CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – DEBT
The Company's debt instruments and balances outstanding as of March 31, 2023 and December 31, 2022, including maturity date, effective interest rate and borrowing capacity, were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Effective interest rate | | | Outstanding as of |
| Maturity Date | Borrowing Capacity | | March 31, 2023 | | December 31, 2022 |
Corporate Debt: | | | | | | | |
7.50% Senior Secured Notes | August 1, 2028 | 7.50 | % | | | $ | 1,000,000 | | | $ | 1,000,000 | |
| | | | | | | |
Total corporate debt | | | | | 1,000,000 | | | 1,000,000 | |
Funding Debt: | | | | | | | |
Heights SPV | July 15, 2025 | 1-Mo SOFR + 4.25% | $425.0 million | | $ | 410,867 | | | $ | 400,758 | |
First Heritage SPV | July 13, 2025 | 1-Mo SOFR + 4.25% | $225.0 million | | 173,923 | | | 182,751 | |
Flexiti SPV (1) | September 29, 2025 | Weighted average interest rate (2)(3) 8.27% | C$535.0 million | | 355,804 | | | 343,565 | |
Flexiti Securitization (1) (4) | December 9, 2025 | 1-Mo CDOR + 3.59% (3) | C$526.5 million | | 390,753 | | | 387,759 | |
Canada SPV (1) | August 2, 2026 | 3-Mo CDOR + 6.00% | C$400.0 million | | 293,457 | | | 294,594 | |
| | | | | | | |
Senior Revolver | August 31, 2023 | 1-Mo SOFR + 5.00% | $40.0 million | | 40,000 | | | 35,000 | |
Total funding debt | | | | | $ | 1,664,804 | | | $ | 1,644,427 | |
Less: debt issuance costs | | | | | (37,541) | | | (37,113) | |
Total Debt | | | | | $ | 2,627,263 | | | $ | 2,607,314 | |
(1) Capacity amounts are denominated in Canadian dollars, whereas outstanding balances as of March 31, 2023 and December 31, 2022 are denominated in U.S. dollars. The exchange rate applied at March 31, 2023 was 0.74217 and the exchange rate at December 31, 2022 was 0.7365. |
(2) The weighted average interest rate does not include the impact of the amortization of deferred loan origination costs or debt discounts.
|
(3) Swapped to fixed rate via interest rate swap hedging arrangement entered into on July 7, 2022 for Flexiti Securitization and October 11, 2022 for Flexiti SPV. |
(4) The effective rate is 7.09%. |
|
Corporate Debt
7.50% Senior Secured Notes
In July 2021, the Company issued $750.0 million of 7.50% Senior Secured Notes which mature on August 1, 2028. Interest on the notes is payable semiannually, in arrears, on February 1 and August 1. In December 2021, the Company issued an additional $250.0 million of 7.50% Senior Secured Notes, also maturing on August 1, 2028, to fund the acquisition of Heights. Refer to Note 14, "Acquisitions and Divestiture" for additional details. In connection with the 7.50% Senior Secured Notes, financing costs of $16.4 million were capitalized, net of amortization, and included in the unaudited Condensed Consolidated Balance Sheets as a component of "Debt." These costs are amortized over the term of the 7.50% Senior Secured Notes as a component of interest expense.
Funding Debt
As of March 31, 2023, the Company had five credit facilities whereby loans receivable were sold to VIEs to collateralize debt incurred under each facility. The following debt arrangements are issued by the Company’s wholly owned, bankruptcy-remote SPVs, which are considered VIEs under U.S. GAAP and are consolidated into the financial statements of their respective primary beneficiary. These facilities are the (i) Heights SPV, (ii) First Heritage SPV, (iii) Canada SPV, (iv) Flexiti SPV and (v) Flexiti Securitization. For further information on these facilities, refer to Note 3, "Variable Interest Entities."
Assets transferred to each SPV are legally isolated from the Company and its affiliates, as well as the claims of the Company’s and its affiliates’ creditors. Further, the assets of each SPV are owned by such SPV and are not available to satisfy the debts or other obligations of the Company or any of its affiliates.
These debts are supported by the expected cash flows from the underlying collateralized finance receivables. Advances on the funding debt are determined based on the contractually agreed upon advance rates. Collections on these finance receivables are remitted to restricted cash collection accounts, which totaled $92.2 million and $52.3 million as of March 31, 2023 and December 31, 2022, respectively. The increase in restricted cash is based on the contractual requirements of the SPVs related to the total value and performance of the underlying collateralized finance receivables.
Heights SPV
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On July 15, 2022, the Company entered into a new $425.0 million non-recourse revolving warehouse facility to replace the incumbent lender's facility and finance future loans originated by Heights. The effective interest rate is 1-month SOFR plus 4.25%. The Company also pays a 0.50% per annum commitment fee on the unused portion of the commitments. The warehouse revolving period matures on July 15, 2025.
First Heritage SPV
On July 13, 2022, concurrently with the closing of the First Heritage acquisition, the Company entered into a $225.0 million non-recourse revolving warehouse facility to replace the incumbent lender's facility and finance future loans originated by First Heritage. The effective interest rate is 1-month SOFR plus 4.25%. The Company also pays a 0.50% per annum commitment fee on the unused portion of the commitments. The warehouse revolving period matures on July 13, 2025.
Flexiti SPV
On September 29, 2022, Flexiti refinanced and increased its Flexiti SPV to increase the borrowing capacity from C$500.0 million to C$535.0 million and extend its maturity to September 29, 2025. As of March 31, 2023, the weighted average interest rate was 8.27%. Flexiti also pays a 0.50% per annum commitment fee on the unused portion of the commitments. All other material terms of the revolving warehouse credit facility remain unchanged.
Flexiti Securitization
In December 2021, Flexiti Securitization Limited Partnership, a wholly-owned Canadian subsidiary of the Company, entered into the Flexiti Securitization. The facility provides for C$526.5 million with a maturity of December 9, 2025. As of March 31, 2023, the effective interest was one-month CDOR plus 3.59%.
Canada SPV
In August 2018, as amended in the fourth quarter of 2021 and first quarter of 2022, CURO Canada Receivables Limited Partnership, a wholly-owned subsidiary of the Company, entered into the Canada SPV. The effective interest rate was 3-month CDOR plus 6.00%. The borrower also pays a 0.50% per annum commitment fee on the unused portion of the commitments.
Senior Revolver
The Company maintains the Senior Revolver that provides $40.0 million of borrowing capacity, including up to $4.0 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The current term expires August 31, 2023. The Senior Revolver accrues interest at one-month SOFR plus 5.00%.
Curo Canada Revolving Credit Facility
Curo Canada maintained the Curo Canada Revolving Credit Facility, which provides short-term liquidity for the Company's Canadian direct lending operations.
The Curo Canada Revolving Credit Facility was collateralized by substantially all of CURO Canada’s assets and contains various covenants. Borrowings under the Curo Canada Revolving Credit Facility bore interest per annum at the prime rate of a Canadian chartered bank plus 1.95%.
On December 21, 2022, the borrowing capacity under the Curo Canada Revolving Credit Facility was reduced from C$10.0 million to C$5.0 million, and the facility was cancelled on January 6, 2023.
On May 9, 2023 the company finalized certain debt related transactions. Refer Note 16 - Subsequent Events for further information.
Derivative Instruments and Hedging Activities
During 2022, the Company entered into interest rate swaps to help manage interest rate risk on certain variable rate debt facilities. The Company designated these risk management derivatives as qualifying cash flow hedges under hedge accounting. The derivative assets are included in Other assets on our unaudited Condensed Consolidated Balance Sheet and changes in the fair value of derivatives are recorded as a component of AOCI. During the three months ended March 31, 2023, the hedges were assessed as effective and as such there was no impact to earnings. However, for cash flow hedges during periods in which the forecasted transactions impact earnings, those amounts are reclassified into earnings in the same period during which the forecasted transactions impact earnings. Additionally, they are presented in the same line item in the unaudited Condensed Consolidated Statements of Operations as the earnings effect of the hedged items and reflected in operating activities on the unaudited Condensed Statement of Cash Flows.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Swap on Flexiti SPV
In accordance with the terms of the Flexiti SPV, on October 11, 2022, Flexiti entered into an interest rate swap due September 29, 2025 on the C$390.0 million, variable rate portion of the borrowing facility, with a notional amount of C$390.0 million. As of March 31, 2023, a $0.5 million interest rate swap is included in Other long term liabilities and, to reflect the change in fair value during the current period, a $1.0 million loss is recognized in Other comprehensive income on the unaudited Condensed Consolidated Balance Sheet.
Interest Rate Swap on Flexiti Securitization
In accordance with the terms of the Flexiti Securitization, on July 7, 2022, Flexiti entered into an interest rate swap due December 9, 2025 on the C$526.5 million, variable rate, borrowing facility, with a notional amount of C$526.5 million. As a result of the swap, the effective interest rate is 7.09%. As of March 31, 2023, a $4.2 million interest rate swap is included in other assets and, to reflected the change in fair value during the current period, a $1.8 million loss is recognized in Other comprehensive income on the unaudited Condensed Consolidated Balance Sheet.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Securities Litigation and Enforcement
In 2018, a putative securities fraud class action lawsuit was filed against the Company and certain of its directors and officers and other related parties in the United States District Court for the District of Kansas, captioned Yellowdog Partners, LP v. CURO Group Holdings Corp., Donald F. Gayhardt, William Baker and Roger W. Dean, Civil Action No. 18-2662 (the "Yellowdog Action"). The suit alleged the Company made misleading statements and omitted material information regarding the Company's efforts to transition the Canadian inventory of products from Installment loans to Revolving LOC loans. The case was resolved in 2020 for $9.0 million, of which the first $2.5 million was paid by the Company and the remainder paid by the Company's insurance carriers. For the year ended December 31, 2022, there was no further expense related to this litigation.
In June and July 2020, three shareholder derivative lawsuits were filed in the United States District Court for the District of Delaware ("Court") against the Company, certain of its directors and officers, and in two of the three lawsuits, a large stockholder. Plaintiffs generally alleged the same underlying facts of the Yellowdog Action. In July 2021, the derivative lawsuits were voluntarily dismissed and plaintiffs refiled two cases in the United States District Court for the District of Kansas. On October 27, 2022, the Court granted final approval of the parties' settlement and dismissed the case with prejudice. The terms of the settlement provided for the implementation of certain corporate governance reforms and a payment of $345.0 thousand in attorneys’ fees and expenses to plaintiffs’ counsel, which was paid by the Company's insurers, and included no admission of liability or wrongdoing by the Company.
Other Legal Matters. The Company is a defendant in certain other litigation matters encountered from time-to-time in the ordinary course of business, some of which may be covered to an extent by insurance. While it is difficult to predict the outcome of any particular proceeding, the Company does not believe the result of any of these matters will have a material adverse effect on the Company's business, results of operations or financial condition.
NOTE 8 – INCOME TAXES
The Company's effective income tax rate was (53.4)% and 45.3% for the three months ended March 31, 2023 and 2022, respectively.
The effective income tax rate for the three months ended March 31, 2023 was lower compared to the blended federal and state/provincial statutory rate of approximately 26.0%, primarily as a result of recording a valuation allowance against U.S. deferred tax assets ("DTAs") of $29.0 million and lost tax benefits related to share-based compensation of $1.2 million.
The effective income tax rate for the three months ended March 31, 2022 was higher compared to the blended federal and state/provincial statutory rates of approximately 26.0%, primarily as a result of lower income before tax combined with $0.3 million lost tax benefits of non-deductible officers’ compensation and $0.3 million tax expense related to share-based compensation.
For the period ended March 31, 2023, we continued to evaluate the positive and negative evidence to estimate whether sufficient future sources of income will be generated to permit the use of the existing DTAs in the U.S. During the first quarter of 2023, we have determined that negative evidence outweighs the positive evidence of our ability to realize the U.S. DTAs. On this basis, we recorded a valuation allowance of $41.9 million against the U.S. DTAs, including $29.0 million recorded as Provision for income taxes and $13.0 million in Accumulated deficit related to the adoption of CECL.
The Company intends to reinvest Canada earnings indefinitely in its Canadian operations and therefore has not provided for any non-U.S. withholding tax that would be assessed on dividend distributions. If the accumulated earnings in Canada of $218.3 million were distributed to the U.S. legal entities, the Company would be subject to Canadian withholding taxes of an estimated $10.9 million. The determination of the U.S. state income taxes upon a potential foreign earnings distribution is impractical. In the event
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the earnings are distributed to the U.S. legal entities, the Company will adjust the income tax provision for the applicable period and determine the amount of foreign tax credit that would be available.
NOTE 9 – EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per share (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | | | |
Net (loss) income | $ | (59,471) | | | $ | 1,336 | | | | | | | |
| | | | | | | | | |
Weighted average common shares - basic | 40,783 | | | 40,368 | | | | | | | |
Dilutive effect of stock options and restricted stock units | — | | | 940 | | | | | | | |
Weighted average common shares - diluted | 40,783 | | | 41,308 | | | | | | | |
| | | | | | | | | |
(Loss) earnings per share: | | | | | | | | | |
Basic (loss) earnings per share | $ | (1.46) | | | $ | 0.03 | | | | | | | |
Diluted (loss) earnings per share | $ | (1.46) | | | $ | 0.03 | | | | | | | |
| | |
Potential shares of common stock that would have the effect of increasing diluted earnings per share or decreasing diluted loss per share are considered to be anti-dilutive; therefore, these shares are not included in calculating diluted earnings per share. For the three months ended March 31, 2023 and 2022, there were 3.6 million and 1.2 million, respectively, of potential shares of common stock excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.
The Company utilizes the "control number" concept in the computation of diluted earnings per share to determine whether potential common stock instruments are dilutive. The control number used is income. The control number concept requires that the same number of potentially dilutive securities applied in computing diluted earnings per share is applied to all other categories of income or loss, regardless of their anti-dilutive effect on such categories.
NOTE 10 – LEASES
Leases entered into by the Company are primarily for retail stores in certain U.S. states and Canadian provinces.
Leases classified as finance leases were immaterial to the Company as of March 31, 2023. Operating leases expire at various times through 2033. Operating leases are included in "Right of use asset - operating leases" and "Lease liability - operating leases" in the unaudited Condensed Consolidated Balance Sheets. Operating lease costs are included in "Occupancy" in the unaudited Condensed Consolidated Statement of Operations. The majority of leases have an original term up to five years plus renewal options under similar terms.
During the first quarter of 2023, the Company recorded a $7.5 million expense for lease abandonment costs and a $4.5 million accrual related to planned store closures as of March 31, 2023. For further information, refer to Note 14, "Restructuring."
The following table summarizes the operating lease costs and other information for the three months ended March 31, 2023 and 2022 (dollars in thousands):
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | 2023 | 2022 |
Operating lease costs: | | | | | |
Third-Party | | | | $ | 6,500 | | 9,479 | |
Related-Party | | | | 157 | | 827 | |
Total operating lease costs | | | | $ | 6,657 | | 10,306 | |
| | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | | | $ | 6,560 | | $ | 10,925 | |
ROU assets obtained | | | | $ | (1,287) | | $ | 5,424 | |
Weighted average remaining lease term - Operating leases | | | | 4.3 years | 4.9 years |
Weighted average discount rate - Operating leases | | | | 8.1 | % | 7.9 | % |
The following table summarizes the aggregate operating lease payments that the Company was contractually obligated to make under operating leases as of March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Third-Party | | Related-Party | | Total |
Remainder of 2023 | | $ | 16,784 | | | $ | 464 | | | $ | 17,248 | |
2024 | | 16,525 | | | 633 | | | 17,158 | |
2025 | | 11,075 | | | 650 | | | 11,725 | |
2026 | | 5,993 | | | 667 | | | 6,660 | |
2027 | | 3,728 | | | 686 | | | 4,414 | |
2028 | | 2,037 | | | 668 | | | 2,705 | |
Thereafter | | 6,056 | | | 326 | | | 6,382 | |
Total | | 62,198 | | | 4,094 | | | 66,292 | |
Less: Imputed interest | | (9,725) | | | (1,099) | | | (10,824) | |
Operating lease liabilities | | $ | 52,473 | | | $ | 2,995 | | | $ | 55,468 | |
There were no material leases entered into subsequent to the balance sheet date.
NOTE 11 – DIVIDENDS
Dividend Program
In October 2022, the Company's Board of Directors suspended its previously authorized quarterly dividend of $0.11 per share ($0.44 per share annualized). There were no dividends paid in Q1 2023, except those related to previously declared dividends on RSUs vested during the three months ended March 31, 2023 related to the unvested period.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – SEGMENT REPORTING
Segment information is prepared on the same basis that the Company's CODM reviews financial information for operational decision making purposes, including gross revenues, net revenue, gross margin, segment operating income and other items.
During the first quarter of 2023, the Company's Chief Executive Officer, who is also the CODM, changed the manner in which he reviews financial information for purposes of assessing business performance, managing the business and allocating resources. In conjunction with this change, the Company realigned its segment structure resulting in the Company having two operating segments: Direct Lending and Canada POS Lending.
Direct Lending. The Direct Lending operating segment represents the majority of net revenue and gross profit. This operating segment represents the Revolving LOC, secured and unsecured installment and single-pay loan products, together with the credit protection and other insurance products and other ancillary sales in the U.S. and Canada, which historically was comprised of the U.S. Direct Lending and Canada Direct Lending operating segments. The U.S. and Canada have similar economic and operating characteristics, including the nature of products and services offered, operating procedures and risks, customer bases and shared corporate resources, which led the CODM to conclude that these separate segments combine to form one operating segment. As of March 31, 2023, the Company operated over 490 U.S. retail locations in 13 states. As of March 31, 2023, the Company operated nearly 150 stores across eight Canadian provinces and had an online presence in eight provinces and one territory.
Canada POS Lending. As of March 31, 2023, the Company served Canadian customers through POS financing available at over 8,500 retail locations and over 3,600 merchant partners across 10 provinces and two territories. The Company provides Revolving LOC loans and a number of other ancillary financial products.
All prior period amounts related to the segment realignment have been retrospectively reclassified throughout to conform to the new presentation.
The following table illustrates summarized financial information concerning reportable segments (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | | | |
Revenues by segment: (1) | | | | | | | | | | |
Direct Lending | | $ | 169,368 | | | $ | 269,887 | | | | | | | |
Canada POS Lending | | 40,105 | | | 20,309 | | | | | | | |
Consolidated revenue | | $ | 209,473 | | | $ | 290,196 | | | | | | | |
Net revenues by segment: | | | | | | | | | | |
Direct Lending | | $ | 121,004 | | | $ | 181,070 | | | | | | | |
Canada POS Lending | | 25,537 | | | 11,595 | | | | | | | |
Consolidated net revenue | | $ | 146,541 | | | $ | 192,665 | | | | | | | |
Segment (loss) income before income taxes: | | | | | | | | | | |
Direct Lending | | $ | (31,632) | | | $ | 12,976 | | | | | | | |
Canada POS Lending | | (7,136) | | | (10,534) | | | | | | | |
Consolidated (loss) income before income taxes | | $ | (38,768) | | | $ | 2,442 | | | | | | | |
Expenditures for long-lived assets by segment: | | | | | | | | | | |
Direct Lending | | $ | 3,857 | | | $ | 7,315 | | | | | | | |
Canada POS Lending | | 6,170 | | | 4,224 | | | | | | | |
Consolidated expenditures for long-lived assets | | $ | 10,027 | | | $ | 11,539 | | | | | | | |
|
The following table presents the proportion of gross loans receivable by segment (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Direct Lending | | $ | 1,209,576 | | | $ | 1,254,395 | |
Canada POS Lending | | 853,253 | | | 833,438 | |
Total gross loans receivable | | $ | 2,062,829 | | | $ | 2,087,833 | |
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Geographic Data
The following table presents total revenues by geographic region:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
U.S. | | $ | 92,424 | | | $ | 198,399 | |
Canada | | 117,049 | | | 91,797 | |
Total revenue | | $ | 209,473 | | | $ | 290,196 | |
The following table presents the proportion of gross loans receivable by geographic region:
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
U.S. | | $ | 714,816 | | | $ | 773,380 | |
Canada | | 1,348,013 | | | 1,314,453 | |
Total gross loans receivable | | $ | 2,062,829 | | | $ | 2,087,833 | |
The following table presents the Company's net long-lived assets, comprised of property and equipment, by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
U.S. | | $ | 12,579 | | | $ | 29,232 | |
Canada | | 17,288 | | | 2,725 | |
Total net long-lived assets | | $ | 29,867 | | | $ | 31,957 | |
The CODM does not review total assets by segment for purposes of allocating resources or decision-making purposes; therefore, total assets by segment are not disclosed.
NOTE 13 – ACQUISITIONS AND DIVESTITURE
ACQUISITIONS
First Heritage
On July 13, 2022, the Company closed the acquisition of First Heritage, a consumer lender that provides near-prime installment loans along with customary opt-in insurance and other financial products, for a purchase price of $140.0 million in cash, subject to certain customary working capital and other adjustments. The Company began consolidating the financial results of First Heritage in the unaudited Condensed Consolidated Financial Statements on July 13, 2022 within the Direct Lending operating segment.
This transaction was accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The Company was the acquirer for purposes of accounting for the business combination. The values assigned to the acquired assets and liabilities assumed are provisional based on the preliminary fair value estimates as of the acquisition date. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Form 10-Q and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of March 31, 2023, the areas that remain subject to such potential adjustments primarily relate to the valuation of certain loans receivables, intangible assets and certain tax-related balances.
The following table presents the preliminary purchase price allocation recorded in the Company’s unaudited Condensed Consolidated Balance Sheet as of the date of acquisition (in thousands):
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| Amounts acquired on July 13, 2022 |
Assets | |
Cash and cash equivalents | $ | 31,396 | |
Restricted cash | 1,933 | |
Gross loans receivable(1) | 218,011 | |
Prepaid expenses and other | 1,285 | |
Property and equipment | 345 | |
Right-of-use assets | 4,241 | |
Intangibles, net | 10,670 | |
Total assets | $ | 267,880 | |
| |
Liabilities | |
Accounts payable and accrued liabilities | $ | 4,270 | |
Lease liabilities | 4,241 | |
Debt | 170,392 | |
Total liabilities | $ | 178,904 | |
| |
Net assets acquired | $ | 88,976 | |
Total consideration paid | 164,341 | |
Goodwill | $ | 75,365 | |
(1) The gross contractual loans receivables as of July 13, 2022 were $236.1 million, of which the Company estimates $18.1 million will not be collected. |
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (dollars in thousands):
| | | | | | | | | | | |
| Fair Value | Useful Life | | | |
Trade name | $ | 3,790 | | 10.0 years | | | |
Customer relationships | 6,880 | | 3.5 years | | | |
Total identified intangible assets | $ | 10,670 | | | | | |
Goodwill of $75.4 million represents the excess of the consideration paid over the fair value of the net tangible and intangible assets acquired. The goodwill was primarily attributable to expected synergies created with the Company’s future product offerings and the value of the combined workforce. Goodwill from this transaction is deductible for income tax purposes.
Heights
On December 27, 2021, the Company acquired 100% of the outstanding stock of Heights for $360.0 million, consisting of $335.0 million in cash and $25.0 million of the Company's common stock. Heights is a consumer finance company that provides secured and unsecured Installment loans to near-prime and non-prime consumers, and offers customary opt-in insurance and other financial products across 390 branches in 11 U.S. states.
The Company began consolidating the financial results of Heights in the unaudited Condensed Consolidated Financial Statements on December 27, 2021 within the Direct Lending operating segment.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2021, the Company completed the determination of the fair values of the acquired identifiable assets and liabilities. During the year ended December 31, 2022, the Company recorded measurement period adjustments that increased goodwill by $11.8 million. The measurement period adjustment related to the fair value of the loan portfolio and would have resulted in $7.7 million of incremental interest and fee revenue during the three months ended March 31, 2022 and no impact on the year ended December 31, 2022. The Company recorded a measurement period adjustment in the fourth quarter of 2022 that decreased goodwill by $3.5 million related to the final true-up of deferred tax balances after the pre-acquisition income tax returns were filed in October 2022. The Company made these measurement period adjustments to reflect the correct deferred tax balances that existed as of the acquisition date and not from events subsequent to such date. Additionally, in the fourth quarter of 2022, a measurement period adjustment was recorded related to tax filings for pre-acquisition activity which resulted in $4.2 million of income tax receivables and an increase to accounts payable for the same amount. As of December 31, 2022, the Company completed the determination of the fair values of the acquired identifiable assets and liabilities.
The following table presents the purchase price allocation recorded in the Company’s unaudited Condensed Consolidated Balance Sheet as of the date of acquisition of Heights (in thousands):
| | | | | | | | | | | | |
| Amounts acquired on December 27, 2021 | Measurement period adjustments | Amounts acquired on December 27, 2021 (as adjusted) | |
Assets | | | | |
Cash and cash equivalents | $ | 13,564 | | $ | — | | $ | 13,564 | | |
Restricted cash | 33,630 | | — | | 33,630 | | |
Gross loans receivable(1) | 471,630 | | (15,379) | | 456,251 | | |
Income tax receivable | 3,526 | | 4,209 | | 7,735 | | |
Prepaid expenses and other | 7,410 | | — | | 7,410 | | |
Property and equipment | 4,748 | | — | | 4,748 | | |
Right-of-use assets | 16,111 | | — | | 16,111 | | |
Intangibles, net | 11,900 | | — | | 11,900 | | |
Deferred tax asset | — | | 2,477 | | 2,477 | | |
Other assets | 98 | | — | | 98 | | |
Total assets | $ | 562,617 | | $ | (8,693) | | $ | 553,924 | | |
| | | | |
Liabilities | | | | |
Accounts payable and accrued liabilities | $ | 19,186 | | $ | 4,209 | | $ | 23,395 | | |
Lease liabilities | 16,315 | | — | | 16,315 | | |
Deferred tax liability | 1,077 | | (1,077) | | — | | |
Accrued interest on debt | 1,781 | | — | | 1,781 | | |
Debt | 350,000 | | — | | 350,000 | | |
Total liabilities | $ | 388,359 | | $ | 3,132 | | $ | 391,491 | | |
| | | | |
Net assets acquired | $ | 174,258 | | $ | (11,825) | | $ | 162,433 | | |
Total consideration paid | 428,115 | | | 428,115 | | |
Goodwill | $ | 253,857 | | | $ | 265,682 | | |
(1) The gross contractual loans receivables as of December 27, 2021 were $485.4 million, of which the Company estimates $29.1 million will not be collected. | |
DIVESTITURE
Legacy U.S. Direct Lending Business
On July 8, 2022, the Company completed the divestiture of its Legacy U.S. Direct Lending Business to Community Choice Financial, for total sale proceeds of $349.2 million, net of working capital adjustments, comprised of $314.2 million of cash received at close and $35.0 million in cash payable in monthly installment payments over the subsequent 12 months.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The divestiture resulted in a gain of $68.4 million for the year ended December 31, 2022, which was recorded in "Gain on sale of business" on the unaudited Condensed Consolidated Statement of Operations. Per ASC 205: Presentation of Financial Statements, the sale of the business is not classified as discontinued operations in the Company’s operations or financial results.
The Company reduced the gain by $2.0 million in the three months ended March 31, 2023 based on expected uncollectible amounts.
The following table presents the amounts attributable to each category recorded in the Company’s unaudited Condensed Consolidated Balance Sheet as of the date of divestiture of the Legacy U.S. Direct Lending Business, as adjusted (in thousands):
| | | | | | | | | | | |
| Amounts divested of on July 8, 2022 | Subsequent adjustments | Amounts divested of on July 8, 2022 (as adjusted) |
Assets | | | |
Cash, cash equivalents and restricted cash | $ | 21,292 | | $ | — | | $ | 21,292 | |
Loans receivable | 162,147 | | — | | 162,147 | |
Right of use asset | 39,326 | | — | | 39,326 | |
Goodwill | 91,131 | | — | | 91,131 | |
Other assets (1) | 30,690 | | (2,027) | | 28,663 | |
Total assets | $ | 344,586 | | $ | (2,027) | | $ | 342,559 | |
| | | |
Liabilities | | | |
Accounts payable and accrued liabilities | $ | (8,947) | | $ | — | | $ | (8,947) | |
Right of use liability | (43,433) | | — | | (43,433) | |
Liability for losses on CSO lender-owned consumer loans | (5,628) | | — | | (5,628) | |
Other long term liabilities (2) | (5,815) | | — | | (5,815) | |
Total liabilities | $ | (63,823) | | $ | — | | $ | (63,823) | |
| | | |
Net assets sold | $ | 280,763 | | | $ | 280,763 | |
Total proceeds | 349,206 | | (2,027) | | 347,179 | |
Total pretax gain on sale of business | $ | 68,443 | | | $ | 66,416 | |
(1) Includes income tax receivable, property and equipment, intangibles, deferred tax assets and other assets. |
(2) Includes deferred revenue, income taxes payable, deferred tax liability and other long-term liabilities |
The Legacy U.S. Direct Lending Business had $36.0 million pre-tax net income for the quarter ended March 31, 2022. Pre-tax net income is comprised of net revenue and expenses directly related to the Legacy U.S. Direct Lending Business, which does not include certain costs recorded in the Legacy U.S. Direct Lending operating segment that are not classified as disposed of, such as interest expense on the 7.50% Senior Secured Notes and certain corporate expenses.
NOTE 14 – RESTRUCTURING
On October 5, 2022, the Company's Board of Directors approved restructuring actions to reduce operating expenses through store closures and headcount reductions in both the U.S. and Canada, and the elimination of duplicative corporate office functions in the U.S. Both the workforce reduction and store closures were aimed at reducing duplicative corporate functions and stores with overlapping customer populations as a result of the acquisitions of Heights in December of 2021 and First Heritage in July of 2022. For the year ended December 31, 2022, the Company incurred $16.0 million of expense related to our restructuring actions, of which $7.9 million related to employee termination benefits resulting from the workforce reduction of approximately 150 employees, and $8.2 million related to lease abandonment costs resulting from the closure of 89 stores in the U.S. and Canada.
For the three months ended March 31, 2023, the Company incurred an additional $10.0 million of expense related to our restructuring actions, of which $2.5 million related to employee termination benefits, and $7.5 million related to lease abandonment costs resulting from the closure of stores in the U.S. and Canada.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the total restructuring costs incurred during the three months ended March 31, 2023 (in thousands):
| | | | | | | | | | | |
| Employee Termination Benefits | Lease Exit Costs | Total Restructuring Costs |
Salaries and Benefits | $ | 1,517 | | $ | — | | $ | 1,517 | |
Other Operating Expense | 958 | | 7,481 | | 8,439 | |
Total | $ | 2,475 | | $ | 7,481 | | $ | 9,956 | |
The following table shows the total amount incurred and liability, which is recorded in accounts payables and other accrued liabilities in the unaudited Condensed Consolidated Balance Sheets, for restructuring-related costs as of March 31, 2023:
| | | | | |
| |
| |
| |
Accrued restructuring costs as of December 31, 2022 | $ | 4,746 | |
Restructuring costs incurred during the three months ended March 31, 2023 | 9,956 | |
Amount paid during the three months ended March 31, 2023 | (4,641) | |
Accrued restructuring costs as of March 31, 2023 | $ | 10,061 | |
NOTE 15 – SHARE REPURCHASE PROGRAM
In February 2022, the Company's Board of Directors authorized a new share repurchase program for the repurchase of up to $25.0 million of CURO common stock. In March 2023, the Board of Directors terminated the program. There were no repurchases under this program.
In May 2021, the Company's Board of Directors authorized a share repurchase program for up to $50.0 million of its common stock. The program commenced in June 2021 and was completed in February 2022. The Company repurchased 824,477 shares of common stock under the plan at an average price of $15.20 for a total cost of $12.5 million during the three months ended March 31, 2022.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – SUBSEQUENT EVENTS
$150.0 million Credit Facility
On May 9, 2023, the Company finalized a new $150.0 million first lien credit facility ("$150.0 million Credit Facility") agreement with approximately 68.2% of the existing holders of the 7.50% Senior Secured Notes. The Term Loans will be senior secured obligations of the Company and will rank senior in right of payment to all of its existing and future unsecured senior debt. The new $150.0 million Credit Facility will accrue interest at a rate of 18.0% per annum The Company may elect to pay up to 12.00% per annum in kind during the first year following the closing and up to 9.00% per annum in kind thereafter. The $150.0 million Credit Facility will be guaranteed by the Company's existing and future domestic subsidiaries. The proceeds of the $150.0 million Credit Facility will be used to repay in full the Senior Revolver, for general corporate purposes and for payment of fees and expenses relating to the transactions. The $150.0 million Credit Facility will mature in August 2027. The transaction is expected to close shortly, subject to certain customary closing conditions, as well as the closing of the new 1.5 Lien Notes and the Canada SPV II and the execution of the Third Supplemental Indenture described below.
1.5 Lien Notes
On May 9, 2023, the Company finalized an exchange agreement with approximately 68.2% of the 7.50% Senior Secured Notes holders, who agreed to exchange approximately $682.3 million aggregate principal amount of the 7.50% Senior Secured Notes for approximately $682.3 million of 7.50% Senior 1.5 Lien Secured Notes due 2028 (the “1.5 Lien Notes”). The 1.5 Lien Notes will retain all the same terms and conditions of the 7.50% Senior Secured Notes except that they will rank senior in lien priority to the remaining $317.7 million 7.50% Senior Secured Notes. The exchange is expected to close shortly, subject to certain customary closing conditions, as well as the closing of the $150.0 million Credit Facility and the Canada SPV II and the execution of the Third Supplemental Indenture described below.
Canada SPV II
On May 9, 2023, the Company finalized a new C$110.0 million non-recourse revolving warehouse facility (the “Canada SPV II”) to finance future loans in Canada. The effective interest will be three-month CDOR plus 8.00%. The Company will also pay a 0.50% per annum commitment fee on the unused portion of the commitments. The warehouse revolving period will mature in November 2025. The transaction is expected to close shortly, subject to certain customary closing conditions.
Third Supplemental Indenture
On May 9, 2023, the Company finalized the Third Supplemental Indenture, which will amend the Indenture, dated July 30, 2021, by and between CURO Group Holdings Corp. and TMI Trust Company to, among other things, eliminate or amend substantially all of the restrictive covenants contained in the Indenture other than those related to the payment of principal and interest. The amendment is expected to become effective substantially concurrently with the closing of the $150.0 million Credit Facility and issuance of 1.5 Lien Notes, subject to certain customary closing conditions, as well as the closing of the $150.0 million Credit Facility, the Canada SPV II and the 1.5 Lien Notes described above.
Senior Revolver
Coincident with the closings of the transactions described above, the Company expects to utilize the proceeds from the $150.0 million Credit Facility to pay off the Senior Revolver. The foregoing transactions are referred to collectively as the “Financing Transactions.”