OppFi Inc 8-K/A, filed Aug 10, 2021
OppFi Inc. (OPFI)
About this 8-K/A
OppFi Inc filed this 8-K/A on August 10, 2021, reporting on events of July 20, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No.1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Explanatory Note
On July 26, 2021, OppFi Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Report”) in connection with its business combination with Opportunity Financial, LLC (“OppFi”). The purpose of this amendment to the Original Report is to provide (i) the unaudited consolidated financial statements of OppFi and the accompanying notes required by Item 9.01(a) of Form 8-K, as of June 30, 2021 and 2020 and for the six months ended June 30, 2021 and 2020 (the “Interim Financial Statements”), and (ii) the unaudited pro forma combined financial statements and the accompanying notes required by Item 9.01(b) of Form 8-K, as of June 30, 2021, for the six months ended June 30, 2021 and for the year ended December 31, 2020 (the “Pro Forma Financial Statements”), which information was excluded from the Original 8-K in reliance upon the instructions to such items, as well as to provide OppFi’s Management’s Discussion and Analysis of Financial Condition and Results of Operations relating to the Interim Financial Statements.
The Pro Forma Financial Statements included in this Amendment No. 1 to the Original Report (the “Amended Report”) have been presented for informational purposes, are based on various adjustments and assumptions and are not necessarily indicative of what the Company’s consolidated statement of operations or consolidated statement of financial condition actually would have been had the business combination and other adjustments been completed as of the dates indicated or will be for any future periods.
| Item 9.01 | Financial Statements and Exhibits. |
(a) Financial statements of business acquired.
The Interim Financial Statements are filed as Exhibit 99.1 to this Amended Report and incorporated herein by reference.
(b) Pro forma financial information.
The Pro Forma Financial Statements are filed as Exhibit 99.2 to this Amended Report and incorporated herein by reference.
(d) Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| OPPFI INC. | ||
| By: | /s/ Shiven Shah | |
| Shiven Shah Chief Financial Officer | ||
Dated: August 10, 2021
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
OPPORTUNITY FINANCIAL, LLC
Six Months Ended June 30, 2021
| Financial Statements (Unaudited) |
||||
| Consolidated balance sheets |
2 | |||
| Consolidated statements of operations |
3 | |||
| Consolidated statements of members’ equity |
4 | |||
| Consolidated statements of cash flows |
5 | |||
| Notes to consolidated financial statements |
6 |
Exhibit 99.1
Opportunity Financial, LLC and Subsidiaries
(in thousands, except unit data)
| (Unaudited) June 30, 2021 |
December 31, 2020 |
|||||||
| Assets |
||||||||
| Cash and cash equivalents, including amounts held by variable interest entities of $127 as of December 31, 2020 |
$ | 55,253 | $ | 25,601 | ||||
| Restricted cash, including amounts held by variable interest entities of $54,627 and $12,350 as of June 30, 2021 and December 31, 2020, respectively |
65,526 | 20,056 | ||||||
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|
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|
|
|||||
| Total cash, cash equivalents, and restricted cash |
120,779 | 45,657 | ||||||
| Finance receivables at fair value, including amounts held by variable interest entities of $253,164 as of June 30, 2021 |
296,381 | — | ||||||
| Finance receivables at amortized cost, net, including amounts held by variable interest entities of $148,473 as of December 31, 2020 |
132 | 222,243 | ||||||
| Debt issuance costs, net, including amounts held by variable interest entities of $1,786 and $2,576 as of June 30, 2021 and December 31, 2020, respectively |
1,786 | 2,598 | ||||||
| Property, equipment and software, net |
12,558 | 10,558 | ||||||
| Other assets, including amounts held by variable interest entities of $18 and $26 as of June 30, 2021 and December 31, 2020, respectively |
5,599 | 4,787 | ||||||
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|
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|
|
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| Total assets |
$ | 437,235 | $ | 285,843 | ||||
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|
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|
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| Liabilities and Members’ Equity |
||||||||
| Liabilities: |
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| Accounts payable, including amounts held by variable interest entities of $7 and $49 as of June 30, 2021 and December 31, 2020, respectively |
$ | 627 | $ | 1,380 | ||||
| Accrued expenses, including amounts held by variable interest entities of $1,581 and $1,647 as of June 30, 2021 and December 31, 2020, respectively |
28,622 | 22,785 | ||||||
| Reserve for repurchase liability |
— | 4,241 | ||||||
| Secured borrowing payable held by variable interest entity |
17,649 | 16,025 | ||||||
| Senior debt, net, including amounts held by variable interest entities of $158,300 and $112,076 as of June 30, 2021 and December 31, 2020, respectively |
206,644 | 131,726 | ||||||
| Subordinated debt - related party |
— | 4,000 | ||||||
| Other debt |
6,354 | 6,354 | ||||||
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| Total liabilities |
259,896 | 186,511 | ||||||
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| Commitments and contingencies (Note 11) |
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| Members’ equity: |
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| Preferred units - no par value, 41,102,500 units authorized, issued, and outstanding as of June 30, 2021 and December 31, 2020 |
6,660 | 6,660 | ||||||
| Additional paid in capital |
581 | 352 | ||||||
| Retained earnings |
170,098 | 92,320 | ||||||
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| Total members’ equity |
177,339 | 99,332 | ||||||
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| Total liabilities and members’ equity |
$ | 437,235 | $ | 285,843 | ||||
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See notes to unaudited consolidated financial statements.
2
Opportunity Financial, LLC and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(in thousands, except unit data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue: |
||||||||||||||||
| Interest and loan related income, net |
$ | 78,030 | $ | 61,165 | $ | 162,133 | $ | 135,694 | ||||||||
| Other income |
346 | 116 | 500 | 240 | ||||||||||||
|
|
|
|
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|
|
|||||||||
| 78,376 | 61,281 | 162,633 | 135,934 | |||||||||||||
| Provision for credit losses on finance receivables |
(31 | ) | (11,168 | ) | (38 | ) | (39,833 | ) | ||||||||
| Provision for repurchase liability |
— | (1,707 | ) | — | (5,042 | ) | ||||||||||
| Change in fair value of finance receivables |
(11,306 | ) | — | (33,695 | ) | — | ||||||||||
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|
|
|||||||||
| Net revenue |
67,039 | 48,406 | 128,900 | 91,059 | ||||||||||||
| Expenses: |
||||||||||||||||
| Salaries and employee benefits |
14,694 | 8,762 | 28,966 | 17,014 | ||||||||||||
| Direct marketing costs |
11,439 | 804 | 18,922 | 3,276 | ||||||||||||
| Interest expense and amortized debt issuance costs |
6,385 | 5,242 | 10,856 | 11,649 | ||||||||||||
| Interest expense - related party |
— | 139 | 137 | 279 | ||||||||||||
| Professional fees |
3,674 | 1,094 | 5,880 | 2,104 | ||||||||||||
| Depreciation and amortization |
2,413 | 1,579 | 4,577 | 2,976 | ||||||||||||
| Technology costs |
2,422 | 1,811 | 4,569 | 3,692 | ||||||||||||
| Payment processing fees |
1,684 | 798 | 3,312 | 1,746 | ||||||||||||
| Occupancy |
879 | 708 | 1,759 | 1,421 | ||||||||||||
| Management fees - related party |
175 | — | 350 | — | ||||||||||||
| General, administrative and other |
5,287 | 2,350 | 7,201 | 4,886 | ||||||||||||
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| Total expenses |
49,052 | 23,287 | 86,529 | 49,043 | ||||||||||||
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| Net income |
$ | 17,987 | $ | 25,119 | $ | 42,371 | $ | 42,016 | ||||||||
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| Three Months Ended June 30, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Preferred Unit |
Profit Unit Interest |
Preferred Unit |
Profit Unit Interest |
|||||||||||||
| Unit data: |
||||||||||||||||
| Earnings per unit: |
||||||||||||||||
| Basic |
$ | 0.34 | $ | 0.34 | $ | 0.49 | $ | 0.49 | ||||||||
| Diluted |
$ | 0.34 | $ | 0.34 | $ | 0.49 | $ | 0.49 | ||||||||
| Weighted average units outstanding: |
||||||||||||||||
| Basic |
41,102,500 | 12,147,335 | 41,102,500 | 10,159,227 | ||||||||||||
| Diluted |
41,331,004 | 12,147,335 | 41,102,500 | 10,159,227 | ||||||||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Preferred Unit |
Profit Unit Interest |
Preferred Unit |
Profit Unit Interest |
|||||||||||||
| Earnings per unit: |
||||||||||||||||
| Basic |
$ | 0.86 | $ | 0.56 | $ | 0.88 | $ | 0.58 | ||||||||
| Diluted |
$ | 0.86 | $ | 0.56 | $ | 0.88 | $ | 0.58 | ||||||||
| Weighted average units outstanding: |
||||||||||||||||
| Basic |
41,102,500 | 12,170,168 | 41,102,500 | 9,974,632 | ||||||||||||
| Diluted |
41,331,004 | 12,170,168 | 41,102,500 | 9,974,632 | ||||||||||||
See notes to unaudited consolidated financial statements.
3
Opportunity Financial, LLC and Subsidiaries
Consolidated Statements of Members’ Equity (Unaudited)
(in thousands, except unit data)
| Preferred Units | Additional Paid | Retained | Total Members’ |
|||||||||||||||||
| Units | Amount | in Capital | Earnings | Equity | ||||||||||||||||
| Balance, March 31, 2021 |
41,102,500 | $ | 6,660 | $ | 401 | $ | 187,054 | $ | 194,115 | |||||||||||
| Current period effects of adopting fair value option |
— | — | — | (1,817 | ) | (1,817 | ) | |||||||||||||
| Profit interest compensation |
— | — | 180 | — | 180 | |||||||||||||||
| Member distributions |
— | — | — | (33,126 | ) | (33,126 | ) | |||||||||||||
| Net income |
— | — | — | 17,987 | 17,987 | |||||||||||||||
|
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|
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|
|
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|
|
|||||||||||
| Balance, June 30, 2021 |
41,102,500 | $ | 6,660 | $ | 581 | $ | 170,098 | $ | 177,339 | |||||||||||
|
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|
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|
|
|||||||||||
| Balance, March 31, 2020 |
41,102,500 | $ | 6,660 | $ | 208 | $ | 46,713 | $ | 53,581 | |||||||||||
| Member distributions |
— | — | — | (55 | ) | (55 | ) | |||||||||||||
| Net income |
— | — | — | 25,119 | 25,119 | |||||||||||||||
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|
|
|||||||||||
| Balance, June 30, 2020 |
41,102,500 | $ | 6,660 | $ | 208 | $ | 71,777 | $ | 78,645 | |||||||||||
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|
|||||||||||
| Balance, December 31, 2020 |
41,102,500 | $ | 6,660 | $ | 352 | $ | 92,320 | $ | 99,332 | |||||||||||
| Effects of adopting fair value option |
— | — | — | 69,435 | 69,435 | |||||||||||||||
| Profit interest compensation |
— | — | 229 | — | 229 | |||||||||||||||
| Member distributions |
— | — | — | (34,028 | ) | (34,028 | ) | |||||||||||||
| Net income |
— | — | — | 42,371 | 42,371 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, June 30, 2021 |
41,102,500 | $ | 6,660 | $ | 581 | $ | 170,098 | $ | 177,339 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, December 31, 2019 |
41,102,500 | $ | 6,660 | $ | 208 | $ | 30,579 | $ | 37,447 | |||||||||||
| Member distributions |
— | — | — | (818 | ) | (818 | ) | |||||||||||||
| Net income |
— | — | — | 42,016 | 42,016 | |||||||||||||||
|
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|
|
|
|
|
|
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|
|||||||||||
| Balance, June 30, 2020 |
41,102,500 | $ | 6,660 | $ | 208 | $ | 71,777 | $ | 78,645 | |||||||||||
|
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|
|
|
|
|
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|
|
|
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See notes to unaudited consolidated financial statements.
4
Opportunity Financial, LLC and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 42,371 | $ | 42,016 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Change in fair value of finance receivables |
33,695 | — | ||||||
| Provision for credit losses on finance receivables |
38 | 39,833 | ||||||
| Provision for repurchase liability |
— | 5,042 | ||||||
| Depreciation and amortization |
4,577 | 2,976 | ||||||
| Debt issuance cost amortization |
1,163 | 977 | ||||||
| Profit interest compensation |
229 | — | ||||||
| Loss on disposition of equipment |
4 | — | ||||||
| Changes in assets and liabilities: |
||||||||
| Unamortized loan origination costs |
— | 6,909 | ||||||
| Accrued interest and fees receivable |
(1,512 | ) | 3,606 | |||||
| Other assets |
(812 | ) | (314 | ) | ||||
| Accounts payable |
(753 | ) | (1,861 | ) | ||||
| Accrued expenses |
5,837 | (267 | ) | |||||
|
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|
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| Net cash provided by operating activities |
84,837 | 98,917 | ||||||
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|
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| Cash flows from investing activities: |
||||||||
| Finance receivables originated and acquired |
(427,412 | ) | (353,196 | ) | ||||
| Finance receivables repayments and recoveries |
386,115 | 358,085 | ||||||
| Net repurchases from third-party lender |
— | (6,839 | ) | |||||
| Purchases of equipment and capitalized technology |
(6,581 | ) | (5,678 | ) | ||||
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| Net cash used in investing activities |
(47,878 | ) | (7,628 | ) | ||||
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| Cash flows from financing activities: |
||||||||
| Member distributions |
(34,028 | ) | (818 | ) | ||||
| Net advances (payments) of secured borrowing payable |
1,624 | (4,852 | ) | |||||
| Net advances (payments) in senior debt |
76,228 | (41,470 | ) | |||||
| Payment of subordinated debt - related party |
(4,000 | ) | — | |||||
| Proceeds from other debt |
— | 6,354 | ||||||
| Payment for debt issuance costs |
(1,661 | ) | (2,174 | ) | ||||
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| Net cash provided by (used in) financing activities |
38,163 | (42,960 | ) | |||||
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| Net increase in cash, cash equivalents and restricted cash |
75,122 | 48,329 | ||||||
| Cash, cash equivalents and restricted cash |
||||||||
| Beginning |
45,657 | 35,979 | ||||||
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| Ending |
$ | 120,779 | $ | 84,308 | ||||
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| Supplemental disclosure of cash flow information: |
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| Interest paid on borrowed funds |
$ | 10,002 | $ | 11,043 | ||||
| Non-cash change from adopting fair value option on finance receivables |
$ | 69,435 | $ | — | ||||
See notes to unaudited consolidated financial statements.
5
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Nature of Operations and Significant Accounting Policies
Nature of operations: The accompanying consolidated financial statements include the accounts of Opportunity Financial, LLC and its wholly owned subsidiaries: Opportunity Funding SPE II, LLC, Opportunity Funding SPE III, LLC, Opportunity Funding SPE IV, LLC, Opportunity Funding SPE V, LLC, Opportunity Funding SPE VI, LLC, and OppWin, LLC (collectively, the Company).
Opportunity Financial, LLC, a Delaware Limited Liability Company, is an online nonprime consumer finance company that is headquartered in Chicago, Illinois. The Company also does business as OppLoans. The Company primarily services and facilitates unsecured installment finance receivables and lines of credit directly to consumers and is licensed to operate within 40 states. In November 2020, the Company launched a salary-linked product (SalaryTap). The Company’s revenue is derived primarily from facilitation of consumer loans.
In 2019, the Company ceased the origination of unsecured lines of credit. As of June 30, 2021, the Company did not have any outstanding finance receivables relating to lines of credit.
In 2017, the Company entered into a preferred return agreement with an unrelated third party which required the Company to create a bankruptcy protected entity named Opportunity Funding SPE II, LLC, a Delaware Limited Liability Company and a wholly owned subsidiary. Under the terms of the agreement, Opportunity Funding SPE II, LLC acquires receivables from Opportunity Financial, LLC and OppWin LLC, and the third party receives a future preferred economic interest in these assets. Opportunity Financial, LLC continues to service the assets in accordance with the terms of the agreement but is required to maintain a backup servicing agreement. This transaction is being accounted for as a secured borrowing payable and the entity holds all assets on its balance sheet, which collateralize the debt.
In 2018, the Company entered into a credit agreement with an unrelated third party which required the Company to create a bankruptcy protected entity named Opportunity Funding SPE III, LLC, a Delaware Limited Liability Company and a wholly owned subsidiary. Under the terms of the agreement, Opportunity Funding SPE III, LLC uses the proceeds from the credit facility to acquire receivables from Opportunity Financial, LLC and OppWin, LLC, which the lender receives first priority lien on all of the entity’s assets. Opportunity Financial, LLC continues to service the assets in accordance with the terms of the agreement but is required to maintain a backup servicing agreement. This transaction is accounted for as senior debt in which this bankruptcy protected entity holds all assets on its balance sheet, which collateralize the debt.
In 2019, the Company entered into a credit agreement with an unrelated third party which required the Company to create a bankruptcy protected entity named Opportunity Funding SPE IV, LLC, a Delaware Limited Liability Company and a wholly owned subsidiary. Under the terms of the agreement, Opportunity Funding SPE IV, LLC uses the proceeds from the credit facility to acquire receivables from Opportunity Financial, LLC and OppWin, LLC, which the lender receives first priority lien on all of the entity’s assets. Opportunity Financial, LLC continues to service the assets in accordance with the terms of the agreement but is required to maintain a backup servicing agreement. This transaction is accounted for as senior debt in which this bankruptcy protected entity holds all assets on its balance sheet, which collateralize the debt. Opportunity Financial, LLC provides an unsecured financial guaranty in connection with this credit agreement.
In 2019, the Company entered into a credit agreement with an unrelated third party which required the Company to create a bankruptcy protected entity named Opportunity Funding SPE V, LLC, a Delaware Limited Liability Company and a wholly owned subsidiary. Under the terms of the agreement, Opportunity Funding SPE V, LLC uses the proceeds from the credit facility to acquire receivables from Opportunity Financial, LLC and OppWin, LLC, which the lender receives first priority lien on all of the entity’s assets. Opportunity Financial, LLC continues to service the assets in accordance with the terms of the agreement but is required to maintain a backup servicing agreement. This transaction is accounted for as senior debt in which this bankruptcy protected entity holds all assets on its balance sheet, which collateralize the debt.
6
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
In 2019, the Company entered into a credit agreement with an unrelated third party which required the Company to create a bankruptcy protected entity named Opportunity Funding SPE VI, LLC, a Delaware Limited Liability Company and a wholly owned subsidiary. Under the terms of the agreement, Opportunity Funding SPE VI, LLC uses the proceeds from the credit facility to acquire receivables from Opportunity Financial, LLC and OppWin, LLC, which the lender receives first priority lien on all of the entity’s assets. Opportunity Financial, LLC continues to service the assets in accordance with the terms of the agreement but is required to maintain a backup servicing agreement. This transaction is accounted for as senior debt in which this bankruptcy protected entity holds all assets on its balance sheet, which collateralize the debt.
The Company has entered into bank partnership arrangements with certain Utah-chartered banks (the Banks) insured by the FDIC. Under the terms and conditions of the agreement, the Banks originate finance receivables based on criteria provided by the Company. After an initial holding period, the Company has committed to acquire the participation rights to the finance receivables originated by the Banks. To facilitate these relationships, the Company formed OppWin, LLC, a Delaware Limited Liability Company and a wholly-owned subsidiary of Opportunity Financial, LLC. OppWin, LLC acquires the participation rights in the economic interest in the finance receivables originated by the Banks. Subsequently, OppWin, LLC sells these rights to Opportunity Funding SPE II, LLC, Opportunity Funding SPE III, LLC, Opportunity Funding SPE IV, LLC, Opportunity Funding SPE V, LLC and Opportunity Funding SPE VI, LLC, which in turn, pledge the participation rights to their respective lenders. The Company accounts for the participation rights as a finance receivable. As part of these bank partnership arrangements, the Banks have the ability to retain a percentage of the finance receivables they have originated. The Company’s economic interest and acquired participation rights are reduced by the percentage retained by the Banks.
Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the US (GAAP) for interim financial information. The accompanying consolidated balance sheet as of December 31, 2020 is derived from the Company’s annual audited financial statements. In the opinion of the Company’s management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results and financial position for the periods presented. The results for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
The consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2020. The Company believes that the disclosures are adequate to make the information presented not misleading.
Principles of consolidation: The consolidated financial statements include the accounts of the above named entities. Opportunity Funding SPE II, LLC, Opportunity Funding SPE III, LLC, Opportunity Funding SPE IV, LLC, Opportunity Funding SPE V, LLC, and Opportunity Funding SPE VI, LLC are special purpose entities holding finance receivables secured by lenders under a credit or preferred return agreement.
Opportunity Financial, LLC has identified Opportunity Funding SPE II, LLC, Opportunity Funding SPE III, LLC, Opportunity Funding SPE IV, LLC, Opportunity Funding SPE V, LLC, and Opportunity Funding SPE VI, LLC as variable interest entities (VIEs). Opportunity Financial, LLC is the sole equity member of these entities and directs the activities of the VIEs that most significantly impact economic performance. Additionally, the Company has the obligation to absorb losses of the VIEs that could potentially be significant. As the primary beneficiary of the VIEs, the Company has consolidated the financial statements of the VIEs. All significant intercompany transactions and balances have been eliminated in consolidation.
7
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
Segments: Segments are defined as components of an enterprise for which discrete financial information is available and evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer and the Company’s Chief Financial Officer are collectively considered to be the CODM. The CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company’s operations constitute a single reportable segment.
Significant accounting policies are as follows:
Use of estimates: The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions, including those impacted by COVID-19, that affect the reported amounts of assets, liabilities and operations and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
The judgements, assumptions, and estimates used by management are based on historical experience, management’s experience and qualitative factors. The areas subject to significant estimation techniques are the determination of fair value of installment finance receivables, the adequacy of the allowance for credit losses on finance receivables, and the adequacy of the reserve for repurchase liability. For the aforementioned estimates, it is reasonably possible the recorded amounts or related disclosures could significantly change in the near future as new information is available.
Income recognition: The Company recognizes finance charges on installment contracts and lines of credit based on the interest method. Under this method, interest is earned over the lives of the finance receivables to produce constant rates of interest (yields). Fees for returned payments approximate the cost of services provided and are recognized as incurred, assuming collectability is reasonably assured.
The Company discontinues and reverses the accrual of interest income on installment contracts at the earlier of 60 days past due based on a recency basis or 90 days past due based on a contractual basis. The accrual of income is not resumed until the account is current on a recency or contractual basis, at which time management considers collectability to be probable.
Cash and cash equivalents: The Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. All cash accounts are held in financially insured institutions, which may at times exceed federally insured limits. The Company has not experienced losses in such accounts. Management believes the Company’s exposure to credit risk is minimal for these accounts.
Restricted cash: Restricted cash consists of the following: (1) cash required to be held on reserve by the Company’s vendors for purposes of loan processing or funding; (2) cash required to be held for the Company’s guaranty on finance receivables under the terms of the Credit Access Business and Credit Service Organization programs (collectively, CSO program); (3) cash required to be held in blocked accounts held by the VIEs; and (4) cash required to be held on deposit in connection with the Company’s Bank Partnership Arrangement. All cash accounts are held in financially insured institutions, which may at times exceed federally insured limits. The Company has not experienced losses in such accounts. Management believes the Company’s exposure to credit risk is minimal for these accounts.
8
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
CSO arrangements: In Texas, the Company arranges for consumers to obtain finance receivable products from an independent third-party lender as part of the CSO program. The Company had also previously arranged for consumers to obtain finance receivable products from an independent third-party lender in Ohio as part of the CSO program. For the consumer finance receivable products originated by the third-party lender under the CSO program, the lender is responsible for providing the criteria by which the consumer’s application is underwritten and, if approved, determining the amount of the finance receivable. When a consumer executes an agreement with the Company under the CSO program, the Company agrees, for a fee payable to the Company by the consumer, to provide certain services to the consumer, one of which is to guarantee the consumer’s obligation to repay the finance receivable obtained by the consumer from the third-party lender if the consumer fails to do so.
On April 23, 2019, the Company discontinued the CSO program in Ohio and no new finance receivables were originated through this program after that date. As of June 30, 2021, there were no finance receivables remaining under the CSO program in Ohio.
On March 19, 2021, the Company discontinued the CSO program in Texas. As of June 30, 2021, finance receivables remaining under the CSO program in Texas totaled $319 thousand.
The guarantee represents an obligation to purchase specific finance receivables that are delinquent, secured by a collateral account established in favor of the respective lenders.
As of June 30, 2021 and December 31, 2020, the unpaid principal balance of off-balance sheet active finance receivables which were guaranteed by the Company was $319 thousand and $19,722 thousand, respectively. Upon the election of the fair value option for installment loan finance receivables on January 1, 2021, the Company released the reserve for repurchase liabilities as the income rights and related losses were included in the valuation of finance receivables at fair value, which was included in the fair value adjustment to retained earnings. As of December 31, 2020, the Company recorded a reserve for repurchase liabilities of $4,241 thousand, which represents the liability for estimated losses on finance receivables guaranteed. The Company used a similar methodology for determining the reserve for repurchase liabilities as it does for calculating the allowance for credit losses on finance receivables.
Under the terms of the CSO program, the Company is required to maintain a restricted cash balance equal to the guaranty, which is determined and settled on a weekly basis. On a daily basis, a receivable and/or payable is recorded to recognize the outstanding settlement balance. As of June 30, 2021 and December 31, 2020, the restricted cash balance held in a federally insured bank account related to the CSO program was $63 thousand and $3,069 thousand, respectively. As of June 30, 2021 and December 31, 2020, there was a payable balance of $104 thousand and $784 thousand, respectively, related to settlement which was included in accrued expenses on the consolidated balance sheets.
Participation rights purchase obligation: As part of the bank partnership arrangements, the Company is committed to acquiring the participation rights in the economic interest of these finance receivables originated by the Bank after the initial hold period. The issuing Bank earns interest during the initial hold period it owns the economic interest in the finance receivables. The Company provides certain services for these receivables in its capacity of sub-servicer pursuant to the terms of the servicing agreement between the Bank and the Company. The Company is committed to purchasing participation rights in the economic interest of outstanding finance receivables, net of bank partnership retention, plus accrued interest. For the six months ended June 30, 2021 and 2020, finance receivables originated through the bank partnership arrangements totaled 84% and 60%, respectively. As of June 30, 2021 and December 31, 2020, the unpaid principal balance of finance receivables outstanding for purchase was $10,000 thousand and $3,307 thousand, respectively.
9
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
Finance receivables: Prior to January 1, 2021, finance receivables, which management has the intent and ability to hold for the foreseeable future or until maturity or payoff, are reported based on outstanding unpaid principal balance net of accrued interest and fees, unamortized loan origination costs and the allowance for credit losses.
On January 1, 2021, the Company elected the fair value option on its installment finance receivables. Accordingly, the related finance receivables are carried at fair value in the consolidated balance sheets and the changes in fair value are included in the consolidated statements of operations. To derive the fair value, the Company generally utilizes discounted cash flow analyses that factor in estimated losses and prepayments over the estimated duration of the underlying assets. Loss and prepayment assumptions are determined using historical loss data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that the Company believes a market participant would require. Accrued interest and fees are included in “Finance receivables” in the consolidated balance sheets. Interest income is included in “Interest and loan related income, net” in the consolidated statements of operations.
The Company did not elect the fair value option on its SalaryTap finance receivables as this product launched in November 2020 and inputs for fair value are not yet determined. Accordingly, the related finance receivables are carried at amortized cost, net of allowance for credit losses.
Loan origination costs: Direct costs incurred for the origination of finance receivables are deferred and amortized over the average life of the customer using the straight-line method. Prior to the election of the fair value option of its installment loans, direct costs incurred for the origination of these finance receivables include underwriting fees, employee salaries and benefits directly related to the origination of the loan and program fees. Loan origination costs also include direct costs incurred for directly acquiring a customer; these costs are deferred and amortized over the average life of the customer using the straight-line method. With the election of the fair value option, loan origination costs related to the origination of installment finance receivables are expensed when incurred.
Allowance for credit losses on finance receivables: Prior to January 1, 2021, the Company used a static pool methodology for determining the adequacy of the allowance for credit losses on all finance receivables. Subsequent to January 1, 2021, the Company obtained and will continue to leverage competitive data for determining the adequacy of the allowance for credit losses on its SalaryTap finance receivables for estimated losses until sufficient Company performance data exists. A provision for credit losses on finance receivables is recorded when the allowance for credit losses is determined to be insufficient to absorb estimated losses. Such provisions are charged to income in amounts sufficient to maintain the allowance for losses on finance receivables at an adequate level. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing finance receivables based on an evaluation of the collectability of the finance receivables and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the finance receivable portfolio, overall portfolio quality and current economic conditions that may affect the borrower’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in any of the factors.
The Company’s charge-off policy is based on a review of delinquent finance receivables on a loan by loan basis. Finance receivables are charged off at the earlier of the time when accounts reach 90 days past due on a recency basis, when the Company receives notification of a customer bankruptcy, or is otherwise deemed uncollectible.
The allowance consists of quantitative and qualitative factors. The quantitative factors are based on historical charge-off experience. The qualitative factors are determined based on management’s assessment of internal and/or external influences on credit quality that are not fully reflected in the historical losses.
Finance receivables are considered small balance homogeneous receivables and are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual small balance homogeneous receivables for impairment disclosures, unless such receivables are the subject of a restructuring agreement.
10
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
Delinquency: The Company determines the past due status on a recency basis, which is defined as the last time a qualifying payment is made on an account. Finance receivables are considered delinquent at 30 days or more past due. Prior to May 2020, a qualifying payment was considered to be 50% of the scheduled payment. In May 2020, the policy was changed to consider 90% of the scheduled payment as a qualifying payment.
Troubled debt restructurings: As the terms of the receivables are typically not renegotiated and settlement offers are not typically made until after a receivable stops accruing interest income (up to 60 days delinquent), the only receivables considered to be impaired, or troubled debt restructurings, are: 1) those receivables where a settlement offer is made after receivables cease accruing interest, which may result in a modification of contractual terms, 2) the Company has received notification that a borrower is working with a third party to settle debt on his/her behalf and 3) customers who have entered into the Company’s short-term or long-term hardship programs. As of June 30, 2021 and December 31, 2020, management determined the balance of troubled debt restructuring receivables to be immaterial to the consolidated financial statements as a whole. As such, substantially all disclosures relating to impaired finance receivables, and troubled debt restructuring, have been omitted from these consolidated financial statements.
Property and equipment: Furniture, equipment, and leasehold improvements are stated at cost. Provisions for depreciation and amortization of furniture, equipment, and leasehold improvements are computed under both straight-line and accelerated methods for financial reporting and income tax purposes, based on the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the useful life of the assets or the term of the lease.
Capitalized technology: Software development costs related to internal use software are incurred in three stages of development: the preliminary project stage, the application development stage, and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Costs incurred during the application development stage that meet the criteria for capitalization are capitalized and amortized, when the software is ready for its intended use, using the straight-line basis, over the estimated useful life of the software. The Company capitalized software costs associated with application development totaling $3,337 thousand and $2,278 for the three months ended June 30, 2021 and 2020, respectively, and $6,073 thousand and $4,124 thousand for the six months ended June 30, 2021 and June 30, 2020, respectively. Amortization expense, which is included in depreciation and amortization on the consolidated statements of operations, totaled $2,178 thousand and $1,407 thousand for the three months ended June 30, 2021 and 2020, respectively, and $4,120 thousand and $2,650 thousand for the six months ended June 30, 2021 and 2020, respectively.
Debt issuance costs: Debt issuance costs are capitalized and amortized based on the contractual terms of the related debt agreements using the interest method for fixed-term debt and the straight-line method for all other debt.
Transfer and servicing of financial assets: After a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The transfers of assets for debt purposes have been accounted for as secured and senior borrowings and the related assets and borrowings are retained on the consolidated balance sheets and no gain or loss has been recognized in the consolidated statements of operations.
Income taxes: The Company is a Limited Liability Corporation taxed as a partnership.
Based on terms of the Company’s Operating Agreement, the Company shall terminate upon the first to occur of the following: (a) The consent of the board of managers; (b) the sale or other disposition of all or substantially all of the assets of the Company; or (c) decree of judicial dissolution pursuant to the Act. Additionally, the death, incompetence, bankruptcy, insolvency or dissolution of a member shall not terminate the Company.
11
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
Profits and losses of the Company are allocated to preferred unit holders in proportion to their respective percentage interests. If cash flow is available for distribution or payment, the Manager may, but shall be under no obligation to, utilize such available cash flow, as follows: (1) as a distribution to the preferred unit holders, in proportion to and to the extent of each unit holder’s unreturned capital contributions and (2) remaining proceeds shall be distributed to holders holding participating profit unit interest, in proportion to their respective participating percentage interests.
The taxable income or loss of the Company is included in the income tax returns of the members; accordingly, no provision for income tax expense or benefit is reflected in the accompanying consolidated financial statements. However, the Company is subject to certain business taxes in some states, which are included in expenses. The Company also recognizes interest and penalties on income taxes as a component of expenses. The Company’s tax returns and the amount of allocable profits or losses are subject to examination by federal and state taxing authorities. The tax liability of the members could be modified if such an examination results in changes to the Company’s profits or losses.
As long as the Company’s partnership income tax election remains in effect, the Company may, from time-to-time, pay distributions to its members in amounts sufficient to enable the members to pay taxes due on their share of the Company’s items of income, deduction, losses and credits which has been allocated to them for reporting on their individual income tax returns.
The Company accounts for uncertainty in income taxes which arises based on determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. The Company did not have any significant uncertain tax positions as of June 30, 2021 and December 31, 2020.
The Company is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 2017.
Government regulation: The Company is subject to complex regulation, supervision and licensing under various federal, state, local statutes, ordinances, regulations, rules and guidance. The Company must comply with federal laws as well as regulations adopted to implement those laws.
In July 2010, the U.S. Congress passed the Dodd-Frank Act, and Title X of the Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), which regulates U.S. consumer financial products and services, including consumer loans offered by the Company. The CFPB has regulatory, supervisory and enforcement powers over providers of consumer financial products and services, including explicit supervisory authority to examine and require registration of such providers.
Fair value disclosure: The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability.
12
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
ASC 820 provides a framework for measuring fair value under generally accepted accounting principles. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the nature of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 - Valuations for assets and liabilities traded in less-active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3 - Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
Accounting pronouncements issued and adopted: In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The amendments in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In April 2019 and November 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, respectively, which provide subsequent amendments to the initial guidance in ASU 2016-13. In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief, which provides entities that have certain instruments within the scope of ASC 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in ASC 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13.
The Company adopted ASU 2016-13 under the modified-retrospective method effective January 1, 2021 and elected the fair value option to account for installment finance receivables. The Company believes that the fair value option better reflects the value of its portfolio and its future economic performance as well as more closely aligns with the Company’s marginal decision-making processes that rely on risk based pricing and discounted cash flow methodologies. In accordance with the transition guidance, the Company (i) released the allowance for estimated losses on finance receivables at that date; (ii) released the unamortized net deferred origination costs at that date; (iii) released the reserve for repurchase liability on third-party lender losses; and (iv) measured the finance receivables at fair value. As a result of the adoption of this ASU, the Company’s finance receivables are carried at fair value with changes in fair value recognized directly in earnings and origination fees and costs are no longer eligible for deferral.
13
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
The following table summarizes the impact of adoption on the consolidated balance sheet as of January 1, 2021, as adjusted (in thousands):
| Fair value adjustment to finance receivables |
$ | 23,584 | ||
| Allowance for credit losses |
55,031 | |||
| Unamortized loan origination costs |
(13,421 | ) | ||
| Reserve for repurchase liability |
4,241 | |||
|
|
|
|||
| Increase in retained earnings |
$ | 69,435 | ||
|
|
|
During the quarter ended June 30, 2021, the Company identified that upon adopting the fair value option of its installment finance receivables, the initial adjustment on January 1, 2021 was overstated by $1,817 thousand. This amount represents the estimated premium on the Company’s off-balance sheet finance receivables, which was adjusted in the current quarter ended June 30, 2021.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which broadens the scope of existing guidance applicable to internal-use software development costs. The update requires costs to be capitalized or expensed based on the nature of the costs and the project stage in which they are incurred subject to amortization and impairment guidance consistent with existing internal-use software development cost guidance. The guidance is effective for annual reporting periods beginning after December 31, 2020, with early adoption permitted. The adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial statements.
Accounting pronouncements issued and not yet adopted: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. In November 2019, the FASB issued ASU 2019-10, which defers the effective date of ASU 2016-02 one year, making it effective for annual reporting periods beginning after December 15, 2020, with early adoption permitted. In June 2020, the FASB issued ASU 2020-05, which defers the effective date of ASU 2019-10 one year, making it effective for annual reporting periods beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The purpose of ASU 2020-04 is to provide optional guidance for a period of time related to accounting for reference rate reform on financial reporting. It is intended to reduce the potential burden of reviewing contract modifications related to discontinued rates. The amendments and expedients in this update are effective as of March 12, 2020 through December 31, 2022 and may be elected by topic. The Company is currently evaluating the impact on the Company’s consolidated financial statements.
14
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 2. Finance Receivables
Finance Receivables at Fair Value: The components of installment finance receivables at fair value as of June 30, 2021 were as follows (in thousands):
| June 30, 2021 | ||||
| Unpaid principal balance of finance receivables - accrual |
$ | 244,305 | ||
| Unpaid principal balance of finance receivables - non-accrual |
15,611 | |||
|
|
|
|||
| Unpaid principal balance of finance receivables |
259,916 | |||
| Finance receivables at fair value - accrual |
286,190 | |||
| Finance receivables at fair value - non-accrual |
770 | |||
|
|
|
|||
| Finance receivables at fair value |
286,960 | |||
| Accrued interest and fees receivable |
9,421 | |||
|
|
|
|||
| Finance receivables at fair value |
296,381 | |||
|
|
|
|||
| Difference between unpaid principal balance and fair value |
$ | 27,044 | ||
|
|
|
|||
The Company’s policy is to discontinue and reverse the accrual of interest income on installment finances receivables at the earlier of 60 days past due on a recency basis or 90 days past due on a contractual basis. As of June 30, 2021, the aggregate unpaid principal balance and fair value of installment finance receivables 90 days or more past due was $10,048 thousand and $495 thousand, respectively.
Changes in the fair value of installment finance receivables at fair value during the three months ended June 30, 2021 were as follows (in thousands):
| Balance at the beginning of the period |
$ | 269,782 | ||
| Originations of principal |
231,475 | |||
| Repayments of principal |
(191,899 | ) | ||
| Accrued interest and fees receivable |
146 | |||
| Charge-offs, net (1) |
(17,322 | ) | ||
| Adjustment to fair value |
(1,817 | ) | ||
| Net change in fair value (1) |
6,016 | |||
|
|
|
|||
| Balance at the end of the period |
$ | 296,381 | ||
|
|
|
| (1) | Included in “Change in fair value of finance receivables” in the Consolidated Statements of Operations. |
15
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 2. Finance Receivables (Continued)
Changes in the fair value of installment finance receivables at fair value during the six months ended June 30, 2021 were as follows (in thousands):
| Balance at the beginning of the period |
$ | 289,166 | ||
| Originations of principal |
427,317 | |||
| Repayments of principal |
(386,102 | ) | ||
| Accrued interest and fees receivable |
1,512 | |||
| Charge-offs, net (1) |
(37,155 | ) | ||
| Adjustment to fair value |
(1,817 | ) | ||
| Net change in fair value (1) |
3,460 | |||
|
|
|
|||
| Balance at the end of the period |
$ | 296,381 | ||
|
|
|
| (1) | Included in “Change in fair value of finance receivables” in the Consolidated Statements of Operations. |
Finance Receivables at Amortized Cost, net: Prior to January 1, 2021, the Company carried all finance receivables at amortized cost, including accrued interest and fees, unamortized loan origination costs, and allowance for credit losses. On January 1, 2021, the Company elected the fair value option for its installment finance receivables. The Company did not elect the fair value option for its SalaryTap finance receivables, which are carried at amortized cost. The components of finance receivables carried at amortized cost as of June 30, 2021 and December 31, 2020 were as follows (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Finance receivables |
$ | 142 | $ | 255,943 | ||||
| Accrued interest and fees |
1 | 7,910 | ||||||
| Unamortized loan origination costs |
— | 13,421 | ||||||
| Allowance for credit losses |
(11 | ) | (55,031 | ) | ||||
|
|
|
|
|
|||||
| Finance receivables at amortized cost, net |
$ | 132 | $ | 222,243 | ||||
|
|
|
|
|
|||||
Changes in the allowance for credit losses on finance receivables during the three and six months ended June 30, 2021 were as follows (in thousands):
| For the Three Months Ended | ||||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Beginning balance |
$ | 7 | $ | 53,497 | ||||
| Provisions for credit losses on finance receivables |
31 | 11,168 | ||||||
| Finance receivables charged off |
(27 | ) | (23,826 | ) | ||||
| Recoveries of charge offs |
— | 3,019 | ||||||
|
|
|
|
|
|||||
| Ending balance |
$ | 11 | $ | 43,858 | ||||
|
|
|
|
|
|||||
| For the Six Months Ended | ||||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Beginning balance |
$ | 55,031 | $ | 53,146 | ||||
| Effects of adopting fair value option |
(55,031 | ) | — | |||||
| Provisions for credit losses on finance receivables |
38 | 39,833 | ||||||
| Finance receivables charged off |
(27 | ) | (54,796 | ) | ||||
| Recoveries of charge offs |
— | 5,675 | ||||||
|
|
|
|
|
|||||
| Ending balance |
$ | 11 | $ | 43,858 | ||||
|
|
|
|
|
|||||
16
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 2. Finance Receivables (Continued)
Changes in the reserve for repurchase liability for third-party lender losses were as follows for the three months ended June 30, 2020 (in thousands):
| Beginning balance, March 31, 2020 |
$ | 4,446 | ||
| Provision for repurchase liabilities |
1,707 | |||
| Finance receivables charged off |
(3,214 | ) | ||
| Recoveries of charge offs |
241 | |||
| Ending balance, June 30, 2020 |
$ | 3,180 | ||
|
|
|
Changes in the reserve for repurchase liability for third-party lender losses were as follows for the six months ended June 30, 2020 (in thousands):
| Beginning balance, December 31, 2019 |
$ | 4,978 | ||
| Provision for repurchase liabilities |
5,042 | |||
| Finance receivables charged off |
(7,345 | ) | ||
| Recoveries of charge offs |
505 | |||
|
|
|
|||
| Ending balance, June 30, 2020 |
$ | 3,180 | ||
|
|
|
The Company released the reserve for repurchase liability for third-party lender losses on January 1, 2021 upon election of the fair value option for its installment finance receivables. As such, there was no reserve for repurchase liability for third-party losses as of January 1, 2021 and thereafter.
The following is an assessment of the credit quality of finance receivables at amortized cost and presents the recency delinquency and contractual delinquency of the finance receivable portfolio as of June 30, 2021 and December 31, 2020 (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||||||||||
| Recency delinquency |
Contractual delinquency |
Recency delinquency |
Contractual delinquency |
|||||||||||||
| Current |
$ | 142 | $ | 142 | $ | 240,623 | $ | 220,438 | ||||||||
| Delinquency |
||||||||||||||||
| 30-59 days |
— | — | 7,760 | 12,574 | ||||||||||||
| 60-89 days |
— | — | 7,560 | 9,852 | ||||||||||||
| 90+ days |
— | — | — | 13,079 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total delinquency |
— | — | 15,320 | 35,505 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Finance receivables |
$ | 142 | $ | 142 | $ | 255,943 | $ | 255,943 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
In accordance with the Company’s income recognition policy, finance receivables in non-accrual status as of December 31, 2020 was $19,277 thousand. There were no finance receivables guaranteed by the Company under the CSO program which were greater than 90 days past due as of June 30, 2021 and December 31, 2020, which had not already been repurchased by the Company and included in the totals above.
17
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 3. Property, Equipment and Software, Net
Property, equipment and software consisted of the following (in thousands):
| June 30, 2021 |
December 31, 2020 |
|||||||
| Capitalized technology |
$ | 26,981 | $ | 20,908 | ||||
| Furniture, fixtures and equipment |
3,613 | 3,228 | ||||||
| Leasehold improvements |
979 | 862 | ||||||
|
|
|
|
|
|||||
| Total property, equipment and software |
31,573 | 24,998 | ||||||
| Less accumulated depreciation and amortization |
(19,015 | ) | (14,440 | ) | ||||
|
|
|
|
|
|||||
| Property, equipment and software, net |
$ | 12,558 | $ | 10,558 | ||||
|
|
|
|
|
|||||
Depreciation and amortization expense for the three months ended June 30, 2021 and 2020 was $ 2,413 thousand and $1,579 thousand, respectively, and for the six months ended June 30, 2021 and 2020 was $4,577 thousand and $2,976 thousand, respectively.
Note 4. Borrowings
The following is a summary of the Company’s borrowings (in thousands):
| Purpose |
Borrower |
Borrowing Capacity |
June, 30, 2021 | December 31, 2020 | Interest Rate as of June 30, 2021 |
Maturity Date | ||||||||||||
| Secured borrowing payable |
Opportunity Funding SPE II, LLC |
$ | 56,460 | $ | 17,649 | $ | 16,025 | 15.00% | October 2021 | |||||||||
|
|
|
|
|
|
|
|||||||||||||
| Senior debt |
||||||||||||||||||
| Revolving line of credit |
Opportunity Financial, LLC |
$ | — | $ | — | $ | 5,000 | LIBOR plus 2.50% | February 2022 | |||||||||
| Revolving line of credit |
Opportunity Funding SPE III, LLC |
175,000 | 87,500 | 59,200 | LIBOR plus 6.00% | January 2024 | ||||||||||||
| Revolving line of credit |
Opportunity Funding SPE V, LLC |
75,000 | 37,500 | 24,222 | LIBOR plus 7.25% | April 2023 | ||||||||||||
| Revolving line of credit |
Opportunity Funding SPE VI, LLC |
50,000 | 25,000 | 16,148 | LIBOR plus 7.25% | April 2023 | ||||||||||||
| Revolving line of credit |
Opportunity Funding SPE IV, LLC |
25,000 | 8,300 | 12,506 | LIBOR plus 4.25% | September 2021 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||||
| Total revolving lines of credit |
325,000 | 158,300 | 117,076 | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||
| Term loan, net |
Opportunity Financial, LLC |
50,000 | 48,344 | 14,650 | LIBOR plus 10.00% | March 2025 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||||
| Total senior debt |
$ | 375,000 | $ | 206,644 | $ | 131,726 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||||
| Subordinated debt - related party |
Opportunity Financial, LLC |
$ | — | $ | — | $ | 4,000 | 14.00% | December 2023 | |||||||||
|
|
|
|
|
|
|
|||||||||||||
| Other debt |
Opportunity Financial, LLC |
$ | 6,354 | $ | 6,354 | $ | 6,354 | 1.00% | April 2022 | |||||||||
|
|
|
|
|
|
|
|||||||||||||
Secured borrowing payable: During 2017, Opportunity Funding SPE II, LLC entered into a preferred return agreement. Per the terms of the agreement, the finance receivables are grouped into quarterly pools. Collections are distributed on a pro rata basis after the payout of expenses to back-up servicer, servicer and other relevant parties. This agreement is secured by the assets of Opportunity Funding SPE II, LLC. The receivables are transferred to Opportunity Funding SPE II, LLC and OppWin LLC by Opportunity Financial, LLC, which has provided representations and warranties in connection with such sale. The agreement is subject to various financial covenants.
18
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 4. Borrowings (Continued)
During 2018, the SPE II, LLC preferred return agreement was amended. Opportunity Funding SPE II, LLC sells a 97.5 percent interest of certain unsecured finance receivables to the unrelated third party. Per the revised agreement, the unrelated third party earns a preferred return of 15 percent and a performance fee after the preferred return has been satisfied. The initial agreement expired August 1, 2018 and was then extended for one year. The agreement provides for two consecutive options to renew the purchase period for eighteen months. The unrelated third party exercised the first option, which provides a $65,000 thousand purchase commitment by the unrelated third party. After satisfaction of the purchase commitment, the agreement provides for a third option for an additional $100,000 thousand purchase commitment.
In May 2020, the SPE II, LLC preferred return agreement was amended. The unrelated third party exercised the option, which provides an additional $100,000 thousand purchase commitment, resulting in a total $165,000 thousand purchase commitment by the unrelated third party, of which $108,540 thousand and $79,816 thousand of finance receivables have been purchased with an active secured borrowing balance of $17,649 thousand and $16,025 thousand as of June 30, 2021 and December 31, 2020, respectively.
Interest expense related to this facility was $547 thousand and $372 thousand for the three months ended June 30, 2021 and 2020, respectively, and $1,372 thousand and $1,110 thousand for the six months ended June 30, 2021 and 2020, respectively. Additionally, the Company has capitalized $168 thousand in debt issuance costs in connection with this transaction . Amortized debt issuance costs was $12 thousand and $12 thousand for the three months ended June 30, 2021 and 2020, respectively, and $25 thousand and $25 thousand for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the remaining balance of unamortized debt issuance costs associated with this facility was $ 4 thousand and $30 thousand, respectively.
Senior debt: On August 13, 2018, the Company entered into a corporate credit agreement with a maximum available amount of $10,000 thousand. Interest is payable monthly. The facility is secured by the Company’s assets and certain brokerage assets made available by the Schwartz Capital Group (SCG), a related party. The agreement is subject to various financial covenants. On August 6, 2020, the corporate credit agreement was amended, and the maturity date was extended to February 2022.
On March 23, 2021, the borrowings under this revolving credit agreement were paid in full. Subsequent to repayment, the Company terminated the revolving credit agreement. Interest expense paid related to the revolving credit agreement totaled $31 thousand for the three months ended June 30, 2020. Interest expense paid related to the revolving credit agreement totaled $35 thousand and $84 thousand for the six months ended June 30, 2021 and 2020, respectively. Additionally, the Company has capitalized $294 thousand in debt issuance costs in connection with this transaction. For the three months ended June 30, 2021 and 2020, there were no amortized debt issuance costs. For the six months ended June 30, 2021 and 2020, amortized debt issuance costs were $21 thousand and $16 thousand, respectively. As of December 31, 2020, the remaining balance of unamortized debt issuance costs associated with the facility was $21 thousand.
On January 23, 2018, Opportunity Funding SPE III, LLC entered into a revolving line of credit agreement that provides maximum borrowings of $75,000 thousand. Interest is payable monthly. Borrowings are secured by the assets of Opportunity Funding SPE III, LLC. Opportunity Financial, LLC provides certain representations and warranties. The line of credit agreement is subject to a borrowing base threshold and various financial covenants, including maintaining a minimum tangible net worth and maximum senior debt to equity.
On January 31, 2020, the revolving line of credit agreement was amended to increase the aggregate commitment to $175,000 thousand. The amendment also changes the interest rate to one-month LIBOR plus 6 percent with a 2 percent LIBOR floor. The agreement matures in January 2024.
19
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 4. Borrowings (Continued)
Interest expense related to this facility was $1,887 thousand and $2,017 thousand for the three months ended June 30, 2021 and 2020, respectively, and $3,186 thousand and $4,537 thousand for the six months ended June 30, 2021 and 2020, respectively. Additionally, the Company has capitalized $2,098 thousand in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $176 thousand and $169 thousand for the three months ended June 30, 2021 and 2020, respectively, and $352 thousand and $394 thousand for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the remaining balance of unamortized debt issuance costs associated with the facility was $1,118 and $1,453, respectively.
In April 2019, Opportunity Funding SPE V, LLC entered into a revolving line of credit agreement that provides maximum borrowings of $75,000 thousand. Interest is payable monthly. Borrowings are secured by the assets of Opportunity Funding SPE V, LLC. Opportunity Financial, LLC provides certain representations and warranties related to the debt. The line of credit agreement is subject to a borrowing base and various financial covenants, including maintaining a minimum tangible net worth and restrictions related to dividend payments.
Interest expense related to this facility was $955 thousand and $943 thousand for the three months ended June 30, 2021 and 2020, respectively, and $1,565 thousand and $2,000 thousand for the six months ended June 30, 2021 and 2020, respectively. Additionally, the Company has capitalized $1,158 thousand in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $107 thousand and $95 thousand for the three months ended June 30, 2021 and 2020, respectively, and $212 thousand and $183 thousand for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the remaining balance of unamortized debt issuance costs associated with this facility was $336 thousand and $538 thousand, respectively.
In April 2019, Opportunity Funding SPE VI, LLC entered into a revolving line of credit agreement that provides maximum borrowings of $50,000 thousand. Interest is payable monthly. Borrowings are secured by the assets of Opportunity Funding SPE VI, LLC. Opportunity Financial, LLC provides certain representations and warranties related to the debt. The line of credit agreement is subject to a borrowing base and various financial covenants, including maintaining a minimum tangible net worth and restrictions related to dividend payments.
Interest expense related to this facility was $637 thousand and $641 thousand for the three months ended June 30, 2021 and 2020, respectively, and $1,044 thousand and $1,348 thousand for the six months ended June 30, 2021 and 2020, respectively. Additionally, the Company has capitalized $918 thousand in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $82 thousand and $75 thousand for the three months ended June 30, 2021 and 2020, respectively, and $164 thousand and $151 thousand for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the remaining balance of unamortized debt issuance costs associated with this facility was $260 thousand and $425 thousand, respectively.
In August 2019, Opportunity Funding SPE IV, LLC entered into a revolving line of credit agreement that provides maximum borrowings of $25,000 thousand. Interest is payable monthly. Borrowings are secured by the assets of Opportunity Funding SPE IV, LLC. Opportunity Financial, LLC provides certain representations and warranties related to the debt, as well as an unsecured guaranty. The line of credit agreement is subject to a borrowing base and various financial covenants, including maintaining a minimum tangible net worth and restrictions related to dividend payments.
Interest expense related to this facility was $111 thousand and $117 thousand for the three months ended June 30, 2021 and 2020, respectively, and $222 thousand and $297 thousand for the six months ended June 30, 2021 and 2020, respectively. Additionally, the Company has capitalized $550 thousand in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $155 thousand and $50 thousand for the three months ended June 30, 2021 and 2020, respectively, and $215 thousand and $96 thousand for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the remaining balance of unamortized debt issuance costs associated with this facility was $67 thousand and $131 thousand, respectively.
20
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 4. Borrowings (Continued)
In November 2018, Opportunity Financial, LLC entered into a $25,000 thousand senior secured multi-draw term loan agreement, which is secured by a senior secured claim on Opportunity Financial, LLC’s assets and a second lien interest in the receivables owned by Opportunity Funding SPE III, LLC, Opportunity Funding SPE V, LLC, and Opportunity Funding SPE VI, LLC. Interest is payable monthly. The loan agreement is subject to various financial covenants. Per the terms of the loan agreement, Opportunity Financial, LLC has issued warrants to the lender. In April 2020, the Company exercised an option to increase the facility commitment amount to $50,000 thousand.
On March 23, 2021, the senior secured multi-draw term loan agreement was amended to decrease the interest rate from LIBOR plus 12% to LIBOR plus 14% and extend the maturity date to March 23, 2025. On March 30, 2021, the Company drew the remaining $35,000 thousand available commitment. As of June 30, 2021 and December 31, 2020, the outstanding balances of $50,000 thousand and $15,000 thousand are net of unamortized discount of $14 thousand and $19 thousand, respectively, and unamortized debt issuance costs of $1,641 thousand and $331 thousand, respectively.
Interest expense related to this facility was $1,528 thousand and $663 thousand for the three months ended June 30, 2021 and 2020, respectively, and $2,192 thousand and $1, 295 thousand for the six months ended June 30, 2021 and 2020, respectively. Additionally, the Company has capitalized $2,295 thousand in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $110 thousand and $57 thousand for the three months ended June 30, 2021 and 2020, respectively, and $173 thousand and $113 thousand for the six months ended June 30, 2021 and 2020, respectively.
Subordinated debt - related party: The Company has an unsecured line of credit agreement with SCG, a related party, with a maximum available amount of $4,000 thousand. Interest due on this facility is paid quarterly, and the outstanding balance is due at maturity. Subordinated debt is subject to the same debt covenants as senior debt facilities. On March 30, 2021, the borrowings under this unsecured line of credit agreement were paid in full.
Interest expense related to this related party transaction was $139 thousand for the three months ended June 30, 2020. Interest expense was $137 thousand and $279 thousand for the six months ended June 30, 2021 and 2020, respectively.
Other debt: On April 13, 2020, the Company obtained an unsecured loan in the amount of $6,354 thousand from a bank in connection with the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (the PPP Loan). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forgiven if the Company uses the proceeds of the PPP Loan for its payroll costs and other expenses in accordance with the requirements of the Paycheck Protection Program. The Company used the proceeds of the PPP Loan for payroll costs and other covered expenses and sought full forgiveness of the PPP Loan, but there can be no assurance that the Company will obtain any forgiveness of the PPP Loan.
If the PPP Loan is not fully forgiven, the Company will remain liable for the full and punctual payment of the outstanding principal balance plus accrued and unpaid interest. The Company submitted the forgiveness application on November 14, 2020. The SBA has not completed its review of the Company’s eligibility for forgiveness. If the SBA determines that the loan is not fully forgiven, the first payment would be due no earlier than 30 days after the date a decision is reached on the loan forgiveness.
Interest accrued and expensed related to this unsecured loan was $77 thousand for the three months ended June 30, 2021 and $77 thousand for the six months ended June 30, 2021.
21
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 4. Borrowings (Continued)
As of June 30, 2021, required payments for all borrowings, excluding secured borrowing and revolving lines of credit, for each of the next five years are as follows (in thousands):
| Year |
Amount | |||
| Remainder of 2021 |
$ | 3,177 | ||
| 2022 |
3,177 | |||
| 2023 |
— | |||
| 2024 |
— | |||
| 2025 |
50,000 | |||
|
|
|
|||
| Total |
$ | 56,354 | ||
|
|
|
|||
Note 5. Warrants
In November 2018, in conjunction with the Company entering into a senior secured multi-draw term loan, Opportunity Finance, LLC issued warrant units to the lender. At close, warrant units equal to 1.0 percent of the total outstanding fully diluted units of equity (preferred units plus class A units) of Opportunity Financial, LLC were issued. Under the terms of the loan agreement, borrowings are subject to additional warrants equal to 0.5 percent of the total outstanding fully diluted units of equity as additional debt is drawn on the facility up to $10,000 thousand. The Company uses an unrelated third party to estimate the fair value of the warrant units issued.
The fair value of the warrant units was estimated using an option pricing model that used the following assumptions:
| June 30, 2021 | December 31, 2020 | |||||||
| Expected term |
3 years | 3 years | ||||||
| Volatility |
49.0 | % | 52.0 | % | ||||
| Discount for lack of marketability |
35.0 | % | 45.0 | % | ||||
| Risk free rate |
0.3 | % | 0.2 | % | ||||
The total proceeds were allocated on a relative fair value basis to the two instruments issued in conjunction and the amount allocated to the warrant units also represented a discount to the debt which is being amortized into interest expense over the term of the agreement. As of June 30, 2021 and December 31, 2020, the fair value of the warrant unit liability was $4,629 thousand and $1,309 thousand, respectively, and is included in accrued expenses in the consolidated balance sheets.
Note 6. Members’ Equity
The Company has two classes of partnership interests, preferred unit and profit unit interest.
22
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 6. Members’ Equity (Continued)
Preferred Unit: Preferred units holders have 100% of the voting rights of the Company and receive distributions, up to unit holders’ cumulative contribution, prior to profit unit interest members. In addition, preferred unit holders have preemptive rights regarding issuance of any securities and the ability to call special meetings. Each Preferred Member shall have the right to vote on matters on which Members may vote with each Preferred Share having one vote. The CEO Manager shall have one vote for each matter voted upon by the Board of Managers and each Founding Manager shall have the greater of: (i) two votes for each matter voted upon by the Board of Managers; and (ii) a number of votes which when added to the number of votes of each of the other Founding Managers results in the Founding Managers having a majority of the votes of the Board of Managers.
Profit Unit Interest: The Operating Agreement was amended in December 2015 to create Class A units to facilitate in the issuance of profit unit interest or Participating Class A Units. Profit unit interest holders have no right to vote or otherwise participate in any discussions of the interest holders, or any right to receive information concerning the Company. The holders of the profit unit interest shall not participate in distribution of income or gain of the Company until the preferred unit holders have received cumulative non-tax distributions equal to capital contributions. The Company has not made non-tax distributions to date. As of June 30, 2021, there have been 12,147,335 units authorized and granted for profit unit interest. The units vest partially on time thresholds over a four-year period based on the vesting schedule and other contractual terms presented in each participant’s agreement; and partially upon performance thresholds including a sale of the Company or based on Company distributions to shareholders.
As of June 30, 2021 and December 31, 2020, the contractually vested units outstanding were 10,312,113 and 7,463,802, respectively.
In accordance with authoritative guidance for equity-based compensation, the Company determines expense based on the measurement date fair value. The Company uses the Black-Scholes option-pricing model to determine the fair value of the profit unit interest. Compensation cost is recognized ratably over the contractually stated vesting period.
Total compensation expense for the three and six months ended June 30, 2021 was $180 thousand and $229 thousand, respectively. There was no compensation expense for the three and six months ended June 30, 2020. The compensation expense accounted for all vested units based on the following assumptions:
| June 30, 2021 | ||||
| Expected term |
3 years | |||
| Volatility |
68.0 | % | ||
| Discount for lack of marketability |
45.0 | % | ||
| Risk free rate |
0.2 | % | ||
23
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 6. Members’ Equity (Continued)
The following table summarizes data concerning the profit unit interest (units in thousands):
| Units | Avg Fair Value at Grant Date |
|||||||
| Outstanding at December 31, 2019 |
9,799 | $ | 0.05 | |||||
| Granted |
2,414 | $ | 0.17 | |||||
| Forfeited |
(11 | ) | $ | 0.03 | ||||
|
|
|
|
|
|||||
| Outstanding at December 31, 2020 |
12,202 | $ | 0.08 | |||||
|
|
|
|
|
|||||
| Granted |
— | — | ||||||
| Forfeited |
(55 | ) | $ | 0.08 | ||||
|
|
|
|
|
|||||
| Outstanding at March 31, 2021 |
12,147 | $ | 0.08 | |||||
|
|
|
|
|
|||||
| Granted |
— | — | ||||||
| Forfeited |
— | — | ||||||
|
|
|
|
|
|||||
| Outstanding at June 30, 2021 |
12,147 | $ | 0.08 | |||||
|
|
|
|
|
|||||
The following table provides information pertaining to non-vested units (units in thousands):
| Units | Avg Fair Value at Grant Date |
|||||||
| Non-vested units at December 31, 2019 |
3,467 | $ | 0.10 | |||||
| Granted |
2,414 | $ | 0.17 | |||||
| Vested |
(1,132 | ) | $ | 0.13 | ||||
| Forfeited |
(11 | ) | $ | 0.03 | ||||
|
|
|
|
|
|||||
| Non-vested units at December 31, 2020 |
4,738 | $ | 0.12 | |||||
|
|
|
|
|
|||||
| Granted |
— | — | ||||||
| Vested |
(326 | ) | $ | 0.15 | ||||
| Forfeited |
(55 | ) | $ | 0.08 | ||||
|
|
|
|
|
|||||
| Non-vested units at March 31, 2021 |
4,357 | $ | 0.12 | |||||
|
|
|
|
|
|||||
| Granted |
— | — | ||||||
| Vested |
(2,522 | ) | $ | 0.07 | ||||
| Forfeited |
— | — | ||||||
|
|
|
|
|
|||||
| Non-vested units at June 30, 2021 |
1,835 | $ | 0.20 | |||||
|
|
|
|
|
|||||
As of June 30, 2021 and December 31, 2020, unrecognized compensation expense was $324 thousand and $386 thousand, respectively.
24
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 7. Interest and Loan Related Income, Net
The following tables summarize interest and loan related income, net, for the three and six months ended June 30 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, 2021 | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Interest and loan related income, gross |
$ | 78,030 | $ | 73,495 | $ | 162,133 | $ | 162,340 | ||||||||
| Amortization of loan origination costs |
— | (12,330 | ) | — | (26,646 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Interest and loan related income, net |
$ | 78,030 | $ | 61,165 | $ | 162,133 | $ | 135,694 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Note 8. Interest Expense and Amortized Debt Issuance Costs
The following tables summarize interest expense and amortized debt issuance costs for the three and six months ended June 30 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Interest expense | $ | 5,743 | $ | 4,785 | $ | 9,693 | $ | 10,672 | ||||||||
| Amortized debt issuance costs | 642 | 457 | 1,163 | 977 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Interest expense and amortized debt issuance costs |
$ | 6,385 | $ | 5,242 | $ | 10,856 | $ | 11,649 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Note 9. Variable Interest Entities
The following table summarizes the carrying amounts of the variable interest entities’ assets and liabilities included in Opportunity Financial, LLC’s consolidated balance sheets, prior to intercompany eliminations, as of June 30, 2021 and December 31, 2020 (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Assets: | ||||||||
| Cash and cash equivalents |
$ | — | $ | 127 | ||||
| Restricted cash |
54,627 | 12,350 | ||||||
| Finance receivables at fair value |
253,164 | — | ||||||
| Finance receivables at amortized cost, net |
— | 148,473 | ||||||
| Debt issuance costs, net |
1,786 | 2,576 | ||||||
| Other assets |
18 | 26 | ||||||
| Liabilities: | ||||||||
| Accounts payable |
$ | 7 | $ | 49 | ||||
| Accrued expenses |
1,581 | 1,647 | ||||||
| Secured borrowing payable |
17,649 | 16,025 | ||||||
| Senior debt |
158,300 | 112,076 | ||||||
25
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 10. Fair Value Measurements
Fair value on a nonrecurring basis: The Company has no assets or liabilities measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances.
Fair value measurement on a recurring basis: Effective January 1, 2021, the Company elected the fair value option to account for its installment finance receivables. Prior to that, the Company only had warrant units that were measured at fair market value on a recurring basis.
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 are as follows (in thousands):
| Carrying Value | Fair Value Measurements | |||||||||||||||
| June 30, 2021 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Financial assets |
||||||||||||||||
| Finance receivables at fair value (1) |
$ | 296,381 | — | — | $ | 296,381 | ||||||||||
| Financial liabilities |
||||||||||||||||
| Warrant units (2) |
(4,629 | ) | — | — | (4,629 | ) | ||||||||||
| Carrying Value | Fair Value Measurements | |||||||||||||||
| December 31, 2020 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Financial liabilities |
||||||||||||||||
| Warrant units (2) |
$ | (1,309 | ) | — | — | $ | (1,309 | ) | ||||||||
| (1) | The Company primarily estimates the fair value of its installment finance receivables portfolio using discounted cash flow models that have been internally developed. The models use inputs that are unobservable but reflect the Company’s best estimates of the assumptions a market participant would use to calculate fair value. The following table presents quantitative information about the significant unobservable inputs used for the Company’s installment finance receivables fair value measurements as of June 30, 2021: |
| June 30, 2021 | ||||
| Interest rate on finance receivables | 149.00 | % | ||
| Discount rate | 21.60 | % | ||
| Servicing fee* | -5.03 | % | ||
| Remaining life | 0.578 years | |||
| Default rate* | 19.60 | % | ||
| Accrued interest* | 3.60 | % | ||
| Prepayment rate* | 21.80 | % | ||
| * | Stated as a percentage of finance receivables |
| (2) | The estimated fair value of the warrant units is calculated using an option pricing model. The resulting fair value measurement is categorized as a Level 3 measurement. For the three and six months ended June 30, 2021, warrant expense was $3,320 thousand. For the three and six months ended June 30, 2020, there was no warrant expense. Warrant expense is included in general, administrative, and other in the consolidated statements of operations. |
26
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 10. Fair Value Measurements (Continued)
Financial assets and liabilities not measured at fair value: The following table presents the carrying value and estimated fair values of financial assets and liabilities disclosed but not carried at fair value and the level within the fair value hierarchy as of June 30, 2021 (in thousands):
| Carrying Value | Fair Value Measurements | |||||||||||||||
| June 30, 2021 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets |
||||||||||||||||
| Cash and cash equivalents |
$ | 55,253 | $ | 55,253 | $ | — | $ | — | ||||||||
| Restricted cash |
65,526 | 65,526 | — | — | ||||||||||||
| Finance receivables at amortized cost, net |
132 | — | — | 132 | ||||||||||||
| Liabilities: |
||||||||||||||||
| Secured borrowing payable |
17,649 | — | — | 17,649 | ||||||||||||
| Senior debt, net |
206,644 | — | — | 206,644 | ||||||||||||
| Other debt |
6,354 | — | — | 6,354 | ||||||||||||
The following table presents the carrying value and estimated fair values of financial assets and liabilities disclosed but not carried at fair value and the level within the fair value hierarchy as of December 31, 2020 (in thousands):
| Carrying Value | Fair Value Measurements | |||||||||||||||
| December 31, 2020 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: |
||||||||||||||||
| Cash and cash equivalents |
$ | 25,601 | $ | 25,601 | $ | — | $ | — | ||||||||
| Restricted cash |
20,056 | 20,056 | — | — | ||||||||||||
| Finance receivables at amortized cost, net |
222,243 | — | — | 287,437 | ||||||||||||
| Liabilities: |
||||||||||||||||
| Reserve for repurchase liability |
4,241 | — | — | 4,241 | ||||||||||||
| Secured borrowing payable |
16,025 | — | — | 16,025 | ||||||||||||
| Senior debt, net |
131,726 | — | — | 131,726 | ||||||||||||
| Subordinated debt - related party |
4,000 | — | — | 4,000 | ||||||||||||
| Other debt |
6,354 | — | — | 6,354 | ||||||||||||
Note 11. Commitments, Contingencies and Related Party Transactions
Commitment: The Company leases its office facilities under a non-cancelable operating lease agreement with an unrelated party. On November 26, 2019, the Company amended the lease agreement to rent additional office space. The amendment reduced the required deposit of a letter of credit from $1,500 thousand to $1,000 thousand, which would be paid to the lessor in the event of default. On June 29, 2021, the required deposit of a letter of credit associated with the agreement was increased to $1,750 thousand. As of June 30, 2021 and December 31, 2020, there were no outstanding balances on the letter of credit. The amendment also extended the expiration date to September 2030.
Rent expense, which is included in occupancy expense in the consolidated statements of operations, totaled $875 thousand and $701 thousand for the three months ended June 30, 2021 and 2020, respectively, and $1,750 thousand and $1,404 thousand for the six months ended June 30, 2021 and 2020, respectively.
27
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 11. Commitments, Contingencies and Related Party Transactions (Continued)
Future minimum lease payments as of June 30, 2021 are as follows (in thousands):
| Year |
Amount | |||
| Remainder of 2021 |
$ | 1,095 | ||
| 2022 |
2,271 | |||
| 2023 |
2,339 | |||
| 2024 |
2,410 | |||
| 2025 |
2,482 | |||
| Thereafter |
12,840 | |||
|
|
|
|||
| Total |
$ | 23,437 | ||
|
|
|
|||
Legal contingencies: Due to the nature of its business activities, the Company is subject to extensive regulations and threatened legal action which arises in the normal course of business.
The Company has received inquiries from certain agencies and states on its lending compliance, the validity of the bank partnership model, and its ability to facilitate the servicing of bank originated loans. Management is confident that its lending practices and the bank partnership structure, in addition to the Company’s technologies, services, and overall relationship with its bank partners, complies with state and federal laws. However, the inquiries are still in process and the outcome is unknown at this time.
In the opinion of management, after considering the advice of its legal counsel, there is no pending or threatened legal action of any material consequence as of June 30, 2021 and December 31, 2020 and that any reasonably possible losses in addition to amounts accrued are not material to the financial statements.
Related party transactions: In August 2020, the Company entered into a Management Fee Agreement (the Agreement) with SCG. Per the Agreement, SCG provides board and advisory services. For the three and six months ended June 30, 2021, management fees totaled $175 thousand and $350 thousand, respectively.
Note 12. Concentration of Credit Risk
As of June 30, 2021, the Company’s portfolio of finance receivables is concentrated to consumers living primarily in Florida and Texas, which make up approximately 13 percent and 11 percent, respectively, of the gross receivable portfolio. There were no other states that make up more than 10 percent or more of the Company’s portfolio of finance receivables. As of December 31, 2020, the Company’s portfolio of finance receivables is concentrated to consumers living primarily in Florida and Illinois, which make up approximately 14 percent and 13 percent, respectively, of the gross receivable portfolio. Furthermore, such consumers’ ability to honor their installment contracts may be affected by economic conditions in these areas. The Company is also exposed to a concentration of credit risk inherent in providing alternate financing programs to borrowers who cannot obtain traditional bank financing.
28
Opportunity Financial, LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited, dollars in thousands)
Note 13. Retirement Plan
The Company sponsors a 401(k) retirement plan (the Plan) for its employees. Full time employees (except non-resident aliens) who are age 21 and older are eligible to participate in the Plan. The Plan participants may elect to contribute a portion of their eligible compensation to the Plan. The Company has elected a matching contribution up to 4% on eligible employee compensation. The Company’s contribution, which is included in salaries and employee benefits in the consolidated statements of operations, totaled $383 thousand and $275 thousand for the three months ended June 30, 2021 and 2020, respectively, and $726 thousand and $538 thousand for the six months ended June 30, 2021 and 2020, respectively.
Note 14. Earnings Per Unit
The Company computes earnings per unit (EPU) of preferred unit and profit unit interest using the two-class method required for participating securities. Refer to Note 6, Members’ Equity, for discussion of the Company’s classes of partnership interests. Refer to the accompanying pro forma financial statements for discussion regarding anticipated impact of the business combination on EPU. The following tables set forth the computation of the Company’s basic and diluted earnings per unit for the three and six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| (in thousands except per unit and per unit data) | Preferred Unit | Profit Unit Interest |
Preferred Unit | Profit Unit Interest |
||||||||||||
| Numerator: |
||||||||||||||||
| Net income available to unit holders |
$ | 13,884 | $ | 4,103 | $ | 20,141 | $ | 4,978 | ||||||||
| Denominator: |
||||||||||||||||
| Weighted average units outstanding - basic |
41,102,500 | 12,147,335 | 41,102,500 | 10,159,227 | ||||||||||||
| Diluted common unit equivalents |
228,504 | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted average units outstanding - diluted |
41,331,004 | 12,147,335 | 41,102,500 | 10,159,227 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Basic earnings per unit |
$ | 0.34 | $ | 0.34 | $ | 0.49 | $ | 0.49 | ||||||||
| Diluted earnings per unit |
$ | 0.34 | $ | 0.34 | $ | 0.49 | $ | 0.49 | ||||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| (in thousands except per unit and per unit data) | Preferred Unit | Profit Unit Interest |
Preferred Unit | Profit Unit Interest |
||||||||||||
| Numerator: |
||||||||||||||||
| Net income available to unit holders |
$ | 35,547 | $ | 6,824 | $ | 36,252 | $ | 5,764 | ||||||||
| Denominator: |
||||||||||||||||
| Weighted average units outstanding - basic |
41,102,500 | 12,170,168 | 41,102,500 | 9,974,632 | ||||||||||||
| Diluted common unit equivalents |
228,504 | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted average units outstanding - diluted |
41,331,004 | 12,170,168 | 41,102,500 | 9,974,632 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Basic earnings per unit |
$ | 0.86 | $ | 0.56 | $ | 0.88 | $ | 0.58 | ||||||||
| Diluted earnings per unit |
$ | 0.86 | $ | 0.56 | $ | 0.88 | $ | 0.58 | ||||||||
As of June 30, 2021 and 2020, there were warrants representing 282,955 units and 511,459 units, respectively, that were anti-dilutive. For the three and six months ended June 30, 2021, there were 228,504 dilutive common unit equivalents. For the three and six months ended June 30, 2020, there were no dilutive common unit equivalents.
Note 15. Subsequent Events
The Company has evaluated the impact of events that have occurred through the date these financial statements were issued and identified the following events that required disclosure.
Business Combination: On February 9, 2021, the Company entered into a definitive business combination agreement with FG New America Acquisition Corp., a special purpose acquisition corporation, that would result in the Company becoming a public company. The business combination was closed on July 20, 2021.
Senior Debt: On August 6, 2021, the Company entered into an amendment to the credit agreement with an unrelated third party for Opportunity Funding SPE IV, LLC which, among other things, extends the scheduled termination date of the credit agreement from August 19, 2021 to September 30, 2021 and amends certain of the financial covenants in the credit agreement.
29
Exhibit 99.2
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Introduction
We are providing the following unaudited pro forma combined financial information to aid you in your analysis of the financial aspects of the Business Combination (as defined below). Unless the context otherwise requires, the terms “we,” “us,” “our,” and the “Company” refers to OppFi Inc. and its consolidated subsidiaries, including Opportunity Financial, LLC, a Delaware limited liability company (“OppFi”), following the Closing and references to “FGNA” refer to FG New America Acquisition Corp. at or prior to the Closing (as defined below).
The unaudited pro forma combined financial information is prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma combined financial information presents the pro forma effects of the Business Combination.
The Unaudited Pro Forma Combined Financial Statements
The following unaudited pro forma combined balance sheet as of June 30, 2021 assumes that the Business Combination occurred on June 30, 2021. The unaudited pro forma combined statement of operations for the six months ended June 30, 2021, and for the year ended December 31, 2020, assumes that the Business Combination had been completed on January 1, 2020.
Management has made significant estimates and assumptions in its determination of the pro forma transaction accounting adjustments. As the unaudited pro forma combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented. The unaudited pro forma combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings or cost savings that may be associated with the Business Combination.
The unaudited pro forma transaction accounting adjustments reflecting the completion of the Business Combination are based on certain currently available information and certain assumptions and methodologies that the Company believes are reasonable under the circumstances. The unaudited pro forma transaction accounting adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the unaudited pro forma transaction accounting adjustments, and it is possible the difference may be material. The Company believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination based on information available to management at this time and that the unaudited pro forma transaction accounting adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma combined financial information.
The pro forma combined financial statements do not necessarily reflect what the Company’s financial condition or results of operations would have been had the Business Combination occurred on the dates indicated. The pro forma combined financial information also may not be useful in predicting the future financial condition and results of operations of the post-combination company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The historical financial information of FGNA was derived from (i) the unaudited financial statements of FGNA as of June 30, 2021 contained in the Company’s Quarterly Report on Form 10-Q filed with the United States Securities and Exchange Commission (the “SEC”) on August 10, 2021, and for the period from January 1, 2021 to June 30, 2021 and (ii) from the audited financial statements of FGNA as of December 31, 2020, and for the period from June 24, 2020 (inception) to December 31, 2020, filed as a part of FGNA’s Definitive Proxy Statement on Schedule 14A with the SEC on June 22, 2021 (the “Proxy Statement”). The historical financial information of OppFi was derived from (i) the unaudited consolidated financial statements as of and for the six months ended June 30, 2021 filed as an exhibit to this Current Report on Form 8-K/A and (ii) from the audited consolidated financial statements as of and for the year ended December 31, 2020, included in the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2021 (the “Original Report”). The unaudited pro forma combined financial information is qualified in its entirety by reference to, and should be read together with FGNA’s and OppFi’s audited and unaudited financial statements and related notes as described above, the sections titled “Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “OppFi Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Proxy Statement, and other financial information included elsewhere in the Proxy Statement and in “OppFi Management’s Discussion and Analysis of Financial Condition and Results of Operations” filed as an exhibit to this Current Report on Form 8-K/A.
Description of the Transaction
On July 20, 2021 (the “Closing Date”) FGNA, completed the transactions contemplated by that certain Business Combination Agreement, dated as of February 9, 2021 (the “Business Combination Agreement”), by and among FGNA, OppFi, OppFi Shares, LLC, a Delaware limited liability company (“OFS”), and Todd Schwartz, in his capacity as the representative (the “Members’ Representative”) of the members of OppFi immediately prior to the closing (the “Closing”) of the transactions contemplated by the Business Combination Agreement (the “Members”). At the Closing, (i) OppFi transferred to the Company (as defined below) 12,977,690 Class A common units of OppFi (“OppFi Units”), which was equal to the number of shares of FGNA’s Class A common stock, par value $0.0001 per share (“Class A Common Stock”), issued and outstanding as of immediately prior to the Closing (after giving effect to redemptions by FGNA’s public stockholders prior to the Closing and the conversion of FGNA’s Class B common stock, par value $0.0001 per share (“Class B Common Stock”)), (ii) FGNA contributed the Cash Consideration (as defined below) to OppFi in accordance with the Business Combination Agreement, which was distributed to the Members, and (iii) FGNA issued 96,987,093 shares of newly authorized Class V common stock, par value $0.0001 per share (“Class V Voting Stock”), which number of shares of Class V Voting Stock was equal to the number of OppFi Units retained by the Members immediately following the Closing (the “Retained OppFi Units”), and which shares of Class V Voting Stock were distributed to OFS, resulting in the combined company being organized in an “Up-C” structure. The transactions contemplated by the Business Combination Agreement are referred to herein as the “Business Combination.”
Upon the Closing, FGNA as the registrant changed its name to “OppFi Inc.”
1
The aggregate value of the consideration paid to the Members in the Business Combination was approximately $806,517,000, after giving effect to the estimated purchase price adjustments as set forth in the Business Combination Agreement, consisting of: (i) cash consideration in the amount of $91,646,050 (the “Cash Consideration”), equal to the cash remaining in FGNA’s trust account as of immediately prior to the Closing (following the redemption of 14,822,435 shares of Class A Common Stock by the FGNA’s public stockholders (the “Redemption Shares”)), and (ii) 96,987,093 shares of Class V Voting Stock.
Immediately after giving effect to the Business Combination, there were 12,977,690 issued and outstanding shares of Class A Common Stock (giving effect to the Redemption Shares and 3,443,750 shares of Class A Common Stock issued upon the conversion of the Class B Common Stock). On the business day following the Closing, FGNA’s public units automatically separated into their component securities upon consummation of the Business Combination and, as a result, no longer trade as a separate security and were delisted from The New York Stock Exchange (the “NYSE”).
In connection with the Closing, on the Closing Date, 25,500,000 Retained OppFi Units (“Earnout Units”) held by the Members and an equal number of shares of Class V Voting Stock distributed to OFS in connection with the transaction, are subject to certain restrictions and potential forfeiture pending the achievement (if any) of certain earnout targets pursuant to the terms of the Business Combination Agreement.
But for restrictions related to a lock-up (transfer restrictions) and forfeiture (earnout criteria), as such restrictions are more specifically set forth in the Investor Rights Agreement entered into at the Closing, by and among the Company, certain founder holders of FGNA, the Members, the Members’ Representative and/or the Third Amended and Restated Limited Liability Company Agreement of OppFi (the “OppFi A&R LLCA”), as applicable, the Earnout Units have all other economic and voting rights of the other units of OppFi. With respect to transfers, the Earnout Units are subject to a lock-up until the later of the end of the lock-up period applicable to other OppFi Units or until such Earnout Units are earned in accordance with the Business Combination Agreement. With respect to distributions (other than tax distributions, which in respect of such Earnout Units are treated the same as any other OppFi Unit in accordance with the OppFi A&R LLCA) in relation to the Earnout Units, such distributions (other than tax distributions) are held back until the Earnout Units are earned. If an Earnout Unit is not earned, and therefore forfeited, related distributions are distributed to the other holders of units at such time.
Following the Closing, the combined Company is organized in an “Up-C” structure in which substantially all of the assets and the business of the combined Company are held by OppFi and its subsidiaries, and the Company’s only direct assets will consist of OppFi Units. The Company owned, as of the Closing, directly or indirectly, approximately 11.8% of the OppFi Units and controls OppFi as the sole manager of OppFi in accordance with the terms of the OppFi A&R LLCA, and all remaining OppFi Units are beneficially owned by the Members. In addition, OFS holds a controlling voting interest in the Company after the Closing and therefore has the ability to control OppFi.
In connection with the Closing, pursuant to (i) the terms and conditions of the FGNA’s certificate of incorporation, (ii) a letter agreement entered into on September 29, 2020, whereby certain holders of Class B Common Stock agreed to waive any and all anti-dilution rights described in FGNA’s charter and (iii) a sponsor forfeiture agreement, dated July 15, 2021, whereby the Sponsor agreed, among other things, to forfeit 2,500,000 shares of Class B Common Stock at the Closing, the outstanding shares of Class B Common Stock were converted into shares of Class A Common Stock on a one-for-one basis and into an aggregate of 3,443,750 shares of Class A common stock.
Beginning on the nine-month anniversary of the Closing (unless otherwise waived by the Company, or, with respect to 11,600,000 Retained OppFi Units held by the Members, following the registration under the Securities Act of such shares), each Retained OppFi Unit held by the Members may be exchanged, subject to certain conditions, for either one share of Class A common stock or, at the election of the Company in its capacity as the sole manager of OppFi, the cash equivalent of the market value of one share of Class A common stock, pursuant to the terms and conditions of the OppFi A&R LLCA. For each Retained OppFi Unit so exchanged, one share of the Class V Voting Stock will be canceled by the Company.
The Cash Consideration payable to the Members was paid from cash available to FGNA from the trust account that held the proceeds (including interest) of FGNA’s initial public offering that closed on October 2, 2020, and after giving effect to taxes payable, redemptions by FGNA’s public stockholders for their pro rata share of the aggregate amount of funds on deposit in the trust account.
2
Accounting for the Business Combination
Business combinations in which the legal acquirer is not the accounting acquirer are commonly referred to as “reverse acquisitions” and can represent asset acquisitions, capital transactions and business combinations. A reverse acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting purposes and the entity whose equity interests are acquired (the legal acquiree) is identified as the acquirer for accounting purposes. Reverse acquisitions are accounted for in accordance with Subtopic 805-40 of Accounting Standards Codification Topic 805 “Business Combinations” (“ASC 805-40”). The Business Combination will be accounted for as a reverse acquisition for which OppFi was determined to be the accounting acquirer based on the following factors:
| (i) | The OFS will retain the largest and controlling voting interest in post-combination company. |
| (ii) | OppFi’s former management will represent the management of the post-combination company. |
| (iii) | The Members retain the ability to elect the majority of the members of the post-combination company’s board of directors. |
| (iv) | OppFi is larger as compared to FGNA based on assets, revenues or earnings. |
Other factors were evaluated but are not considered to have a material impact on the determination of OppFi as the accounting acquirer. The transaction is accounted for as a reverse acquisition in accordance with U.S. GAAP. Under this method of accounting, FGNA, which is the legal acquirer, will be treated as the “acquired” company for financial reporting purposes and OppFi will be treated as the accounting acquirer. As the same entity controls the target company and post transaction public reporting entity, for accounting purposes, the transaction is treated as the equivalent of a capital transaction in which OppFi is issuing units for the net assets of FGNA, accompanied by a recapitalization. The net assets of FGNA are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the transaction are those of OppFi.
Accounting Policies and Reclassifications
Based on management’s initial analysis of the accounting policies of FGNA and OppFi, there were no significant differences identified that would have an impact on the unaudited pro forma combined financial information or that would require adjustments to the unaudited pro forma combined financial statements. Upon completion of the transaction, management is performing a comprehensive review of the accounting policies of FGNA and OppFi. As a result of the comprehensive review, management may identify differences between the accounting policies of these entities which, when conformed, could have a material impact on the financial statements of the post-combination company.
The following unaudited pro forma combined balance sheet as of June 30, 2021, and the unaudited pro forma combined statement of operations for the six months ended June 30, 2021 and for the year ended December 31, 2020 are based on the historical financial statements of FGNA and OppFi. The unaudited pro forma transaction accounting adjustments are based on information currently available, and assumptions and estimates underlying the unaudited pro forma transaction accounting adjustments are described in the accompanying notes. Actual results may differ materially from the assumptions used to present the accompanying unaudited pro forma combined financial information.
3
FG New America Acquisition Corp.
Unaudited Pro Forma Combined Balance Sheet
As of June 30, 2021
(in thousands)
| Pro forma | ||||||||||||||||||||
| Transaction | ||||||||||||||||||||
| OppFi | Accounting | Proforma | ||||||||||||||||||
| FGNA (Historical) | (Historical) | Adjustments | Combined | |||||||||||||||||
| ASSETS |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 310 | $ | 55,253 | $ | 91,646 | A | $ | 25,751 | |||||||||||
| (29,812 | ) | C | ||||||||||||||||||
| (91,646 | ) | D | ||||||||||||||||||
| Restricted Cash |
— | 65,526 | — | 65,526 | ||||||||||||||||
| Finance Receivable |
— | 296,514 | — | 296,514 | ||||||||||||||||
| Prepaid expenses |
118 | — | 118 | |||||||||||||||||
| Debt issuance costs |
— | 1,786 | — | 1,786 | ||||||||||||||||
| Other assets |
— | 5,598 | — | 5,598 | ||||||||||||||||
| Marketable securities held in trust account |
243,381 | — | (243,381 | ) | A | — | ||||||||||||||
| Property, equipment and software, net |
— | 12,558 | — | 12,558 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Assets |
$ | 243,809 | $ | 437,235 | $ | (273,193 | ) | $ | 407,851 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
4
Unaudited Pro Forma Combined Balance Sheet (continued)
As of June 30, 2021
(in thousands)
| Pro forma | ||||||||||||||||||
| Transaction | ||||||||||||||||||
| OppFi | Accounting | Proforma | ||||||||||||||||
| FGNA (Historical) | (Historical) | Adjustments | Combined | |||||||||||||||
| LIABILITIES |
||||||||||||||||||
| Accounts payable |
$ | 1,540 | $ | 627 | $ | (1,511 | ) | C | $ | 656 | ||||||||
| Accrued Expenses |
— | 28,622 | (4,629 | ) | J | 23,993 | ||||||||||||
| Secured borrowing payable |
— | 17,649 | — | 17,649 | ||||||||||||||
| Senior Debt, Net |
— | 206,644 | — | 206,644 | ||||||||||||||
| Warrant Liabilities |
39,441 | — | (5,180 | ) | N | 34,261 | ||||||||||||
| Other debt |
— | 6,354 | — | 6,354 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total liabilities |
40,981 | 259,896 | (11,320 | ) | 289,557 | |||||||||||||
| Class A common stock subject to possible redemption, 21,215,577 shares at redemption value |
197,827 | — | (197,827 | ) | B | — | ||||||||||||
| Stockholders’ Equity: |
||||||||||||||||||
| Common Stock |
2 | — | 2 | B | 13 | |||||||||||||
| 6 | F | |||||||||||||||||
| 3 | M | |||||||||||||||||
| Preferred units |
— | 6,660 | (6,660 | ) | F | — | ||||||||||||
| Additional paid-in capital |
32,385 | 581 | (151,735 | ) | A | 58,703 | ||||||||||||
| 197,825 | B | |||||||||||||||||
| (29,812 | ) | C | ||||||||||||||||
| (27,386 | ) | E | ||||||||||||||||
| 4,629 | J | |||||||||||||||||
| 6,654 | F | |||||||||||||||||
| (104,332 | ) | K | ||||||||||||||||
| 1,511 | C | |||||||||||||||||
| 123,203 | M | |||||||||||||||||
| 5,180 | N | |||||||||||||||||
| Accumulated (deficit) earnings |
(27,386 | ) | 170,098 | (91,646 | ) | D | (44,754 | ) | ||||||||||
| 27,386 | E | |||||||||||||||||
| (123,206 | ) | M | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total stockholders’ equity |
5,001 | 177,339 | (168,379 | ) | 13,961 | |||||||||||||
| Noncontrolling interests |
104,332 | K | 104,332 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total equity |
5,001 | 177,339 | (64,046 | ) | 118,293 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Liabilities, Stockholder’s Equity and Noncontrolling interests |
$ | 243,809 | $ | 437,235 | $ | (273,193 | ) | $ | 407,851 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
5
FG New America Acquisition Corp.
Unaudited Pro Forma Combined Statement of Operations
For the six months Ended June 30, 2021
(in thousands, except share and per share data)
| Six Months | ||||||||||||||||||
| Ended June 30, | Six Months Ended | Six Months Ended | ||||||||||||||||
| 2021 | June 30, 2021 | June 30, 2021 | ||||||||||||||||
| Pro forma | ||||||||||||||||||
| Transaction | ||||||||||||||||||
| FGNA | OppFi | Accounting | Pro Forma | |||||||||||||||
| (Historical) | (Historical) | Adjustments | Combined | |||||||||||||||
| Interest and loan related income, net |
$ | — | $ | 162,133 | $ | — | $ | 162,133 | ||||||||||
| Other income |
— | 500 | — | 500 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenue |
— | 162,633 | — | 162,633 | ||||||||||||||
| Provision for credit losses on finance receivables |
— | (38 | ) | — | (38 | ) | ||||||||||||
| Change in fair value of finance receivables |
— | (33,695 | ) | — | (33,695 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net Revenue |
— | 128,900 | — | 128,900 | ||||||||||||||
| Expenses: |
||||||||||||||||||
| Salaries and employee benefits |
— | 28,966 | — | 28,966 | ||||||||||||||
| Interest expense and amortized debt issuance costs |
— | 18,922 | — | 18,922 | ||||||||||||||
| Interest expense - related party |
— | 10,856 | — | 10,856 | ||||||||||||||
| Direct marketing costs |
— | 137 | 137 | |||||||||||||||
| Technology costs |
— | 5,880 | 5,880 | |||||||||||||||
| Depreciation and amortization |
— | 4,577 | — | 4,577 | ||||||||||||||
| Professional fees |
— | 4,569 | 4,569 | |||||||||||||||
| Payment Processing Fees |
— | 3,312 | 3,312 | |||||||||||||||
| Occupancy |
— | 1,759 | — | 1,759 | ||||||||||||||
| Management Fees - related party |
— | 350 | — | 350 | ||||||||||||||
| General, administrative and other |
2,355 | 7,201 | (2,355 | ) | G | 7,201 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Expenses |
2,355 | 86,528 | (2,355 | ) | 86,528 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| (Loss) / Income from Operations |
(2,355 | ) | 42,371 | 2,355 | 42,371 | |||||||||||||
| Change in fair value of warrant liabilities |
(17,005 | ) | — | 3,155 | O | (13,850 | ) | |||||||||||
| Investment income on trust account |
12 | — | (12 | ) | H | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net (loss)/income before taxes |
(19,348 | ) | 42,371 | 5,498 | 28,521 | |||||||||||||
| Provision for income taxes |
— | — | 842 | I | 842 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net (loss)/income |
$ | (19,348 | ) | $ | 42,371 | $ | 4,656 | $ | 27,679 | |||||||||
| Net (loss)/income attributable to noncontrolling interest |
24,412 | L | 24,412 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net (loss)/income attributable to common stockholders |
$ | (19,348 | ) | $ | 42,371 | $ | (19,756 | ) | $ | 3,267 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Basic weighted average shares outstanding |
12,977,690 | |||||||||||||||||
| Fully diluted weighted average shares outstanding |
12,977,690 | |||||||||||||||||
| Basic net income per share |
$ | 0.25 | ||||||||||||||||
| Fully diluted net income per share |
$ | 0.25 | ||||||||||||||||
6
FG New America Acquisition Corp.
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2020
(in thousands, except share and per share data)
| For the Period | ||||||||||||||||||
| from June 24, | ||||||||||||||||||
| 2020 (Inception) | Year Ended | Year Ended | ||||||||||||||||
| to December 31, | December 31, | December 31, | ||||||||||||||||
| 2020 | 2020 | 2020 | ||||||||||||||||
| Transaction | ||||||||||||||||||
| Accounting | Pro Forma | |||||||||||||||||
| Adjustments | Combined | |||||||||||||||||
| FGNA | OppFi | Assuming No | Assuming No | |||||||||||||||
| (Historical) | (Historical) | Redemptions | Redemptions | |||||||||||||||
| Interest and loan related income, net |
$ | — | $ | 290,225 | $ | — | $ | 290,225 | ||||||||||
| Other income |
— | 789 | — | 789 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenue |
— | 291,014 | — | 291,014 | ||||||||||||||
| Total provision |
— | 90,787 | — | 90,787 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net Revenue |
— | 200,227 | — | 200,227 | ||||||||||||||
| Expenses: |
||||||||||||||||||
| Salaries and employee benefits |
— | 44,196 | — | 44,196 | ||||||||||||||
| Interest expense and amortized debt issuance costs |
— | 20,667 | — | 20,667 | ||||||||||||||
| Interest expense - related party |
— | 562 | — | 562 | ||||||||||||||
| Direct marketing costs |
— | 18,643 | 18,643 | |||||||||||||||
| Technology costs |
— | 7,623 | 7,623 | |||||||||||||||
| Depreciation and amortization |
— | 6,732 | — | 6,732 | ||||||||||||||
| Professional fees |
— | 6,569 | 6,569 | |||||||||||||||
| Payment Processing Fees |
— | 4,123 | 4,123 | |||||||||||||||
| Occupancy |
— | 3,091 | — | 3,091 | ||||||||||||||
| Management Fees - related party |
— | 700 | — | 700 | ||||||||||||||
| Formation Costs |
1 | — | (1 | ) | G | — | ||||||||||||
| General, administrative and other |
190 | 9,805 | (190 | ) | G | 9,805 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Expenses |
191 | 122,711 | (191 | ) | 122,711 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| (Loss) / Income from Operations |
(191 | ) | 77,516 | 191 | 77,516 | |||||||||||||
| Change in fair value of warrant liabilities |
(7,853 | ) | — | 2,025 | O | (5,828 | ) | |||||||||||
| Investment income on trust account |
6 | — | (6 | ) | H | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net (loss)/income before taxes |
(8,038 | ) | 77,516 | 2,210 | 71,688 | |||||||||||||
| Provision for income taxes |
— | — | 2,115 | I | 2,115 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net (loss)/income |
$ | (8,038 | ) | $ | 77,516 | $ | 95 | $ | 69,573 | |||||||||
| Net (loss)/income attributable to noncontrolling interest |
$ | 61,362 | L | $ | 61,362 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net (loss)/income attributable to common stockholders |
$ | (8,038 | ) | $ | 77,516 | $ | (61,267 | ) | $ | 8,211 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Basic weighted average shares outstanding - excluding Class V voting stock pertaining to Earnout Units |
12,977,690 | |||||||||||||||||
| Fully diluted weighted average shares outstanding - excluding Class V voting stock pertaining to Earnout Units |
12,977,690 | |||||||||||||||||
| Basic net income per share - excluding Class V voting stock pertaining to Earnout Units |
$ | 0.63 | ||||||||||||||||
| Fully diluted net income per share - excluding Class V voting stock pertaining to Earnout Units |
$ | 0.63 | ||||||||||||||||
Adjustments to Unaudited Pro Forma Combined Financial Information
The historical consolidated financial statements have been adjusted in the unaudited pro forma combined financial information to give effect to pro forma events that are (1) directly attributable to the transaction, (2) factually supportable and (3) with respect to the statement of operations, expected to have a continuing impact on the results of the post-combination company.
There were no intercompany balances or transactions between FGNA and OppFi as of the dates and for the periods of these unaudited pro forma combined financial statements.
The unaudited pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma combined consolidated statements of operations, are based upon the number of shares outstanding, assuming the transaction occurred on January 1, 2020.
7
The unaudited pro forma transaction accounting adjustments included in the unaudited pro forma combined balance sheet as of June 30, 2021, and the unaudited pro forma combined statements of operations for the six months ended June 30, 2021, and for the year ended December 31, 2020, are as follows:
Adjustments to Unaudited Pro Forma Combined Balance Sheet
| A. | Represents the reclassification of cash and investments held in the trust account that became available at the Closing. |
| B. | Represents the reclassification of Class A Common Stock subject to possible redemption to permanent equity. |
| C. | Represents the pro forma transaction accounting adjustments for transaction costs incurred in aggregate by FGNA and OppFi of approximately $8.6 million and $21.2 million, respectively, for legal, financial advisory, insurance and other professional fees as part of the Business Combination, including approximately $1.5 million in costs previously recognized as expense. |
| D. | Represents the pro forma transaction accounting adjustments for Cash Consideration to be paid to the Members in exchange for the OppFi Units, as defined herein. |
| E. | Represents the pro forma transaction accounting adjustments for the elimination of FGNA’s historical accumulated deficit at reverse acquisition. |
| F. | Represents the pro forma transaction accounting adjustments to eliminate the OppFi Preferred Units as a result of the Recapitalization (as defined in the Business Combination Agreement), pursuant to which all classes of equity held by the Members were converted or exchanged (whether by direct exchange, merger or otherwise) into a number of OppFi Units in the amounts determined in accordance with the OppFi A&R LLCA, the result of which were that the Members collectively held a single class of equity interests in OppFi as of immediately prior to the Closing. |
| J. | Represents the pro forma transaction accounting adjustments for the cashless exercise of the outstanding warrant to purchase 511,459 OppFi Preferred Units at June 30, 2021, which warrant provided for automatic cashless exercise immediately prior to, and conditioned upon, the Closing. |
| K. | Represents the proforma transaction accounting adjustment for the noncontrolling interest of the Retained OppFi Unit holders, which is calculated as combined pro forma total equity of $118.3 million multiplied by 88.2% representing the percentage of outstanding OppFi Units retained by the Members. |
| M. | Represents the proforma transaction accounting adjustment for the issuance of 25,500,000 shares of Class V Voting Stock at fair value issued to OFS in connection with the Closing which are subject to certain restrictions and potential forfeiture pending the achievement (if any) of certain earnout targets pursuant to the terms of the Business Combination Agreement. |
| N. | Represents the proforma transaction accounting adjustment related to 2,200,000 warrants forfeited upon the close of the transaction. |
8
Adjustments to Unaudited Pro Forma Combined Statement of Operations
| G. | Represents pro forma transaction accounting adjustment to eliminate historical expenses incurred by FGNA, which will not be recurring after the completion of the Business Combination. |
| H. | Represents pro forma transaction accounting adjustment to eliminate interest income earned on FGNA’s trust account, which will not be recurring after the completion of the Business Combination. |
| L. | Represents pro forma income tax provision at a rate of 25% reflecting the U.S. federal statutory rate of 21% and a blended statutory rate for state income taxes, net of federal benefit, of 4%, based on applicable law in effect on December 31, 2020, and June 30, 2021, and applied to pre-tax income after deducting the approximately 88.2% of pass-through income to the Members. Represents pro forma transaction accounting adjustment to reflect net income attributable to the retained OppFi Unit holders as a noncontrolling interest. |
| O. | Represents the proforma transaction accounting adjustment to the change in fair value resulting from the forfeiture of 2,200,000 in warrants at the close of the transaction. |
Net Income Per Share
Represents the net income / loss per share calculated using the historical weighted average shares outstanding of the Company, giving effect to the Retained OppFi Units as participating securities (“shares”), assuming the shares were outstanding since January 1, 2020. As the Business Combination and related transactions are being reflected as if they had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net income / loss per share assumes that the shares currently outstanding as well as issuable relating to the transaction have been outstanding for the entire period presented. The calculation excludes Company warrants of 15,339,437 with strike prices of $11.50 and $15.00 as they are anti-dilutive.
| Six months | ||||
| ended June 30, 2021 | ||||
| Pro forma net income available to common shareholders, basic |
$ | 3,267 | ||
| Weighted average common shares outstanding, basic |
12,977,690 | |||
| Weighted average common shares outstanding, diluted |
12,977,690 | |||
| Net income per share, basic |
$ | 0.25 | ||
| Net income per share, diluted |
$ | 0.25 | ||
| Weighted average common shares calculation: |
||||
| Total outstanding shares pre business combination |
30,300,125 | |||
| Total pro forma common shares to be issued pursuant to the Business Combination Agreement |
96,987,093 | |||
| Share redemptions and forfeitures |
(17,322,435 | ) | ||
| Noncontrolling interests |
(96,987,093 | ) | ||
|
|
|
|||
| Weighted average common shares outstanding, basic |
12,977,690 | |||
|
|
|
|||
| Weighted average common shares outstanding, diluted |
12,977,690 | |||
|
|
|
|||
9
| Twelve months | ||||
| ended December 31, 2020 | ||||
| Pro forma net income available to common shareholders, basic |
$ | 8,211 | ||
| Weighted average common shares outstanding, basic |
12,977,690 | |||
| Weighted average common shares outstanding, diluted |
12,977,690 | |||
| Net income per share, basic |
$ | 0.63 | ||
| Net income per share, diluted |
$ | 0.63 | ||
| Weighted average common shares calculation: |
||||
| Total outstanding shares pre business combination |
30,300,125 | |||
| Total pro forma common shares to be issued pursuant to the Business Combination Agreement |
96,987,093 | |||
| Share redemptions and forfeitures |
(17,322,435 | ) | ||
| Noncontrolling interests |
(96,987,093 | ) | ||
|
|
|
|||
| Weighted average common shares outstanding, basic |
12,977,690 | |||
|
|
|
|||
| Weighted average common shares outstanding, diluted |
12,977,690 | |||
|
|
|
|||
10
COMPARATIVE SHARE INFORMATION
The following table sets forth the per share data of FGNA on a stand-alone basis and the unaudited pro forma combined per share data for the six months ended June 30, 2021 and for the year ended December 31, 2020.
The pro forma combined book value information reflects the Business Combination and related transactions as if they had occurred on June 30, 2021 or on December 31, 2020. For pro forma combined information, the weighted average shares outstanding and net income per share information give pro forma effect to the Business Combination and related transactions as if they had occurred on January 1, 2020.
You should read the information in the following table in conjunction with the historical financial statements of FGNA and OppFi and related notes that are included in the Proxy Statement, in the Original Report and as exhibits to this Current Report on Form 8-K/A. The unaudited pro forma combined per share information is derived from, and should be read in conjunction with, the unaudited pro forma combined financial statements and related notes included above.
The unaudited pro forma combined net income per share information below does not purport to represent the net income per share which would have occurred had the companies been combined during the periods presented, nor net income per share for any future date or period. The unaudited pro forma combined book value per share information below does not purport to represent what the value of FGNA and OppFi would have been had the companies been combined during the periods presented.
| OppFi | FGNA | Pro Forma Combined |
||||||||||
| (in thousands, except share and per share data) | ||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||
| Net income (loss) attributable to common stockholders |
$ | 42,371 | $ | (19,348 | ) | $ | 3,267 | |||||
| Stockholders’ Equity |
$ | 177,339 | $ | 5,001 | $ | 13,961 | ||||||
| Weighted average shares outstanding, basic |
53,273 | 10,974,550 | 12,977,690 | |||||||||
| Weighted average shares outstanding, diluted |
53,501 | 10,974,550 | 12,977,690 | |||||||||
| Basic net income (loss) per share |
$ | 0.80 | $ | (1.76 | ) | $ | 0.25 | |||||
| Diluted net income (loss) per share |
$ | 0.79 | $ | (1.76 | ) | $ | 0.25 | |||||
| Stockholders’ equity per share(4) |
$ | 3.33 | $ | 0.71 | $ | 1.08 | ||||||
| OppFi | FGNA | Pro Forma Combined |
||||||||||
| (in thousands, except share and per share data) | ||||||||||||
| Year Ended December 31, 2020 | ||||||||||||
| Net income (loss) attributable to common stockholders |
$ | 77,516 | $ | (8,038 | ) | $ | 8,211 | |||||
| Stockholders’ Equity |
$ | 99,332 | $ | 5,001 | $ | 5,856 | ||||||
| Weighted average shares outstanding, basic |
52,125 | 7,016,091 | 12,977,690 | |||||||||
| Weighted average shares outstanding, diluted |
52,339 | 7,016,091 | 12,977,690 | |||||||||
| Basic net income (loss) per share |
$ | 1.49 | $ | (1.15 | ) | $ | 0.63 | |||||
| Diluted net income (loss) per share |
$ | 1.48 | $ | (1.15 | ) | $ | 0.63 | |||||
| Stockholders’ equity per share(4) |
$ | 1.91 | $ | 0.55 | $ | 0.45 | ||||||
| (1) | Excludes an aggregate of 10,107,945 weighted average shares subject to possible redemption at December 31, 2020 and 19,325,575 weighted average shares subject to redemption at June 30, 2021. |
| (2) | In the periods when net loss is incurred, no impact of dilutive securities is included in the calculation of weighted average number of common shares outstanding. |
| (3) | Excludes the effect of 21,215,577 shares of Class A Common Stock classified as held for redemption as of December 31, 2020 and 19,325,575 shares of Class A common stock classified as held for redemption as of June 30, 2021. |
| (4) | Based on weighted average shares outstanding, basic. |
11
Exhibit 99.3
OPPFI MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, all references in this section to “OppFi” refer to Opportunity Financial, LLC and subsidiaries prior to the consummation of the business combination. You should read the following discussion and analysis of OppFi’s financial condition and results of operations together with the OppFi’s audited consolidated financial statements and the related notes filed as a part of FGNA’s Definitive Proxy Statement on Schedule 14A with the SEC on June 22, 2021 (the “Proxy Statement”). This discussion contains forward-looking statements that reflect OppFi’s plans, estimates, and beliefs that involve risks and uncertainties. In addition, OppFi’s business is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in the Proxy Statement. As a result of these factors, such as those set forth under the headings “Risk Factors” and “Forward-Looking Statements” and elsewhere in the Proxy Statement, OppFi’s actual results may differ materially from those anticipated in these forward-looking statements.
Overview
OppFi is a leading mission-driven financial technology platform that powers banks to offer accessible lending products and a top-rated experience to everyday consumers. Through OppFi’s unwavering commitment to customer service, OppFi helps consumers who are turned away by traditional providers build a better financial path. Consumers on OppFi’s platform benefit from higher approval rates and a highly automated, efficient, all-digital experience. OppFi’s bank partners benefit from access to new customers and increased automation throughout the lending process.
Recent Developments
Key recent events impacting OppFi’s business are as follows:
| • | Business Combination — On February 9, 2021, OppFi announced that it had entered into a definitive business combination agreement with FG New America Acquisition Corp., a special purpose acquisition corporation, that would result in OppFi becoming a public company. The business combination was closed on July 20, 2021. Upon the close of the transaction, the combined company had 84,464,783 shares outstanding excluding 25,500,000 earnout units. OppFi also had 15,339,437 warrants outstanding with exercise prices at $11.50 and $15.00 per share. |
| • | Hiring of Neville Crawley as President — OppFi is pleased to welcome Neville Crawley in the newly created role of President. Crawley will help formulate OppFi’s technology and go-to-market strategies, and work to aggressively expand OppFi’s products and services. Crawley will additionally oversee OppFi’s social impact commitments. Prior to joining OppFi, Crawley served as CEO of the global fintech platform, Kiva, from 2017 to 2021. Kiva had funded more than $1.5 billion in loans to some of the world’s most financially excluded populations. Previously, Crawley served as CEO of Quid, an artificial intelligence company, as Senior Vice President of strategy and corporate development at GLG, the world’s largest expert network, and as a strategy and M&A consultant to fintech companies at McKinsey & Company. |
| • | COVID-19 — In March 2020, the World Health Organization recognized a global pandemic known as the coronavirus or COVID-19. Due to the economic uncertainty that this has caused, and can continue to cause, there is added risk to OppFi’s overall future outlook. OppFi has implemented cost containment and cash management initiatives to mitigate the potential impact of the COVID-19 pandemic on its business and liquidity. The full extent of any impact cannot be determined at this time. OppFi did see a slowdown in growth during the year ended December 31, 2020 and the first quarter ended March 31, 2021 due to the government stimulus program, which also had a positive impact on OppFi’s credit performance even while the credit risk of OppFi loan applicants remained flat during this period. Management will continue to monitor any changes to the business as the pandemic continues throughout 2021. |
1
Three and Six Months Ended June 30, 2021
Highlights
Our financial results as of and for the three months ended June 30, 2021 are summarized below.
| • | Net Originations increased 84% to $144.0 million from $78.1 million for the three months ended June 30, 2021 and 2020, respectively. |
| • | Ending Receivables increased 19% to $260.4 million from $218.8 million as of June 30, 2021 and 2020, respectively. |
| • | Total Revenue increased 28% to $78.4 million from $61.3 million for the three months ended June 30, 2021 and 2020, respectively, and Adjusted Revenue increased 6% to $78.4 million from $73.6 million for the three months ended June 30, 2021 and 2020, respectively. |
| • | Net Income was $18.0 million and $42.4 million for the three and six months ended June 30, 2021, respectively. |
| • | Adjusted Net Income was $17.9 million and $37.2 million for the three and six months ended June 30, 2021, respectively. |
Key Performance Metrics
OppFi regularly reviews the following key metrics, to evaluate its business, measure its performance, identify trends affecting its business, formulate financial projections and make strategic decisions, which may also be useful to an investor.
Total Net Originations
We measure originations to assess the growth trajectory and overall size of our loan portfolio. There is a direct correlation between origination growth and revenue growth. We include both bank partner originations as well as those originated by us directly. Originations may be useful to an investor because it helps understand the growth trajectory of revenues.
The following tables present total net originations (defined as gross originations net of transferred balance on refinanced loans), percentage of net originations by bank partners, and percentage of net originations by new loans for the three and six months ended June 30, 2021 and 2020.
| Three Months Ended June 30, |
Change | |||||||||||||||
| (dollars in thousands) | 2021 | 2020 | $ | % / bps | ||||||||||||
| Total Net Originations |
$ | 143,983 | $ | 78,098 | $ | 65,885 | 84.4 | % | ||||||||
| Percentage of Net Originations by Bank Partners |
93.0 | % | 62.0 | % | N/A | 3,100 bps | ||||||||||
| Percentage of Net Originations by New Loans |
41.7 | % | 31.7 | % | N/A | 1,000 bps | ||||||||||
| Six Months Ended June 30, |
Change | |||||||||||||||
| (dollars in thousands) | 2021 | 2020 | $ | % / bps | ||||||||||||
| Total Net Originations |
$ | 243,792 | $ | 202,244 | $ | 41,548 | 20.5 | % | ||||||||
| Percentage of Net Originations by Bank Partners |
86.1 | % | 63.9 | % | N/A | 2,220 bps | ||||||||||
| Percentage of Net Originations by New Loans |
38.4 | % | 44.1 | % | N/A | (570 bps | ) | |||||||||
2
Net Originations increased to $144.0 million and $243.8 million for the three and six months ended June 30, 2021, respectively, from $78.1 million and $202.2 million for the three and six months ended June 30, 2020, respectively. The 84.4% and 20.5% increases were primarily due to a recovery from the short-term reduction in customer demand attributable to the COVID-19 pandemic as well as governmental stimulus measures in 2020.
OppFi’s originations model continues to shift towards a facilitation model for bank partners from a direct origination model. Total Net Originations by OppFi’s bank partners increased to 93.0% and 86.1% for the three and six months ended June 30, 2021, respectively, from 62.0% and 63.9% for the three and six months ended June 30, 2020, respectively.
In addition, OppFi’s net originations saw an increase in the percentage of originations being new loans compared to refinanced loans as customer demand continued to return to pre-pandemic levels coupled with increased automation, which drove a higher conversion of applications to funded loans. Total Net Originations of new loans as percentage of total loans increased to 41.7% for the three months ended June 30, 2021 from 31.7% for the three months ended June 30, 2020. Total Net Originations of new loans as a percentage of total loans decreased to 38.4% for the six months ended June 30, 2021 from 44.1% for the six months ended June 30, 2020. The 570 bps decrease was primarily driven by the short-term reduction in customer demand attributable to governmental stimulus measures for the first quarter of 2021 relative to the first quarter of 2020.
Ending Receivables
Ending receivables are defined as the unpaid principal balances of both on- and off-balance sheet loans at the end of the reporting period.
The following table presents ending receivables as of June 30, 2021 and 2020. Ending receivables increased to $260.4 million as of June 30, 2021 from $218.8 million as of June 30, 2020. The 19.0% increase was primarily driven by a return to growth in originations for the three months ended June 30, 2021 after the short-term reduction in customer demand attributable to the COVID-19 pandemic as well as governmental stimulus measures in 2020.
| As of June 30, |
Change | |||||||||||||||
| (dollars in thousands) | 2021 | 2020 | $ | % | ||||||||||||
| Ending Receivables |
$ | 260,377 | $ | 218,767 | $ | 41,610 | 19.0 | % | ||||||||
Average Yield
Average yield represents annualized interest income from the period as a percent of average receivables. Receivables are defined as unpaid principal balances of both on- and off-balance sheet loans.
The following tables present average yield for the three and six months ended June 30, 2021 and June 30, 2020. Yield increased to 128.5% for the three and six months ended June 30, 2021, respectively, from 124.3% and 126.5% for the three and six months ended June 30, 2020, respectively. The 420 bps and 200 bps increases were driven by lower percentage of the portfolio in non accrual status and a lower percentage of customers on OppFi’s COVID hardship program which impacted results for the quarter ended June 30, 2020.
| Three Months Ended June 30, |
Change | |||||||||||
| 2021 | 2020 | bps | ||||||||||
| Average Yield |
128.5 | % | 124.3 | % | 420 bps | |||||||
| Six Months Ended June 30, |
Change | |||||||||||
| 2021 | 2020 | bps | ||||||||||
| Average Yield |
128.5 | % | 126.5 | % | 200 bps | |||||||
3
Net Charge-Offs as a Percentage of Average Receivables
Net charge-offs as a percentage of average receivables represents annualized total charge offs from the period less recoveries as a percent of average receivables. Receivables are defined as unpaid principal of both on- and off-balance sheet loans. OppFi’s charge-off policy is based on a review of delinquent finance receivables on a loan by loan basis. Finance receivables are charged off at the earlier of the time when accounts reach 90 days past due on a recency basis, when OppFi receives notification of a customer bankruptcy, or is otherwise deemed uncollectible.
The following tables present net charge-offs as a percentage of average receivables for the three and six months ended June 30, 2021 and 2020. Net charge-offs as a percentage of average receivables decreased by 1,160 bps to 28.4% and 1,430 bps to 29.1% from the three and six months ended June 30, 2020, respectively, to the three and six months ended June 30, 2021, respectively, as a result of the positive impact on customers’ bank balances from government stimulus programs.
| Three Months Ended June 30, |
Change | |||||||||||
| 2021 | 2020 | bps | ||||||||||
| Net Charge-Offs as % of Avg. Receivables |
28.4 | % | 40.0 | % | (1,160 bps | ) | ||||||
| Six Months Ended June 30, |
Change | |||||||||||
| 2021 | 2020 | bps | ||||||||||
| Net Charge-Offs as % of Avg. Receivables |
29.1 | % | 43.4 | % | (1,430 bps | ) | ||||||
Marketing Cost per Funded Loan
Marketing cost per funded loan represents marketing cost per funded loan for new and refinance loans. This metric is the amount of direct marketing costs incurred during a period divided by the number of loans originated during that same period.
The following tables present marketing cost per funded loan for the three and six months ended June 30, 2021 and 2020. OppFi’s marketing cost per funded loan has decreased to $72 and $65 for the three and six months ended June 30, 2021, respectively, from $91 and $83 for the three and six months ended June 30, 2020, respectively. OppFi’s marketing cost per funded loan was impacted in the three and six months ended June 30, 2020 due to the stimulus impact on demand in 2020.
| Three Months Ended June 30, |
Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Marketing Cost per Funded Loan |
$ | 72 | $ | 91 | $ | (19 | ) | (20.9% | ) | |||||||
| Six Months Ended June 30, |
Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Marketing Cost per Funded Loan |
$ | 65 | $ | 83 | $ | (18 | ) | (21.7% | ) | |||||||
Marketing Cost per New Funded Loan
Marketing cost per new funded loan represents the amount of direct marketing costs incurred during a period divided by the number of new loans originated during that same period.
The following tables present marketing cost per funded loan (new) for the three and six months ended June 30, 2021 and 2020. OppFi’s marketing cost per new funded loan decreased by 46.0% and 13.1% for the three and six months ended June 30, 2021, respectively, from the three and six months ended June 30, 2020, respectively, due primarily to the impact on direct mail performance due to the 2020 government stimulus programs which temporarily reduced customer demand.
4
| Three Months Ended June 30, |
Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Marketing Cost per New Funded Loan |
$ | 245 | $ | 454 | $ | (209 | ) | (46.0% | ) | |||||||
| Six Months Ended June 30, |
Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Marketing Cost per New Funded Loan |
$ | 253 | $ | 291 | $ | (38 | ) | (13.1% | ) | |||||||
Auto-Approval Rate
Auto-approval rate is calculated by taking the number of approved loans that are not decisioned by a loan advocate or underwriter (auto-approval) divided by the total number of loans approved.
Overall auto decisioning, which also takes into account those applications that were denied which are not decisioned by a loan advocate or underwriter (auto-denial) plus auto-approval divided by the total number of applications, was 77% for the three months ended June 30, 2021.
The following table presents auto approval rate as of June 30, 2021 and June 30, 2020. Auto-approval rate increased by 3,140 bps as of June 30, 2021 from June 30, 2020 driven by the continued application of algorithmic automation projects that streamline frictional steps of the origination process.
| As of June 30, |
Change | |||||||||||
| 2021 | 2020 | bps | ||||||||||
| Auto-Approval Rate |
50.5 | % | 19.1 | % | 3,140 bps | |||||||
Sales and Servicing Cost per Loan
Sales and Servicing cost per loan is calculated by taking the total servicing costs, which include customer center salaries, underwriting and reporting costs, and payment processing fees, divided by the average amount of outstanding loans during that period.
The following tables present servicing cost per loan for the three and six months ended June 30, 2021 and June 30, 2020. OppFi’s servicing cost per loan increased by $27 and $12 for the three and six months ended June 30, 2021, respectively, from the three and six months ended June 30, 2020, respectively, due to the increase in underwriting costs and payment processing fees tied to the increase in originations. Due to improvements in auto-approval rates which drove scale to the business, the percentage growths of 19.6% and 8.2% for the three and six months ended June 30, 2021 were significantly lower than origination growth of 84.4% and 20.5% for the three and six months ended June 30, 2021.
| Three Months Ended June 30, |
Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Sales and Servicing Cost per Loan |
$ | 164 | $ | 137 | $ | 27 | 19.6 | % | ||||||||
5
| Six Months Ended June 30, |
Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Sales and Servicing Cost per Loan |
$ | 160 | $ | 148 | $ | 12 | 8.2 | % | ||||||||
Results of Operations
Comparison of the Three Months Ended June 30, 2021 and 2020
The following table presents OppFi’s consolidated results of operations for the three months ended June 30, 2021 and 2020:
| Three Months Ended June 30, |
Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| (In thousands, except % change) | ||||||||||||||||
| Interest and Loan Related Income, Gross (a) |
$ | 78,030 | $ | 73,495 | $ | 4,535 | 6.2 | % | ||||||||
| Other Income |
346 | 116 | 230 | 197.8% | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Interest, Loan Related, and Other Income |
$ | 78,376 | $ | 73,611 | $ | 4,765 | 6.5% | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Amortization of Loan Origination Costs |
— | (12,330 | ) | 12,330 | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Revenue |
$ | 78,376 | $ | 61,281 | $ | 17,095 | 27.9% | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Provision |
(31 | ) | (12,875 | ) | 12,844 | (100.0% | ) | |||||||||
| Change in Fair Value |
(11,306 | ) | — | (11,306 | ) | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Revenue |
$ | 67,039 | $ | 48,406 | $ | 18,633 | 38.5% | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Expenses |
49,052 | 23,287 | 25,765 | 110.6% | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| EBT (b) |
$ | 17,987 | $ | 25,119 | $ | (7,132 | ) | (28.4 | %) | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | Loan Related Income primarily consists of non-sufficient funds fees, which are immaterial and were discontinued during Q1 2021. Interest income related to finance receivables accounted for under the fair value option is included in “Interest and loan related income, gross” in the consolidated statements of operations. |
| (b) | Represents Net Income as reported in OppFi’s consolidated financial statements, as prior to the business combination OppFi did not have tax provision under its pass-through structure as a limited liability company. |
Total Revenue
Total revenue consists mainly of revenue earned from interest on receivables from outstanding loans based only on the interest method, as well as amortization of loan origination costs in previous periods. OppFi also earns revenues from referral fees related primarily to its turn-up program, which represented less than 0.5% of total revenues in the three months ended June 30, 2021.
Total revenue increased by $17.1 million, or 27.9%, to $78.4 million for the three months ended June 30, 2021 from $61.3 million for the three months ended June 30, 2020. This increase was primarily due to the removal of the amortization of loan origination costs as a result of the election of the fair value option in 2021. Under the fair value option, loan origination costs related to the origination of installment loans are expensed when incurred and are no longer recognized as a part of total revenue. Total revenue also improved year over year due to the increase in interest income from higher receivables and yield compared to the previous period.
Total Provision and Change in Fair Value
Commencing on January 1, 2021, OppFi elected the fair value option on its installment loans. To derive the fair value, OppFi generally utilizes discounted cash flow analyses that factor in estimated losses and prepayments over the estimated duration of the underlying assets. Loss and prepayment assumptions are determined using historical loss data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that OppFi believes a market participant would require based on the risk characteristics of OppFi’s loans.
6
In the three months ended June 30, 2021, change in fair value consists of gross charge-offs incurred in the period, net of recoveries, plus the change in the fair value of the installment loans. Change in fair value decreased by $11.3 million for the three months ended June 30, 2021 as OppFi adopted the fair value option for its installment product on January 1, 2021. The $11.3 million comprised $17.3 million of net charge-offs offset partially by $6.0 million change in the fair value premium of receivables. Net charge-offs as a percentage of receivables improved due to impact from government stimulus programs. Change in fair value premium had a positive impact due to the increase in receivables in the period and an increase in the fair value mark. The fair value mark improved due to an increase in the remaining life of the portfolio driven by a younger portfolio from origination growth in the period, as well as an increase in the weighted average interest rate of the portfolio driven by a change in state mix.
In the three months ended June 30, 2021, total provision consists of gross charge-offs incurred in the period, net of recoveries, plus the change in the allowance for credit losses for OppFi’s SalaryTap product. In the three months ended June 30, 2020, total provision consists of gross charge-offs incurred in the period, net of recoveries, plus the change in the allowance for credit losses for OppFi’s installment loan product. OppFi’s provisions for future losses is based on incurred credit loss application whereby it reserves for life of loan losses.
Net Revenue
Net revenue is equal to total revenue less the change in fair value and less total provision costs. Total net revenue increased by $18.6 million, or 38.5%, to $67.0 million for the three months ended June 30, 2021 from $48.4 million for the three months ended June 30, 2020. This increase was primarily attributable to increase in gross interest and loan related income, lower gross charge-offs, net of recoveries, as well as the removal of the amortization of loan origination costs from total revenues as a result of the election of the fair value option in 2021.
Expenses
Total expenses consist of salaries and employee benefits, interest expense and amortized debt issuance costs, servicing costs, direct marketing costs, technology costs, depreciation and amortization, professional fees and other expenses.
Total expenses increased by $25.8 million, or 110.6%, to $49.1 million for the three months ended June 30, 2021 from $23.3 million for the three months ended June 30, 2020. This was primarily due to higher marketing costs due to higher originations, an increase in salaries and employee benefits, technology infrastructure costs, professional fees, increase in warrant liability, and impact of 2021 election of fair value option. As a result of the election of the fair value option, loan origination costs including direct marketing costs and payment processing fees related to the origination of installment loans are recognized as expenses when incurred and are no longer recognized as an offset to total revenue.
Earnings Before Tax (“EBT”)
EBT is the difference between net revenue and expenses. EBT represents Net Income as reported in OppFi’s consolidated financial statements, as prior to the closing of the business combination OppFi did not have a tax provision under its pass-through structure as a limited liability company. Total EBT decreased by $7.1 million, or 28.4%, $18.0 million for the three months ended June 30, 2021 from $25.1 million for the three months ended June 30, 2020.
7
Comparison of the Six Months Ended June 30, 2021 and 2020
The following table presents OppFi’s consolidated results of operations for the six months ended June 30, 2021 and 2020:
| Six Months Ended June 30, |
Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| (In thousands, except % change) | ||||||||||||||||
| Interest and Loan Related Income, Gross (a) |
$ | 162,133 | $ | 162,340 | $ | (207 | ) | (0.1% | ) | |||||||
| Other Income |
500 | 240 | 260 | 107.8% | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Interest, Loan Related, and Other Income |
$ | 162,633 | $ | 162,580 | $ | 53 | 0.0% | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Amortization of Loan Origination Costs |
— | (26,646 | ) | 26,646 | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Revenue |
$ | 162,633 | $ | 135,934 | $ | 26,699 | 19.6% | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Provision |
(38 | ) | (44,875 | ) | 44,837 | (100.0% | ) | |||||||||
| Change in Fair Value |
(33,695 | ) | — | (33,695 | ) | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Revenue |
$ | 128,900 | $ | 91,059 | $ | 37,841 | 41.6% | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Expenses |
86,529 | 49,043 | 37,486 | 76.4% | ||||||||||||
|
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|
|
|
|
|
|
|
|||||||||
| EBT (b) |
$ | 42,371 | $ | 42,016 | $ | 355 | 0.8 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | Loan Related Income primarily consists of non-sufficient funds fees, which are immaterial and were discontinued during Q1 2021. Interest income related to finance receivables accounted for under the fair value option is included in “Interest and loan related income, gross” in the consolidated statements of operations. |
| (b) | Represents Net Income as reported in OppFi’s consolidated financial statements, as prior to the business combination OppFi did not have tax provision under its pass-through structure as a limited liability company. |
Total Revenue
Total revenue consists mainly of revenue earned from interest on receivables from outstanding loans based only on the interest method, as well as amortization of loan origination costs in previous periods. OppFi also earns revenues from referral fees related primarily to its turn-up program, which represented less than 0.5% of total revenues in the six months ended June 30, 2021.
Total revenue increased by $26.7 million, or 19.6%, to $162.6 million for the six months ended June 30, 2021 from $135.9 million for the six months ended June 30, 2020. This increase was primarily due to the removal of the amortization of loan origination costs as a result of the election of the fair value option in 2021. Under the fair value option, loan origination costs related to the origination of installment loans are expensed when incurred and are no longer recognized as a part of total revenue.
Total Provision and Change in Fair Value
Commencing on January 1, 2021, OppFi elected the fair value option on its installment loans. To derive the fair value, OppFi generally utilizes discounted cash flow analyses that factor in estimated losses and prepayments over the estimated duration of the underlying assets. Loss and prepayment assumptions are determined using historical loss data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that OppFi believes a market participant would require based on the risk characteristics of OppFi’s loans.
In the six months ended June 30, 2021, change in fair value consists of gross charge-offs incurred in the period, net of recoveries, plus the change in the fair value of the installment loans. Change in fair value decreased by $33.7 million for the six months ended June 30, 2021 as OppFi adopted the fair value option for its installment product on January 1, 2021. The $33.7 million comprised $37.2 million of net charge-offs offset partially by $3.5 million change in the Fair Value premium of receivables. Net charge-offs as a percentage of receivables improved due to impact from government stimulus programs. Change in fair value premium had a positive impact due to the increase in receivables in the period and an increase in the fair value mark. The fair value mark improved due to an increase in the remaining life of the portfolio driven by a younger portfolio from origination growth in the period, as well as an increase in the weighted average interest rate of the portfolio driven by a change in state mix.
In the six months ended June 30, 2021, total provision consists of gross charge-offs incurred in the period, net of recoveries, plus the change in the allowance for credit losses for OppFi’s SalaryTap product. In the six months ended June 30, 2020, total provision consists of gross charge-offs incurred in the period, net of recoveries, plus the change in the allowance for credit losses for OppFi’s installment loan product. OppFi’s provisions for future losses is based on incurred credit loss application whereby it reserves for life of loan losses.
Net Revenue
Net revenue is equal to total revenue less the change in fair value and less total provision costs. Total net revenue increased by $37.8 million, or 41.6%, to $128.9 million for the six months ended June 30, 2021 from $91.1 million for the six months ended June 30, 2020. This increase was primarily attributable to lower gross charge-offs, net of recoveries, as well as the removal of the amortization of loan origination costs from total revenues as a result of the election of the fair value option in 2021.
8
Expenses
Total expenses consist of salaries and employee benefits, interest expense and amortized debt issuance costs, servicing costs, direct marketing costs, technology costs, depreciation and amortization, professional fees and other expenses.
Total expenses increased by $37.5 million, or 76.4%, to $86.5 million for the six months ended June 30, 2021 from $49.0 million for the six months ended June 30, 2020. This was primarily due to higher marketing costs due to higher originations, an increase in salaries and employee benefits, technology infrastructure costs, professional fees, increase in warrant liability, and impact of 2021 election of fair value option. As a result of the election of the fair value option, loan origination costs including direct marketing costs and payment processing fees related to the origination of installment loans are recognized as expenses when incurred and are no longer recognized as an offset to total revenue.
Earnings Before Tax (“EBT”)
EBT is the difference between net revenue and expenses. EBT represents Net Income as reported in OppFi’s consolidated financial statements, as OppFi does not have a tax provision under its current pass-through structure as a limited liability company. Total EBT increased by $0.4 million, or 0.8%, to $42.4 million for the six months ended June 30, 2021 from $42.0 million for the six months ended June 30, 2020.
Non-GAAP Financial Measures
We believe that the provision of non-GAAP financial measures in this report, including Fair Value Pro Forma information, Adjusted Revenue, Adjusted EBITDA, and Adjusted Net Income can provide useful measures for period-to-period comparisons of our business and useful information to investors and others in understanding and evaluating our operating results. However, non-GAAP financial measures are not calculated in accordance with United States generally accepted accounting principles, or GAAP, should not be considered an alternative to any measure of financial performance calculated and presented in accordance with GAAP, and may not be comparable to the non-GAAP financial measures of other companies.
Fair Value Pro Forma
| Three Months Ended June 30, |
Variance | |||||||||||||||||||
| 2021 | 2020 | % | ||||||||||||||||||
| (In thousands) Unaudited |
As Reported | As Reported |
FV Adjustments |
FV Pro Forma |
||||||||||||||||
| Total Revenue |
$ | 78,376 | $ | 61,281 | $ | 12,330 | $ | 73,611 | 6.5 | % | ||||||||||
| Total Provision |
(31 | ) | (12,875 | ) | 12,875 | — | — | |||||||||||||
| FV Adjustment (a) |
(11,306 | ) | — | (41,522 | ) | (41,522 | ) | (72.7% | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net Revenue |
$ | 67,039 | $ | 48,406 | $ | (16,317 | ) | $ | 32,089 | 108.9 | % | |||||||||
|
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|
|
|
|||||||||||
| Expenses |
||||||||||||||||||||
| Sales and Marketing |
11,545 | 2,373 | 2,838 | 5,211 | 121.6% | |||||||||||||||
| Customer Operations |
9,876 | 4,170 | 4,527 | 8,697 | 13.6% | |||||||||||||||
| Technology, Products, and Analytics |
6,513 | 4,731 | — | 4,731 | 37.7% | |||||||||||||||
| General, Administrative, and Other |
14,733 | 6,631 | — | 6,631 | 122.2% | |||||||||||||||
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|
|
|
|
|
|
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|
|
|||||||||||
| Total Expenses before Interest Expense |
$ | 42,667 | $ | 17,905 | $ | 7,365 | $ | 25,270 | 68.8 | % | ||||||||||
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|
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|
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|
|||||||||||
| Interest Expense (b) |
6,385 | 5,382 | — | 5,382 | 18.6% | |||||||||||||||
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|
|
|
|
|
|||||||||||
| EBT (c) |
$ | 17,987 | $ | 25,119 | $ | (23,682 | ) | $ | 1,437 | 1,152.0 | % | |||||||||
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|
|
|
|||||||||||
| (a) | FV Adjustment of $41.5M includes net charge-offs of $23.8M and FMV Adjustment of $17.7M driven by lower receivables and lower FMV mark as a result of the COVID-19 pandemic. |
| (b) | Includes debt amortization costs. |
| (c) | Represents Net Income as reported in OppFi’s consolidated financial statements, as prior to the business combination OppFi did not have tax provision under its pass-through structure as a limited liability company. |
9
| Six Months Ended June 30, |
Variance | |||||||||||||||||||
| 2021 | 2020 | % | ||||||||||||||||||
| (In thousands) Unaudited |
As Reported | As Reported |
FV Adjustments |
FV Pro Forma |
||||||||||||||||
| Total Revenue |
$ | 162,633 | $ | 135,934 | $ | 26,646 | $ | 162,580 | 0.0% | |||||||||||
| Total Provision |
(38 | ) | (44,875 | ) | 44,875 | — | — | |||||||||||||
| FV Adjustment (a) |
(33,695 | ) | — | (75,590 | ) | (75,590 | ) | (55.4% | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net Revenue |
$ | 128,900 | $ | 91,059 | $ | (4,069 | ) | $ | 86,990 | 48.2% | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Expenses |
||||||||||||||||||||
| Sales and Marketing |
19,480 | 6,492 | 9,353 | 15,845 | 22.9% | |||||||||||||||
| Customer Operations |
19,485 | 8,229 | 10,386 | 18,615 | 4.7% | |||||||||||||||
| Technology, Products, and Analytics |
12,340 | 9,174 | — | 9,174 | 34.5% | |||||||||||||||
| General, Administrative, and Other |
24,231 | 13,220 | — | 13,220 | 83.3% | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Expenses before Interest Expense |
$ | 75,536 | $ | 37,115 | $ | 19,739 | $ | 56,854 | 32.9% | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Interest Expense (b) |
10,993 | 11,928 | — | 11,928 | (7.8% | ) | ||||||||||||||
|
|
|
|
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| EBT (c) |
$ | 42,371 | $ | 42,016 | $ | (23,808 | ) | $ | 18,208 | 132.7% | ||||||||||
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| (a) | FV Adjustment of $75.6M includes net charge-offs of $56.0M and FMV Adjustment of $19.6M driven by lower receivables and lower FMV mark as a result of the COVID-19 pandemic. |
| (b) | Includes debt amortization costs. |
| (c) | Represents Net Income as reported in OppFi’s consolidated financial statements, as prior to the business combination OppFi did not have tax provision under its pass-through structure as a limited liability company. |
Adjusted Revenue
Adjusted revenue is a non-GAAP financial measure defined as our total revenue, as reported, adjusted for the impact of amortization of loan origination costs. Under the fair value option, loan origination costs related to the origination of installment loans are expensed when incurred and are no longer recognized as a part of total revenue. We believe that adjusted revenue is an important measure because it allows management, investors, and our Board to evaluate and compare our revenue for period-to-period comparisons of our business, as it removes the effect of differing accounting methodologies.
| Three Months Ended June 30, |
Variance | |||||||||||
| (In thousands) Unaudited |
2021 | 2020 | % | |||||||||
| Total Revenue |
$ | 78,376 | $ | 61,281 | 27.9% | |||||||
| Amortization of Loan Origination Costs |
— | 12,330 | — | |||||||||
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|||||||
| Adjusted Revenue |
$ | 78,376 | $ | 73,611 | 6.5% | |||||||
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10
| Six Months Ended June 30, |
Variance | |||||||||||
| (In thousands) Unaudited |
2021 | 2020 | % | |||||||||
| Total Revenue |
$ | 162,633 | $ | 135,934 | 19.6% | |||||||
| Amortization of Loan Origination Costs |
— | 26,646 | — | |||||||||
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|||||||
| Adjusted Revenue |
$ | 162,633 | $ | 162,580 | 0.0% | |||||||
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Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure defined as our net income, adjusted for the impact of our election of the fair value option and further adjusted to eliminate the effect of certain items as shown below. We believe that Adjusted EBITDA is an important measure because it allows management, investors, and our Board to evaluate and compare our operating results from period-to-period by making the adjustments described below. In addition, it provides a useful measure for period-to-period comparisons of our business, as it removes the effect of taxes, certain non-cash items, variable charges, and timing differences.
| Three Months Ended June 30, |
Variance | |||||||||||
| (In thousands) Unaudited |
2021 | 2020 | % | |||||||||
| EBT (a) |
$17,987 | $ | 25,119 | (28.4% | ) | |||||||
| FV Adjustments |
— | (23,682 | ) | — | ||||||||
| Debt Amortization |
642 | 458 | 40.1% | |||||||||
| Other Addback and One-Time Expenses (b) |
5,181 | 220 | 2,251.7% | |||||||||
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| Adjusted EBT |
$ | 23,810 | $ | 2,115 | 1,025.9% | |||||||
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|||||||
| Less: Pro Forma Taxes (c) |
(5,952 | ) | (529 | ) | 1,025.9% | |||||||
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| Adjusted Net Income |
$ | 17,858 | $ | 1,586 | 1,025.9% | |||||||
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| Pro Forma Taxes (c) |
5,952 | 529 | 1,025.9% | |||||||||
| Depreciation and Amortization |
2,413 | 1,579 | 52.8% | |||||||||
| Interest Expense |
5,744 | 4,924 | 16.6% | |||||||||
| Business (Non-income) Taxes |
357 | 483 | (25.9% | ) | ||||||||
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| Adjusted EBITDA |
$ | 32,324 | $ | 9,101 | 255.2% | |||||||
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|||||||
| (a) | Represents Net Income as reported in OppFi’s consolidated financial statements, as prior to the business combination OppFi did not have tax provision under its pass-through structure as a limited liability company. |
| (b) | One-time expense includes a $3.3 million impact in 2021 from an increase in warrant liability, $1.2 million in costs related to the business combination, and $0.7 million in stock compensation, management fees, and other addbacks. |
| (c) | Assumes a tax rate of 25% reflecting the U.S. federal statutory rate of 21% and a blended statutory rate for state income taxes, in order to allow for a comparison with publicly traded companies. |
11
| Six Months Ended June 30, |
Variance | |||||||||||
| (In thousands) Unaudited |
2021 | 2020 | % | |||||||||
| EBT (a) |
$42,371 | $ | 42,016 | 0.8% | ||||||||
| FV Adjustments |
— | (23,808 | ) | — | ||||||||
| Debt Amortization |
1,163 | 977 | 19.0% | |||||||||
| Other Addback and One-Time Expenses (b) |
5,995 | 277 | 2,070.4% | |||||||||
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|||||||
| Adjusted EBT |
$ | 49,529 | $ | 19,462 | 154.5% | |||||||
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|||||||
| Less: Pro Forma Taxes (c) |
(12,382 | ) | (4,865 | ) | 154.5% | |||||||
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|
|||||||
| Adjusted Net Income |
$ | 37,147 | $ | 14,597 | 154.5% | |||||||
|
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|
|||||||
| Pro Forma Taxes (c) |
12,382 | 4,865 | 154.5% | |||||||||
| Depreciation and Amortization |
4,577 | 2,976 | 53.8% | |||||||||
| Interest Expense |
9,830 | 10,951 | (10.2% | ) | ||||||||
| Business (Non-income) Taxes |
792 | 656 | 20.8% | |||||||||
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|||||||
| Adjusted EBITDA |
$ | 64,728 | $ | 34,045 | 90.1% | |||||||
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|||||||
| (a) | Represents Net Income as reported in OppFi’s consolidated financial statements, as prior to the business combination OppFi did not have tax provision under its pass-through structure as a limited liability company. |
| (b) | One-time expense includes a $3.3 million impact in 2021 from an increase in warrant liability, $1.4 million in costs related to the business combination, and $1.3 million in stock compensation, management fees, and other addbacks. |
| (c) | Assumes a tax rate of 25% reflecting the U.S. federal statutory rate of 21% and a blended statutory rate for state income taxes, in order to allow for a comparison with publicly traded companies. |
Condensed Balance Sheets
Comparison June 30, 2021 and December 31, 2020
The following table presents OppFi’s condensed balance sheet for June 30, 2021 and December 31, 2020:
| Change | ||||||||||||||||
| (In thousands) Unaudited |
June 30, 2021 |
December 31, 2020 |
$ | % | ||||||||||||
| Assets |
||||||||||||||||
| Cash and restricted cash |
$ | 120,779 | $ | 45,657 | $ | 75,122 | 164.5% | |||||||||
| Finance receivables at fair value |
296,381 | — | 296,381 | — | ||||||||||||
| Finance receivables at amortized cost, net |
132 | 222,243 | (222,111 | ) | (99.9% | ) | ||||||||||
| Other assets |
19,943 | 17,943 | 2,000 | 11.1% | ||||||||||||
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| Total assets |
$ | 437,235 | $ | 285,843 | $ | 151,392 | 53.0% | |||||||||
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| Liabilities and members’ equity |
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| Current liabilities |
$ | 29,249 | $ | 28,406 | $ | 843 | 3.0% | |||||||||
| Total debt |
230,647 | 158,105 | 72,542 | 45.9% | ||||||||||||
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| Total liabilities |
$ | 259,896 | $ | 186,511 | $ | 73,385 | 39.3% | |||||||||
| Total members’ equity |
177,339 | 99,332 | 78,007 | 78.5% | ||||||||||||
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| Total liabilities and members’ equity |
$ | 437,235 | $ | 285,843 | $ | 151,392 | 53.0% | |||||||||
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Total cash increased by $75.1 million as of June 30, 2021, driven by free cash flow from operations as well as increased borrowings under OppFi’s refinanced corporate credit facility and higher utilization of senior debt. Finance receivables in 2021 increased as a result of the election of the fair value option in 2021.
Total debt increased by $72.5 million driven by an increase in utilization of leverage facilities of $46.6 million and a $26.0 million net impact of the corporate credit facility refinancing. Total equity increased by $78.0 million driven by net income for the first six months of $42.4 million and impact of adoption of the fair value method of accounting of $69.4 million, partially offset by distributions of $34.0 million.
12
Liquidity and Capital Resources
To date, the funds received from operating income and OppFi’s ability to obtain lending commitments, have provided the liquidity necessary for OppFi to fund its operations.
OppFi’s liquidity profile has improved each period due to growth in operating cash flows and increased liquidity from debt providers. Maturities of OppFi’s facilities are staggered over three years to help minimize refinance risk.
The following table presents OppFi’s unrestricted cash and undrawn debt as of June 30, 2021:
| June 30, 2021 | December 31, 2020 | |||||||
| (In thousands) | ||||||||
| Unrestricted cash |
$ | 55,253 | $ | 25,601 | ||||
| Undrawn debt |
$ | 223,160 | $ | 338,108 | ||||
As of June 30, 2021, OppFi had $55.3 million in unrestricted cash, up $29.7 million from the prior year end, driven by strong cash flow from operations. As of June 30, 2021, OppFi had an additional $223.2 million of unused debt capacity under its financing facilities for future availability, representing a 51% overall undrawn capacity. Including total financing commitments and cash on the balance sheet, OppFi had more than $500 million in funding capacity as of June 30, 2021.
OppFi believes that its unrestricted cash, undrawn debt and funds from operating income will be sufficient to meet its liquidity needs for at least the next 12 months from the date of this prospectus. OppFi’s future capital requirements will depend on multiple factors, including its revenue growth, working capital requirements, cash provided by and used in operating, investing and financing activities and capital expenditures.
To the extent OppFi’s unrestricted cash balances, funds from operating income and funds from undrawn debt are insufficient to satisfy its liquidity needs in the future, OppFi may need to raise additional capital through equity or debt financing and may not be able to do so on terms acceptable to it, if at all. If OppFi is unable to raise additional capital when needed, its results of operations and financial condition would be materially and adversely impacted.
Cash Flows
The following table presents cash provided by (used in) operating, investing and financing activities during the six months ended June 30, 2021 and 2020:
| Six Months Ended June 30, |
Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| (In thousands, except % change) | ||||||||||||||||
| Net cash provided by operating activities |
$ | 84,837 | $ | 98,917 | $ | (14,080 | ) | (14.2% | ) | |||||||
| Net cash (used in) investing activities |
(47,878 | ) | (7,628 | ) | (40,250 | ) | 527.6% | |||||||||
| Net cash provided by (used in) financing activities |
38,163 | (42,960 | ) | 81,123 | 188.8% | |||||||||||
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| Net increase in cash, cash equivalents and restricted cash |
$ | 75,122 | $ | 48,329 | $ | 26,793 | 55.4% | |||||||||
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Operating Activities
Net cash provided by operating activities was $84.8 million for the six months ended June 30, 2021. This was down $14.1 million from the $98.9 million of cash provided by operating activities during the six months ended June 30, 2020. Cash provided by operating activities decreased due to higher expenses in 2021, driven by higher marketing costs due to higher originations, as well as an increase in salaries and employee benefits, technology infrastructure costs, and professional fees.
Investing Activities
Net cash used in investing activities was $47.9 million for the six months ended June 30, 2021. This was up $40.3 million from the $7.6 million cash used in investing activities during the six months ended June 30, 2020 due to higher finance receivables originated partially offset by higher finance receivables repaid.
13
Financing Activities
Net cash provided by financing activities was $38.2 million for the six months ended June 30, 2021. This was up $81.1 million from the $43.0 million cash used in financing activities during the six months ended June 30, 2020 due primarily to an increase in net advances in senior debt lines of credit partially offset by an increase in member distributions.
Financing Arrangements
The following is a summary of OppFi’s borrowings as of June 30, 2021:
| Purpose |
Borrower |
Borrowing Capacity |
June 30, 2021 |
December 31, 2020 |
Interest Rate as of June 30, 2021 |
Maturity Date |
||||||||||||||
| Secured Borrowing |
Opportunity Funding SPE II, LLC | $ | 56,460 | $ | 17,649 | $ | 16,025 | 15.00% | 10/2021 | |||||||||||
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| Senior debt |
||||||||||||||||||||
| Revolving line of credit |
Opportunity Financial, LLC | $ | — | $ | — | $ | 5,000 | LIBOR + 2.50% |
02/2022 | |||||||||||
| Revolving line of credit |
Opportunity Funding SPE III, LLC | 175,000 | 87,500 | 59,200 | LIBOR + 6.00% |
01/2024 | ||||||||||||||
| Revolving line of credit |
Opportunity Funding SPE V, LLC | 75,000 | 37,500 | 24,222 | LIBOR + 7.25% |
04/2023 | ||||||||||||||
| Revolving line of credit |
Opportunity Funding SPE VI, LLC | 50,000 | 25,000 | 16,148 | LIBOR + 7.25% |
04/2023 | ||||||||||||||
| Revolving line of credit |
Opportunity Funding SPE IV, LLC | 25,000 | 8,300 | 12,506 | LIBOR + 4.25% |
09/2021 | ||||||||||||||
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| Total revolving lines of credit |
$ | 325,000 | $ | 158,300 | $ | 117,076 | ||||||||||||||
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| Term loan, net |
Opportunity Financial, LLC | 50,000 | 48,344 | 14,650 | LIBOR + 10.00% |
03/2025 | ||||||||||||||
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| Total senior debt |
$ | 375,000 | $ | 206,644 | $ | 131,726 | ||||||||||||||
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|
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| Subordinated debt |
Opportunity Financial, LLC | $ | — | $ | — | $ | 4,000 | 14.00% | 12/2023 | |||||||||||
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| Other debt |
Opportunity Financial, LLC | $ | 6,354 | $ | 6,354 | $ | 6,354 | 1.00% | 04/2022 | |||||||||||
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Since 2017, Opportunity Financial completed the following transactions, each of which has provided liquidity and cash resources.
Secured Borrowing Payable
| • | During 2017, Opportunity Funding SPE II, LLC entered into a preferred return agreement. Per the terms of the agreement, the finance receivables are grouped into quarterly pools. Collections are distributed on a pro rata basis after the payout of expenses to back-up servicer, servicer and other relevant parties. This agreement is secured by the assets of Opportunity Funding SPE II, LLC. The receivables are transferred to Opportunity Funding SPE II, LLC and OppWin LLC by Opportunity Financial, LLC, which has provided representations and warranties in connection with such sale. The agreement is subject to various financial covenants. |
14
| • | During 2018, the SPE II, LLC preferred return agreement was amended. Opportunity Funding SPE II, LLC sells a 97.5 percent interest of certain unsecured finance receivables to the unrelated third party. Per the revised agreement, the unrelated third party earns a preferred return of 15 percent and a performance fee after the preferred return has been satisfied. The initial agreement expired August 1, 2018 and was then extended for one year. The agreement provides for two consecutive options to renew the purchase period for eighteen months. The unrelated third party exercised the first option, which provides a $65.0 million purchase commitment by the unrelated third party. After satisfaction of the purchase commitment, the agreement provides for a third option for an additional $100.0 million purchase commitment. |
| • | In May 2020, the SPE II, LLC preferred return agreement was amended. The unrelated third party exercised the option, which provides an additional $100.0 million purchase commitment, resulting in a total $165.0 million purchase commitment by the unrelated third party, of which $108.5 million and $79.8 million of finance receivables have been purchased with an active secured borrowing balance of $17.6 million and $16.0 million as of June 30, 2021 and December 31, 2020, respectively. Interest expense related to this facility was $0.5 million and $0.4 million for the three months ended June 30, 2021 and 2020, respectively, and $1.4 million and $1.1 million for the six months ended June 30, 2021 and 2020, respectively. Additionally, OppFi has capitalized $0.2 million in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $0.1 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.1 million and $0.1 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the remaining balance of unamortized debt issuance costs associated with this facility was $0.1 million and $0.1 million, respectively. |
Senior Debt
| • | On August 13, 2018, OppFi entered into a corporate credit agreement with a maximum available amount of $10.0 million. Interest is payable monthly. The facility is secured by OppFi’s assets and certain brokerage assets made available by the Schwartz Capital Group (SCG), a related party. The agreement is subject to various financial covenants. On August 6, 2020, the corporate credit agreement was amended, and the maturity date was extended to February 2022. |
| • | On March 23, 2021, the borrowings under this revolving corporate credit agreement were paid in full. Subsequent to repayment, OppFi terminated the revolving credit agreement. Interest expense paid related to the revolving credit agreement for the three months ended June 30, 2020. Interest expense paid related to the revolving credit agreement totaled $0.1 million and $0.1 million for the six months ended June 30, 2021 and 2020, respectively. Additionally, OppFi has capitalized $0.3 million in debt issuance costs in connection with this transaction. For the three months ended June 30, 2021 and 2020, there were no amortized debt issuance costs. For the six months ended June 30, 2021 and 2020, amortized debt issuance costs were $0.1 million and $0.1 million, respectively. As of December 31, 2020, the remaining balance of unamortized debt issuance costs associated with the facility was $0.1 million. |
| • | On January 23, 2018, Opportunity Funding SPE III, LLC entered into a revolving line of credit agreement that provides maximum borrowings of $75.0 million. Interest is payable monthly. Borrowings are secured by the assets of Opportunity Funding SPE III, LLC. Opportunity Financial, LLC provides certain representations and warranties. The line of credit agreement is subject to a borrowing base threshold and various financial covenants, including maintaining a minimum tangible net worth and maximum senior debt to equity. |
| • | On January 31, 2020, the revolving line of credit agreement was amended to increase the aggregate commitment to $175.0 million. The amendment also changes the interest rate to one-month LIBOR plus 6 percent with a 2 percent LIBOR floor. The agreement matures in January 2024. |
| • | Interest expense related to this facility was $1.9 million and $2.0 million for the three months ended June 30, 2021 and 2020, respectively, and $3.2 million and $4.5 million for the six months ended June 30, 2021 and 2020, respectively. Additionally, OppFi has capitalized $2.1 million in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $0.2 million and $0.2 million for the three months ended June 30, 2021 and 2020, respectively, and $0.4 million and $0.4 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the remaining balance of unamortized debt issuance costs associated with the facility was $1,118 and $1,453, respectively. |
15
| • | In April 2019, Opportunity Funding SPE V, LLC entered into a revolving line of credit agreement that provides maximum borrowings of $75.0 million. Interest is payable monthly. Borrowings are secured by the assets of Opportunity Funding SPE V, LLC. Opportunity Financial, LLC provides certain representations and warranties related to the debt. The line of credit agreement is subject to a borrowing base and various financial covenants, including maintaining a minimum tangible net worth and restrictions related to dividend payments. Interest expense related to this facility was $1.0 million and $0.9 million for the three months ended June 30, 2021 and 2020, respectively, and $1.6 million and $2.0 million for the six months ended June 30, 2021 and 2020, respectively. Additionally, OppFi has capitalized $1.2 million in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $0.1 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the remaining balance of unamortized debt issuance costs associated with this facility was $0.3 million and $0.5 million, respectively. |
| • | In April 2019, Opportunity Funding SPE VI, LLC entered into a revolving line of credit agreement that provides maximum borrowings of $50.0 million. Interest is payable monthly. Borrowings are secured by the assets of Opportunity Funding SPE VI, LLC. Opportunity Financial, LLC provides certain representations and warranties related to the debt. The line of credit agreement is subject to a borrowing base and various financial covenants, including maintaining a minimum tangible net worth and restrictions related to dividend payments. Interest expense related to this facility was $0.6 million and $0.6 million for the three months ended June 30, 2021 and 2020, respectively, and $1.0 million and $1.3 million for the six months ended June 30, 2021 and 2020, respectively. Additionally, OppFi has capitalized $0.9 million in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $0.1 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the remaining balance of debt issuance costs associated with this facility was $0.3 million and $0.4 million, respectively. |
| • | In August 2019, Opportunity Funding SPE IV, LLC entered into a revolving line of credit agreement that provides maximum borrowings of $25.0 million. Interest is payable monthly. Borrowings are secured by the assets of Opportunity Funding SPE IV, LLC. Opportunity Financial, LLC provides certain representations and warranties related to the debt, as well as an unsecured guaranty. The line of credit agreement is subject to a borrowing base and various financial covenants, including maintaining a minimum tangible net worth and restrictions related to dividend payments. Interest expense related to this facility was $0.1 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.3 million for the six months ended June 30, 2021 and 2020, respectively. Additionally, OppFi has capitalized $0.6 million in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $0.2 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.1 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the remaining balance of unamortized debt issuance costs associated with this facility was $0.1 million and $0.1 million, respectively. |
| • | In November 2018, Opportunity Financial, LLC entered into a $25.0 million senior secured multi-draw term loan agreement, which is secured by a senior secured claim on Opportunity Financial, LLC’s assets and a second lien interest in the receivables owned by Opportunity Funding SPE III, LLC, Opportunity Funding SPE V, LLC, and Opportunity Funding SPE VI, LLC. Interest is payable monthly. The loan agreement is subject to various financial covenants. Per the terms of the loan agreement, Opportunity Financial, LLC has issued warrants to the lender. In April 2020, OppFi exercised an option to increase the facility commitment amount to $50.0 million. |
| • | On March 23, 2021, the senior secured multi-draw term loan agreement was amended to decrease the interest rate from LIBOR plus 14% to LIBOR plus 10% and extend the maturity date to March 23, 2025. On March 30, 2021, OppFi drew the remaining $35.0 million available commitment. As of June 30, 2021 and December 31, 2020, the outstanding balances of $50.0 million and $15.0 million are net of unamortized discount of $0.1 million and $0.1 million, respectively, and unamortized debt issuance costs of $1.6 million and $0.3 million, respectively. Interest expense related to this facility was $1.5 million and $0.7 million for the three months ended June 30, 2021 and 2020, respectively, and $2.2 million and $1.3 million for the six months ended June 30, 2021 and 2020, respectively. Additionally, OppFi has capitalized $2.3 million in debt issuance costs in connection with this transaction. Amortized debt issuance costs was $0.1 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.1 million for the six months ended June 30, 2021 and 2020, respectively. |
| • | On August 6, 2021, OppFi entered into an amendment to the credit agreement with an unrelated third party for Opportunity Funding SPE IV, LLC which, among other things, extends the scheduled termination date of the credit agreement from August 19, 2021 to September 30, 2021 and amends certain of the financial covenants in the credit agreement. |
16
Subordinated Debt – Related Party
| • | OppFi had an unsecured line of credit agreement with SCG, a related party, with a maximum available amount of $4.0 million. Interest due on this facility is paid quarterly, and the outstanding balance is due at maturity. Subordinated debt is subject to the same debt covenants as senior debt facilities. On March 30, 2021, the borrowings under this unsecured line of credit agreement were paid in full and the facility was terminated. Interest expense related to this related party transaction was $0.1 million for the three months ended June 30, 2020. Interest expense was $0.1 million and $0.3 million for the six months ended June 30, 2021 and 2020, respectively. |
Other Debt
| • | On April 13, 2020, OppFi obtained an unsecured loan in the amount of $6.4 million from a bank in connection with the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (the PPP Loan). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forgiven if OppFi uses the proceeds of the PPP Loan for its payroll costs and other expenses in accordance with the requirements of the Paycheck Protection Program. OppFi used the proceeds of the PPP Loan for payroll costs and other covered expenses and sought full forgiveness of the PPP Loan, but there can be no assurance that OppFi will obtain any forgiveness of the PPP Loan. |
| • | If the PPP Loan is not fully forgiven, OppFi will remain liable for the full and punctual payment of the outstanding principal balance plus accrued and unpaid interest. OppFi submitted the forgiveness application on November 14, 2020. The SBA has not completed its review of OppFi’s eligibility for forgiveness. If the SBA determines that the loan is not fully forgiven, the first payment would be due no earlier than 30 days after the date a decision is reached on the loan forgiveness. Interest accrued and expensed related to this unsecured loan was $0.1 million for the three months ended June 30, 2021 and $0.1 million for the six months ended June 30, 2021. |
CSO Arrangements
In Texas, OppFi arranges for consumers to obtain finance receivable products from an independent third-party lender as part of the CSO program. OppFi had also previously arranged for consumers to obtain finance receivable products from an independent third-party lender in Ohio as part of the CSO program. For the consumer finance receivable products originated by the third-party lender under the CSO program, the lender is responsible for providing the criteria by which the consumer’s application is underwritten and, if approved, determining the amount of the finance receivable. When a consumer executes an agreement with OppFi under the CSO program, OppFi agrees, for a fee payable to OppFi by the consumer, to provide certain services to the consumer, one of which is to guarantee the consumer’s obligation to repay the finance receivable obtained by the consumer from the third-party lender if the consumer fails to do so.
On April 23, 2019, OppFi discontinued the CSO program in Ohio and no new finance receivables were originated through this program after that date. As of June 30, 2021, there were no finance receivables remaining under the CSO program in Ohio.
On March 19, 2021 OppFi discontinued the CSO program in Texas and no new finance receivables were originated through this program after that date. As of June 30, 2021, finance receivables remaining under the CSO program in Texas was $0.3 million.
As of June 30, 2021 and December 31, 2020, the unpaid principal balance of off-balance sheet active finance receivables which were guaranteed by OppFi were $0.3 million and $19.7 million, respectively. Upon the election of the fair value option for installment loan finance receivables on January 1, 2021, OppFi released the reserve for repurchase liabilities, which was included in the fair value adjustment to retained earnings. As of December 31, 2020, OppFi recorded a reserve for repurchase liabilities of $4.2 million, which represents the liability for estimated losses on finance receivables guaranteed. OppFi uses a similar methodology for determining the reserve for repurchase liabilities as it does for calculating the allowance for credit losses on finance receivables.
Under the terms of the CSO program, OppFi is required to maintain a restricted cash balance equal to the guaranty, which is determined and settled on a weekly basis. On a daily basis, a receivable and/or payable is recorded to recognize the outstanding settlement balance. As of June 30, 2021 and December 31, 2020, the restricted cash balance held in a federally insured bank account related to the CSO program was $0.1 million and $3.1 million, respectively. As of June 30, 2021 and December 31, 2020, there was a payable balance of $0.1 million and $0.8 million, respectively, related to settlement which was included in accrued expenses on the consolidated balance sheets.
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Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires OppFi to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. OppFi bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ significantly from its estimates. To the extent that there are differences between OppFi’s estimates and actual results, OppFi’s future financial statement presentation, financial condition, results of operations and cash flows will be affected.
OppFi’s significant accounting policies are described in “Note 1. Nature of Operations and Significant Accounting Policies” to OppFi’s consolidated financial statements included elsewhere in this proxy statement. OppFi believes that the accounting policies described in Note 1 of the financial statements reflect its most critical accounting policies and estimates, which represent those that involve a significant degree of judgment and complexity. Accordingly, OppFi believes these policies are critical in fully understanding and evaluating OppFi’s reported financial condition and results of operations.
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