Oportun Financial Corporation Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2020


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

For the transition period from ___________ to ___________

Commission File Number 001-39050

OPORTUN FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)



Delaware		45-3361983
State or Other Jurisdiction of Incorporation or Organization		I.R.S. Employer Identification No.

2 Circle Star Way
San Carlos,	CA	94070
Address of Principal Executive Offices		Zip Code

(650) 810-8823

Registrant’s Telephone Number, Including Area Code

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	OPRT	Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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



Large accelerated filer	☐	Smaller reporting company	☒
Accelerated filer	☐	Emerging growth company	☐
Non-accelerated filer	☒

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

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

The number of shares of registrant’s common stock outstanding as of May 8, 2020 was 27,171,802.



TABLE OF CONTENTS
GLOSSARY

PART I ‑ FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations and Comprehensive Income	6
	Condensed Consolidated Statements of Changes in Stockholders' Equity	7
	Condensed Consolidated Statements of Cash Flow	8
	Notes to the Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50

PART II ‑ OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 3.	Defaults Upon Senior Securities	75
Item 4.	Mine Safety Disclosures	75
Item 5.	Other Information	75
Item 6.	Exhibit Index	76

Signature		77

GLOSSARY

Terms and abbreviations used in this report are defined below.



Term or Abbreviation		Definition
30+ Day Delinquency Rate ⁽¹⁾		Unpaid principal balance for our owned loans that are 30 or more calendar days contractually past due as of the end of the period divided by Owned Principal Balance as of such date
Access Loan Program		A program intended to make credit available to select borrowers who do not qualify for credit under Oportun's core loan origination program
Active Customers ⁽¹⁾		Number of customers with an outstanding loan serviced by us at the end of a period. Active Customers includes customers whose loans are owned by us and loans that have been sold that we continue to service. Customers with charged-off accounts are excluded from Active Customers
Adjusted EBITDA		Adjusted EBITDA is a non-GAAP financial measure calculated as net income (loss), adjusted for the impact of our election of the fair value option and further adjusted to eliminate the effect of the following items: income tax expense (benefit), stock-based compensation, depreciation and amortization, litigation reserve, origination fees for Fair Value Loans, net and fair value mark-to-market adjustment
Adjusted Earnings Per Share ("EPS")		Adjusted EPS is a non-GAAP financial measure calculated by dividing Adjusted Net Income by adjusted weighted-average diluted common shares outstanding. Weighted-average diluted common shares outstanding have been adjusted to reflect the conversion of all preferred shares as of the beginning of each annual period
Adjusted Net Income		Adjusted Net Income is a non-GAAP financial measure calculated by adjusting our net income (loss), for the impact of our election of the fair value option, and further adjusted to exclude income tax expense (benefit), stock-based compensation expense and litigation reserve, net of tax
Adjusted Operating Efficiency		Adjusted Operating Efficiency is a non-GAAP financial measure calculated by dividing total operating expenses (excluding stock-based compensation expense and litigation reserve) by Fair Value Pro Forma Total Revenue
Adjusted Return on Equity ("ROE")		Adjusted Return on Equity is a non-GAAP financial measure calculated by dividing annualized Adjusted Net Income by Average Fair Value Pro Forma total stockholders’ equity
Adjusted Tangible Book Value		Fair Value Pro Forma total stockholders' equity, excluding intangible assets and system development costs
Adjusted Tangible Book Value Per Share		Adjusted Tangible Book Value divided by common shares outstanding at period end. Common shares outstanding at period end have been adjusted to reflect the conversion of all preferred shares as of the beginning of each annual period.
Aggregate Originations ⁽¹⁾		Aggregate amount disbursed to borrowers during a specific period. Aggregate Originations excludes any fees in connection with the origination of a loan
Annualized Net Charge-Off Rate ⁽¹⁾		Annualized loan principal losses (net of recoveries) divided by the Average Daily Principal Balance of owned loans for the period
AOCI		Accumulated other comprehensive income (loss)
APR		Annual Percentage Rate
Average Daily Debt Balance		Average of outstanding debt principal balance at the end of each calendar day during the period
Asset-Backed Notes at Fair Value (or "Fair Value Notes")		All asset-backed notes issued by Oportun on or after January 1, 2018
Average Daily Principal Balance ⁽¹⁾		Average of outstanding principal balance of owned loans at the end of each calendar day during the period
Board		Oportun’s Board of Directors
Book Value		Total assets less total liabilities, or equal to total stockholders' equity
Book Value Per Share		Book Value divided by common shares outstanding at period end
Cost of Debt		Annualized interest expense divided by Average Daily Debt Balance
Customer Acquisition Cost ⁽¹⁾		Sales and marketing expenses, which include the costs associated with various paid marketing channels, including direct mail, digital marketing and brand marketing and the costs associated with our telesales and retail operations divided by number of loans originated to new and returning customers during a period
Emergency Hardship Deferral		Any receivable that has had one or more payments deferred and added at the end of the loan payment schedule in connection with a local or wide-spread emergency declared by local, state or federal government such as a natural disaster, government shutdown or pandemic
Fair Value Loans (or "Loans Receivable at Fair Value")		All loans receivable held for investment that were originated on or after January 1, 2018
Fair Value Pro Forma		In order to facilitate comparisons to periods prior to January 1, 2018, certain metrics included in this presentation have been shown on a pro forma basis, or the Fair Value Pro Forma, as if we had elected the fair value option since our inception for all loans originated and held for investment and all asset-backed notes issued
Fair Value Pro Forma Total Revenue		Fair Value Pro Forma Total Revenue is calculated as the sum of Fair Value Pro Forma interest income and non-interest income. Fair Value Pro Forma interest income includes interest on loans and fees; origination fees are recognized upon disbursement. Non-interest income includes gain on sales, servicing fees and other income. The Company adopted ASU 2019-05 as of January 1, 2020 and as a result Fair Value Pro Forma Total Revenue and GAAP Total Revenue are equal for all prospective reporting periods.
Fair Value Notes (or "Asset-Backed Notes at Fair Value")		All asset-backed notes issued by Oportun on or after January 1, 2018
FICO® score or FICO®		A credit score created by Fair Isaac Corporation
GAAP		Generally Accepted Accounting Principles
Initial Fair Value Loans		All loans receivable held for investment that were originated on or after January 1, 2018



Term or Abbreviation		Definition
Leverage		Average Daily Debt Balance divided by Average Daily Principal Balance
Loans Receivable at Amortized Cost		Loans held for investment that were originated prior to January 1, 2018. Upon the adoption of ASU 2019-05 as of January 1, 2020 this line item has been eliminated for all prospective reporting periods.
Loans Receivable at Fair Value (or "Fair Value Loans")		All Initial Fair Value Loans, together with the Subsequent Fair Value Loans
Managed Principal Balance at End of Period ⁽¹⁾		Total amount of outstanding principal balance for all loans, including loans sold, which we continue to service, at the end of the period
Net Revenue		Net Revenue is calculated by subtracting interest expense and provision (release) for loan losses from total revenue and adding the net increase (decrease) in fair value.
Operating Efficiency		Total operating expenses divided by total revenue
Owned Principal Balance at End of Period ⁽¹⁾		Total amount of outstanding principal balance for all loans, excluding loans sold, at the end of the period
Principal Balance		Original principal balance reduced by principal payments received to date
Return on Equity		Annualized net income divided by average stockholders' equity for a period
Subsequent Fair Value Loans		All loans receivable held for investment, previously measured at amortized cost for which the Company elected the fair value option upon adoption of ASU 2019-05, effective January 1, 2020
TDR Finance Receivables		Troubled debt restructured finance receivables. This is only applicable to Loans Receivable at Amortized Cost. Debt restructuring in which a concession is granted to the borrower as a result of economic or legal reasons related to the borrower’s financial difficulties. Upon the adoption of ASU 2019-05 as of January 1, 2020 this line item has been eliminated for all prospective reporting periods.
Secured Financing		Asset-backed revolving debt facility
VIEs		Variable interest entities
Weighted Average Interest Rate		Annualized interest expense as a percentage of average debt
Yield		Annualized interest income as a percentage of Average Daily Principal Balance

⁽¹⁾ Credit card data has been excluded from these metrics for the three months ended March 31, 2020 because they are de minimis.

PART I ‑ FINANCIAL INFORMATION

Item 1. Financial Statements

OPORTUN FINANCIAL CORPORATION

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share data)



	March 31,			December 31,
	2020			2019
Assets
Cash and cash equivalents	$	144,836		$	72,179
Restricted cash	61,258			63,962
Loans receivable at fair value	1,760,481			1,882,088
Loans receivable at amortized cost	—			42,546
Less:
Unamortized deferred origination costs and fees, net	—			(103		)
Allowance for loan losses	—			(3,972		)
Loans receivable at amortized cost, net	—			38,471
Loans held for sale	141			715
Interest and fees receivable, net	18,254			17,185
Right of use assets - operating	50,973			50,503
Deferred tax assets	1,261			1,563
Other assets	80,116			75,208
Total assets	$	2,117,320		$	2,201,874

Liabilities and stockholders' equity
Liabilities
Secured financing	$	279,064		$	60,910
Asset-backed notes at fair value	999,113			1,129,202
Asset-backed notes at amortized cost	199,602			359,111
Amount due to whole loan buyer	33,259			33,354
Lease liabilities	53,825			53,357
Deferred tax liabilities	24,666			24,868
Other liabilities	44,250			52,306
Total liabilities	1,633,779			1,713,108
Stockholders' equity
Preferred stock, $0.0001 par value - 100,000,000 shares authorized at March 31, 2020 and December 31, 2019; 0 shares issued and outstanding at March 31, 2020 and December 31, 2019	—			—
Preferred stock, additional paid-in capital	—			—
Common stock, $0.0001 par value - 1,000,000,000 shares authorized at March 31, 2020 and December 31, 2019; 27,403,279 shares issued and 27,143,797 shares outstanding at March 31, 2020; 27,262,639 shares issued and 27,003,157 shares outstanding at December 31, 2019	6			6
Common stock, additional paid-in capital	421,657			418,299
Common stock warrants	63			63
Accumulated other comprehensive loss	(279		)	(162		)
Retained earnings	68,213			76,679
Treasury stock at cost, 259,482 shares at March 31, 2020 and December 31, 2019	(6,119		)	(6,119		)
Total stockholders’ equity	483,541			488,766
Total liabilities and stockholders' equity	$	2,117,320		$	2,201,874

See Notes to the Condensed Consolidated Financial Statements.

OPORTUN FINANCIAL CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(in thousands, except share and per share data)



	Three Months Ended March 31,
	2020			2019
Revenue
Interest income	$	150,700		$	126,746
Non-interest income	12,728			11,582
Total revenue	163,428			138,328
Less:
Interest expense	16,361			14,619
Provision (release) for loan losses	—			(366		)
Decrease in fair value	(66,469		)	(25,416		)
Net revenue	80,598			98,659

Operating expenses:
Technology and facilities	30,774			21,641
Sales and marketing	24,827			21,266
Personnel	25,582			18,877
Outsourcing and professional fees	13,618			13,549
General, administrative and other	3,813			3,358
Total operating expenses	98,614			78,691

Income before taxes	(18,016		)	19,968
Income tax expense (benefit)	(4,715		)	5,354
Net income (loss)	$	(13,301	)	$	14,614
Change in post-termination benefit obligation	(117		)	(3		)
Total comprehensive income (loss)	$	(13,418	)	$	14,611

Net income (loss) attributable to common stockholders	$	(13,301	)	$	1,688

Share data:
Earnings (loss) per share:
Basic	$	(0.49	)	$	0.57
Diluted	$	(0.49	)	$	0.51
Weighted average common shares outstanding:
Basic	27,015,730			2,938,006
Diluted	27,015,730			3,314,387

See Notes to the Condensed Consolidated Financial Statements.

OPORTUN FINANCIAL CORPORATION

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(in thousands, except share data)



For the Three Months Ended March 31, 2020
	Convertible Preferred Stock					Common Stock Warrants			Common Stock
	Shares	Par Value		Additional Paid-in Capital		Shares	Par Value		Shares	Par Value		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Stockholders' Equity
Balance – January 1, 2020	—	$	—	$	—	23,512	$	63	27,003,157	$	6	$	418,299		$	(162	)	$	76,679		$	(6,119	)	$	488,766
Issuance of common stock upon exercise of stock options	—	—		—		—	—		3,161	—		20			—			—			—			20
Stock-based compensation expense	—	—		—		—	—		—	—		4,151			—			—			—			4,151
Vesting of restricted stock units, net	—	—		—		—	—		137,479	—		(813		)	—			—			—			(813		)
Cumulative effect of adoption of ASU 2019-05	—	—		—		—	—		—	—		—			—			4,835			—			4,835
Change in post-termination benefit obligation	—	—		—		—	—		—	—		—			(117		)	—			—			(117		)
Net loss	—	—		—		—	—		—	—		—			—			(13,301		)	—			(13,301		)
Balance – March 31, 2020	—	$	—	$	—	23,512	$	63	27,143,797	$	6	$	421,657		$	(279	)	$	68,213		$	(6,119	)	$	483,541



For the Three Months Ended March 31, 2019
	Convertible Preferred Stock					Convertible Preferred and Common Stock Warrants			Common Stock
	Shares	Par Value		Additional Paid-in Capital		Shares	Par Value		Shares	Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Stockholders' Equity
Balance – January 1, 2019	14,043,977	$	16	$	257,887	24,959	$	130	2,935,249	$	3	$	44,411	$	(132	)	$	52,662		$	(8,428	)	$	346,549
Issuance of common stock upon exercise of stock options	—	—		—		—	—		7,317	—		142		—			—			—			142
Stock-based compensation expense	—	—		—		—	—		—	—		1,980		—			—			—			1,980
Cumulative effect of adoption of ASC 842	—	—		—		—	—		—	—		—		—			(125		)	—			(125		)
Change in post-termination benefit obligation	—	—		—		—	—		—	—		—		(3		)	—			—			(3		)
Net income	—	—		—		—	—		—	—		—		—			14,614			—			14,614
Balance – March 31, 2019	14,043,977	$	16	$	257,887	24,959	$	130	2,942,566	$	3	$	46,533	$	(135	)	$	67,151		$	(8,428	)	$	363,157

See Notes to the Condensed Consolidated Financial Statements.

OPORTUN FINANCIAL CORPORATION

Condensed Consolidated Statements of Cash Flow (Unaudited)

(in thousands)



	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net income (loss)	$	(13,301	)	$	14,614
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	4,658			2,879
Fair value adjustment, net	66,469			25,416
Origination fees for loans receivable at fair value, net	1,542			(106		)
Gain on loan sales	(7,532		)	(7,312		)
Stock-based compensation expense	4,151			1,980
Provision (release) for loan losses	—			(366		)
Deferred tax provision, net	101			5,163
Other, net	3,521			582
Originations of loans sold and held for sale	(74,530		)	(70,734		)
Proceeds from sale of loans	82,636			76,046
Changes in operating assets and liabilities:
Interest and fee receivable, net	(1,987		)	(478		)
Other assets	(5,818		)	(39,723		)
Amount due to whole loan buyer	(95		)	2,549
Other liabilities	(7,693		)	36,668
Net cash provided by operating activities	52,122			47,178
Cash flows from investing activities
Originations of loans	(314,484		)	(300,226		)
Repayments of loan principal	282,212			247,257
Purchase of fixed assets, net	(1,615		)	(2,231		)
Capitalization of system development costs	(5,461		)	(2,509		)
Net cash used in investing activities	(39,348		)	(57,709		)
Cash flows from financing activities
Borrowings under secured financing	235,000			—
Repayments of secured financing	(17,001		)	—
Repayments of asset-backed notes	(160,001		)	—
Repayments of capital lease obligations	(26		)	(42		)
Net payments related to stock-based activities	(793		)	143
Net cash provided by financing activities	57,179			101
Net increase (decrease) in cash and cash equivalents and restricted cash	69,953			(10,430		)
Cash and cash equivalents and restricted cash, beginning of period	136,141			129,175
Cash and cash equivalents and restricted cash, end of period	$	206,094		$	118,745

Supplemental disclosure of cash flow information
Cash and cash equivalents	$	144,836		$	58,109
Restricted cash	61,258			60,636
Total cash and cash equivalents and restricted cash	$	206,094		$	118,745

Cash paid for income taxes, net of refunds	$	455		$	142
Cash paid for interest and prepayment fees	$	16,378		$	13,863
Cash paid for amounts included in the measurement of operating lease liabilities	$	4,051		$	3,093
Supplemental disclosures of non-cash investing and financing activities
Right of use assets obtained in exchange for operating lease obligations	$	3,429		$	44,778
Non-cash investments in capitalized assets	$	702		$	667

See Notes to the Condensed Consolidated Financial Statements.

OPORTUN FINANCIAL CORPORATION

Notes to the Condensed Consolidated Financial Statements (Unaudited)

March 31, 2020



1.	Organization and Description of Business

Oportun Financial Corporation (together with its subsidiaries, "Oportun" or the " Company") is a technology-powered and mission-driven provider of inclusive, affordable financial services to customers who do not have a credit score, known as credit invisibles, or who may have a limited credit history and are "mis-scored," meaning that the Company believes that traditional credit scores do not properly reflect such customers’ credit worthiness. The Company's primary product offerings are small dollar, unsecured installment loans that are affordably priced and that help customers establish a credit history. The Company has begun to expand beyond its core offering into other financial services that a significant portion of its customers already use, such as auto loans, credit cards and personal loans secured by a vehicle. The Company has developed a proprietary lending platform that enables the Company to underwrite the risk of low-to-moderate income customers that are credit invisible or mis-scored, leveraging data collected through the application process and data obtained from third-party data providers, and a technology platform for application processing, loan accounting and servicing. The Company is headquartered in San Carlos, California. The Company has been certified by the United States Department of the Treasury as a Community Development Financial Institution ("CDFI") since 2009.

The Company uses securitization transactions, warehouse facilities and whole loan sales, to finance the principal amount of most of the loans it makes to its customers.

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.

Initial Public Offering

On September 30, 2019, the Company completed its initial public offering (“IPO”), in which it issued and sold 4,873,356 shares of common stock and selling stockholders sold 2,314,144 shares of common stock, including the underwriters' over-allotment, at a price of $15.00 per share with net proceeds to the Company of approximately $60.5 million, after deducting underwriting discounts and commissions of $5.1 million and offering expenses paid by the Company of approximately $7.5 million. In connection with the IPO, all 14,043,977 shares of the Company’s outstanding redeemable convertible preferred stock automatically converted into 19,075,167 shares of common stock. Additionally, on September 26, 2019, 3,969 shares of common stock were issued in connection with the cashless exercise of 9,090 Series F-1 convertible preferred stock warrants.

On September 9, 2019, the Company effected a one-for-eleven reverse stock split of its issued and outstanding shares of common stock and convertible preferred stock. The par value of the common and convertible preferred stock was not adjusted as a result of the reverse stock split. Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split.



2.	Summary of Significant Accounting Policies

Basis of Presentation ‑ The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These statements are unaudited and reflect all normal, recurring adjustments that are, in management's opinion, necessary for the fair presentation of results. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior-period financial information has been reclassified to conform to current period presentation. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 ("the Annual Report"), filed with the Securities and Exchange Commission ("SEC") on February 28, 2020. All share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the Company's one-for-eleven reverse stock split. See "Initial Public Offering" above for additional information.

Use of Estimates ‑ The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from those estimates and assumptions.

Accounting Policies - There have been no changes to the Company's significant accounting policies from those described in Part II, Item 8 - Financial Statements and Supplementary Data in the Annual Report, except for the new accounting pronouncements subsequently adopted as noted below.

Recently Adopted Accounting Standards

Allowance for Loan Losses and Fair Value Option ‑ In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This guidance significantly changes the way entities are required to measure credit losses. Under the new standard, estimated credit losses are based upon an expected credit loss approach rather than an incurred loss approach that was previously required. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition. This ASU provides an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for certain financial assets upon the adoption of Topic 326. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for public filers that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018, including interim periods in those fiscal years. The Company elected to early adopt ASU 2016-13 and ASU 2019-05 effective January 1, 2020.

The Company previously elected the fair value option for all loans originated after January 1, 2018. Upon adoption of ASU 2019-05, the Company elected the fair value option on all loans receivable originated prior to January 1, 2018 that were previously measured at amortized cost. As a result, adoption of ASU 2016-13 did not have impact on the Company's condensed consolidated financial statements and disclosures. The Company made an accounting policy election not to measure an allowance for credit losses on accrued interest receivable amounts as the Company writes off the uncollectible accrued interest receivable balance in a timely manner and makes relevant disclosures.

The adoption of ASU 2019-05 and fair value election resulted in (i) the release of the remaining allowance for loan losses on Loans Receivable at Amortized Cost as of December 31, 2019; (ii) recognition of the unamortized net originations fee income as of December 31, 2019; and (iii) measurement of the remaining loans originated prior to January 1, 2018 at fair value. These adjustments resulted in an increase to opening retained earnings as of January 1, 2020 of approximately $4.8 million. ASU 2019-05 does not allow for the fair value option to be elected on our asset-backed notes carried at amortized cost.

Fair Value Disclosures ‑ In August 2018, the FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement. This ASU simplifies the disclosure requirements for fair value measurements. The Company adopted this ASU effective January 1, 2020. The simplified disclosure requirements included a new disclosure for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. These new disclosure requirements were applied prospectively.

Cloud Computing Arrangements - In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use-Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted the amendments of this ASU effective January 1, 2020 on a prospective basis with no impact upon adoption. All eligible implementation costs related to cloud computing arrangements are now recorded as part of "prepaid expenses" within "Other assets" on the Condensed Consolidated Balance Sheets (Unaudited). The amortization expense is presented in the same line on the income statement as the fees for the associated hosted service within "Operating expenses" on the Company's Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited), and the cash payments related to implementation of cloud computing arrangements are classified as "cash flows from operating activities" within the Condensed Consolidated Statements of Cash Flow (Unaudited).

Accounting Standards to be Adopted

Income Taxes - In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. The ASU is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and disclosures.

Reference rate reform - 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 amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform if certain criteria are met. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The amendments in this ASU must be applied prospectively for all eligible contract modifications. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and disclosures.



3.	Earnings (Loss) per Share

Basic and diluted earnings (loss) per share are calculated as follows:



	Three Months Ended March 31,
(in thousands, except share and per share data)	2020			2019
Net income (loss)	$	(13,301	)	$	14,614
Less: Net income allocated to participating securities ⁽¹⁾	—			(12,926		)
Net (loss) income attributable to common stockholders	$	(13,301	)	$	1,688

Basic weighted-average common shares outstanding	27,015,730			2,938,006
Weighted average effect of dilutive securities:
Stock options	—			317,433
Restricted stock units	—			46,512
Warrants	—			12,436
Diluted weighted-average common shares outstanding	27,015,730			3,314,387

Earnings (loss) per share:
Basic	$	(0.49	)	$	0.57
Diluted	$	(0.49	)	$	0.51

⁽¹⁾ In a period of net income, both earnings and dividends (if any) are allocated to participating securities. In a period of net loss, only dividends (if any) are allocated to participating securities.

The following common share equivalent securities have been excluded from the calculation of diluted weighted-average common shares outstanding because the effect is anti-dilutive for the periods presented:



	Three Months Ended March 31,
	2020	2019
Stock options	4,086,128	—
Restricted stock units	1,757,010	—
Warrants	23,512	—
Convertible preferred stock	—	17,201,639
Total anti-dilutive common share equivalents	5,866,650	17,201,639

Restricted stock units granted with performance criterion were not reflected in the computation of diluted earnings (loss) per share for the three months ended March 31, 2019 as the performance condition was not considered probable. Per the provisions of ASC Topic 260, Earnings Per Share, diluted earnings (loss) per share only reflects those shares that would be issued if the reporting period were the end of the contingency period. Accordingly, total outstanding restricted stock units of 0 and 455,821 were not reflected in the denominator in the computation of diluted earnings per share for the three months ended March 31, 2020 and 2019.

The income available to common stockholders, which is the numerator in calculating diluted earnings per share, does not include any compensation cost related to these restricted stock unit awards for the three months ended March 31, 2019.



4.	Variable Interest Entities

As part of the Company’s overall funding strategy, the Company transfers a pool of designated loans receivable to wholly owned special-purpose subsidiaries ("VIEs") to collateralize certain asset-backed financing transactions. The Company has determined that it is the primary beneficiary of these VIEs because it has the power to direct the activities that most significantly impact the VIEs’ economic performance and the obligation to absorb the losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Such power arises from the Company’s contractual right to service the loans receivable securing the VIEs’ asset-backed debt obligations. The Company has an obligation to absorb losses or the right to receive benefits that are potentially significant to the VIEs because it retains the residual interest of each asset-backed financing transaction either in the form of an asset-backed certificate or as an uncertificated residual interest. Accordingly, the Company includes the VIEs’ assets, including the assets securing the financing transactions, and related liabilities in its consolidated financial statements.

Each VIE issues a series of asset-backed securities that are supported by the cash flows arising from the loans receivable securing such debt. Cash inflows arising from such loans receivable are distributed monthly to the transaction’s noteholders and related service providers in accordance with the transaction’s contractual priority of payments. The creditors of the VIEs above have no recourse to the general credit of the Company as the primary beneficiary of the VIEs and the liabilities of the VIEs can only be settled by the respective VIE’s assets. The Company retains the most subordinated economic interest in each financing transaction through its ownership of the respective residual interest in each VIE. The Company has no obligation

to repurchase loans receivable that initially satisfied the financing transaction’s eligibility criteria but subsequently became delinquent or a defaulted loans receivable.

The following table represents the assets and liabilities of consolidated VIEs recorded on the Company’s Condensed Consolidated Balance Sheets (Unaudited):



	March 31,		December 31,
(in thousands)	2020		2019
Consolidated VIE assets
Restricted cash	$	25,963	$	28,821
Loans receivable at fair value	1,693,903		1,745,465
Loans receivable at amortized cost	—		41,747
Interest and fee receivable	17,274		15,874
Total VIE assets	1,737,140		1,831,907
Consolidated VIE liabilities
Secured financing ⁽¹⁾	279,999		62,000
Asset-backed notes at fair value	999,113		1,129,202
Asset-backed notes at amortized cost ⁽¹⁾	200,000		360,001
Total VIE liabilities	$	1,479,112	$	1,551,203

⁽¹⁾Amounts exclude deferred financing costs. See Note 8, Borrowings for additional information.



5.	Loans Receivable at Amortized Cost, Net

Upon adoption of ASU 2019-05, effective January 1, 2020, the Company elected the fair value option on all loans receivable previously measured at amortized cost as of December 31, 2019. Accordingly, for the three months ended March 31, 2020, the Company did not have any loans receivable measured at amortized cost. Therefore, the relevant disclosures related to loans receivable at amortized cost, net, such as credit quality information, past due loans receivable, troubled debt restructurings, and allowance for loan losses are not applicable for the three months ended March 31, 2020. The disclosures below relate to the prior year and are disclosed for comparative period purposes.

Loans receivable at amortized cost, net, consisted of the following:



	March 31,		December 31,
(in thousands)	2020		2019
Loans receivable at amortized cost	$	—	$	42,546
Deferred origination costs and fees, net	—		(103		)
Allowance for loan losses	—		(3,972		)
Loans receivable at amortized cost, net	$	—	$	38,471

Loans receivable at amortized cost are the unpaid principal balances of the loans. Accrued and unpaid interest and late fees on the loans estimated to be collected from customers are included in interest and fees receivable in the condensed consolidated balance sheets. At December 31, 2019, accrued and unpaid interest on loans were $0.3 million. Accrued and unpaid late fees were immaterial at December 31, 2019.

Credit Quality Information - The Company uses a proprietary credit scoring algorithm to assess the creditworthiness of individuals who have limited or no credit profile. Data used in the algorithm is obtained from customers, alternative credit reporting agencies, commercially available data sources, as well as information from traditional credit bureaus.

The Company’s proprietary credit scoring platform determines the amount and duration of the loan. The amount of the loan is determined based on the credit risk and cash flow of the individual. Lower risk individuals with higher cash flows are eligible for larger loans with longer duration. Higher risk individuals with lower cash flows are eligible for smaller loans with shorter duration. Larger loans typically have lower interest rates than smaller loans.

After the loan is disbursed, the Company monitors the credit quality of its loans receivable on an ongoing and a total portfolio basis. The following is a credit quality indicator that the Company uses to monitor its exposure to credit risk, to evaluate allowance for loan losses and help set the Company’s strategy in granting future loans:


•	Delinquency Status ‑ The delinquency status of the Company’s loan receivables reflects, among other factors, changes in the mix of loans in the portfolio, the quality of receivables, the success of collection efforts and general economic conditions.

The recorded investment in loans receivable at amortized cost based on this credit quality indicator was as follows:



	March 31,		December 31,
Credit Quality Indicator (in thousands)	2020		2019
Delinquency Status
30-59 days past due	$	—	$	2,304
60-89 days past due	—		1,615
90-119 days past due	—		1,459
	$	—	$	5,378

Past Due Loans Receivable - In accordance with the Company’s policy, for loans recorded at amortized cost, income from interest and fees continues to be recorded for loans that are delinquent 90 days or more. The Company addresses the valuation risk on loans recorded at amortized cost that are delinquent 90 days or more by reserving them at 100%.

The recorded investment in loans receivable at amortized cost that are 90 or more days delinquent and still accruing income from interest and fees were as follows:



	March 31,		December 31,
(in thousands)	2020		2019
Non-TDRs	$	—	$	720
TDRs	—		739
Total	$	—	$	1,459

Troubled Debt Restructurings ("TDR") - For the three months ended March 31, 2019, TDRs were primarily related to concessions involving interest rate reduction and extension of term.

As of December 31, 2019, TDRs comprised 21% of the Company’s total loan portfolio at amortized cost.

The amount of unamortized origination fees, net of origination costs, that were written off as a result of TDR restructurings of loans recorded at amortized cost during the three months ended March 31, 2019 was not material.

The Company’s TDR loans receivable at amortized cost based on delinquency status were as follows:



	March 31,		December 31,
(in thousands)	2020		2019
TDRs current to 29 days delinquent	$	—	$	6,367
TDRs 30 or more days delinquent	—		2,462
Total	$	—	$	8,829

A loan that has been classified as a TDR remains so until the loan is paid off or charged off. A TDR loan that misses its first two scheduled payments is charged off at the end of the month upon reaching 30 days' delinquency. A TDR loan that makes the first two scheduled payments is charged off according to the Company’s normal charge-off policy at 120 days' delinquency.

For loans recorded at amortized cost, previously accrued but unpaid interest and fees are also written off when the loan is charged off upon reaching 120 days' delinquency or when collection is not deemed probable.

Information on TDRs that defaulted and were charged off during the periods indicated were as follows:



	Three Months Ended March 31,
(in thousands)	2020		2019
Recorded investment in TDRs that subsequently defaulted and were charged off	$	—	$	3,254
Unpaid interest and fees charged off	—		419

When a loan recorded at amortized cost is restructured as a TDR, a portion of all of the accrued but unpaid interest and late fees may be forgiven. The following table shows the financial effects of TDRs that occurred during the periods indicated:



	Three Months Ended March 31,
(in thousands)	2020		2019
Contractual interest and fees forgiven	$	—	$	—

Allowance for Loan Losses - For loans receivable at amortized cost, the Company sets the allowance for loan losses on a total portfolio by analyzing historical charge-off rates for the loan portfolio and the credit quality indicators discussed earlier.

The provision (release) for loan losses reflects the activity for the applicable period and provides an allowance at a level that management believes is adequate to cover probable loan losses at the balance sheet date. The Company estimates an allowance for loan losses only for loans receivable at amortized cost.

Activity in the allowance for loan losses was as follows:



	Three Months Ended March 31,
(in thousands)	2020			2019
Balance - beginning of period	$	3,972		$	26,326
Adjustment upon adoption of ASU 2019-05	(3,972		)	—
Provision (release) for loan losses	—			(366		)
Loans charged off	—			(12,083		)
Recoveries	—			3,315
Balance - end of period	$	—		$	17,192



6.	Loans Held for Sale

The originations of loans sold and held for sale during the three months ended March 31, 2020 was $74.5 million and the Company recorded a gain on sale of $7.5 million and servicing revenue of $4.5 million. The originations of loans sold and held for sale during the three months ended March 31, 2019 was $70.7 million and the Company recorded a gain on sale of $7.3 million and servicing revenue of $3.5 million.

Whole Loan Sale Program ‑ In November 2014, the Company entered into a whole loan sale agreement with an institutional investor, which agreement has been amended from time to time. The term of the current agreement expires on November 10, 2020. Pursuant to this agreement, the Company has committed to sell at least 10% of its unsecured loan originations, with an option to sell an additional 5%, subject to certain eligibility criteria and minimum and maximum volumes.

In addition, in July 2017, the Company entered into a separate whole loan sale arrangement with an institutional investor, which agreement has been amended from time to time, providing for a commitment to sell 100% of the Company’s loans originated under its Access Loan Program.



7.	Other Assets

Other assets consist of the following:



	March 31,			December 31,
(in thousands)	2020			2019
Fixed assets
Computer and office equipment	$	10,697		$	10,432
Furniture and fixtures	10,805			10,768
Purchased software	4,900			4,527
Vehicles	79			171
Leasehold improvements	28,673			27,701
Total cost	55,154			53,599
Less: Accumulated depreciation	(33,086		)	(30,765		)
Total fixed assets, net	$	22,068

10-Q	2020-03-31	Filed 2020-05-15
10-K	2019-12-31	Filed 2020-02-28
10-Q	2019-09-30	Filed 2019-11-13
S-1	2019-07-17	Public Filing

8-K	2020-05-14	Earnings, Exhibits
8-K	2020-04-02	Earnings, Regulation FD, Exhibits
8-K	2020-03-09	Leave Agreement, Exhibits
8-K	2020-02-27	Earnings, Exhibits
8-K	2019-11-12	Earnings, Exhibits

EX-31.1	ceocertexhibitq12020.htm
EX-31.2	cfocertexhibitq12020.htm
EX-32.1	section1350certsq12020.htm

OPRT 10Q Quarterly Report

Oportun Financial Corporation Earnings 2020-03-31