stockholders;

• prohibit stockholder action by written consent, which will require that all stockholder actions must be taken at a stockholder meeting;

• do not provide for cumulative voting; and

• establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”) which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.

Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers, employees or agents, (iii) any action asserting a claim against us arising under the DGCL or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision does not preclude or contract the scope of exclusive federal or concurrent jurisdiction for any actions brought under the Securities Act or the Exchange Act. Accordingly, our exclusive forum provision will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations. The choice of forum provision in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

GENERAL RISK FACTORS

Customer complaints and/or negative perception could reduce our customer growth and our business could suffer.

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

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

Sales of substantial amounts of our common stock in the public markets, or the perception that it may occur, could reduce the price of our common stock and may dilute your voting power and ownership interest.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate.

We may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we are subject to the reporting requirements of the Exchange Act, the NYSE listing standards and other applicable securities rules and regulations. Compliance with these rules and regulations increases our legal and financial compliance costs, makes some activities more difficult, time-consuming or costly, and increases demand on our systems and resources, particularly after we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenues-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

If we fail to maintain an effective system of disclosure controls and procedures and internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires, among other things, our management to report on, and, if we cease to be an emerging growth company our independent registered public accounting firm will have to attest to the effectiveness of, our internal control over financial reporting. Our management may conclude that our internal controls over financial reporting are not effective if we fail to cure any identified material weakness or otherwise.

If we fail to achieve and maintain the adequacy of our internal controls over financial reporting, as these standards may be modified, supplemented or amended from time to time, we may be unable to report our financial information on a timely basis, may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, and may suffer adverse regulatory consequences or violations of listing standards.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could materially and adversely affect our business, results of operations, and financial condition and could cause a decline in the trading price of our common stock.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our business, our results of operations and our financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K.

Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” and "Note About Forward-Looking Statements" sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We generally refer to loans, customers and other information and data associated with each of our brands (Rise, Elastic and Today Card) as Elevate’s loans, customers, information and data, irrespective of whether Elevate directly originates the credit to the customer or whether such credit is originated by a third party.

OVERVIEW

We provide online credit solutions to consumers in the US who are not well-served by traditional bank products and who are looking for better options than payday loans, title loans, pawn and storefront installment loans. Non-prime consumers now represent a larger market than prime consumers but are risky to underwrite and serve with traditional approaches. We’re succeeding at it - and doing it responsibly - with best-in-class advanced technology and proprietary risk analytics honed by serving more than 2.7 million customers with $9.8 billion in credit. Our current online credit products, Rise, Elastic and Today Card, reflect our mission to provide customers with access to competitively priced credit and services while helping them build a brighter financial future with credit building and financial wellness features. We call this mission "Good Today, Better Tomorrow."

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

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

We use our working capital and our credit facility with Victory Park Management, LLC ("VPC” and the "VPC Facility") to fund the loans we directly make to our Rise customers. The VPC Facility has a maximum total borrowing amount available of $200 million at December 31, 2021. See “—Liquidity and Capital Resources—Debt facilities.”

We also license our Rise installment loan brand to two banks. FinWise Bank originates Rise installment loans in 17 states. This bank initially provides all of the funding, retains 4% of the balances of all of the loans originated and sells the remaining 96% loan participation in those Rise installment loans to a third-party SPV, EF SPV, Ltd. ("EF SPV"). These loan participation purchases are funded through a separate financing facility (the "EF SPV Facility"), and through cash flows from operations generated by EF SPV. The EF SPV Facility has a maximum total borrowing amount available of $250 million. We do not own EF SPV, but we have a credit default protection agreement with EF SPV whereby we provide credit protection to the investors in EF SPV against Rise loan losses in return for a credit premium. Elevate is required to consolidate EF SPV as a variable interest entity ("VIE") under US GAAP and the consolidated financial statements include revenue, losses and loans receivable related to the 96% of the Rise installment loans originated by FinWise Bank and sold to EF SPV.

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

The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all loans originated and sells a 90% loan participation in the Elastic lines of credit. An SPV structure was implemented such that the loan participations are sold by Republic Bank to Elastic SPV, Ltd. (“Elastic SPV”) and Elastic SPV receives its funding from VPC in a separate financing facility (the “ESPV Facility”), which was finalized on July 13, 2015. We do not own Elastic SPV but we have a credit default protection agreement with Elastic SPV whereby we provide credit protection to the investors in Elastic SPV against Elastic loan losses in return for a credit premium. Per the terms of this agreement, under US GAAP, we are the primary beneficiary of Elastic SPV and are required to consolidate the financial results of Elastic SPV as a VIE in our consolidated financial results. The ESPV Facility has a maximum total borrowing amount of $350 million as of December 31, 2021.

Today Card is a credit card product designed to meet the spending needs of non-prime consumers by offering a prime customer experience. Today Card is originated by CCB under the licensed MasterCard brand, and a 95% participation interest in the credit card receivable is sold to us. These credit card receivable purchases are funded through a separate financing facility (the "TSPV Facility"), and through cash flows from operations generated by the Today Card portfolio. The TSPV Facility has a maximum commitment amount of $50 million, which may be increased up to $100 million. As the lowest APR product in our portfolio, Today Card allows us to serve a broader spectrum of non-prime Americans. The Today Card experienced significant growth in its portfolio size despite the pandemic due to the success of our direct mail campaigns, the primary marketing channel for acquiring new Today Card customers. We are following a specific growth plan to grow the product while monitoring customer responses and credit quality. Customer response to the Today Card is very strong, as we continue to see extremely high response rates, high customer engagement, and positive customer satisfaction scores.

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

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

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

• Margin expansion .    We aim to manage our business to achieve a long-term operating margin of 20%. In periods of significant loan portfolio growth, our margins may become compressed due to the upfront costs associated with marketing and credit provisioning expense associated with this growth. As we continue to rebuild and scale our portfolio from the impacts of COVID-19, we anticipate that our direct marketing costs primarily associated with new customer acquisitions will be approximately 10% of revenues and our operating expenses will decline to 20% of revenues. While our operating margins may exceed 20% in certain years, such as in 2020 when we incurred lower levels of direct marketing expense and materially lower credit losses due to a lack of customer demand for loans resulting from the effects of COVID-19, we do not expect our operating margin to increase beyond that level over the long-term, as we intend to pass on any improvements over our targeted margins to our customers in the form of lower APRs. We believe this is a critical component of our responsible lending platform and over time will also help us continue to attract new customers and retain existing customers.

Impact of COVID-19

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

In 2020, we experienced a significant decline in the loan portfolio due to a lack of customer demand for loans resulting from the effects of COVID-19 and related government stimulus programs. These impacts resulted in a lower level of direct marketing expense and materially lower credit losses during 2020 and continuing into early 2021. Beginning in the second quarter of 2021, we experienced a return of demand for the loan products that we, and the bank originators we support, offer, resulting in significant growth in the loan portfolio from that point. This significant loan portfolio growth is resulting in compressed margins in 2021 due to the upfront costs associated with marketing and credit provisioning expense related to growing and “rebuilding” the loan portfolio from the impacts of COVID-19. We continue to target loan portfolio originations within our target CACs of $250-$300 and credit quality metrics of 45-55% of revenue which, when combined with our expectation of continuing customer loan demand for our portfolio products, we believe will allow us to return to our historical performance levels prior to COVID-19 after initially resulting in earnings compression.

Both we and the bank originators are closely monitoring the key credit quality indicators such as payment defaults, continued payment deferrals, and line of credit utilization. While we initially anticipated that the COVID-19 pandemic would have a negative impact on our credit quality, instead the monetary stimulus programs provided by the US government to our customer base have generally allowed customers to continue making payments on their loans. At the beginning of the pandemic, we expected an increase in net charge-offs as compared to prior periods but experienced historically low net charge-offs as a percentage of revenue in the second half of 2020 and early 2021. With the increased volume of new customer loans expected to be originated as we grow our loan portfolio back to our pre-pandemic size and the ending of government assistance, we expect an initial increase in net charge-offs in excess of our targeted range with a return of net charge-offs to our targeted range of 45-55% of revenue as the portfolio becomes more seasoned with a balance of new and returning customers. Further, we believe that the allowance for loan losses is adequate to absorb the losses inherent in the portfolio as of December 31, 2021.

We have implemented a hybrid remote environment where employees may choose to work primarily from the office or from home and gather collectively in the office on a limited basis. We have sought to ensure our employees feel secure in their jobs, have flexibility in their work location and have the resources they need to stay safe and healthy. As a 100% online lending solutions provider, our technology and underwriting platform has continued to serve our customers and the bank originators that we support without any material interruption in services.

COVID-19 has had a significant adverse impact on our business, and while uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment and expect continued loan portfolio growth and strong credit quality into the next year. We will continue assessing our minimum cash and liquidity requirement, monitoring our debt covenant compliance and implementing measures to ensure that our cash and liquidity position is maintained through the current economic cycle.

KEY FINANCIAL AND OPERATING METRICS

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

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

Revenues

As of and for the years ended December 31,

Revenue metrics (dollars in thousands, except as noted)

Revenues

Period-over-period revenue decrease

Ending combined loans receivable – principal (1)

Average combined loans receivable – principal (1)(2)

Total combined loans originated – principal

Average customer loan balance (in dollars) (3)

Number of new customer loans

Ending number of combined loans outstanding

Customer acquisition costs (in dollars)

Effective APR of combined loan portfolio

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

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

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

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

Ending and average combined loans receivable – principal .    We calculate the average combined loans receivable – principal by taking a simple daily average of the ending combined loans receivable – principal for each period. Key metrics that drive the ending and average combined loans receivable – principal include the amount of loans originated in a period and the average customer loan balance. All loan balance metrics include only the 90% participation in the related Elastic line of credit advances (we exclude the 10% held by Republic Bank), the 96% participation in FinWise Bank originated Rise installment loans and the 95% participation in CCB originated Rise installment loans and the 95% participation in the CCB originated Today Card credit card receivables, but include the full loan balances on CSO loans, which are not presented on our Consolidated Balance Sheets.

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

Average customer loan balance and effective APR of combined loan portfolio .    The average loan amount and its related APR are based on the product and the underlying credit quality of the customer. Generally, better credit quality customers are offered higher loan amounts at lower APRs. Additionally, new customers have more potential risk of loss than prior or existing customers due to lack of payment history and the potential for fraud. As a result, newer customers typically will have lower loan amounts and higher APRs to compensate for that additional risk of loss. The effective APR is calculated based on the actual amount of finance charges generated from a customer loan divided by the average outstanding balance for the loan and can be lower than the stated APR on the loan due to waived finance charges and other reasons. For example, a Rise customer may receive a $2,000 installment loan with a term of 24 months and a stated rate of 130%. In this example, the customer’s monthly installment loan payment would be $236.72. As the customer can prepay the loan balance at any time with no additional fees or early payment penalty, the customer pays the loan in full in month eight. The customer’s loan earns interest of $1,657.39 over the eight-month period and has an average outstanding balance of $1,912.37. The effective APR for this loan is 130% over the eight-month period calculated as follows:

($1,657.39 interest earned / $1,912.37 average balance outstanding) x 12 months per year = 130%

8 months

In addition, as an example for Elastic, if a customer makes a $2,500 draw on the customer’s line of credit and this draw required bi-weekly minimum payments of 5% (equivalent to 20 bi-weekly payments), and if all minimum payments are made, the draw would earn finance charges of $1,125. The effective APR for the line of credit in this example is 107% over the payment period and is calculated as follows:

($1,125.00 fees earned / $1,369.05 average balance outstanding)  x 26 bi-weekly periods per year = 107%

20 payments

The actual total revenue we realize on a loan portfolio is also impacted by the amount of prepayments and charged-off customer loans in the portfolio. For a single loan, on average, we typically expect to realize approximately 60% of the revenues that we would otherwise realize if the loan were to fully amortize at the stated APR. From the Rise example above, if we waived $350 of interest for this customer, the effective APR for this loan would decrease to 103%. From the Elastic example above, if we waived $125 of fees for this customer, the effective APR for this loan would decrease to 95%.

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

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

The following tables summarize the changes in customer loans by product for the years ended December 31, 2021, 2020 and 2019.

Year Ended December 31, 2021

Rise

Elastic

Today

(Installment Loans)

(Lines of Credit)

(Credit Card)

Total

Beginning number of combined loans outstanding

New customer loans originated

Former customer loans originated

Attrition

Ending number of combined loans outstanding

Customer acquisition cost

Average customer loan balance

Year Ended December 31, 2020

Rise

Elastic

Today

(Installment Loans)

(Lines of Credit)

(Credit Card)

Total

Beginning number of combined loans outstanding

New customer loans originated

Former customer loans originated

Attrition

Ending number of combined loans outstanding

Customer acquisition cost

Average customer loan balance

Year Ended December 31, 2019

Rise

Elastic

Today

(Installment Loans)

(Lines of Credit)

(Credit Card)

Total

Beginning number of combined loans outstanding

New customer loans originated

Former customer loans originated

Attrition

Ending number of combined loans outstanding

Customer acquisition cost

Average customer loan balance

Recent trends.     Our revenues for the year ended December 31, 2021 totaled $416.6 million, a decrease of 10% versus the prior year period. Our revenues for the year ended December 31, 2020 totaled $465.3 million, a decrease of 27% versus the prior year period. Both the Rise and Elastic products experienced a year-over-year decline in revenues of 12% and 11%, respectively, which were attributable to reductions in year-to-date average loan balances due to the economic crisis created by the COVID-19 pandemic beginning in March 2020, which resulted in substantial government assistance to our potential customers that lowered demand for our products, and a lower Rise effective APR. This decline in revenue was partially offset by a year-over-year increase in revenues for the Today Card product, which more than tripled its average principal balance outstanding year-over year. We believe Today Card balances have increased despite the impact of COVID-19 due to the nature of the product (credit card versus installment loan or lines of credit), the lower APR of the product (effective APR of 31% for the year ended December 31, 2021, compared to Rise at 103% and Elastic at 94%) as customers receiving stimulus payments would be more apt to pay down more expensive forms of credit, and the added convenience of having a credit card for online purchases of day-to-day items such as groceries or clothing (whereas the primary usage of a Rise installment loan or Elastic line of credit is for emergency financial needs such as a medical deductible or automobile repair).

We are currently experiencing an increase in new and former customers as demand for the loan products provided by us and the bank originators began to return during the second quarter of 2021. This is in contrast to 2020 and early 2021 when the portfolio of loan products experienced significantly decreased loan demand for both new and former customers due to COVID-19, including the effects of monetary stimulus provided by the US government reducing demand for loan products. All three of our products experienced an increase in principal loan balances in 2021 compared to a year ago. Rise and Elastic principal balances at December 31, 2021 totaled $310.5 million and $199.7 million, respectively, up $82.2 million and $42.3 million, respectively, from a year ago. Today Card principal loan balances at December 31, 2021 totaled $48.6 million, up $34.5 million from a year ago.

Our CAC was lower in the year ended December 31, 2021 at $247 as compared to the prior year at $297, with the prior year not reflective of our historical CAC due to the significant reduction in new loan originations due to the COVID-19 pandemic. Our 2021 loan volume is being sourced from all our marketing channels including direct mail, strategic partners and digital. We’ve seen a marked improvement in loan volume from our strategic partners channel where we have improved our technology and risk capabilities to interface with the strategic partners via our application programming interface (APIs) that we developed within our new technology platform, Blueprint™. Blueprint™ will allow us to more efficiently acquire new customers within our targeted CAC range. We believe our CAC in future quarters will continue to remain within or below our target range of $250 to $300 as we continue to optimize the efficiency of our marketing channels and continue to grow the Today Card which successfully generated new customers at a sub-$100 CAC.

Credit quality

As of and for the years ended December 31,

Credit quality metrics (dollars in thousands)

Net charge-offs(1)

Additional provision for loan losses(1)

Provision for loan losses

Past due combined loans receivable – principal as a percentage of combined loans receivable – principal(2)

Net charge-offs as a percentage of revenues(1)

Total provision for loan losses as a percentage of revenues

Combined loan loss reserve(3)

Combined loan loss reserve as a percentage of combined loans receivable(3)

(1) Net charge-offs and additional provision for loan losses are not financial measures prepared in accordance with US GAAP. Net charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due (Rise and Elastic) or 120 days past due (Today Card), or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud, offset by any recoveries. Additional provision for loan losses is the amount of provision for loan losses needed for a particular period to adjust the combined loan loss reserve to the appropriate level in accordance with our underlying loan loss reserve methodology. See “—Non-GAAP Financial Measures” for more information and for a reconciliation to Provision for loan losses, the most directly comparable financial measure calculated in accordance with US GAAP.

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

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

Net principal charge-offs as a percentage of average combined loans receivable - principal (1)(2)(3)

First

Quarter

Second Quarter

Third

Quarter

Fourth Quarter

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

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

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

The above chart depicts the historically low charge-off metrics from the third quarter of 2020 through the third quarter of 2021, due to COVID-19 pandemic impacts such as a lack of new customer demand, our implementation of payment assistance tools, and government stimulus payments received by our customers. Net principal charge-offs as a percentage of average combined loans receivable-principal for the fourth quarter of 2021 has returned to the levels consistent with 2019 due to the volume of new customers being originated as we rebuild the portfolio from the impacts of the COVID-19 pandemic and return to a more normalized credit profile.

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

Net charge-offs .    Net charge-offs comprise gross charge-offs offset by recoveries on prior charge-offs. Gross charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due (Rise and Elastic) or 120 days (Today Card), or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud. Any payments received on loans that have been charged off are recorded as recoveries and reduce the total amount of gross charge-offs. Recoveries are typically less than 10% of the amount charged off, and thus, we do not view recoveries as a key credit quality metric.

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

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

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

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

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

Example (dollars in thousands)

Beginning combined loan loss reserve

Less: Net charge-offs

Provision for loan losses:

Provision for net charge-offs

Additional provision for loan losses

Total provision for loan losses

Ending combined loan loss reserve balance

Loan loss reserve methodology .    Our loan loss reserve methodology is calculated separately for each product and, in the case of Rise loans originated under the state lending model (including CSO program loans), is calculated separately based on the state in which each customer resides to account for varying state license requirements that affect the amount of the loan offered, repayment terms and other factors. For each product, loss factors are calculated based on the delinquency status of customer loan balances: current, 1 to 30 days past due, 31 to 60 days past due or 61-120 past due (for Today Card only). These loss factors for loans in each delinquency status are based on average historical loss rates by product (or state) associated with each of these three delinquency categories. Hence, another key credit quality metric we monitor is the percentage of past due combined loans receivable – principal, as an increase in past due loans will cause an increase in our combined loan loss reserve and related additional provision for loan losses to increase the reserve. For customers that are not past due, we further stratify these loans into loss rates by payment number, as a new customer that is about to make a first loan payment has a significantly higher risk of loss than a customer who has successfully made ten payments on an existing loan with us. Based on this methodology, during the past three years we have seen our combined loan loss reserve as a percentage of combined loans receivable fluctuate between approximately 10% and 14% depending on the overall mix of new, former and past due customer loans.

Recent trends.     Total loan loss provision for the year ended December 31, 2021 was 45% of revenues, which was within our targeted range of 45% to 55%, compared to 34% in the prior year period. For the year ended December 31, 2021, net charge-offs as a percentage of revenues totaled 39%, compared to 41% in the prior year period. The increase in total loan loss provision as a percentage of revenues in 2021 was due to the increase in new loan originations beginning in the second quarter of 2021 and the loan loss provisioning associated with a growing portfolio. We would expect to have higher charge-offs as a percent of revenue, as compared to our targeted range, in the first quarter of 2022 due to the heavier mix of new customer loans in the second half of 2021, which have a higher loss profile. We expect to return within our targeted range beginning in the second quarter as the portfolio seasons with a mix of new and returning customers. While we initially anticipated that the COVID-19 pandemic would have a negative impact on our credit quality, instead the large quantity of monetary stimulus provided by the US government to our customer base has generally allowed customers to continue making payments on their loans, which resulted in a decrease in net charge-offs as a percentage of revenue compared to last year. We continue to monitor the portfolio during the economic recovery resulting from COVID-19 and will adjust our underwriting and credit policies to mitigate any potential negative impacts as needed. As loan demand continues to return to pre-pandemic levels and the loan portfolio grows, we expect our total loan loss provision as a percentage of revenues to be within our targeted range of approximately 45% to 55% of revenue.

The combined loan loss reserve as a percentage of combined loans receivable totaled 12%, 12% and 13% as of December 31, 2021, 2020 and 2019, respectively. The relatively steady loan loss reserve percentage reflects the stable credit performance of the portfolio, and we would expect the loan loss reserve to stabilize in the 12-13% range as we manage the portfolio to ensure a consistent mix of new and returning customers within the portfolio and return the portfolio to a normalized credit profile. Past due loan balances at December 31, 2021 were 10% of total combined loans receivable - principal, up from 6% from a year ago, due to the number of new customers originated beginning in the second quarter of 2021, and is consistent with our historical past due percentages prior to the pandemic. We, and the bank originators we support, are no longer offering specific COVID-19 payment deferral programs, but continue to offer other payment flexibility programs if certain qualifications are met. We are continuing to see that most customers are meeting their scheduled payments once they exit the payment deferral program. We anticipate the combined loan loss reserve as a percentage of combined loans receivable, as well as our past due loan balances as a percentage of total combined loans receivable-principal, will maintain at their historic norms as we continue to grow our loan portfolio with a consistent mix of new and returning customers.

We also look at Rise and Elastic principal loan charge-offs (including both credit and fraud losses) by loan vintage as a percentage of combined loans originated-principal. As the below table shows, our cumulative principal loan charge-offs for Rise and Elastic through December 31, 2021 for each annual vintage since the 2013 vintage are generally under 30% and continue to generally trend at or slightly below our 20% to 25% long-term targeted range. During 2019, we implemented new fraud tools that have helped lower fraud losses for the 2019 vintage and rolled out our next generation of credit models during the second quarter of 2019 and continued refining the models during the third and fourth quarters of 2019. Our payment deferral programs have also assisted in reducing losses in our 2019 and 2020 vintages coupled with a lower volume of new loan originations in our 2020 vintage. The 2019 and 2020 vintages are both performing better than the 2017 and 2018 vintages. While still early, we would expect the 2021 vintage to be at or near 2018 levels or slightly lower given the increased volume of new customer loans originated this year and a return of net charge-offs to our targeted range of 45-55% of revenue. It is also possible that the cumulative loss rates on all vintages will increase and may exceed our recent historical cumulative loss experience due to the economic impact of a prolonged crisis resulting from the COVID-19 pandemic.

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

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

We also look at Today Card principal loan charge-offs (including both credit and fraud losses) by account vintage as a percentage of account principal originations. As the below table shows, our cumulative principal credit card charge-offs through December 31, 2021 for the 2020 account vintage is under 7%. While our 2021 account vintage is currently performing better than 2020, we expect the 2021 account vintage to have losses at or higher than the 2020 account vintage based on the volume of new customers originated in the second half of 2021. The Today Card requires accounts to be charged off that are more than 120 days past due which results in a longer maturity period for the cumulative loss curve related to this portfolio. Our 2018 and 2019 vintages are considered to be test vintages and were comprised of limited originations volume and not reflective of our current underwriting standards.

Margins

Twelve Months Ended December 31,

Margin metrics (dollars in thousands)

Revenues

Net charge-offs (1)

Additional provision for loan losses (1)

Direct marketing costs

Other cost of sales

Gross profit

Operating expenses

Operating income

As a percentage of revenues:

Net charge-offs

Additional provision for loan losses

Direct marketing costs

Other cost of sales

Gross margin

Operating expenses

Operating margin

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

Gross margin is calculated as revenues minus cost of sales, or gross profit, expressed as a percentage of revenues, and operating margin is calculated as operating income expressed as a percentage of revenues. Due to the negative impact of COVID-19 on our loan balances and revenue, we are monitoring our profit margins closely. Long-term, we intend to continue to manage the business to a targeted 20% operating margin.

Recent operating margin trends .    For the year ended December 31, 2021, our operating margin was 5%, which was a decrease from 26% in the prior year period, as well as a decrease from 16% in 2019. The margin decreases experienced in 2021 were primarily driven by the upfront costs associated with credit provisioning and direct marketing expense associated with the increased new and former customer loan origination volume as we grow and rebuild our loan portfolio from the impacts of COVID-19. The margins achieved in 2020 were not reflective of our historical performance as we experienced a significant decline in the loan portfolio due to a lack of customer demand resulting from the effects of COVID-19 and related government stimulus programs. These impacts resulted in a lower level of direct marketing expense and materially lower credit losses during 2020, leading to an increased gross margin.

Our operating expense metrics have been negatively impacted by the COVID-19 pandemic and its impact on loan balances and revenue. We began to see improvements in our operating expense metric in the third and fourth quarter of 2021 due to the growth in the portfolio and associated increase in revenue during those periods as we continued to manage and maintain a relatively consistent operating expense between the two quarters. In the short term, with the growth in the loan portfolio experienced in 2021, we expect our expense metrics to continue to improve and move toward our target range as we focus on growth to increase our new and former customer loan volume and continue to scale the overall loan portfolio. In the long term, as we grow the loan portfolio while actively managing our operating expenses, we expect to see our operating expense metrics return to approximately 20-25% of revenue. However, management will continue to look for opportunities to reduce our expenses to help offset the increased loan origination and direct marketing expenses.

NON-GAAP FINANCIAL MEASURES

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

Adjusted Earnings (Loss)

Adjusted earnings (loss) represent our net income (loss) from continuing operations, adjusted to exclude:

• Uncertain tax position

• Contingent losses related to legal matters

• Cumulative tax effect of adjustments

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

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

Twelve Months Ended December 31,

(Dollars in thousands except per share amounts)

Net income (loss) from continuing operations

Impact of uncertain tax position

Impact of contingent losses related to legal matters

Cumulative tax effect of adjustments

Adjusted earnings (loss)

Diluted earnings (loss) per share - continuing operations

Impact of uncertain tax position

Impact of contingent losses related to legal matters

Cumulative tax effect of adjustments

Adjusted diluted earnings (loss) per share

Adjusted EBITDA and Adjusted EBITDA Margin

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

• Net interest expense primarily associated with notes payable under the debt facilities used to fund the loan portfolios;

• Share-based compensation;

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

• Gains and losses from dispositions or contingent losses related to legal matters included in non-operating loss; and

• Income taxes.

Adjusted EBITDA margin is Adjusted EBITDA divided by revenue.

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

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

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

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

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

The following table presents a reconciliation of net income (loss) from continuing operations to Adjusted EBITDA and Adjusted EBITDA margin for each of the periods indicated:

Twelve Months Ended December 31,

(Dollars in thousands)

Net income (loss) from continuing operations

Adjustments:

Net interest expense

Share-based compensation

Depreciation and amortization

Non-operating loss

Income tax expense (benefit)

Adjusted EBITDA

Adjusted EBITDA margin

Free cash flow

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

• Net charge-offs – combined principal loans; and

• Capital expenditures.

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

Twelve Months Ended December 31,

(Dollars in thousands)

Net cash provided by continuing operating activities (1)

Adjustments:

Net charge-offs – combined principal loans

Capital expenditures

FCF

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

Net charge-offs and additional provision for loan losses

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

Net charge-offs .    Net charge-offs comprise gross charge-offs offset by recoveries on prior charge-offs. Gross charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due (Rise and Elastic) or 120 days (Today Card), or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud. Any payments received on loans that have been charged off are recorded as recoveries and reduce total gross charge-offs.

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

Twelve Months Ended December 31,

(Dollars in thousands)

Net charge-offs

Additional provision for loan losses

Provision for loan losses

Combined loan information

The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all of the loans originated and sells a 90% loan participation in the Elastic lines of credit to a third-party SPV, Elastic SPV, Ltd. Elevate is required to consolidate Elastic SPV, Ltd. as a VIE under US GAAP and the consolidated financial statements include revenue, losses and loans receivable related to the 90% of Elastic lines of credit originated by Republic Bank and sold to Elastic SPV.

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

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

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

The information presented in the tables below on a combined basis are non-GAAP measures based on a combined portfolio of loans, which includes the total amount of outstanding loans receivable that we own and that are on our balance sheets plus outstanding loans receivable originated and owned by third parties that we guarantee pursuant to CSO programs in which we participate. There were no new loan originations in 2021 under our CSO programs, but we continued to have obligations as the CSO until the wind-down of this portfolio was completed in the third quarter of 2021. See “—Basis of Presentation and Critical Accounting Policies—Allowance and liability for estimated losses on consumer loans.”

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

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

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

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

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

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

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

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

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

(Dollars in thousands)

December 31

March 31

June 30

September 30

December 31

March 31

June 30

September 30

December 31

Company Owned Loans:

Loans receivable – principal, current, company owned

Loans receivable – principal, past due, company owned

Loans receivable – principal, total, company owned

Loans receivable – finance charges, company owned

Loans receivable – company owned

Allowance for loan losses on loans receivable, company owned

Loans receivable, net, company owned

Third-Party Loans Guaranteed by the Company:

Loans receivable – principal, current, guaranteed by company

Loans receivable – principal, past due, guaranteed by company

Loans receivable – principal, total, guaranteed by company (1)

Loans receivable – finance charges, guaranteed by company (2)

Loans receivable – guaranteed by company

Liability for losses on loans receivable, guaranteed by company

Loans receivable, net, guaranteed by company (3)

Combined Loans Receivable (3) :

Combined loans receivable – principal, current

Combined loans receivable – principal, past due

Combined loans receivable – principal

Combined loans receivable – finance charges

Combined loans receivable

(Dollars in thousands)

December 31

March 31

June 30

September 30

December 31

March 31

June 30

September 30

December 31

Combined Loan Loss Reserve (3) :

Allowance for loan losses on loans receivable, company owned

Liability for losses on loans receivable, guaranteed by company

Combined loan loss reserve

Combined loans receivable – principal, past due (3)

Combined loans receivable – principal (3)

Percentage past due

Combined loan loss reserve as a percentage of combined loans receivable (3)(4)

Allowance for loan losses as a percentage of loans receivable – company owned

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

(2) Represents finance charges earned by third-party lenders through the CSO programs, which are not included in our consolidated financial statements. The wind-down of the CSO program was completed in the third quarter of 2021.

(3) Non-GAAP measure.

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

COMPONENTS OF OUR RESULTS OF OPERATIONS

Revenues

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

Cost of sales

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

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

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

Operating expenses

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

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

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

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

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

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

Other expense

Net interest expense .   Net interest expense primarily includes the interest expense associated with the VPC Facility that funds the Rise installment loans, the ESPV Facility related to the Elastic lines of credit and related Elastic SPV entity, the EF SPV and EC SPV Facilities that fund Rise installment loans originated by FinWise Bank and CCB, respectively, and the TSPV facility used to fund credit card receivable purchases. Interest expense also includes any amortization of deferred debt issuance cost and prepayment penalties incurred associated with the debt facilities.

RESULTS OF OPERATIONS

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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

Years ended December 31,

Consolidated statements of operations data (dollars in thousands)

Revenues

Cost of sales:

Provision for loan losses

Direct marketing costs

Other cost of sales

Total cost of sales

Gross profit

Operating expenses:

Compensation and benefits

Professional services

Selling and marketing

Occupancy and equipment

Depreciation and amortization

Other

Total operating expenses

Operating income

Other expense:

Net interest expense

Non-operating loss

Total other expense

Income (loss) from continuing operations before taxes

Income tax expense (benefit)

Net income (loss) from continuing operations

Net income (loss) from discontinued operations

Net income (loss)

Years ended December 31,

As a percentage of revenues

Cost of sales:

Provision for loan losses

Direct marketing costs

Other cost of sales

Total cost of sales

Gross profit

Operating expenses:

Compensation and benefits

Professional services

Selling and marketing

Occupancy and equipment

Depreciation and amortization

Other

Total operating expenses

Operating income

Other expense:

Net interest expense

Non-operating loss

Total other expense

Income (loss) from continuing operations before taxes

Income tax expense (benefit)

Net income (loss) from continuing operations

Net income (loss) from discontinued operations

Net income (loss)

Comparison of the years ended December 31, 2021 and 2020

Revenues

Years ended December 31,

Period-to-period change

(Dollars in thousands)

Amount

Percentage of

revenues

Amount

Percentage of

revenues

Amount

Percentage

Finance charges

Other

Revenues

Revenues decreased by $48.7 million, or 10%, from $465.3 million for the year ended December 31, 2020 to $416.6 million for the year ended December 31, 2021. The decrease in revenue is primarily attributable to a lower average combined loans receivable-principal balance coupled with lower effective APRs earned on the loan portfolio.

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

Year Ended December 31, 2021

(Dollars in thousands)

Rise(1)

(Installment Loans)

Elastic

(Lines of Credit)

Today

(Credit Cards)

Total

Average combined loans receivable – principal(2)

Effective APR

Finance charges

Other

Total revenue

Year Ended December 31, 2020

(Dollars in thousands)

Rise(1)

(Installment Loans)

Elastic

(Lines of Credit)

Today

(Credit Cards)

Total

Average combined loans receivable – principal(2)

Effective APR

Finance charges

Other

Total revenue

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

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

Our average combined loans receivable principal decreased $21 million for the year ended December 31, 2021 as compared to 2020. This decrease in average balance is primarily due to lower combined loans receivable-principal balances in the Rise and Elastic portfolios in the first half of 2021 which were impacted by the COVID-19 pandemic and substantial government assistance to our customers prior to the growth which commenced in late second quarter 2021. The decrease in average balances accounted for approximately $32 million of the reduction in revenue for the period. Our average APR declined from 102% for the year ended December 31, 2020 to 95% for the year ended December 31, 2021. This reduction in the effective APR is due to both the lower effective interest rates earned on loans in a deferral status under the payment flexibility tools that were implemented in response to the COVID-19 pandemic and the growth of Today Card relative to the total loan portfolio, which has the lowest APR. The lower effective APR accounted for approximately $20 million of the reduction in revenue for the period. We expect the overall effective APR of the loan portfolio to remain flat going forward.

Cost of sales

Years ended December 31,

Period-to-period

change

(Dollars in thousands)

Amount

Percentage of

revenues

Amount

Percentage of

revenues

Amount

Percentage

Cost of sales:

Provision for loan losses

Direct marketing costs

Other cost of sales

Total cost of sales

Provision for loan losses .    Provision for loan losses increased by $28.9 million, or 18%, from $156.9 million for the year ended December 31, 2020 to $185.8 million for the year ended December 31, 2021.

The tables below break out these changes by loan product:

Year Ended December 31, 2021

(Dollars in thousands)

Rise

(Installment Loans)

Elastic

(Lines of Credit)

Today

(Credit Cards)

Total

Combined loan loss reserve(1):

Beginning balance

Net charge-offs

Provision for loan losses

Ending balance

Combined loans receivable(1)(2)

Combined loan loss reserve as a percentage of ending combined loans receivable

Net charge-offs as a percentage of revenues

Provision for loan losses as a percentage of revenues

Year Ended December 31, 2020

(Dollars in thousands)

Rise

(Installment Loans)

Elastic

(Lines of Credit)

Today

(Credit Cards)

Total

Combined loan loss reserve(1):

Beginning balance

Net charge-offs

Provision for loan losses

Ending balance

Combined loans receivable(1)(2)

Combined loan loss reserve as a percentage of ending combined loans receivable

Net charge-offs as a percentage of revenues

Provision for loan losses as a percentage of revenues

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

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

Total loan loss provision for the year ended December 31, 2021 was 45% of revenues, which was within our targeted range of 45% to 55%, and higher than 34% for the year ended December 31, 2020. For the year ended December 31, 2021, net charge-offs as a percentage of revenues was 39%, a decrease from 41% for the comparable period in 2020. The increase in total loan loss provision as a percentage of revenues in 2021 compared to last year was due to the increase in new loan originations beginning in the second quarter of 2021 and charge-offs and loan loss provisioning associated with a growing portfolio. While we initially anticipated that the COVID-19 pandemic would have a negative impact on our credit quality, instead the large quantity of monetary stimulus provided by the US government to our customer base has generally allowed customers to continue making payments on their loans, which resulted in a decrease in net charge-offs as a percentage of revenue compared to last year. We continue to monitor the portfolio during the economic recovery resulting from COVID-19 and will adjust our underwriting and credit policies to mitigate any potential negative impacts as needed. As loan demand continues to return to pre-pandemic levels and the loan portfolio grows, we expect our total loan loss provision as a percentage of revenues to be within our targeted range of approximately 45% to 55% of revenue.

The combined loan loss reserve as a percentage of combined loans receivable totaled 12% as of both December 31, 2021 and December 31, 2020. The loan loss reserve percentage is flat at December 31, 2021, reflecting the stable credit performance of the portfolio, and we would expect the loan loss reserve to stabilize in the 12-13% range as we manage the portfolio to ensure a consistent mix of new and returning customers within the portfolio and return the portfolio to a normalized credit profile. Past due loan balances at December 31, 2021 were 10% of total combined loans receivable - principal, up significantly from 6% from a year ago, due to the number of new customers originated beginning in the second quarter of 2021, but is consistent with our historical past due percentages prior to the pandemic.

Direct marketing costs .    Direct marketing costs increased by approximately $21.3 million, or 105%, from $20.3 million for the year ended December 31, 2020 to $41.5 million for the year ended December 31, 2021. We had limited marketing activities and new loan origination volume in 2020 in response to the COVID-19 pandemic. We have seen a return to more normalized new customer acquisition in all the three loan products in 2021 as the economy continues to recover from the COVID-19 pandemic and demand for the loan products returns. For the year ended December 31, 2021, the number of new customers acquired increased to 168,339 compared to 68,245 during the year ended December 31, 2020. We anticipate our direct marketing costs will continue to increase as we focus on growing our loan portfolio. Our CAC for the year ended December 31, 2021 was lower than the year ended December 31, 2020 at $247 as compared to $297, with 2020 not reflective of our historical CAC due to the significant reduction in new loan originations due to the COVID-19 pandemic. We believe our CAC in future quarters will continue to remain within or below our target range of $250 to $300 as we continue to optimize the efficiency of our marketing channels and continue to grow the Today Card which successfully generated new customers at a sub-$100 CAC.

Other cost of sales .    Other cost of sales increased by approximately $5.8 million, or 72%, from $8.1 million for the year ended December 31, 2020 to $14.0 million for the year ended December 31, 2021 due to increased data verification costs resulting from increased loan origination volume.

Operating expenses

Years ended December 31,

Period-to-period

change

(Dollars in thousands)

Amount

Percentage of

revenues

Amount

Percentage of

revenues

Amount

Percentage

Operating expenses:

Compensation and benefits

Professional services

Selling and marketing

Occupancy and equipment

Depreciation and amortization

Other

Total operating expenses

Compensation and benefits .    Compensation and benefits decreased by $7.7 million, or 9%, from $84.1 million for the year ended December 31, 2020 to $76.4 million for the year ended December 31, 2021 primarily due to the reduction in staff related to an operating expense reduction plan we implemented in the second and third quarters of 2020 in response to the pandemic.

Professional services .    Professional services increased by $0.9 million, or 3%, from $31.6 million for the year ended December 31, 2020 to $32.5 million for the year ended December 31, 2021 due to increased legal expenses, partially offset by decreased board of directors' stock compensation expense.

Selling and marketing .    Selling and marketing decreased by $0.2 million, or 6%, from $3.5 million for the year ended December 31, 2020 to $3.3 million for the year ended December 31, 2021 primarily due to decreased marketing agency fees.

Occupancy and equipment .    Occupancy and equipment increased by $2.9 million, or 15%, from $18.8 million for the year ended December 31, 2020 to $21.7 million for the year ended December 31, 2021 primarily due to increased web hosting, partially offset by licenses and rentals expense.

Depreciation and amortization .    Depreciation and amortization increased by approximately $0.3 million, or 2%, from $18.1 million for the year ended December 31, 2020 to $18.5 million for the year ended December 31, 2021 primarily due to the acceleration of a board member's non-compete agreement of $0.5 million with a slight depreciation expense decrease between the two years.

Net interest expense

Years ended December 31,

Period-to-period

change

(Dollars in thousands)

Amount

Percentage of

revenues

Amount

Percentage of

revenues

Amount

Percentage

Net interest expense

Net interest expense decreased $10.5 million, or 22%, during the year ended December 31, 2021 versus the year ended December 31, 2020. Our average balance of notes payable outstanding under the debt facilities for the year ended December 31, 2021 decreased $74.7 million from $467.7 million for the year ended December 31, 2020 to $393.0 million for the year ended December 31, 2021 due to debt paydowns, including the maturity of one of our term notes, partially offset by new draws to fund loan portfolio growth. This reduction resulted in a decrease in interest expense of approximately $7.3 million. In addition, our average effective cost of funds on our notes payable outstanding decreased from 10.5% for the year ended December 31, 2020 to 9.8% for the year ended December 31, 2021, resulting in a decrease in interest expense of approximately $3.2 million. At December 31, 2021, our effective cost of funds on new borrowings on our VPC facilities is currently 8%, which is expected to reduce our overall effective costs of funds as we continue to borrow on our debt facilities in the future.

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

Years ended December 31,

(Dollars in thousands)

VPC Facility

Average facility balance during the period

Net interest expense

Effective cost of funds

ESPV Facility

Average facility balance during the period

Net interest expense

Effective cost of funds

EF SPV Facility

Average facility balance during the period

Net interest expense

Effective cost of funds

EC SPV Facility

Average facility balance during the period

Net interest expense

Effective cost of funds

TSPV Facility

Average facility balance during the period (1)

Net interest expense

Effective cost of funds

(1) Average facility balance from inception at October 12, 2021 to December 31, 2021.

In July 2020, we entered into a new facility, the EC SPV Facility. As of December 31, 2021, we have drawn $55.5 million on the EC SPV facility. In October 2021, we entered into a new facility, the TSPV facility, and have drawn $37 million as of December 31, 2021. Per the terms of the February 2019 amendments and the July 31, 2020 EC SPV agreement, we qualified for a 25 bps rate reduction on the VPC, ESPV, EF SPV, and EC SPV facilities effective January 1, 2021. We have evaluated the interest rates for our debt and believe they represent market rates based on our size, industry, operations and recent amendments. As a result, the carrying value for the debt approximates the fair value. See " — Liquidity and Capital Resources — Debt facilities" for more information.

Non-operating loss

Years ended December 31,

Period-to-period

change

(Dollars in thousands)

Amount

Percentage of

revenues

Amount

Percentage of

revenues

Amount

Percentage

Non-operating loss

During the year ended December 31, 2021, we accrued $22.8 million in contingent losses related to legal matters related to our spin-off from our predecessor company in 2014 and a regulatory litigation matter, partially offset by a $0.5 million recovery related to an indemnification for a former executive of the Company. During the year ended December 31, 2020, we recognized $24.1 million in non-operating expenses related to an estimated $17 million contingent loss associated with a legal matter related to our spin-off from our predecessor company in 2014 and a separate $7 million indemnification accrual related to a legal matter for a former executive of the Company.

Income tax expense (benefit)

Years ended December 31,

Period-to-period

change

(Dollars in thousands)

Amount

Percentage of

revenues

Amount

Percentage of

revenues

Amount

Percentage

Income tax expense (benefit)

Our income tax expense decreased $18.7 million, or 171%, from $10.9 million for the year ended December 31, 2020 to a income tax benefit of $7.8 million for the year ended December 31, 2021. We recognized an uncertain tax position of $1.3 million in income tax expense due to a recent change in tax regulation in the state of Texas that impacted our previously recognized research and development state tax credits. Our effective tax rates for continuing operations for the years ended December 31, 2021 and 2020 were 19% and 23%, respectively. Our effective tax rates are different from the standard corporate federal income tax rate of 21% primarily due to the uncertain tax position, of which $1.2 million would impact our effective tax rate if realized, permanent non-deductible items, and corporate state tax obligations in the states where we have lending activities. Our US cash effective tax rate was approximately 0.3% for 2021.

Net loss from discontinued operations

Our loss from discontinued operations on our UK entity (ECIL) for the year ended December 31, 2020 consists of an investment loss of $28.0 million, operating losses of $5.1 million, and a goodwill impairment loss of $9.3 million, partially offset by an income tax benefit of $28.4 million.

Net income (loss)

Years ended December 31,

Period-to-period

change

(Dollars in thousands)

Amount

Percentage of

revenues

Amount

Percentage of

revenues

Amount

Percentage

Net income (loss)

Our net income (loss) decreased $54.2 million, or 263%, from net income of $20.6 million for the year ended December 31, 2020 to a net loss of $33.6 million for the year ended December 31, 2021 primarily due to the earnings compression experienced due to loan portfolio growth (upfront costs associated with credit provision and direct marketing expense) during the second half of 2021, as well as non-operating losses related to litigation accruals.

LIQUIDITY AND CAPITAL RESOURCES

As previously discussed, we are closely monitoring the impacts of the COVID-19 pandemic across our business, including the resulting uncertainties around customer demand, credit performance of the loan portfolio, our levels of liquidity and our ongoing compliance with debt covenants. We had cash and cash equivalents available of $85 million at December 31, 2021, compared to cash and cash equivalents available of $198 million at December 31, 2020, a decrease of $113 million, primarily due to increased loan origination and participation purchases. Our principal debt payment obligation of $18 million was paid off in January 2021 prior to its maturity in February 2021, and there are no additional required principal payments on our outstanding debt until January 2024. Throughout the first half of 2021, we made additional net paydowns on the debt facilities of approximately $70 million. As we are experiencing increased demand for the loan products, resulting in increased origination volume, we are drawing down on our available debt facilities to fund the loan portfolio growth. In the second half of 2021, we made draws on the debt facilities of approximately $154 million. In January 2022, we entered into a sub-debt facility with Pine Hill Finance LLC of $20 million to supplement our working capital.

While the ultimate impact of COVID-19 on our business, financial condition, liquidity and results of operations is dependent on future developments which are highly uncertain, we believe that our actions taken to date, future cash provided by operating activities, availability under our debt facilities with VPC and PCAM, and possibly the capital markets, as well as certain potential measures within our control that could be put in place to maintain a sound financial position and liquidity will provide adequate resources to fund our operating and financing needs.

We are continuing to assess our minimum cash and liquidity requirements and implementing measures to ensure that our cash and liquidity position is maintained through the current economic cycle created by the COVID-19 pandemic. We believe that our existing cash balances, together with the available borrowing capacity under the debt facilities, will be sufficient to meet our anticipated cash operating expense and capital expenditure requirements through at least the next year. We principally rely on our working capital and our credit facilities with VPC and PCAM to fund the loans we make to our customers. At December 31, 2021, we have contractual obligations for our operating leases and long-term debt totaling $4 million in 2022, and an additional $475 million in total due in the next three years. We also are committed, among other things, to pay $41 million in 2022 as a result of the Think Finance and District of Columbia litigation settlements, as described further in Note 14 - Commitments, Contingencies and Guarantees and Note 19 - Subsequent Events . If our loan growth exceeds our expectations or other unexpected liquidity needs arise, our available cash balances may be insufficient to satisfy our liquidity requirements, and we may seek additional equity or debt financing. This additional capital may not be available on reasonable terms, or at all.

Stock Repurchase Program

At December 31, 2021, we had an outstanding stock repurchase plan authorized by our Board of Directors providing for the repurchase of up to $80 million of our common stock through July 31, 2024, inclusive of two $25 million increases to the plan authorized by the Board of Directors in January and October 2021. The Board of Directors further authorized a $10 million increase to the annual fiscal limit of repurchases in October 2021. During the year ended December 31, 2020, we repurchased $19.8 million of common stock. We repurchased 7,337,277 common shares at a total cost of $27.5 million during the year ended December 31, 2021. In January 2022, we repurchased an additional 47,981 of common shares at a total cost of $148 thousand. Separately from the repurchase plan, have repurchased approximately 925 thousand shares of common stock during the first quarter of 2022 pursuant to the Think Finance litigation settlement agreement executed in February 2022.

The amended stock repurchase program provides that up to a maximum aggregate amount of $35 million shares may be repurchased in any given fiscal year. Repurchases will be made in accordance with applicable securities laws from time-to-time in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. The share repurchase program does not require the purchase of any minimum number of shares and may be implemented, modified, suspended or discontinued in whole or in part at any time without further notice. Any repurchased shares will be available for use in connection with equity plans and for other corporate purposes.

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

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

As of and for the years ended December 31,

(Dollars in thousands)

Cash and cash equivalents

Restricted cash

Loans receivable, net

Cash provided by (used in):

Operating activities - continuing operations

Investing activities - continuing operations

Financing activities - continuing operations

Our cash and cash equivalents at December 31, 2021 were held primarily for working capital purposes. We may, from time to time, use excess cash and cash equivalents to fund our lending activities, paydown debt or repurchase stock. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate working capital requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our excess cash is invested primarily in demand deposit accounts that are currently providing only a minimal return.

Net cash provided by operating activities

We generated $156.2 million in cash from our operating activities-continuing operations for the year ended December 31, 2021 primarily from revenues derived from our loan portfolio. This was down $53.9 million from the $210.1 million of cash provided by operating activities-continuing operations during the year ended December 31, 2020 due to a decrease in revenues resulting from a smaller average loan portfolio and lower effective APR as compared to the prior year. For the year ended December 31, 2020, net cash provided by operating activities was down $123.33 million from the year ended December 31, 2019 due to a decrease in revenues.

Net cash provided by (used in) investing activities

For the years ended December 31, 2021, 2020 and 2019, cash provided by (used in) investing activities-continuing operations was $(304.6) million, $25.6 million and $(307.8) million, respectively. The decrease for the year ended December 31, 2021 was primarily due to an increase in net loans issued to customers and a growing loan portfolio compared to prior year. For the year ended December 31, 2020 net cash provided by investing activities increased from the year ended December 31, 2019 primarily due to a decrease in net loans originated to customers related to the COVID-19 pandemic.

The following table summarizes cash provided by (used in) investing activities-continuing operations for the periods indicated:

For the years ended December 31,

(Dollars in thousands)

Cash provided by (used in) investing activities - continuing operations

Net loans originated to consumers, less repayments

Participation premium paid

Purchases of property and equipment

Proceeds from sale of intangible assets

Net cash provided by (used in) financing activities

Cash flows from financing activities-continuing operations primarily include cash received from issuing notes payable, payments on notes payable, and activity related to stock awards. For the years ended December 31, 2021, 2020 and 2019, cash provided by (used in) financing activities-continuing operations was $38.2 million, $(108.0) million and $(2.9) million, respectively. The following table summarizes cash provided by (used in) financing activities-continuing operations for the periods indicated:

For the years ended December 31,

(Dollars in thousands)

Cash provided by (used in) financing activities - continuing operations

Proceeds from issuance of Notes payable, net

Payments on Notes payable

Debt prepayment penalties paid

Common stock repurchased

Proceeds from issuance of stock, net

Taxes paid related to net share settlement

The increase in cash provided by (used in) financing activities-continuing operations for the year ended December 31, 2021 versus the comparable period of 2020 was primarily due to increased draws on our debt facilities during the year ended December 31, 2021, which were partially offset by payments on the facilities early in 2021. For the year ended December 31, 2020, net cash used in financing activities increased compared to the prior year primarily due to increased payments made on notes payable and increased repurchases of common stock, which commenced in the third quarter of 2019.

Free Cash Flow

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

For the years ended December 31,

(Dollars in thousands)

Net cash provided by continuing operating activities

Adjustments:

Net charge-offs – combined principal loans

Capital expenditures

FCF

Our FCF was $15.8 million for the year ended December 31, 2021 compared to $49.3 million for the prior year. The decrease in our FCF was the result of the decrease in cash provided by continuing operations and a slight increase in capital expenditures, partially offset by a decrease in net-charge-offs - combined principal loans during the year ended December 31, 2021.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Debt Facilities

We have debt facilities to support the loans we make directly to our customers and the loan and credit card participations we, or our consolidated VIEs purchase from the third-party banks that license our brands. Each of these facilities have certain covenants for the Company overall, as well as certain covenants for the underlying product portfolios. All of our assets are pledged as collateral to secure one or more of the debt facilities. Previously, we had a debt facility, the 4th Tranche Term note, used to fund working capital. This facility was paid in full in early 2021.

See Note 7 - Notes Payable, Net in the Notes to the Consolidated Financial Statements included in this report for further information.

The outstanding balances of the debt facilities as of December 31, 2021 and 2020 are as follows:

(Dollars in thousands)

US Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)

4th Tranche Term Note bearing interest at the base rate + 13%

ESPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)

EF SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)

EC SPV Term Note bearing interest at the base rate + 7.0% (2021) or + 7.25% (2020)

TSPV Term Note bearing interest at the base rate + 3.60%

Total

The following table presents the future debt maturities, as of December 31, 2021:

Year (dollars in thousands)

December 31, 2021

Thereafter

Total

Other Commitments

We are a party to other contractual obligations involving commitments to make payments to third parties. These obligations may impact our short-term or long-term liquidity and capital resource needs. Our primary contractual obligations include our operating leases, loss contingencies for legal matters (including amounts payable pursuant to the Think Finance and District of Columbia litigation settlements), and various compensation and benefit plans. See No te 9 - Leases , Note 10 - Share-based Compensation and Note 14 - Commitments, Contingencies and Guarantees included in this report for further information on our leases, loss contingencies and compensation plans, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

We previously provided services in connection with installment loans originated by independent third-party lenders (“CSO lenders”) whereby we acted as a credit service organization/credit access business on behalf of consumers in accordance with applicable state laws through our “CSO program.” The CSO program included arranging loans with CSO lenders, assisting in the loan application, documentation and servicing processes. Under the CSO program, we guaranteed the repayment of a customer’s loan to the CSO lenders as part of the credit services we provided to the customer. As of September 30, 2021, the CSO program has completed its wind-down and we no longer have a guarantee under this program.

Prior to ECIL entering administration and being classified a discontinued operation by us on June 29, 2020, the VPC Facility included the UK Term Note. Upon deconsolidation of ECIL, this note was removed from our Consolidated Balance Sheets and is presented within Liabilities from discontinued operations in all prior periods presented. Under the terms of the VPC Facility, we had provided a guarantee to VPC for the repayment of the debt of any subsidiary, which included the outstanding debt of ECIL. ECIL completed payment of the UK Term Note in the third quarter of 2020 and any guarantee obligation associated with the UK Term Note was released with the repayment.

RECENT REGULATORY DEVELOPMENTS

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

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

On July 13, 2021, the Federal Reserve, Office of the Comptroller of the Currency, and the FDIC issued proposed guidance on managing risks associated with third-party relationships, including relationships with fintech entities and bank/fintech sponsorship arrangements. The guidance sets forth expectations for managing risk throughout the life cycle of such arrangements, including planning, due diligence and contract negotiation, oversight and accountability, ongoing monitoring, and termination. We will continue to monitor this guidance as it potentially becomes final.

On August 31, 2021, the U.S. District Court for the Western District of Texas issued an order in Community Financial Services Association of America, LTD. v. Consumer Financial Protection Bureau, granting the Bureau's motion for summary judgment and staying the date for complying with the CFPB's Rulemaking on Payday, Vehicle Title, and High-Cost Installment Loans for 286 days until June 13, 2022. On October 1, 2021, the trade groups appealed the Texas federal district court’s final judgment and argued that the compliance date should be 286 days after their appeal to the Fifth Circuit is resolved. On October 14, 2021, the Fifth Circuit Court of Appeals agreed to an extension of the compliance date until after resolution of the appeal. Regardless of outcome of the appeal, it is anticipated that the rule will increase costs and create challenges in the Company's collection activities.

State Privacy Laws: The California Consumer Privacy Act went into effect Jan. 1, 2020, and enforcement by California’s Office of the Attorney General began July 1, 2020. The California Privacy Rights Act ballot initiative passed in November 2020, with the majority of its provisions becoming operative Jan. 1, 2023. Virginia passed the Consumer Data Protection Act which establishes a framework for controlling and processing personal data in the Commonwealth. The bill applies to all persons that conduct business in the Commonwealth and either (i) control or process personal data of at least 100,000 consumers or (ii) derive over 50 percent of gross revenue from the sale of personal data and control or process personal data of at least 25,000 consumers. The bill outlines responsibilities and privacy protection standards for data controllers and processors and has a delayed effective date of January 1, 2023. On July 7, 2021, Colorado Governor Jared Polis signed the Colorado Privacy Act into law that will go into effect on July 1, 2023. Once effective, covered entities will be required to provide Colorado residents with various privacy rights, including the right to access, correct, and delete their personal data and to opt out of the sale of their personal data. Covered entities also will need to provide privacy policy disclosures and create data protection assessments for certain types of processing activities. Ongoing implementation of and changes to state-enacted privacy laws will increase the Company's costs and could create challenges in the relevant markets. Many states have also introduced similar legislation to govern privacy.

BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

Revenue recognition

We recognize consumer loan fees as revenues for each of the loan products we offer. Revenues on the Consolidated Statements of Operations include: finance charges, lines of credit fees, fees for services provided through CSO programs (“CSO fees”), and interest, as well as any other fees or charges permitted by applicable laws and pursuant to the agreement with the borrower. Other revenues also include marketing and licensing fees received from the originating lender related to the Elastic product and Rise bank-originated loans and from CSO fees related to the Rise product. Revenues related to these fees are recognized when the service is performed.

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

The spread of COVID-19 since March 2020 has created a global public health crisis that has resulted in unprecedented disruption to businesses and economies. In response to the pandemic's effects and in accordance with federal and state guidelines, we expanded our payment flexibility programs for our customers, including payment deferrals. This program allows for a deferral of payments for an initial period of 30-60 days, and generally up to a maximum of 180 days on a cumulative basis. The customer will return to their normal payment schedule after the end of the deferral period with the extension of their maturity date equivalent to the deferral period, which is generally not to exceed an additional 180 days. Per FASB guidance, the finance charges will continue to accrue at a lower effective interest rate over the expected term of the loan considering the deferral period provided (not to exceed an amount greater than the amount at which the borrower could settle the loan) or placed on non-accrual status. The COVID-19 payment flexibility programs were no longer offered effective July 1, 2021, eliminating any new payment deferrals up to 180 days. We and the bank originators continue to offer certain payment flexibility programs if certain qualifications are met.

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

Allowance and liability for estimated losses on consumer loans

We have adopted Financial Accounting Standards Board (“FASB”) guidance for disclosures about the credit quality of financing receivables and the allowance for loan losses (“allowance”). We maintain an allowance for loan losses for loans and interest receivable for loans not classified as TDRs at a level estimated to be adequate to absorb credit losses inherent in the outstanding loans receivable. We primarily utilize historical loss rates by product, stratified by delinquency ranges, to determine the allowance, but we also consider recent collection and delinquency trends, as well as macro-economic conditions that may affect portfolio losses. Additionally, due to the uncertainty of economic conditions and cash flow resources of our customers, the estimate of the allowance for loan losses is subject to change in the near-term and could significantly impact the consolidated financial statements. If a loan is deemed to be uncollectible before it is fully reserved, it is charged-off at that time. For loans classified as TDRs, impairment is typically measured based on the present value of the expected future cash flows discounted at the original effective interest rate. We have elected to adopt the Current Expected Credit Losses ("CECL") model as of January 1, 2022, which requires a broader range of reasonable and supportable information to inform credit loss estimates. See "- Recently Issued Accounting Pronouncements And JOBS Act Election" for more information.

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

Goodwill

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

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

Internal-use software development costs

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

Income taxes

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

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

At December 31, 2021, we recorded a gross liability for an uncertain tax position of $1.3 million. No liability was recorded at December 31, 2020. Tax periods from fiscal years 2014 to 2020 remain open and subject to examination for US federal and state tax purposes. As we had no operations nor had filed US federal tax returns prior to May 1, 2014, there are no other US federal or state tax years subject to examination.

Share-Based Compensation

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND JOBS ACT ELECTION

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

Recently Adopted Accounting Standards

See Note 1 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in this report for a discussion of recent accounting pronouncements.