(Amendment No. 1)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
December 31,☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
of
ATLANTICUSHOLDINGS CORPORATION
a Georgia Corporation
IRS Employer Identification No.58-2336689
SEC File Number 0-53717
Five Concourse Parkway, Suite 300
Atlanta, Georgia 30328
(770)828-2000
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”"Act") and is listed:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common stock, no par value per share | ATLC | NASDAQ Global Select Market |
Series B Preferred Stock, no par value per share | ATLCP | NASDAQ Global Select Market |
Senior Notes due 2026 | ATLCL | NASDAQ Global Select Market |
Indicate by check mark if the NASDAQ Global Select Market.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act, (2)Act. Yes ☐ No ☒
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 (3)(2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
Indicate by check mark whether the Act complied with all applicable filing requirements during 2016.
Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is not a shell company.
The aggregate market value of Atlanticus’ common stock (based upon the closing sales price quoted on the NASDAQ Global Select Market) held by non-affiliates as of June 30, 20162022, was $15.2$163.9 million. (For this purpose, directors, officers and 10% shareholders have been assumed to be affiliates, and we also have excluded 1,459,233 loaned shares at June 30, 2016.affiliates.)
As of
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Atlanticus’Atlanticus' Proxy Statement for its 20172023 Annual Meeting of Shareholders filed on April 17, 2023 are incorporated by reference into Part III.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends the original Annual Report except ason Form 10-K for the context suggests otherwise, the words “Company,” “Atlanticus Holdings Corporation,” “Atlanticus,” “we,” “our,” “ours” and “us” refer toyear ended December 31, 2022 filed by Atlanticus Holdings Corporation (the “Company”, “Atlanticus Holdings Corporation”, “Atlanticus”, “we”, “our”, “ours” and its subsidiaries and predecessors. Atlanticus owns Aspire
The purpose of this Amendment is to amend and fair valuerestate (i) the Risk Factors disclosure included in Part I, Item 1A “Risk Factors” to describe risks related to a material weakness in our internal control over financial reporting that was identified subsequent to the filing of the Original Form 10-K; (ii) the “Report of Independent Registered Certified Public Accounting Firm” of BDO USA, P.C. (“BDO”) appearing in the Index to Financial Statements regarding the effectiveness of our credit card loansinternal control over financial reporting; and fees receivable(iii) the disclosure on our internal control over financial reporting in Part II, Item 9A “Controls and Procedures” to reflect management’s conclusion that our disclosure controls and procedures were not effective at December 31, 2022 due to a material weakness in our internal control over financial reporting identified subsequent to the filing of the Original Form 10-K. This material weakness did not result in any change to our consolidated financial statements as set forth in the Original Form 10-K. Part IV, Item 15, “Exhibits and Financial Statement Schedules,” also has been amended and restated to include currently-dated certifications from the Company’s principal executive officer and principal financial officer as required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The certifications are attached to this Amendment as Exhibits 31.1, 31.2 and 32.1.
Other than the changes as outlined above and the fair valueinclusion within this Amendment of their underlying structured financing facilities; the impact of actionsnew certifications by the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Board, Federal Trade Commission (“FTC”), Consumer Financial Protection Bureau (“CFPB”)management and other regulators on both us, banks that issue credit cards and other credit products on our behalf, and merchants that participate in our point-of-sale finance operations; account growth; the performance of investments that we have made; operating expenses; the impact of bankruptcy law changes; marketing plans and expenses; the performancea new consent of our Auto Finance segment; our plans inindependent registered public accounting firm (and related amendment to the U.K.;exhibit index that is incorporated by reference into Item 15 of the impactOriginal Form 10-K to reflect the addition of our credit card receivables on our financial performance;such certifications and consent and related changes to the sufficiency of available capital; the prospect for improvements in the capital and finance markets; future interest costs; sources of funding operations and acquisitions; growth and profitability of our point-of-sale finance operations; our entry into international markets; our abilityfootnotes to raise funds or renew financing facilities; share repurchases or issuances; debt retirement; the results associated with our equity-method investee; our servicing income levels; gains and losses from investments in securities; experimentation with new products and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions also are forward-looking statements. Each forward-looking statementthat exhibit index), this Amendment speaks only as of the date of the particular statement. The forward-lookingOriginal Form 10-K and does not modify or update any other disclosures contained in our Original Form 10-K for other events or information subsequent to the date of the filing of the Original Form 10-K. Specifically, there are no changes to our consolidated financial statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.
Table of new information, future events or otherwise, except as required by law.
Contents
| Page | |||
| PART I | |||
| Item 1A. | Risk Factors | 1 | |
| PART II | |||
| Item 8. | Financial Statements and Supplementary Data | 16 | |
| Item 9A. | Controls and Procedures | 16 | |
| PART IV | |||
| Item 15. | Exhibits and Financial Statement Schedules | 17 | |
| Signatures | 20 |
An investment in our common stock, preferred stock or other securities involves a number of risks. You should carefully consider each of the risks described below before deciding to invest in our common stock or other securities. If any of the following risks develops into actual events, our business, financial condition or results of operations could be negatively affected, the market priceprices of our common stock or other securities could decline and you may lose all or part of your investment.
The impact of COVID-19 on global commercial activity and the corresponding volatility in our common stockfinancial markets is evolving. Initially, the global impact of the outbreak led to many federal, state and local governments instituting quarantines and restrictions on travel. More recently, there have been disruptions in global supply chains that have adversely impacted a number of industries, such as transportation, hospitality and entertainment. In addition, there have been significant inflation and labor shortages over the past year. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown or other securities at the present time in lightrecession. The rapid development and fluidity of uncertaintiesthis situation preclude any accurate prediction as to the profitabilityultimate impact of COVID-19. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our business model going forwardperformance and financial results. For additional information, see "—Other Risks to Our Business—COVID-19 has caused severe disruptions in the U.S. economy, and may have an adverse impact on our inabilityperformance, results of operations and access to achieve consistent earnings from our operations in recent years.
Our Cash Flows and Net Income Are Dependent Upon Payments from Our Investments in Receivables
The collectibilitycollectability of our investments in receivables is a function of many factors including the criteria used to select who is issued credit, the pricing of the credit products, the lengths of the relationships, general economic conditions, the rate at which consumers repay their accounts or become delinquent, and the rate at which consumers borrow funds. Deterioration in these factors would adversely impact our business. In addition, to the extent we have over-estimated collectibility,collectability, in all likelihood we have over-estimated our financial performance. Some of these concerns are discussed more fully below.
Our portfolio of receivables is not diversified and primarily originates from consumers whose creditworthiness is considered sub-prime.
Economic slowdowns increase our credit losses.
During periods of economic slowdown or recession, we generally experience an increase in rates of delinquencies and frequency and severity of credit losses. Our actual rates of delinquencies and frequency and severity of credit losses may be comparatively higher during periods of economic slowdown orBecause a significant portion of our reported income is based on management’smanagement’s estimates of the future performance of receivables, differences between actual and expected performance of the receivables may cause fluctuations in net income.
Due to our relative lack of historicalsignificant experience with Internet consumers, we may not be able to evaluate their creditworthiness.
We Are Substantially Dependent Upon Borrowed Funds to Fund Receivables We Purchase
We finance receivables that we acquire in large part through financing facilities. All of our financing facilities are of finite duration (and ultimately will need to be extended or replaced) and contain financial covenants and other conditions that must be fulfilled in order for funding to be available. Moreover, some of our facilities currently are in amortization stages (and are not allowing for the funding of any new loans) based on their original terms. The cost and availability of equity and borrowed funds is dependent upon our financial performance, the performance of our industry generallyoverall and general economic and market conditions, and at times equity and borrowed funds have been both expensive and difficult to obtain.
If additional financing facilities are not available in the future on terms we consider acceptable—an issue that has been made even more acute in the U.S. given regulatory changes that reduced asset-level returns on credit card lending—acceptable, we will not be able to purchase additional receivables and those receivables may contract in size.
Capital markets may experience periods of disruption and instability, potentially limiting our ability to grow our receivables. From time-to-time, capital markets may experience periods of disruption and instability. For example, from 2008 to 2009, the global capital markets were unstable as evidenced by the lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. These events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. If similar adverse and volatile market conditions repeat in the future, we and other companies in the financial services sector may have to access, if available, alternative markets for debt and equity capital in order to grow our receivables.
Moreover, the re-appearance of market conditions similar to those experienced from 2008 through 2009 for any substantial length of time or worsened market conditions could make it difficult for us to borrow money or to extend the maturity of or refinance any indebtedness we may have under similar terms and any failure to do so could have a material adverse effect on our business. Unfavorable economic and political conditions, including future recessions, political instability, geopolitical turmoil and foreign hostilities, energy disruptions, inflation and disease, pandemics and other serious health events, also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us.
COVID-19 continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The pandemic has, in part, caused disruptions in global supply chains that have adversely impacted a number of industries, such as transportation, hospitality and entertainment. In addition, there have been significant inflation and labor shortages over the past year. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation preclude any accurate prediction as to the ultimate adverse impact of the coronavirus response. Nevertheless, the pandemic presents material uncertainty and risk with respect to our performance and financial results.
We may in the future have difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may cause us to reduce the volume of receivables we purchase or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our Financial Performance Is, in Part, a Function of the Aggregate Amount of Receivables That Are Outstanding
The aggregate amount of outstanding receivables is a function of many factors including purchase rates, payment rates, interest rates, seasonality, general economic conditions, competition from credit card issuers and other sources of consumer financing, access to funding, and the timing and extent of our receivable purchases.
The recent growth of our recent purchases ofinvestments in private label credit and general purpose credit card receivables may not be indicative of our aggregateability to grow such receivables in the future. Our period-end managed receivables balance for private label credit and general purpose credit card receivables contracted over the last several years.
Reliance upon relationships with a few large retailers in the point-of-sale financeprivate label credit operations may adversely affect our revenues and operating results from these operations.
We Operate in a Heavily Regulated Industry
Changes in bankruptcy, privacy or other consumer protection laws, or to the prevailing interpretation thereof, may expose us to litigation, adversely affect our ability to collect receivables, or otherwise adversely affect our operations. Similarly, regulatory changes could adversely affect the ability or willingness of lenders who utilize our technology platform and related services to market credit products and services to consumers. While the new Presidential Administration and the congressional majorities in the U.S. Senate and House of Representatives support reducing regulatory burdens, the prospects for significant modifications are uncertain. Also, the accounting rules that apply to our business are exceedingly complex, difficult to apply and in a state of flux. As a result, how we value our receivables and otherwise account for our business is subject to change depending upon the changes in, and interpretation of, those rules. Some of these issues are discussed more fully below.
Reviews and enforcement actions by regulatory authorities under banking and consumer protection laws and regulations may result in changes to our business practices, may make collection of receivables more difficult or may expose us to the risk of fines, restitution and litigation.
Our operations and the operations of the issuing banks through which the credit products we service are originated are subject to the jurisdiction of federal, state and local government authorities,If any deficiencies or violations of law or regulations are identified by us or asserted by any regulator or if the CFPB, the FDIC, the FTC or any other regulator requiresrequire us or issuing banks to change any practices, the correction of such deficiencies or violations, or the making of such changes, could have a material adverse effect on our financial condition, results of operations or business. In addition, whether or not these practices are modified when a regulatory or enforcement authority requests or requires, there is a risk that we or other industry participants may be named as defendants in litigation involving alleged violations of federal and state laws and regulations, including consumer protection laws. Any failure to comply with legal requirements by us or the banks that originate credit products utilizing our platform in connection with the issuance of those products, or by us or our agents as the servicer of our accounts, could significantly impair our ability to collect the full amount of the account balances. The institution of any litigation of this nature, or any judgment against us or any other industry participant in any litigation of this nature, could adversely affect our business and financial condition in a variety of ways.
The regulatory landscape in which we operate is continually changing due to new rules, regulations and interpretations, as well as various legal actions that have been brought against others that have sought to re-characterize certain loans made by federally insured banks as loans made by third parties. If litigation on similar theories were brought against us when we work with a federally insured bank that makes loans and were such an action successful, we could be subject to state usury limits and/or state licensing requirements, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans. The case law involving whether an originating lender, on the one hand, or a third party, on the other hand, is the “true lender” of a loan is still developing and courts have come to different conclusions and applied different analyses. The determination of whether a third-party service provider is the “true lender” is significant because third parties risk having the loans they service becoming subject to a consumer’s state usury limits. A number of federal courts that have opined on the “true lender” issue have looked to who is the lender identified on the borrower’s loan documents. A number of state courts and at least one federal district court have considered a number of other factors when analyzing whether the originating lender or a third party is the “true lender,” including looking at the economics of the transaction to determine, among other things, who has the predominant economic interest in the loan being made. If we were re-characterized as a “true lender” with respect to the receivables originated by the bank that utilizes our technology platform and other services, such receivables could be deemed to be void and unenforceable in some states, the right to collect finance charges could be affected, and we could be subject to fines and penalties from state and federal regulatory agencies as well as claims by borrowers, including class actions by private plaintiffs. Even if we were not required to change our business practices to comply with applicable state laws and regulations or cease doing business in some states, we could be required to register or obtain lending licenses or other regulatory approvals that could impose a substantial cost on us. If the bank that originates loans utilizing our technology platform were subject to such a lawsuit, it may elect to terminate its relationship with us voluntarily or at the direction of its regulators, and if it lost the lawsuit, it could be forced to modify or terminate such relationship.
In addition to true lender challenges, a question regarding the applicability of state usury rates may arise when a loan is sold from a bank to a non-bank entity. In Madden v. Midland Funding, LLC, the U.S. Court of Appeals for the Second Circuit held that the federal preemption of state usury laws did not extend to the purchaser of a loan issued by a national bank. In its brief urging the U.S. Supreme Court to deny certiorari, the U.S. Solicitor General, joined by the Office of the Comptroller of the Currency (“OCC”), noted that the Second Circuit (Connecticut, New York and Vermont) analysis was incorrect. On remand, the U.S. District Court for the Southern District of New York concluded on February 27, 2017, that New York’s state usury law, not Delaware’s state usury law, was applicable and that the plaintiff’s claims under the FDCPA and state unfair and deceptive acts and practices could proceed. To that end, the court granted Madden’s motion for class certification. At this time, it is unknown whether Madden will be applied outside of the defaulted debt context in which it arose. The facts in Madden are not directly applicable to our business, as we do not engage in practices similar to those at issue in Madden. However, to the extent that the holding in Madden is broadened to cover circumstances applicable to our business, or if other litigation on related theories were brought against us or others and were successful, or we otherwise were found to be the “true lender,” we could become subject to state usury limits and state licensing laws, in addition to the state consumer protection laws to which we are already subject, in a greater number of states, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.
In response to the uncertainty Madden created as to the validity of interest rates of bank-originated loans sold in the secondary market, in May 2020 and June 2020, the OCC and the FDIC, respectively, issued final rules that reaffirmed the “valid when made” doctrine and clarified that when a bank sells, assigns, or otherwise transfers a loan, the interest rates permissible prior to the transfer continue to be permissible following the transfer. In the summer of 2020, a number of state attorneys general filed suits against the OCC and the FDIC, challenging these "valid when made" rules. In February 2022, the U.S. District Court for the Northern District of California entered two orders granting summary judgement in favor of the OCC and the FDIC. The court held that the bank regulators had the power to issue the rules reaffirming the "valid when made" doctrine. Although the practical consequences of Madden have diminished since the initial ruling, uncertainty remains in this area of law.
The bank that we support in connection with its extension of loans and one of our subsidiaries currently are involved in a dispute with the Maryland Commissioner of Financial Regulation with respect to the extent to which federal preemption preempts state regulation of bank activities related to the lending process, such as lender licensing requirements and aspects of those licensing requirements that purport to limit the rate of interest that can be charged. The Commissioner issued a "charge letter" making various assertions regarding the applicability of the licensing requirements and interest rate limitations, with the case to be heard in the Maryland Office of Administrative Hearings where the case is currently pending. The ultimate remedy sought by the Commissioner is the invalidation of loans to Maryland residents. We are dependent upon banksbelieve that preemption should apply and that the licensing requirements should not apply to the bank in its making loans in Maryland, but the ultimate outcome could be unfavorable. In light of the amount of loans involved, we do not believe that an adverse outcome would be material, but it could result in further erosion of federal preemption and our ability to operate as we currently do in Maryland and other states.
We support a single bank that markets general purpose credit cards and certain other credit products directly to consumers. We acquire interests in and service the receivables originated by that bank. The bank could determine not to continue the relationship for various business reasons, or its regulators could limit its ability to issue credit cards and provide certain other credit products utilizing our technology platform and related services.
TheFDIC has issued examination guidance affecting the point-of-salebank that utilizes our technology platform to market general purpose credit cards and direct-to-consumer receivables.
In July 2016, the board of directors of the FDIC released examination guidance relating to third-party lending as part of a package of materials designed to “improve the transparency and clarity of the FDIC’s supervisory policies and practices” and consumer compliance measures that FDIC-supervised institutions should follow when lending through a business relationship with a third party. The proposed guidance, if finalized, would apply to all FDIC-supervised institutions that engage in third-party lending programs, including the bank that utilizes our technology platform and other services to market general purpose credit cards and certain other credit products.
The proposed guidance elaborates on previously-issued agency guidance on managing third-party risks and specifically addresses third-party lending arrangements where an FDIC-supervised institution relies on a third party to perform a significant aspect of the lending process. The types of relationships that would be covered by the guidance include (but are not limited to) relationships for originating loans on behalf of, through or jointly with third parties, or using platforms developed by third parties. If adopted as proposed, the guidance would result in increased supervisory attention of institutions that engage in significant lending activities through third parties, including at least one examination every 12 months, as well as supervisory expectations for a third-party lending risk management program and third-party lending policies that contain certain minimum requirements, such as self-imposed limits as a percentage of total capital for each third-party lending relationship and for the overall loan program, relative to origination volumes, credit exposures (including pipeline risk), growth, loan types, and acceptable credit quality. While the guidance has never formally been adopted, it is our understanding that the FDIC has relied upon it in its examination of third-party
lending arrangements.
On July 20, 2020, the FDIC announced that it is seeking the public's input on the potential for a public/private standard-setting partnership and voluntary certification program to promote the effective adoption of innovative technologies at FDIC-supervised financial institutions. Released as part of the FDiTech initiative, the request asks whether the proposed program might reduce the regulatory and operational uncertainty that may prevent financial institutions from deploying new technology or entering into partnerships with technology firms, including "fintechs." For financial institutions that choose to use the system, a voluntary certification program could help standardize due diligence practices and reduce associated costs. At this time, it is unclear what impact this request and potential proposal will have on our operations.
On July 13, 2021, the Federal Reserve, Office of the Comptroller of the Currency, and the FDIC issued proposed guidance on managing risks associated with third-party relationships, including relationships with fintech entities and bank/fintech sponsorship arrangements. The guidance sets forth expectations for managing risk throughout the life cycle of such arrangements, including planning, due diligence and contract negotiation, oversight and accountability, ongoing monitoring, and termination. We will continue to monitor this guidance as it potentially becomes final.
Changes to consumer protection laws or changes in their interpretation may impede collection efforts or otherwise adversely impact our business practices.
Federal and state consumer protection laws regulate the creation and enforcement of consumer credit card receivables and other loans. Many of these laws (and the related regulations) are focused on| ● | receivables not originated in compliance with law (or revised interpretations) could become unenforceable and uncollectible under their terms against the obligors; | |
| ● | we may be required to credit or refund previously collected amounts; | |
| ● | certain fees and finance charges could be limited, prohibited or restricted, reducing the profitability of certain investments in receivables; | |
| ● | certain collection methods could be prohibited, forcing us to revise our practices or adopt more costly or less effective practices; | |
| ● | limitations on our ability to recover on charged-off receivables regardless of any act or omission on our part; | |
| ● | some credit products and services could be banned in certain states or at the federal level; | |
| ● | federal or state bankruptcy or debtor relief laws could offer additional protections to consumers seeking bankruptcy protection, providing a court greater leeway to reduce or discharge amounts owed to us; and | |
| ● | a reduction in our ability or willingness to invest in receivables arising under loans to certain consumers, such as military personnel. |
Material regulatory developments may adversely impact our business and results from operations.
Our Automobile Lending Activities Involve Risks in Addition to Others Described Herein
Automobile lending exposes us not only to most of the risks described above but also to additional risks, including the regulatory scheme that governs installment loans and those attendant to relying upon automobiles and their repossession and liquidation value as collateral. In addition, our Auto Finance segment operation acquires loans on a wholesale basis from used car dealers, for which we rely upon the legal compliance and credit determinations by those dealers.
Funding for automobile lending may become difficult to obtain and expensive.
In the event we are unable to renew or replace any Auto Finance segment credit facilities that bear refunding or refinancing risks when they become due, our Auto Finance segment could experience significantOur automobile lending business is dependent upon referrals from dealers.
Currently we provide substantially all of our automobile loans only to or through used car dealers. Providers of automobile financing have traditionally competed based on the interest rate charged, the quality of credit accepted and the flexibility of loan terms offered. In order to be successful, we not only need to be competitive in these areas, but also need to establish and maintain good relations with dealers and provide them with a level of service greater than what they can obtain from our competitors.The financial performance of our automobile loan portfolio is in part dependent upon the liquidation of repossessed automobiles.
In the event of certain defaults, we may repossess automobiles and sell repossessed automobiles at wholesale auction markets located throughout the U.S. Auction proceeds from these types of sales and other recoveriesRepossession of automobiles entails the risk of litigation and other claims.
Although we have contracted with reputable repossession firms to repossess automobiles on defaulted loans, it is not uncommon for consumers to assert that we were not entitled to repossess an automobile or that the repossession was not conducted in accordance with applicable law. These claims increase the cost of our collection efforts and, ifWe Routinely Explore Various Opportunities to Grow Our Business, to Make Investments and to Purchase and Sell Assets
We routinely consider acquisitions of, or investments in, portfolios and other assets as well as the sale of portfolios and portions of our business. There are a number of risks attendant to any acquisition, including the possibility that we will overvalue the assets to be purchased and that we will not be able to produce the expected level of profitability from the acquired business or assets. Similarly, there are a number of risks attendant to sales, including the possibility that we will undervalue the assets to be sold. As a result, the impact of any acquisition or sale on our future performance may not be as favorable as expected and actually may be adverse.
Portfolio purchases may cause fluctuations in our reported Credit and Other InvestmentsCaaS segment’s managed receivables data, which may reducepossibly reducing the usefulness of this data in evaluating our business. Our reported Credit and Other InvestmentsCaaS segment managed receivables data may fluctuate substantially from quarter to quarter as a result of recent and future credit card portfolio acquisitions.
Receivables included in purchased portfolios are likely to have been originated using credit criteria different from the criteria of issuing bank partners that have originated accounts utilizing our technology platform. Receivables included in any particular purchased portfolio may have significantly different delinquency rates and charge-off rates than the receivables previously originated and purchased by us. These receivables also may earn different interest rates and fees as compared to
Any acquisition or investment that we make will involve risks different from and in addition to the risks to which our business is currently exposed. These include the risks that we will not be able to integrate and operate successfully new businesses, that we will have to incur substantial indebtedness and increase our leverage in order to pay for the acquisitions, that we will be exposed to, and have to comply with, different regulatory regimes and that we will not be able to apply our traditional analytical framework (which is what we expect to be able to do) in a successful and value-enhancing manner.
Risks Related to Our Financial Reporting and Accounting
We are remediatinga material weakness in our internal control over financial reporting. If we experience additional material weaknesses in the future, our business may be harmed. Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the effectiveness of our system of internal control. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles in the United States (“GAAP”). As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public companies. In particular, we are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act, which requires us to furnish annually a report by management on the effectiveness of our internal control over financial reporting.
Management reassessed the effectiveness of our internal control over financial reporting as of December 31, 2022 and concluded that our internal control over financial reporting was not effective as of December 31, 2022 due to a material weakness described under Part II, Item 9A “Controls and Procedures” in this Annual Report on Form 10-K/A.
Remediation efforts place a significant burden on management and add increased pressure on our financial resources and processes. If we identify material weaknesses in our internal control over financial reporting in the future, our business may be harmed. Such harm may include: (i) failure to accurately report our financial results, to prevent fraud or to meet our SEC reporting obligations in a timely basis or at all; (ii) material misstatements in our consolidated financial statements and harm to our operating results and investor confidence; and (iii) a material adverse effect on the trading prices of our securities. In addition, the foregoing could subject us to sanctions or investigations by the NASDAQ, the SEC or other regulatory authorities, and result in the breach of covenants in our debt agreements, any of which could have a material adverse impact on our operations, financial condition, results of operations, liquidity and our securities’ trading prices.
Further, there are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.
Other Risks of Our Business
COVID-19has caused severe disruptions in the U.S. economy and may have an adverse impact on our performance, results of operations and access to capital. In March 2020, a national emergency was declared under the National Emergencies Act due to a new strain of coronavirus ("COVID-19"). Measures initially taken across the U.S. and worldwide to mitigate the spread of the virus significantly impacted the macroeconomic environment, including consumer confidence, unemployment and other economic indicators that contribute to consumer spending behavior and demand for credit. More recently, policy responses to the COVID-19 pandemic have, in part, caused, supply chain disruptions, significant inflation and labor shortages. Our results of operations are impacted by the relative strength of the overall economy. As general economic conditions improve or deteriorate, the amount of consumer disposable income tends to fluctuate, which, in turn, impacts consumer spending levels and the willingness of consumers to finance purchases. Furthermore, to the extent that supply chain disruptions result in deferred purchases, there will be a corresponding decrease in our receivable purchases.
We routinely engage in discussions with customers, some of whom have indicated that they have experienced economic hardship due to the COVID-19 pandemic and have requested payment deferral or forbearance or other modifications of their accounts. While we are addressing requests for relief, we may still experience higher instances of default. Additionally, the COVID-19 pandemic could adversely affect our liquidity position and could limit our ability to grow our business or fully execute on our business strategy. Furthermore, the COVID-19 pandemic and resulting economic conditions could negatively impact our access to capital.
The COVID-19 pandemic also resulted in us modifying certain business practices, such as transitioning to a distributed work model. We may take further actions as required by government authorities or as we determine to be in the best interests of our employees and consumers. We may experience disruptions due to a number of operational factors, including, but not limited to:
| ● | increased cyber and payment fraud risk related to COVID-19, as cybercriminals attempt to profit from the disruption, given increased e-commerce and other online activity; | |
| ● | challenges to the security, availability and reliability of our information technology platform due to changes to normal operations, including the possibility of one or more clusters of COVID-19 cases affecting our employees or affecting the systems or employees of our partners; and | |
| ● | an increased volume of borrower and regulatory requests for information and support, or new regulatory requirements, which could require additional resources and costs to address. |
Even as the COVID-19 pandemic subsides, our business may continue to be unfavorably impacted by the economic turmoil caused by the pandemic. There are no recent comparable events that could serve to indicate the ultimate effect the COVID-19 pandemic may have and, as such, we do not at this time know what the extent of the impact of the COVID-19 pandemic will be on our business. To the extent the COVID-19 pandemic adversely affects our business and financial results, it also may heighten other risks described in this Part I, Item 1A.
For additional discussion of the impact of COVID-19 on our business, see additional risk factors included in this Part I, Item 1A, as well as Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Our business and operations may be negatively affected by rising prices and interest rates. Our financial performance and consumers’ ability to repay indebtedness may be affected by uncertain economic conditions, including inflation and changing interest rates. Higher inflation increases the costs of goods and services, reduces consumer spending power and may negatively affect our ability to purchase receivables. In 2022, inflation reached a four-decade high.
The Federal Reserve has raised, and has indicated that it expects to continue to raise, interest rates to combat inflation. Increased interest rates may adversely impact the spending levels of consumers and their ability and willingness to borrow money. Higher interest rates often lead to higher payment obligations, which may reduce the ability of consumers to remain current on their obligations and, therefore, lead to increased delinquencies, defaults, customer bankruptcies and charge-offs, and decreased recoveries, all of which could have an adverse effect on our business.
Recently, prices for energy and food have been particularly volatile in light of Russia’s invasion of Ukraine and the resulting trade restrictions and sanctions imposed on Russia by the U.S. and other countries. These recent events have increased inflationary pressures.
We are a holding company with no operations of our own. own.As a result, our cash flow and ability to service our debt is dependent upon distributions from our subsidiaries. The distribution of subsidiary earnings, or advances or other distributions of funds by subsidiaries to us, all of which are subject to statutory and could be subject to contractual restrictions, are contingent upon the subsidiaries’ cash flows and earnings and are subject to various business and debt covenant considerations.
We are party to litigation.
We areThe failure of economic risk associatedfinancial institutions or transactional counterparties could adversely affect our current and projected business operations and our financial condition and results of operations. On March 10, 2023, Silicon Valley Bank, or SVB, was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. A statement by the Department of the Treasury, the Federal Reserve and the FDIC stated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts. Although we do not have any funds deposited with new investment activities.
Because we outsource account-processing functions that are integral to our business, any disruption or termination of thatthese outsourcing relationshiprelationships could harm our business.
Failureto keep up with the rapid technological changes in financial services and e-commerce could harm our business. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial and lending institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of consumers by using technology to support products and services that will satisfy consumer demands for convenience, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services as quickly as some of our competitors. Failure to successfully keep pace with technological change affecting the financial services industry could harm our ability to compete with our competitors. Any such failure to adapt to changes could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Ifwe are unable to protect our information systems against service interruption, our operations could be disrupted and our reputation may be damaged.
We rely heavily on networks and information systems and other technology, that are largely hosted byUnauthorized or unintentional disclosure of sensitive or confidential customer data could expose us to protracted and costly litigation, and civil and criminal penalties. To conduct our business, we are required to manage, use, and store large amounts of personally identifiable information, consisting primarily of confidential personal and financial data regarding consumers across all operations areas. We also depend on our IT networks and systems, and those of third parties, to process, store, and transmit this information. As a result, we are subject to numerous U.S. federal and state laws designed to protect this information. Security breaches involving our files and infrastructure could lead to unauthorized disclosure of confidential information.
We take a number of measures to ensure the security of our hardware and software systems and customer information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect data being breached or compromised. In the past, banks and other financial service providers have been the subject of sophisticated and highly targeted attacks on their information technology. An increasing number of websites have reported breaches of their security.
If any person, including our employees or those of third-party vendors, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to costly litigation, monetary damages, fines, and/or criminal prosecution. Any unauthorized disclosure of personally identifiable information could subject us to liability under data privacy laws. Further, under credit card rules and our contracts with our card processors, if there is a breach of credit card information that we store, we could be liable to the credit card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow credit card industry security standards, even if there is no compromise of customer information, we could incur significant fines. Security breaches also could harm our reputation, which could potentially cause decreased revenues, the loss of existing merchant credit partners, or difficulty in adding new merchant credit partners.
Internet and data security breaches also could impede our bank partners from originating loans over the Internet, cause us to lose consumers or otherwise damage our reputation or business.
Consumers generally are concerned with security and privacy, particularly on the Internet. As part of our growth strategy, we have enabled lenders to originate loans over the Internet. The secure transmission of confidential information over the Internet is essential to maintaining customer confidence in such products and services offered online.Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology used by us to protect our client or consumer application and transaction data transmitted over the Internet. In addition to the potential for litigation and civil penalties described above, security breaches could damage our reputation and cause consumers to become unwilling to do business with our clients or us, particularly over the Internet. Any publicized security problems could inhibit the growth of the Internet as a means of conducting commercial transactions. Our ability to service our clients’ needs over the Internet would be severely impeded if consumers become unwilling to transmit confidential information online.
Also, a party that is able to circumvent our security measures could misappropriate proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and business.
Regulationin the areas of privacy and data security could increase our costs.
We are subject to various regulations related to privacy and data security/breach, and we could be negatively impacted by these regulations. For example, we are subject to theThe California Consumer Privacy Act (the “CCPA”) became effective on January 1, 2020. The CCPA requires, among other things, covered companies to provide new disclosures to California consumers and afford such consumers with expanded protections and control over the collection, maintenance, use and sharing of personal information. The CCPA continues to be subject to new regulations and legislative amendments. Although we have implemented a compliance program designed to address obligations under the CCPA, it remains unclear what future modifications will be made or how the CCPA will be interpreted in the future. The CCPA provides for civil penalties for violations and a private right of action for data breaches.
In addition, in November 2020, California voters approved the California Privacy Rights Act of 2020 (the “CPRA”) ballot initiative, which became effective on January 1, 2023. The CPRA established the California Privacy Protection Agency to implement and enforce the CCPA and CPRA. We anticipate that the CPRA and certain regulations promulgated by the California Privacy Protection Agency will apply to our business and we will work to ensure compliance with such laws and regulations by their effective dates.
Compliance with these laws regarding the protection of consumer and employee data could result in higher compliance and technology costs for us, as well as potentially significant fines and penalties for non-compliance.noncompliance. Further, there are various other statutes and regulations relevant to the direct email marketing, debt collection and text-messaging industries including the Telephone Consumer Protection Act. The interpretation of many of these statutes and regulations is evolving in the courts and administrative agencies and an inability to comply with them may have an adverse impact on our business.
In addition to the foregoing enhanced data security requirements, various federal banking regulatory agencies, and at least 48all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands, have enacted data security regulations and laws requiring varying levels of consumer notification in the event of a security breach.
Unplanned system interruptions or system failures could harm our business and reputation. Any interruption in the availability of our transactional processing services due to hardware, and operating system failures, or system conversion will reduce our revenues and profits. Any unscheduled interruption in our services results in an immediate, and possibly substantial, reduction in our ability to serve our customers, thereby resulting in a loss of revenues. Frequent or persistent interruptions in our services could cause current or potential consumers to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our websites or services, and could permanently harm our reputation.
Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, computer viruses, computer denial-of-service attacks, and similar events or disruptions. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities. Our systems also are subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions we may take, the occurrence of a natural disaster, pandemic, a decision by any of our third-party hosting providers to close a facility we use without adequate notice for financial or other reasons or other unanticipated problems at our hosting facilities could cause system interruptions, delays, and loss of critical data, and result in lengthy interruptions in our services. Our business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.
Climate change and related regulatory responses may impact our business
Weelected the fair value option for newly originated assets, effective as of January 1, 2020, and we use estimates in determining the fair value of our loans. If our estimates prove incorrect, we may be required to write down the value of these assets, adversely affecting our results of operations. Our ability to measure and report our financial position and results of operations is influenced by the need to estimate the impact or outcome of future events on the basis of information available at the time of the issuance of the financial statements. Further, most of these estimates are determined using Level 3 inputs for which changes could significantly impact our fair value measurements. A variety of factors including, but not limited to, estimated yields on consumer receivables, customer default rates, the timing of expected payments, estimated costs to service the portfolio, interest rates, and valuations of comparable portfolios may ultimately affect the fair values of our loans and finance receivables. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. Management has processes in place to monitor these judgments and assumptions, but these processes may not ensure that our judgments and assumptions are accurate.
Our allowance for uncollectible loans is determined based upon both objective and subjective factors and may not be adequate to absorb credit losses. We face the risk that customers will fail to repay their loans in full. Through our analysis of loan performance, delinquency data, charge-off data, economic trends and the potential effects of those economic trends on consumers, we establish an allowance for uncollectible loans, interest and fees receivable as an estimate of the probable losses inherent within those loans, interest and fees receivable that we do not report at fair value. We determine the necessary allowance for uncollectible loans, interest and fees receivable by analyzing some or all of the following unique to each type of receivable pool: historical loss rates; current delinquency and roll-rate trends; vintage analyses based on the number of months an account has been in existence; the effects of changes in the economy on consumers; changes in underwriting criteria; and estimated recoveries. These inputs are considered in conjunction with (and potentially reduced by) any unearned fees and discounts that may be applicable for an outstanding loan receivable. Actual losses are difficult to forecast, especially if such losses are due to factors beyond our historical experience
or control. As a result, our allowance for uncollectible loans may not be adequate to absorb incurred losses or prevent a material adverse effect on our business, financial condition and results of operations. Losses are the largest cost as a percentage of revenues across all of our products. Fraud and customers not being able to repay their loans are both significant drivers of loss rates. If we experienced rising credit or fraud losses this would significantly reduce our earnings and profit margins and could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
The priceprices of our common stocksecurities may fluctuate significantly, and this may make it difficult for you to resell your shares of our common stocksecurities when you want or at prices you find attractive.
| ● | actual or anticipated fluctuations in our operating results; | |
| ● | changes in expectations as to our future financial performance, including financial estimates and projections by Atlanticus, securities analysts and investors; | |
| ● | the overall financing environment, which is critical to our value; | |
| ● | changes in interest rates; | |
| ● | inflation and supply chain disruptions; | |
| ● | the operating and stock performance of our competitors; | |
| ● | announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; | |
| ● | the announcement of enforcement actions or investigations against us or our competitors or other negative publicity relating to us or our industry; | |
| ● | changes in GAAP, laws, regulations or the interpretations thereof that affect our various business activities and segments; | |
| ● | general domestic or international economic, market and political conditions; | |
| ● | changes in ownership by executive officers, directors and parties related to them who control a majority of our common stock; | |
| ● | additions or departures of key personnel; | |
| ● | the annual yield from distributions on the Series B Preferred Stock as compared to yields on other financial instruments; and | |
| ● | global pandemics (such as the COVID-19 pandemic). |
In addition, the stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the trading priceprices of our common stock,securities, regardless of our actual operating performance.
Future sales of our common stock or equity-related securities in the public market including sales of our common stock pursuant to share lending agreements or short sale transactions by purchasers of convertible senior notes, could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings.
Theshares of Series A Convertible Preferred Stock and Series B Preferred Stock are senior obligations, rank prior to our common stock with respect to dividends, distributions and payments upon liquidation and have other terms, such as a redemption right, that could negatively impact the value of shares of our common stock. In December 2019, we issued 400,000 shares of Series A Convertible Preferred Stock. The rights of the holders of our Series A Convertible Preferred Stock with respect to dividends, distributions and payments upon liquidation rank senior to similar obligations to our holders of common stock. Holders of the Series A Convertible Preferred Stock are entitled to receive dividends on each share of such stock equal to 6% per annum on the liquidation preference of $100. The dividends on the Series A Convertible Preferred Stock are cumulative and non-compounding and must be paid before we pay any dividends on the common stock.
Further, on and after January 1, 2024, the holders of the Series A Convertible Preferred Stock will have the right to require us to purchase outstanding shares of Series A Convertible Preferred Stock for an amount equal to $100 per share plus any accrued but unpaid dividends. This redemption right could expose us to a liquidity risk if we do not have sufficient cash resources at hand or are not able to find financing on sufficiently attractive terms to comply with our obligations to repurchase the Series A Convertible Preferred Stock upon exercise of such redemption right.
In June and July 2021, we issued 3,188,533 shares of Series B Preferred Stock. The rights of the holders of our Series B Preferred Stock with respect to dividends, distributions and payments upon liquidation rank junior to similar obligations to our holders of Series A Convertible Preferred Stock and senior to similar obligations to our holders of common stock. Holders of the Series B Preferred Stock are entitled to receive dividends on each share of such stock equal to 7.625% per annum on the liquidation preference of $25.00 per share. The dividends on the Series B Preferred Stock are cumulative and non-compounding and must be paid before we pay any dividends on the common stock.
In the event of our liquidation, dissolution or the winding up of our affairs, the holders of our Series A Convertible Preferred Stock and Series B Preferred Stock have the right to receive a liquidation preference entitling them to be paid out of our assets generally available for distribution to our equity holders and before any payment may be made to holders of our common stock.
Our obligations to the holders of Series A Convertible Preferred Stock and Series B Preferred Stock also could limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition and the value of our common stock.
Ouroutstanding Series A Convertible Preferred Stock has anti-dilution protection that, if triggered, could cause substantial dilution to our then-existing holders of common stock, which could adversely affect our stock price. The document governing the terms of our outstanding Series A Convertible Preferred Stock contains anti-dilution provisions to benefit the holders of such stock. As a result, if we, in the future, issue common stock or other derivative securities, subject to specified exceptions, for a per share price less than the then existing conversion price of the Series A Convertible Preferred Stock, an adjustment to the then current conversion price would occur. This reduction in the conversion price could result in substantial dilution to our then-existing holders of common stock, adversely affecting the price of our common stock.
In the past, we have not paid cash dividends on our common stock on a regular basis, and an increase in the market price of our common stock, if any, may be the sole source of gain on an investment in our common stock. With the exception of dividends payable on our Series A Convertible Preferred Stock and Series B Preferred Stock, we currently plan to retain any future earnings for use in the operation and expansion of our business and may not pay any dividends on our common stock in the foreseeable future. The declaration and payment of all future dividends on our common stock, if any, will be at the sole discretion of our board of directors, which retains the right to change our dividend policy at any time. Any decision by our board of directors to declare and pay dividends in the future will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions, restrictions on dividends imposed by the documents governing the terms of the Series A Convertible Preferred Stock and Series B Preferred Stock and other factors that our board of directors may deem relevant. Consequently, appreciation in the market price of our common stock, if any, may be the sole source of gain on an investment in our common stock for the foreseeable future. Holders of the Series A Convertible Preferred Stock and Series B Preferred Stock are entitled to receive dividends on such stock that are cumulative and noncompounding and must be paid before we pay any dividends on the common stock.
Wehave the ability to issue additional preferred stock, warrants, convertible debt and other securities without shareholder approval. Our common stock may be subordinate to additional classes of preferred stock issued in the future in the payment of dividends and other distributions made with respect to common stock, including distributions upon liquidation or dissolution. Our articlesAmended and Restated Articles of incorporationIncorporation (the "Articles of Incorporation") permit our Boardboard of Directorsdirectors to issue preferred stock without first obtaining shareholder approval.approval, which we did in December 2019 when we issued the Series A Convertible Preferred Stock and in June and July 2021 when we issued the Series B Preferred Stock. If we issuedissue additional classes of preferred stock, these additional securities may have dividend or liquidation preferences senior to the common stock. If we issue additional classes of convertible preferred stock, a subsequent conversion may dilute the current common shareholders’ interest. We have similar abilities to issue convertible debt, warrants and other equity securities.
Our executive officers, directors and parties related to them, in the aggregate, control a majority of our common stock and may have the ability to control matters requiring shareholder approval.
Our executive officers, directors and parties related to them own a large enough share of our common stock to have an influence on, if not control of, the matters presented to shareholders. As a result, these shareholders may have the ability to control matters requiring shareholder approval, including the election and removal of directors, the approval of significant corporate transactions, such as any reclassification, reorganization, merger, consolidation or sale of all or substantially all of our assets and the control of our management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change of control of us, impede a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us,The rightSeries B Preferred Stock rank junior to receiveour Series A Convertible Preferred Stock and all of our indebtedness and other liabilities and are effectively junior to all indebtedness and other liabilities of our subsidiaries. In the event of our bankruptcy, liquidation, dissolution or winding-up of our affairs, our assets will be available to pay obligations on the Series B Preferred Stock only after all of our indebtedness and other liabilities have been paid and the liquidation preference of the Series A Convertible Preferred Stock has been satisfied. The rights of holders of the Series B Preferred Stock to participate in the distribution of our assets will rank junior to the prior claims of our current and future creditors, the Series A Convertible Preferred Stock and any future series or class of preferred stock we may issue that ranks senior to the Series B Preferred Stock. Our Articles of Incorporation authorize us to issue up to 10,000,000 shares of preferred stock in one or more series on terms determined by our board of directors, and we currently have outstanding 400,000 shares of Series A Convertible Preferred Stock and 3,255,967 shares of Series B Preferred Stock. We may issue up to 6,344,033 additional shares of preferred stock.
In addition, the Series B Preferred Stock effectively ranks junior to all existing and future indebtedness and other liabilities of (as well as any preferred equity interests held by others in) our existing subsidiaries and any future subsidiaries. Our existing subsidiaries are, and any future subsidiaries would be, separate legal entities and have no legal obligation to pay any amounts to us in respect of dividends due on the Series B Preferred Stock. If we are forced to liquidate our assets to pay our creditors and holders of our Series A Convertible Preferred Stock, we may not have sufficient assets to pay amounts due on any or all of the Series B Preferred Stock then outstanding. We and our subsidiaries have incurred and may in the future incur substantial amounts of debt and other obligations that will rank senior to the Series B Preferred Stock. We may incur additional indebtedness and become more highly leveraged in the future, harming our financial position and potentially limiting our cash available to pay dividends. As a result, we may not have sufficient funds remaining to satisfy our dividend obligations relating to our Series B Preferred Stock if we incur additional indebtedness or issue additional preferred stock that ranks senior to the Series B Preferred Stock.
Future offerings of debt or senior equity securities may adversely affect the market price of the Series B Preferred Stock. If we decide to issue debt or senior equity securities in the future, it is possible that these securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of the Series B Preferred Stock and may result in dilution to holders of the Series B Preferred Stock. We and, indirectly, our shareholders will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we do not know the amount, timing or nature of any future offerings. Thus, holders of the Series B Preferred Stock bear the risk of our future offerings reducing the market price of the Series B Preferred Stock and diluting the value of their holdings in us.
Wemay issue additional shares of the Series B Preferred Stock and additional series of preferred stock that rank on a parity with the Series B Preferred Stock as to dividend rights, rights upon liquidation or voting rights. We are allowed to issue additional shares of Series B Preferred Stock and additional series of preferred stock that would rank on a parity with the Series B Preferred Stock as to dividend payments and rights upon our liquidation, dissolution or winding up of our affairs pursuant to our Articles of Incorporation and the Amended and Restated Articles of Amendment Establishing the Series B Preferred Stock without any vote of the holders of the Series B Preferred Stock. Our Articles of Incorporation authorize us to issue up to 10,000,000 shares of preferred stock in one or more series on terms determined by our board of directors, and we currently have outstanding 400,000 shares of Series A Convertible Preferred Stock and 3,255,967 shares of Series B Preferred Stock. We may issue up to 6,344,033 additional shares of preferred stock. The issuance of additional shares of Series B Preferred Stock and additional series of parity preferred stock could have the effect of reducing the amounts available to the holders of Series B Preferred Stock upon our liquidation or dissolution or the winding up of our affairs. It also may reduce dividend payments on the Series B Preferred Stock if we do not have sufficient funds to pay dividends on all Series B Preferred Stock outstanding and other classes of stock with equal priority with respect to dividends.
In addition, although holders of the Series B Preferred Stock are entitled to limited voting rights with respect to such matters, the holders of the Series B Preferred Stock will vote separately as a class along with all other outstanding series of our convertible senior notespreferred stock that we may issue upon which like voting rights have been conferred and are exercisable. As a result, the voting rights of holders of the Series B Preferred Stock may be significantly diluted, and the holders of such other series of preferred stock that we may issue may be able to control or significantly influence the outcome of any vote.
Future issuances and sales of parity preferred stock, or the perception that such issuances and sales could occur, may cause prevailing market prices for the Series B Preferred Stock and our common stock to decline and may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us. Such issuances may also reduce or eliminate our ability to pay dividends on our common stock.
Holders of Series B Preferred Stock have extremely limited voting rights. Holders of Series B Preferred Stock have limited voting rights. Our common stock is subordinatedthe only class of our securities that carries full voting rights. Voting rights for holders of Series B Preferred Stock exist primarily with respect to the ability to elect (together with the holders of other outstanding series of our preferred stock, or additional series of preferred stock we may issue in the future and upon which similar voting rights have been or are in the future conferred and are exercisable) two additional directors to our board of directors in the event that six quarterly dividends (whether or not declared or consecutive) payable on the Series B Preferred Stock are in arrears, and with respect to voting on amendments to our Articles of Incorporation or Amended and Restated Articles of Amendment Establishing the Series B Preferred Stock (in some cases voting together with the holders of other outstanding series of our preferred stock as a single class) that materially and adversely affect the rights of the holders of Series B Preferred Stock (and other series of preferred stock, as applicable) or create additional classes or series of our existingstock that are senior to the Series B Preferred Stock, provided that in any event adequate provision for redemption has not been made. Other than in limited circumstances, holders of Series B Preferred Stock do not have any voting rights.
The conversion feature of the Series B Preferred Stock may not adequately compensate holders of such stock, and the conversion and redemption features of the Series B Preferred Stock may make it more difficult for a party to take over our company and may discourage a party from taking over the Company. Upon the occurrence of a Delisting Event or Change of Control (as defined in the document governing the terms of the Series B Preferred Stock), holders of the Series B Preferred Stock will have the right (unless, prior to the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable, we have provided or provide notice of our election to redeem the Series B Preferred Stock) to convert some or all of the Series B Preferred Stock into our common stock (or equivalent value of alternative consideration), and under these circumstances we will also have a special optional redemption right to redeem the Series B Preferred Stock. Upon such a conversion, the holders will be limited to a maximum number of shares of our common stock equal to the Share Cap (as defined in the document governing the terms of the Series B Preferred Stock) multiplied by the number of shares of Series B Preferred Stock converted. If the common stock price is less than $19.275, subject to adjustment, the holders will receive a maximum of 1.29702 shares of our common stock per share of Series B Preferred Stock, which may result in a holder receiving value that is less than the liquidation preference of the Series B Preferred Stock. In addition, those features of the Series B Preferred Stock may have the effect of inhibiting a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing a change of control of the Company under circumstances that otherwise could provide the holders of our common stock and Series B Preferred Stock with the opportunity to realize a premium over the then-current market price or that shareholders may otherwise believe is in their best interests.
Holdersof Series B Preferred Stock may be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.” Distributions paid to corporate U.S. holders on the Series B Preferred Stock may be eligible for the dividends-received deduction, and distributions paid to non-corporate U.S. holders on the Series B Preferred Stock may be subject to tax at the preferential tax rates applicable to “qualified dividend income,” if we have current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. Although we presently have accumulated earnings and profits, we may not have sufficient current or accumulated earnings and profits during future secured creditors.
Holders of Series B Preferred Stock may be subject to tax if we make or fail to make certain adjustments to the conversion rate of the Series B Preferred Stock even though such holders do not receive a corresponding cash dividend. The conversion rate for the Series B Preferred Stock is subject to adjustment in certain circumstances. A failure to adjust (or to adjust adequately) the conversion rate after an event that increases the proportionate interest of the Series B Preferred Stock holders in us could be treated as a deemed taxable dividend to you. If a holder is a non-U.S. holder, any deemed dividend may be subject to U.S. federal withholding tax at a 30% rate, or such lower rate as may be specified by an applicable treaty, which may be set off against subsequent payments on the Series B Preferred Stock. In April 2016, the U.S. Treasury issued proposed income tax regulations in regard to the taxability of changes in conversion rights that will apply to the Series B Preferred Stock when published in final form and may be applied to us before final publication in certain instances.
The indenture governing the 6.125% Senior Notes due 2026 (the “Senior Notes”) does not prohibit us from incurring additional indebtedness. If we incur any additional indebtedness that ranks equally with the Senior Notes, the holders of that debt will be entitled to share ratably with holders of the Senior Notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization or dissolution. This may have the effect of reducing the amount of proceeds paid to holders of Senior Notes. Incurrence of additional debt would also further reduce the cash available to invest in operations, as a result of increased debt service obligations. If new debt is added to our current debt levels, the related risks that we now face could intensify.
Our convertible senior noteslevel of indebtedness could have important consequences to holders of the Senior Notes, because:
● | it could affect our ability to satisfy our financial obligations, including those relating to the Senior Notes; |
● | a substantial portion of our cash flows from operations would have to be dedicated to interest and principal payments and may not be available for operations, capital expenditures, expansion, acquisitions or general corporate or other purposes; |
● | it may impair our ability to obtain additional debt or equity financing in the future; |
● | it may limit our ability to refinance all or a portion of our indebtedness on or before maturity; |
● | it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and |
● | it may make us more vulnerable to downturns in our business, our industry or the economy in general. |
Our operations may not generate sufficient cash to enable us to service our debt. If we fail to make a payment on the Senior Notes, we could be in default on the Senior Notes, and this default could cause us to be in default on other indebtedness, to the extent outstanding. Conversely, a default under any other indebtedness, if not waived, could result in acceleration of the debt outstanding under the related agreement and entitle the holders thereof to bring suit for the enforcement thereof or exercise other remedies provided thereunder. In addition, such default or acceleration may result in an event of default and acceleration of other indebtedness, entitling the holders thereof to bring suit for the enforcement thereof or exercise other remedies provided thereunder. If a judgment is obtained by any such holders, such holders could seek to collect on such judgment from the assets of Atlanticus. If that should occur, we may not be able to pay all such debt or to borrow sufficient funds to refinance it. Even if new financing were then available, it may not be on terms that are acceptable to us.
However, no event of default under the Senior Notes would result from a default or acceleration of, or suit, other exercise of remedies or collection proceeding by holders of, our other outstanding debt, if any. As a result, all or substantially all of our assets may be used to satisfy claims of holders of our other outstanding debt, if any, without the holders of the Senior Notes having any rights to such assets.
The Senior Notes are unsecured and therefore are subordinateeffectively subordinated to existing andany secured indebtedness that we currently have or that we may incur in the future. The Senior Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the Senior Notes are effectively subordinated to any secured indebtedness that we or our subsidiaries have currently outstanding or may incur in the future secured obligations to the extent of the value of the assets securing such obligations. As a result,indebtedness. The indenture governing the Senior Notes does not prohibit us or our subsidiaries from incurring additional secured (or unsecured) indebtedness in the event of a bankruptcy,future. In any liquidation, dissolution, reorganizationbankruptcy or other similar proceeding, of our company, our assets generally would be available to satisfy obligations of our secured debt before any payment may be made on the convertible senior notes. To the extent that such assets cannot satisfy in full our secured debt, the holders of such debt would have a claim for any shortfall that would rank equally in right of payment (or effectively senior if the debt were issued by a subsidiary) with the convertible senior notes. In such an event, we may not have sufficient assets remaining to pay amounts on anyour existing or all of the convertible senior notes.
TheSenior Notes are structurally subordinated to the existingindebtedness and futureother liabilities of our subsidiaries. The Senior Notes are obligations exclusively of Atlanticus and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes, and the Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. Therefore, in any bankruptcy, liquidation or similar proceeding, all claims of creditors (including trade creditors) of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our subsidiaries’ creditors. Holders of the convertible senior notes are not creditors, of our subsidiaries. Any claims ofincluding holders of the convertible senior notesSenior Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, derive from our own equityclaims would still be effectively subordinated to any security interests in those subsidiaries. Claims of our subsidiaries’ creditors will generally have priority as to the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our subsidiaries over our own equity interest claims and will therefore have priority over the holders of the convertible senior notes.claims. Consequently, the convertible senior notesSenior Notes are effectively subordinatestructurally subordinated to all indebtedness and other liabilities whether or not secured,(including trade payables) of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish. Our subsidiaries’ creditors also may include general creditors and taxing authorities. As of December 31, 2016,establish as financing vehicles or otherwise. The indenture governing the Senior Notes does not prohibit us or our subsidiaries had total
The indenture governing the Senior Notes contains limited protection for holders of the Senior Notes. The indenture under which the Senior Notes were issued offers limited protection to holders of the Senior Notes. The terms of the indenture and the Senior Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on the Senior Notes. In particular, the terms of the indenture and the Senior Notes does not place any restrictions on our or our subsidiaries’ ability to:
| ● | issue debt securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Senior Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Senior Notes to the extent of the value of the assets securing such indebtedness or other obligations, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore would be structurally senior to the Senior Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Senior Notes with respect to the assets of our subsidiaries; | |
| ● | pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities subordinated in right of payment to the Senior Notes; | |
| ● | sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); | |
| ● | enter into transactions with affiliates; | |
| ● | create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; | |
| ● | make investments; or | |
| ● | create restrictions on the payment of dividends or other amounts to us from our subsidiaries. |
In addition, the indenture does not include any protection against certain events, such as a change of control, a leveraged recapitalization or “going private” transaction (which may result in a significant increase of our indebtedness levels), restructuring or similar transactions. Furthermore, the terms of the indenture and the Notes does not protect holders of the Senior Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity. Also, an event of default or acceleration under our other indebtedness would not necessarily result in an “event of default” under the Senior Notes.
Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the indenture may have important consequences for holders of the Senior Notes, including making it more difficult for us to satisfy our obligations with respect to the Senior Notes or negatively affecting the trading value of the Senior Notes.
Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Senior Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Senior Notes.
Wemay not be able to generate sufficient cash to service all of our debt, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful. Our ability to make scheduled payments on, or to refinance our obligations under, our debt will depend on our financial and operating performance and that of our subsidiaries, which, in turn, will be subject to prevailing economic and competitive conditions and to financial and business factors, many of which may be beyond our control.
We may not maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may decidebe forced to reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or restructure our debt. In the future, our cash flow and capital resources may not be sufficient for payments of interest on, and principal of, our debt, and such alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. We may not be able to refinance any of our indebtedness or obtain additional financing. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those sales, or if we do, at an opportune time, the proceeds that we realize may not be adequate to meet debt service obligations when due. Repayment of our indebtedness, to a certain degree, is also dependent on the generation of cash flows by our subsidiaries (none of which are guarantors of the Senior Notes) and their ability to make such cash available to us, by dividend, loan, debt repayment, or otherwise. Our subsidiaries may not be able to, or be permitted to, make distributions or other payments to enable us to make payments in respect of our indebtedness. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, applicable U.S. and foreign legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not receive distributions or other payments from our subsidiaries, we may be unable to make required payments on our indebtedness.
An increase in market interest rates could result in a decrease in the value of the Senior Notes. In general, as market interest rates rise, notes bearing interest at a fixed rate decline in value. Consequently, if market interest rates increase, the portionmarket value of the Senior Notes may decline.
We may issue additional notes. Under the terms of the indenture governing the Senior Notes, we may from time to time without notice to, or the consent of, the holders of the Senior Notes, create and issue additional notes which may rank equally with the Senior Notes. If any such additional notes are not fungible with the Senior Notes initially offered hereby for U.S. federal income tax purposes, such additional notes will have one or more separate CUSIP numbers.
The rating for the Senior Notes could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency. Ratings only reflect the views of the issuing rating agency or agencies and such ratings could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency. A rating is not a recommendation to purchase, sell or hold the Senior Notes. Ratings do not reflect market prices or suitability of a security for a particular investor and the rating of the Senior Notes may not reflect all risks related to us and our activities thatbusiness, or the structure or market value of the Senior Notes. We may elect to issue other securities for which we conduct through subsidiaries.
Note Regarding Risk Factors
The risk factors presented above are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial, also may adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occurs, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock or other securities could decline, and you could lose part or all of your investment.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.PART II
| Financial Statements and Supplementary Data |
The information in response to this item is included in our consolidated financial statements, together with the reports thereon of BDO USA, P.C., beginning on page F-1 of this Annual Report on Form 10-K/A, which follows the signature page hereto.
| Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of December 31, 2022, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Act) was carried out on behalf of Atlanticus Holdings Corporation and our subsidiaries by our management and with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer).
At the time we filed the Original Form 10-K, our principal executive officer and principal financial officer had concluded that as of December 31, 2022, our disclosure controls and procedures were effective. As part of the preparation of the Company’s June 30, 2023 interim financial statements, the Company’s management determined that management did not appropriately design and implement management review controls that included sufficient documentary evidence to support the precision of review over the development of cash flow forecasts used in the calculation of the fair value estimate of loans, interest and fees receivable at fair value. Thus, these controls were not operating effectively. As a result, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2022 because of this material weakness in our internal control over financial reporting.
Notwithstanding this material weakness, the Company has concluded that no material misstatements exist in the consolidated financial statements as filed on the Original Form 10-K, and as included in this Amendment, and such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Accordingly, there are no changes to the Company’s previously-reported consolidated financial statements.
Restated Management’s Report on Internal Control Over Financial Reporting
Management of Atlanticus Holdings Corporation is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Act) for Atlanticus Holdings Corporation and our subsidiaries. Our management conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2022, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control-Integrated Framework (2013 framework).
In Management’s Report on Internal Control over Financial Reporting included in the Original Form 10-K, our management previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2022. Subsequent to the filing date of the Original Form 10-K, management has concluded that the material weakness described above existed as of December 31, 2022. As a result, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2022, based on criteria in the COSO 2013 framework. Accordingly, management has restated its report on internal control over financial reporting.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, has been audited by BDO USA, P.C., an independent registered public accounting firm, as stated in their accompanying revised report on page F-1 of the attached financial statements.
Remediation Plan
The Company’s management is committed to maintaining a strong internal control environment. In response to the material weakness identified above, management, with the oversight of the Audit Committee of the Board of Directors, evaluated the material weakness described above and designed a remediation plan to enhance the Company’s internal control environment. To remediate the material weakness, the Company’s management performed an evaluation of the relevant controls, and implemented procedures to enhance documentation, and retain incremental evidence that supports the effectiveness of controls related to the development and review of cash flow forecasts used in the calculation of fair value estimate of loans, interest and fees receivable, at fair value. These enhanced procedures were implemented as of June 30, 2023, and will be monitored for effectiveness.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2022, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent limitation on the effectiveness of internal controls
The Company’s management, including its principal executive officer and principal financial officer, do not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART III
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following documents are filed as part of this Report:
1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page | |
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting(BDO USA, P.C.; Atlanta, GA; PCAOB ID#243) | |
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements(BDO USA, P.C.; Atlanta, GA; PCAOB ID#243) |
2. Financial Statement Schedules
None.
3. Exhibits
Exhibit Number | Description of Exhibit | Incorporated by Reference from Atlanticus’ SEC Filings Unless Otherwise Indicated(1) | ||
3.1 | November 8, 2022, Form 10-Q, exhibit 3.1 | |||
| 3.1(a) | Articles of Amendment Establishing Cumulative Convertible Preferred Stock, Series A (included as Exhibit B to Exhibit 3.1 hereto) | November 8, 2022, Form 10-Q, exhibit 3.1 | ||
| 3.1(b) | Amended and Restated Articles of Amendment Establishing the 7.625% Series B Cumulative Perpetual Preferred Stock (included as Exhibit C to Exhibit 3.1 hereto) | November 8, 2022, Form 10-Q, exhibit 3.1 | ||
3.2 | Amended and Restated Bylaws (as amended through May 12, 2017) | May 16, 2017, Form 8-K, exhibit 3.2 | ||
| 4.1 | Description of Atlanticus Holdings Corporation's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 | March 15, 2022, Form 10-K, exhibit 4.1 | ||
4.2 | March 30, 2016, Form 10-K, exhibit 4.1 | |||
4.3 | Indenture, dated as of November 22, 2021, by and between Atlanticus Holdings Corporation and U.S. Bank National Association, as trustee | November 22, 2021, Form 8-K, exhibit 4.1 | ||
| 4.4 | First Supplemental Indenture, dated as of November 22, 2021, by and between Atlanticus Holdings Corporation and U.S. Bank National Association, as trustee | November 22, 2021, Form 8-K, exhibit 4.2 | ||
| 4.5 | Form of 6.125% Senior Notes due 2026 (included in Exhibit 4.4) | November 22, 2021, Form 8-K, exhibit 4.3 | ||
10.1 | January 18, 2000, Form S-1, exhibit 10.1 | |||
10.2† | April 11, 2019, Definitive Proxy Statement on Schedule 14A, Appendix A | |||
10.2(a)† | August 14, 2019, Form 10-Q, exhibit 10.2 | |||
10.2(b)† | August 14, 2019, Form 10-Q, exhibit 10.3 | |||
10.2(c)† | August 14, 2019, Form 10-Q, exhibit 10.4 | |||
10.2(d)† | August 14, 2019, Form 10-Q, exhibit 10.5 | |||
10.2(e)† | August 14, 2019, Form 10-Q, exhibit 10.6 | |||
10.2(f)† | August 14, 2019, Form 10-Q, exhibit 10.7 | |||
10.3† | April 10, 2018, Definitive Proxy Statement on Schedule 14A, Appendix A | |||
10.4† | May 14, 2021, Form 10-Q, exhibit 10.1 | |||
10.5† | May 14, 2021, Form 10-Q, exhibit 10.2 | |||
10.6† | March 28, 2014, Form 10-K, exhibit 10.8 | |||
| 10.7† | Amended and Restated Consultant Agreement, dated May 1, 2020, between Atlanticus Services Corporation and Denise M. Harrod | May 14, 2021, Form 10-Q, exhibit 10.4 | ||
10.8† | November 8, 2022, Form 10-Q, exhibit 10.1 | |||
10.9 | June 25, 2010, Form 8-K/A, exhibit 10.1 | |||
10.10 | July 7, 2009, Form 8-K, exhibit 10.1 | |||
10.11 | May 15, 2017, Form 10-Q, exhibit 10.1 | |||
| 10.11(a)* | Series 2017-One Indenture Supplement for Perimeter Master Note Business Trust, dated February 8, 2017 | March 15, 2022, Form 10-K, exhibit 10.11(a) | ||
10.11(b)* | March 30, 2020, Form 10-K, exhibit 10.11(a) |
Exhibit Number | Description of Exhibit | Incorporated by Reference from Atlanticus’ SEC Filings Unless Otherwise Indicated(1) | ||
| 10.13 | Amended and Restated Program Management Agreement, dated April 1, 2020, between The Bank of Missouri and Atlanticus Services Corporation | August 14, 2020, Form 10-Q, exhibit 10.1 | ||
| 10.13(a) | First Amendment to Amended and Restated Program Management Agreement, dated June 30, 2020, between The Bank of Missouri and Atlanticus Services Corporation | August 14, 2020, Form 10-Q, exhibit 10.1(a) | ||
| 10.13(b)* | Amended and Restated Receivable Sales Agreement, dated April 1, 2020, between The Bank of Missouri and Fortiva Funding, LLC | August 14, 2020, Form 10-Q, exhibit 10.2 | ||
| 10.13(c) | First Amendment to Amended and Restated Receivable Sales Agreement, dated June 30, 2020, between The Bank of Missouri and Fortiva Funding, LLC | August 14, 2020, Form 10-Q, exhibit 10.2(a) | ||
| 10.13(d) | Assignment and Assumption Agreement, dated March 24, 2018, among Mid America Bank & Trust Company, Atlanticus Services Corporation and The Bank of Missouri | May 14, 2019, Form 10-Q, exhibit 10.2(b) | ||
| 10.13(e) | Assignment and Assumption Agreement, dated March 24, 2018, among Mid America Bank & Trust Company, Fortiva Funding, LLC and The Bank of Missouri | May 14, 2019, Form 10-Q, exhibit 10.2(c) | ||
| 10.14* | Amended and Restated Operating Agreement of Access Financial Holdings, LLC, dated November 14, 2019 | March 30, 2020, Form 10-K, exhibit 10.15 | ||
| 21.1 | Subsidiaries of the Registrant | March 15, 2023, Form 10-K, exhibit 21.1 | ||
| 23.1 | Consent of BDO USA, P.C. | Filed herewith | ||
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) | Filed herewith | ||
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) | Filed herewith | ||
32.1 | Filed herewith | |||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | Filed herewith | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||
101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | Filed herewith | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
† | Management contract, compensatory plan or arrangement. |
(1) | Documents incorporated by reference from SEC filings made prior to June 2009 were filed under CompuCredit Corporation (now Atlanticus Services Corporation) (File No. 000-25751), our predecessor issuer. |
* | Certain portions of this document have been omitted because they are both not material and are the type that the Company treats as private or confidential. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on November 8, 2023.
Atlanticus Holdings Corporation | |||
By: | /s/ Jeffrey A. Howard | ||
Jeffrey A. Howard President and Chief Executive Officer | |||
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Atlanticus Holdings Corporation
Atlanta, Georgia
Opinion on Internal Control over Financial Reporting
We have audited Atlanticus Holdings Corporation’s (the “Company’s”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. In our report dated March 14, 2023, we expressed an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2022. Subsequent to March 14, 2023, Management revised its assessment of internal control over financial reporting due to the identification of a material weakness, as described below. Accordingly, our opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 expressed herein is different from that expressed in our previous report.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, shareholders’ equity and temporary equity and cash flows for our executive officeseach of the three years in the period ended December 31, 2022, and the primary operationsrelated notes and our report dated March 14, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of our Credit and Other Investments segment. We have sub-leased 255,110 square feetthe effectiveness of this office space. Our Auto Finance segment principally operates from 12,807 square feet of leased office space in Lake Mary, Florida, with additional offices and branch locations in various states and territories. Our operationsinternal control over financial reporting, included in the U.K., whichaccompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are withina public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our Creditaudit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and Other Investments segment, include leased spaceperform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in Crawley.all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our facilities are suitableaudit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness exists regarding management’s failure to design and implement management review controls that included sufficient documentary evidence to support the precision of review over the development of cash flow forecasts used in the calculation of the fair value estimate of loans, interest and fees receivable at fair value. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our business and that we will be able to lease or purchase additional facilities as our needs, if any, require.
| 2015 | High | Low |
| 1st Quarter 2015 | $3.10 | $2.08 |
| 2nd Quarter 2015 | $3.86 | $2.03 |
| 3rd Quarter 2015 | $4.02 | $3.40 |
| 4th Quarter 2015 | $3.64 | $2.88 |
| 2016 | High | Low |
| 1st Quarter 2016 | $3.48 | $2.90 |
| 2nd Quarter 2016 | $3.23 | $2.64 |
| 3rd Quarter 2016 | $3.15 | $2.72 |
| 4th Quarter 2016 | $3.50 | $2.71 |
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (1)(2) | |||||||||
| October 1- October 31 | — | $ | — | — | 4,912,401 | |||||||
| November 1 - November 30 | 24,799 | $ | 3.21 | — | 4,912,401 | |||||||
| December 1 - December 31 | — | $ | — | — | 4,912,401 | |||||||
| Total | 24,799 | $ | 3.21 | — | 4,912,401 | |||||||
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, P.C.
Atlanta, Georgia
March 14, 2023, except as to the effect of the material weakness, which is dated November 8, 2023.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Atlanticus Holdings Corporation
Atlanta, Georgia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Atlanticus Holdings Corporation (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, shareholders’ equity and temporary equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 14, 2023, and November 8, 2023, as to the effects of the material weakness as described in Management’s Annual Report on Internal Control over Financial Reporting, expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included therein, where certain terms (including trust, subsidiaryperforming procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and other entity namesperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial operatingstatements. Our audits also included evaluating the accounting principles used and statistical measures) have been defined.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from these expectations. For more information, see “Cautionary Notice Regarding Forward-Looking Statements”the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate(s) to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter(s) does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Loans, Interest and Fees Receivable, at Fair Value.
As described in Note 2 and Note 6 to the beginningCompany’s consolidated financial statements, the Company has outstanding loans, interest, and fees receivable, at fair value of this Report.
We identified the significant assumptions used by the Company in the discounted cash flow model used to estimate the fair value of outstanding loans, interest, and fees receivable, at fair value to be a critical audit matter. The significant assumptions impacting the fair value calculation include the timing of expected cash flows and discount rates applied. Auditing these significant assumptions involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters including the involvement of individuals with specialized skill and knowledge.
The primary procedures we performed to address this critical audit matter included:
● | Obtaining an understanding, assessing the design and testing the operating effectiveness of controls over the Company’s estimate of the fair value of loans, interest and fees receivable, including controls over management’s review of the significant assumptions and the completeness and accuracy of data used to develop the fair value calculation. | |
● | Testing the relevance and reliability of data related to the assumptions by agreeing data to internal and external third-party sources. | |
● | Evaluating the assumptions used for the timing of expected cash flows by comparing to historical performance to determine if such assumptions were relevant, reliable, and reasonable for the purpose used, including consideration of evidence (e.g., external economic data and peer data) that may be contradictory to the conclusions reached by management. | |
● | Involving professionals with specialized skills and knowledge in valuation to assist in the evaluation of the reasonableness of discount rates assumptions used by management to determine the fair value by comparing to market-based discount rates to determine if such assumptions were relevant, reliable, and reasonable for the purpose used, including consideration of evidence (e.g., external economic data, peer data, internal company data) that may be contradictory to the conclusion reached by management. |
/s/ BDO USA, P.C.
We have served as the Company’s auditor since 2002.
Atlanta, Georgia
March 14, 2023
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
December 31, | December 31, | |||||||
2022 | 2021 | |||||||
Assets | ||||||||
Unrestricted cash and cash equivalents (including $202.2 million and $209.5 million associated with variable interest entities at December 31, 2022 and December 31, 2021, respectively) | $ | 384,984 | $ | 409,660 | ||||
Restricted cash and cash equivalents (including $27.6 million and $75.9 million associated with variable interest entities at December 31, 2022 and December 31, 2021, respectively) | 48,208 | 96,968 | ||||||
Loans, interest and fees receivable: | ||||||||
Loans, interest and fees receivable, at fair value (including $1,735.9 million and $925.5 million associated with variable interest entities at December 31, 2022 and December 31, 2021, respectively) | 1,817,976 | 1,026,424 | ||||||
Loans, interest and fees receivable, gross (including $0 and $369.6 million associated with variable interest entities at December 31, 2022 and December 31, 2021, respectively) | 105,267 | 470,293 | ||||||
Allowances for uncollectible loans, interest and fees receivable (including $0 and $55.1 million associated with variable interest entities at December 31, 2022 and December 31, 2021, respectively) | (1,643 | ) | (57,201 | ) | ||||
Deferred revenue (including $0 and $8.2 million associated with variable interest entities at December 31, 2022 and December 31, 2021, respectively) | (16,190 | ) | (29,281 | ) | ||||
Net loans, interest and fees receivable | 1,905,410 | 1,410,235 | ||||||
Property at cost, net of depreciation | 10,013 | 7,335 | ||||||
Operating lease right-of-use assets | 11,782 | 4,016 | ||||||
Prepaid expenses and other assets | 27,417 | 15,649 | ||||||
Total assets | $ | 2,387,814 | $ | 1,943,863 | ||||
Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 44,332 | $ | 42,287 | ||||
Operating lease liabilities | 20,112 | 4,842 | ||||||
Notes payable, net (including $1,586.0 million and $1,223.4 million associated with variable interest entities at December 31, 2022 and December 31, 2021, respectively) | 1,653,306 | 1,278,864 | ||||||
Senior notes, net | 144,385 | 142,951 | ||||||
Income tax liability | 60,689 | 47,770 | ||||||
Total liabilities | 1,922,824 | 1,516,714 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Preferred stock, no par value, 10,000,000 shares authorized: | ||||||||
Series A preferred stock, 400,000 shares issued and outstanding at December 31, 2022 (liquidation preference - $40.0 million); 400,000 shares issued and outstanding at December 31, 2021 (Note 4) (1) | 40,000 | 40,000 | ||||||
Class B preferred units issued to noncontrolling interests (Note 4) | 99,950 | 99,650 | ||||||
Shareholders' Equity | ||||||||
Series B preferred stock, no par value, 3,204,640 shares issued and outstanding at December 31, 2022 (liquidation preference - $80.1 million); 3,188,533 shares issued and outstanding at December 31, 2021 (1) | — | — | ||||||
Common stock, no par value, 150,000,000 shares authorized: 14,453,415 and 14,804,408 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively | — | — | ||||||
Paid-in capital | 121,996 | 227,763 | ||||||
Retained earnings | 204,415 | 60,236 | ||||||
Total shareholders’ equity | 326,411 | 287,999 | ||||||
Noncontrolling interests | (1,371 | ) | (500 | ) | ||||
Total equity | 325,040 | 287,499 | ||||||
Total liabilities, preferred stock and equity | $ | 2,387,814 | $ | 1,943,863 | ||||
(1) Both the Series A preferred stock and the Series B preferred stock have no par value and are part of the same aggregate 10,000,000 shares authorized.
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share data)
For the Year Ended | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Revenue: | ||||||||||||
Consumer loans, including past due fees | $ | 786,235 | $ | 518,783 | $ | 410,616 | ||||||
Fees and related income on earning assets | 217,071 | 194,466 | 133,960 | |||||||||
Other revenue | 42,798 | 30,606 | 15,431 | |||||||||
Total operating revenue, net | 1,046,104 | 743,855 | 560,007 | |||||||||
Other non-operating revenue | 809 | 4,201 | 3,403 | |||||||||
Total revenue | 1,046,913 | 748,056 | 563,410 | |||||||||
Interest expense | (81,851 | ) | (54,127 | ) | (51,548 | ) | ||||||
Provision for losses on loans, interest and fees receivable recorded at amortized cost | (1,252 | ) | (36,455 | ) | (142,719 | ) | ||||||
Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value | (577,069 | ) | (218,733 | ) | (108,548 | ) | ||||||
Net margin | 386,741 | 438,741 | 260,595 | |||||||||
Operating expense: | ||||||||||||
Salaries and benefits | 43,063 | 34,024 | 29,079 | |||||||||
Card and loan servicing | 95,428 | 75,397 | 63,047 | |||||||||
Marketing and solicitation | 62,403 | 56,635 | 35,012 | |||||||||
Depreciation | 2,175 | 1,493 | 1,247 | |||||||||
Other | 34,400 | 22,180 | 17,819 | |||||||||
Total operating expense | 237,469 | 189,729 | 146,204 | |||||||||
Loss on repurchase and redemption of convertible senior notes | — | 29,439 | — | |||||||||
Income before income taxes | 149,272 | 219,573 | 114,391 | |||||||||
Income tax expense | (14,660 | ) | (41,784 | ) | (20,474 | ) | ||||||
Net income | 134,612 | 177,789 | 93,917 | |||||||||
Net loss attributable to noncontrolling interests | 985 | 113 | 203 | |||||||||
Net income attributable to controlling interests | 135,597 | 177,902 | 94,120 | |||||||||
Preferred dividends and discount accretion | (25,076 | ) | (22,363 | ) | (17,070 | ) | ||||||
Net income attributable to common shareholders | $ | 110,521 | $ | 155,539 | $ | 77,050 | ||||||
Net income attributable to common shareholders per common share—basic | $ | 7.55 | $ | 10.32 | $ | 5.32 | ||||||
Net income attributable to common shareholders per common share—diluted | $ | 5.83 | $ | 7.56 | $ | 3.95 | ||||||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity and Temporary Equity
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
Series B Preferred Stock | Common Stock | Temporary Equity | ||||||||||||||||||||||||||||||||||||||
Shares Issued | Amount | Shares Issued | Amount | Paid-In Capital | Retained Earnings (Deficit) | Noncontrolling Interests | Total Equity | Class B Preferred Units | Series A Preferred Stock | |||||||||||||||||||||||||||||||
Balance at December 31, 2019 | — | $ | — | 15,885,314 | $ | — | $ | 212,692 | $ | (211,786 | ) | $ | (571 | ) | $ | 335 | $ | 49,050 | $ | 40,000 | ||||||||||||||||||||
Accretion of discount associated with issuance of subsidiary equity | — | — | — | — | (300 | ) | — | — | (300 | ) | 300 | — | ||||||||||||||||||||||||||||
Preferred dividends | — | — | — | — | (16,770 | ) | — | — | (16,770 | ) | — | — | ||||||||||||||||||||||||||||
Stock option exercises and proceeds related thereto | — | — | 407,533 | — | 1,326 | — | — | 1,326 | — | — | ||||||||||||||||||||||||||||||
Compensatory stock issuances, net of forfeitures | — | — | 68,040 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Contributions by preferred shareholders | — | — | — | — | — | — | — | — | 50,000 | |||||||||||||||||||||||||||||||
Stock-based compensation costs | — | — | — | — | 1,355 | — | — | 1,355 | — | — | ||||||||||||||||||||||||||||||
Redemption and retirement of shares | — | — | (245,534 | ) | — | (3,353 | ) | — | — | (3,353 | ) | — | — | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 94,120 | (203 | ) | 93,917 | — | — | |||||||||||||||||||||||||||||
Balance at December 31, 2020 | — | $ | — | 16,115,353 | $ | — | $ | 194,950 | $ | (117,666 | ) | $ | (774 | ) | $ | 76,510 | $ | 99,350 | $ | 40,000 | ||||||||||||||||||||
Accretion of discount associated with issuance of subsidiary equity | — | — | — | — | (300 | ) | — | — | (300 | ) | 300 | — | ||||||||||||||||||||||||||||
Preferred dividends | — | — | — | — | (22,063 | ) | — | — | (22,063 | ) | — | — | ||||||||||||||||||||||||||||
Stock option exercises and proceeds related thereto | — | — | 526,015 | — | 1,885 | — | — | 1,885 | — | — | ||||||||||||||||||||||||||||||
Compensatory stock issuances, net of forfeitures | — | — | 56,654 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Issuance of series B preferred stock, net | 3,188,533 | — | — | — | 75,270 | — | — | 75,270 | — | — | ||||||||||||||||||||||||||||||
Contributions by owners of noncontrolling interests | — | — | — | — | — | — | 387 | 387 | — | — | ||||||||||||||||||||||||||||||
Stock-based compensation costs | — | — | — | — | 3,240 | — | — | 3,240 | — | — | ||||||||||||||||||||||||||||||
Redemption and retirement of shares | — | — | (1,893,614 | ) | — | (25,219 | ) | — | — | (25,219 | ) | — | — | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 177,902 | (113 | ) | 177,789 | — | ||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 3,188,533 | $ | — | 14,804,408 | $ | — | $ | 227,763 | $ | 60,236 | $ | (500 | ) | $ | 287,499 | $ | 99,650 | $ | 40,000 | |||||||||||||||||||||
See accompanying notes.
Series B Preferred Stock | Common Stock | Temporary Equity | ||||||||||||||||||||||||||||||||||||||
Shares Issued | Amount | Shares Issued | Amount | Paid-In Capital | Retained Earnings (Deficit) | Noncontrolling Interests | Total Equity | Class B Preferred Units | Series A Preferred Stock | |||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 3,188,533 | $ | — | 14,804,408 | $ | — | $ | 227,763 | $ | 60,236 | $ | (500 | ) | $ | 287,499 | $ | 99,650 | $ | 40,000 | |||||||||||||||||||||
Cumulative effects from adoption of the CECL standard | — | — | — | 8,582 | — | 8,582 | — | — | ||||||||||||||||||||||||||||||||
Accretion of discount associated with issuance of subsidiary equity | — | — | — | — | (300 | ) | — | — | (300 | ) | 300 | — | ||||||||||||||||||||||||||||
Discount associated with repurchase of preferred stock | — | — | — | — | 18 | — | — | 18 | — | — | ||||||||||||||||||||||||||||||
Preferred dividends | — | — | — | — | (24,794 | ) | — | — | (24,794 | ) | — | — | ||||||||||||||||||||||||||||
Stock option exercises and proceeds related thereto | — | — | 1,211,141 | — | 3,731 | — | — | 3,731 | — | — | ||||||||||||||||||||||||||||||
Compensatory stock issuances, net of forfeitures | — | — | 112,027 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Issuance of series B preferred stock, net | 19,607 | — | — | — | 437 | — | — | 437 | — | — | ||||||||||||||||||||||||||||||
Contributions by owners of noncontrolling interests | — | — | — | — | — | — | 114 | 114 | — | — | ||||||||||||||||||||||||||||||
Stock-based compensation costs | — | — | — | — | 4,167 | — | — | 4,167 | — | — | ||||||||||||||||||||||||||||||
Redemption and retirement of preferred shares | (3,500 | ) | — | — | — | (87 | ) | — | — | (87 | ) | — | — | |||||||||||||||||||||||||||
Redemption and retirement of common shares | — | — | (1,674,161 | ) | — | (88,939 | ) | — | — | (88,939 | ) | — | — | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 135,597 | (985 | ) | 134,612 | — | — | |||||||||||||||||||||||||||||
Balance at December 31, 2022 | 3,204,640 | $ | — | 14,453,415 | $ | — | $ | 121,996 | $ | 204,415 | $ | (1,371 | ) | $ | 325,040 | $ | 99,950 | $ | 40,000 | |||||||||||||||||||||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
For the Year Ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Operating activities | ||||||||||||
Net income | $ | 134,612 | $ | 177,789 | $ | 93,917 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation, amortization and accretion, net | 4,848 | 2,494 | 7,952 | |||||||||
Provision for losses on loans, interest and fees receivable | 1,252 | 36,455 | 142,719 | |||||||||
Interest expense from accretion of discount on notes | — | 453 | 585 | |||||||||
Income from accretion of merchant fees and discount associated with receivables purchases | (137,179 | ) | (166,266 | ) | (110,402 | ) | ||||||
Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value | 577,069 | 218,733 | 108,548 | |||||||||
Amortization of deferred loan costs | 5,101 | 5,114 | 5,137 | |||||||||
Income from equity-method investments | — | (16 | ) | (456 | ) | |||||||
Loss on repurchase and redemption of convertible senior notes | — | 29,439 | — | |||||||||
Stock-based compensation costs | 4,167 | 3,240 | 1,355 | |||||||||
Lease liability payments | (4,053 | ) | (10,470 | ) | (10,278 | ) | ||||||
Gain on sale of property | — | (599 | ) | — | ||||||||
Changes in assets and liabilities: | ||||||||||||
Increase in uncollected fees on earning assets | (252,704 | ) | (111,807 | ) | (43,319 | ) | ||||||
Increase in income tax liability | 10,412 | 21,838 | 20,147 | |||||||||
Increase in accounts payable and accrued expenses | 4,260 | 6,005 | (3,096 | ) | ||||||||
Other | (1,655 | ) | (36 | ) | (75 | ) | ||||||
Net cash provided by operating activities | 346,130 | 212,366 | 212,734 | |||||||||
Investing activities | ||||||||||||
Investments in equity-method investee | — | (398 | ) | — | ||||||||
Proceeds from equity-method investee | — | 560 | 998 | |||||||||
Proceeds from recoveries on charged off receivables | 32,361 | 14,065 | 13,781 | |||||||||
Investments in earning assets | (2,544,477 | ) | (2,018,760 | ) | (1,330,980 | ) | ||||||
Proceeds from earning assets | 1,836,183 | 1,535,500 | 1,024,375 | |||||||||
Sale of property | — | 1,100 | — | |||||||||
Purchases and development of property, net of disposals | (4,852 | ) | (7,089 | ) | (749 | ) | ||||||
Net cash used in investing activities | (680,785 | ) | (475,022 | ) | (292,575 | ) | ||||||
Financing activities | ||||||||||||
Noncontrolling interests contributions | 114 | 387 | 50,000 | |||||||||
Proceeds from issuance of Series B preferred stock, net of issuance costs | 437 | 75,270 | — | |||||||||
Preferred dividends | (24,793 | ) | (21,809 | ) | (13,561 | ) | ||||||
Proceeds from exercise of stock options | 3,731 | 1,885 | 1,326 | |||||||||
Purchase and retirement of outstanding stock | (89,008 | ) | (25,219 | ) | (3,353 | ) | ||||||
Proceeds from issuance of Senior notes, net of issuance costs | — | 142,832 | — | |||||||||
Proceeds from borrowings | 680,527 | 923,477 | 588,229 | |||||||||
Repayment of borrowings | (309,753 | ) | (586,495 | ) | (460,256 | ) | ||||||
Net cash provided by financing activities | 261,255 | 510,328 | 162,385 | |||||||||
Effect of exchange rate changes on cash | (36 | ) | (5 | ) | 23 | |||||||
Net (decrease) increase in cash and cash equivalents and restricted cash | (73,436 | ) | 247,667 | 82,567 | ||||||||
Cash and cash equivalents and restricted cash at beginning of period | 506,628 | 258,961 | 176,394 | |||||||||
Cash and cash equivalents and restricted cash at end of period | $ | 433,192 | $ | 506,628 | $ | 258,961 | ||||||
Supplemental cash flow information | ||||||||||||
Cash paid for interest | $ | 75,357 | $ | 47,608 | $ | 46,526 | ||||||
Net cash income tax payments | $ | 4,248 | $ | 19,946 | $ | 327 | ||||||
Increase in accrued and unpaid preferred dividends | $ | 1 | $ | 254 | $ | 3,209 | ||||||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2022, 2021 and 2020
1. | Description of Our Business |
Our accompanying consolidated financial statements include the accounts of Atlanticus Holdings Corporation (the “Company”) and those entities we control. We are a purpose driven financial technology company. We are primarily focused on facilitating consumer credit market. Currently, withinthrough the use of our financial technology and related services. Through our subsidiaries, we provide technology and other support services to lenders who offer an array of financial products and services to consumers who may have been declined by other providers of credit.
We are principally engaged in providing products and services to lenders in the U.S. and, in most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services. From time to time, we also purchase receivables portfolios from third parties. In these Notes to Consolidated Financial Statements, “receivables” or “loans” typically refer to receivables we have purchased from our bank partners or from third parties.
Within our Credit and Other Investmentsas a Service (“CaaS”) segment, we are applyingapply our technology solutions, in combination with the experiences gained, and infrastructure built from servicing over $25$30 billion in consumer loans over our 20-yearmore than 25 years of operating history, to support lenders who originate a range of consumer loan products.in offering more inclusive financial services. These products include retailprivate label credit personal loans, and general purpose credit cards marketedoriginated by lenders through multiple channels, including retail point-of-sale,retailers and healthcare providers, direct mail solicitation, Internet-baseddigital marketing and partnerships with third parties. In the point-of-sale channel, we partnerThe services of our bank partners are often extended to consumers who may not have access to financing options with retailers and service providers in various industries across the U.S. to allow them to provide credit to their customers for the purchase of a variety of goods and services including consumer electronics, furniture, elective medical procedures, educational services and home-improvements.larger financial institutions. Our flexible technology platform allowssolutions allow our lendingbank partners to integrate our paperless process and instant decision-makingdecisioning platform with the technologyexisting infrastructure of participating retailers, healthcare providers and other service providers. These services ofUsing our lending partners are often extended to consumers who may have been declined under traditional financing options. We specialize in supporting this “second-look” credit service. Additionally, we support lenders who market general purpose personal loans and credit cards directly to consumers through additional channels, which enables them to reach consumers through a diverse origination platform that includes direct mail, Internet-based marketing and our retail partnerships. Our technology platform and proprietary predictive analytics, enable lenders tocan make instant credit decisions utilizing hundreds of inputs from multiple sources and thereby offer credit to consumers overlooked by traditionalmany providers of credit. By offering a range of products through a multitude of channels, we enable lenders to provide the right type of credit, wheneverfinancing who focus exclusively on consumers with higher FICO scores. Atlanticus’ underwriting process is enhanced by artificial intelligence and wherever the consumer has a need. In most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services.
We also provide loan servicing, including risk management and customer service outsourcing, for third parties. Also through our Credit and Other Investments segment, we engage in testing and limited investment in consumer finance technology platforms as we seek to capitalize on our expertise and infrastructure.
Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.
In March 2020, a national emergency was declared under the National Emergencies Act due to a new strain of coronavirus ("COVID-19"). The COVID-19 pandemic has negatively impacted global supply chains and manage our expenses basedbusiness operations. In addition, rising inflation in 2021 and 2022 resulted in increased costs for many goods and services. As a result of persistently high inflation, interest rates have been on current product offerings (andthe rise and are expected to continue rising in recent years have significantly reduced our overhead infrastructure which was builtthe near term. The combination of rising inoculation rates in the U.S. population and the federal COVID-19 relief package contributed to accommodate higher managed receivables levelsincreased economic recovery in 2021; however, fiscal support of businesses and a much greater numberindividuals has declined. Russia’s invasion of accounts serviced). As such, we are maintaining our infrastructureUkraine has intensified supply chain disruptions and incurring increased overhead and other costs in order to expand point-of-sale and direct-to-consumer finance and credit solutions andheightened uncertainty surrounding the near-term outlook for the broader economy. The impacts of new product offerings that we believe have the potential to grow into our existing infrastructure and allow for long-term shareholder returns.
| Income | |||||||||||
| For the Year Ended December 31, | Increases (Decreases) | ||||||||||
| (In Thousands) | 2016 | 2015 | from 2015 to 2016 | ||||||||
| Total interest income | $ | 88,622 | $ | 69,917 | $ | 18,705 | |||||
| Interest expense | (20,207 | ) | (18,330 | ) | (1,877 | ) | |||||
| Fees and related income on earning assets: | |||||||||||
| Fees on credit products | 3,526 | 6,907 | (3,381 | ) | |||||||
| Changes in fair value of loans and fees receivable recorded at fair value | 1,587 | 6,265 | (4,678 | ) | |||||||
| Changes in fair value of notes payable associated with structured financings recorded at fair value | 3,773 | 1,262 | 2,511 | ||||||||
| Rental revenue | 8,235 | 36,032 | (27,797 | ) | |||||||
| Other | 195 | 2,716 | (2,521 | ) | |||||||
| Other operating income: | |||||||||||
| Servicing income | 4,087 | 5,004 | (917 | ) | |||||||
| Other income | 320 | 553 | (233 | ) | |||||||
| Gain on repurchase of convertible senior notes | 1,151 | — | 1,151 | ||||||||
| Equity in income equity-method investee | 2,150 | 2,780 | (630 | ) | |||||||
| Total | $ | 93,439 | $ | 113,106 | $ | (19,667 | ) | ||||
| Net recovery of losses upon charge off of loans and fees receivable recorded at fair value | (22,096 | ) | (38,878 | ) | (16,782 | ) | |||||
| Provision for losses on loans and fees receivable recorded at net realizable value | 53,721 | 26,608 | (27,113 | ) | |||||||
| Other operating expenses: | |||||||||||
| Salaries and benefits | 24,026 | 19,825 | (4,201 | ) | |||||||
| Card and loan servicing | 30,662 | 37,071 | 6,409 | ||||||||
| Marketing and solicitation | 3,171 | 2,235 | (936 | ) | |||||||
| Depreciation, primarily related to rental merchandise | 7,477 | 40,778 | 33,301 | ||||||||
| Other | 8,834 | 21,932 | 13,098 | ||||||||
| Net (loss) income | (6,341 | ) | 1,706 | (8,047 | ) | ||||||
| Net loss attributable to noncontrolling interests | 6 | 7 | (1 | ) | |||||||
| Net (loss) income attributable to controlling interests | (6,335 | ) | 1,713 | (8,048 | ) | ||||||
| At or for the Three Months Ended | |||||||||||||||||||||||
| 2016 | 2015 | ||||||||||||||||||||||
| Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | ||||||||||||||||
| Period-end managed receivables | $245,007 | $221,683 | $201,406 | $155,425 | $152,528 | $151,055 | $142,338 | $140,660 | |||||||||||||||
| Percent 30 or more days past due | 11.8 | % | 10.9 | % | 8.2 | % | 9.7 | % | 11.5 | % | 10.5 | % | 11.8 | % | 10.1 | % | |||||||
| Percent 60 or more days past due | 8.1 | % | 7.3 | % | 5.3 | % | 7.1 | % | 7.9 | % | 7.2 | % | 8.8 | % | 7.5 | % | |||||||
| Percent 90 or more days past due | 5.2 | % | 4.7 | % | 3.4 | % | 5.1 | % | 5.4 | % | 5.0 | % | 4.9 | % | 5.4 | % | |||||||
| Average managed receivables | $236,103 | $216,951 | $188,128 | $152,831 | $152,983 | $143,946 | $139,401 | $146,792 | |||||||||||||||
| Total yield ratio | 32.6 | % | 33.5 | % | 36.8 | % | 35.4 | % | 35.2 | % | 41.3 | % | 38.1 | % | 38.3 | % | |||||||
| Combined gross charge-off ratio | 21.1 | % | 13.3 | % | 14.9 | % | 18.2 | % | 16.8 | % | 21.5 | % | 17.4 | % | 23.8 | % | |||||||
| Adjusted charge-off ratio | 17.8 | % | 10.7 | % | 11.7 | % | 14.1 | % | 12.9 | % | 16.5 | % | 13.2 | % | 19.2 | % | |||||||
| At or for the Three Months Ended | |||||||||||||||||||||||||||||||
| 2016 | 2015 | ||||||||||||||||||||||||||||||
| Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | ||||||||||||||||||||||||
| Period-end managed receivables | $ | 79,683 | $ | 76,615 | $ | 80,903 | $ | 78,415 | $ | 77,833 | $ | 75,428 | $ | 78,342 | $ | 73,371 | |||||||||||||||
| Percent 30 or more days past due | 14.2 | % | 12.7 | % | 12.3 | % | 10.2 | % | 14.0 | % | 13.3 | % | 13.5 | % | 10.7 | % | |||||||||||||||
| Percent 60 or more days past due | 5.4 | % | 4.5 | % | 3.9 | % | 4.2 | % | 5.5 | % | 5.3 | % | 5.6 | % | 4.4 | % | |||||||||||||||
| Percent 90 or more days past due | 2.4 | % | 1.8 | % | 1.5 | % | 2.2 | % | 2.5 | % | 2.6 | % | 2.5 | % | 2.1 | % | |||||||||||||||
| Average managed receivables | $ | 78,209 | $ | 78,089 | $ | 80,213 | $ | 78,122 | $ | 76,413 | $ | 75,987 | $ | 77,182 | $ | 72,258 | |||||||||||||||
| Total yield ratio | 37.8 | % | 39.1 | % | 38.0 | % | 37.3 | % | 38.3 | % | 38.2 | % | 37.6 | % | 39.2 | % | |||||||||||||||
| Combined gross charge-off ratio | 2.6 | % | 2.8 | % | 3.1 | % | 2.7 | % | 3.3 | % | 3.0 | % | 1.9 | % | 0.5 | % | |||||||||||||||
| Recovery ratio | 1.6 | % | 1.0 | % | 1.5 | % | 1.3 | % | 1.6 | % | 1.3 | % | 0.6 | % | 1.5 | % | |||||||||||||||
| Revolving credit facility (expiring October 29, 2017) that is secured by certain receivables and restricted cash | $ | 34.7 | |
| Revolving credit facility (expiring November 1, 2018) that is secured by the financial and operating assets of our CAR operations | 29.2 | ||
| Revolving credit facility (expiring December 31, 2019) that is secured by certain receivables and restricted cash | 19.5 | ||
| Senior secured term loan from related parties (expiring November 22, 2017) that is secured by certain assets of the Company with an annual interest rate equal to 9.0% | 40.0 | ||
| Total | $ | 123.4 | |
| December 31, 2016 | December 31, 2015 | ||||||
| Assets | |||||||
| Unrestricted cash and cash equivalents | $ | 76,052 | $ | 51,033 | |||
| Restricted cash and cash equivalents | 16,589 | 20,547 | |||||
| Loans and fees receivable: | |||||||
| Loans and fees receivable, at fair value | 15,648 | 26,706 | |||||
| Loans and fees receivable, gross | 290,697 | 180,144 | |||||
| Allowances for uncollectible loans and fees receivable | (43,275 | ) | (21,474 | ) | |||
| Deferred revenue | (23,639 | ) | (16,721 | ) | |||
| Net loans and fees receivable | 239,431 | 168,655 | |||||
| Rental merchandise, net of depreciation | 27 | 4,666 | |||||
| Property at cost, net of depreciation | 3,829 | 5,686 | |||||
| Investment in equity-method investee | 6,725 | 10,123 | |||||
| Deposits | 505 | 825 | |||||
| Prepaid expenses and other assets | 20,831 | 19,194 | |||||
| Total assets | $ | 363,989 | $ | 280,729 | |||
| Liabilities | |||||||
| Accounts payable and accrued expenses | $ | 86,768 | $ | 51,722 | |||
| Notes payable, at face value | 141,589 | 90,000 | |||||
| Notes payable to related parties | 40,000 | 20,000 | |||||
| Notes payable associated with structured financings, at fair value | 12,276 | 20,970 | |||||
| Convertible senior notes | 61,810 | 64,783 | |||||
| Income tax liability | 15,769 | 22,303 | |||||
| Total liabilities | 358,212 | 269,778 | |||||
| Commitments and contingencies (Note 11) | |||||||
| Equity | |||||||
| Common stock, no par value, 150,000,000 shares authorized: 15,348,086 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2016; and 15,332,041 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2015 | — | — | |||||
| Additional paid-in capital | 211,646 | 211,083 | |||||
| Accumulated other comprehensive loss | — | (600 | ) | ||||
| Retained deficit | (205,859 | ) | (199,524 | ) | |||
| Total shareholders’ equity | 5,787 | 10,959 | |||||
| Noncontrolling interests | (10 | ) | (8 | ) | |||
| Total equity | 5,777 | 10,951 | |||||
| Total liabilities and equity | $ | 363,989 | $ | 280,729 | |||
| For the Year Ended December 31, | |||||||
| 2016 | 2015 | ||||||
| Interest income: | |||||||
| Consumer loans, including past due fees | $ | 88,389 | $ | 69,830 | |||
| Other | 233 | 87 | |||||
| Total interest income | 88,622 | 69,917 | |||||
| Interest expense | (20,207 | ) | (18,330 | ) | |||
| Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable | 68,415 | 51,587 | |||||
| Fees and related income on earning assets | 17,316 | 53,182 | |||||
| Net recovery of charge off of loans and fees receivable recorded at fair value | 22,096 | 38,878 | |||||
| Provision for losses on loans and fees receivable recorded at net realizable value | (53,721 | ) | (26,608 | ) | |||
| Net interest income, fees and related income on earning assets | 54,106 | 117,039 | |||||
| Other operating income: | |||||||
| Servicing income | 4,087 | 5,004 | |||||
| Other income | 320 | 553 | |||||
| Gain on repurchase of convertible senior notes | 1,151 | — | |||||
| Equity in income of equity-method investee | 2,150 | 2,780 | |||||
| Total other operating income | 7,708 | 8,337 | |||||
| Other operating expense: | |||||||
| Salaries and benefits | 24,026 | 19,825 | |||||
| Card and loan servicing | 30,662 | 37,071 | |||||
| Marketing and solicitation | 3,171 | 2,235 | |||||
| Depreciation, primarily related to rental merchandise | 7,477 | 40,778 | |||||
| Other | 8,834 | 21,932 | |||||
| Total other operating expense | 74,170 | 121,841 | |||||
| (Loss) income before income taxes | (12,356 | ) | 3,535 | ||||
| Income tax benefit (expense) | 6,015 | (1,829 | ) | ||||
| Net (loss) income | (6,341 | ) | 1,706 | ||||
| Net loss attributable to noncontrolling interests | 6 | 7 | |||||
| Net (loss) income attributable to controlling interests | $ | (6,335 | ) | $ | 1,713 | ||
| Net (loss) income attributable to controlling interests per common share—basic | $ | (0.46 | ) | $ | 0.12 | ||
| Net (loss) income attributable to controlling interests per common share—diluted | $ | (0.46 | ) | $ | 0.12 | ||
| For the Year Ended December 31, | |||||||
| 2016 | 2015 | ||||||
| Net (loss) income | $ | (6,341 | ) | $ | 1,706 | ||
| Other comprehensive (loss) income: | |||||||
| Foreign currency translation adjustment | — | (50 | ) | ||||
| Reclassifications of foreign currency translation adjustment to consolidated statements of operations | 600 | 1,849 | |||||
| Income tax expense related to other comprehensive income | — | (558 | ) | ||||
| Comprehensive (loss) income | (5,741 | ) | 2,947 | ||||
| Comprehensive loss attributable to noncontrolling interests | 6 | 7 | |||||
| Comprehensive (loss) income attributable to controlling interests | $ | (5,735 | ) | $ | 2,954 | ||
| Common Stock | ||||||||||||||||||||||||||
| Shares Issued | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Deficit | Noncontrolling Interests | Total Equity | ||||||||||||||||||||
| Balance at December 31, 2014 | 15,308,971 | $ | — | $ | 210,519 | $ | (1,841 | ) | $ | (201,237 | ) | $ | 1 | $ | 7,442 | |||||||||||
| Stock options exercises and proceeds related thereto | 3,334 | 8 | — | — | — | 8 | ||||||||||||||||||||
| Compensatory stock issuances, net of forfeitures | 106,334 | — | — | — | — | — | — | |||||||||||||||||||
| Distributions to owners of noncontrolling interests | — | — | — | — | — | (2 | ) | (2 | ) | |||||||||||||||||
| Amortization of deferred stock-based compensation costs | — | — | 846 | — | — | — | 846 | |||||||||||||||||||
| Redemption and retirement of shares | (86,598 | ) | — | (259 | ) | — | — | — | (259 | ) | ||||||||||||||||
| Tax effects of stock-based compensation costs | — | — | (31 | ) | — | — | — | (31 | ) | |||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 1,241 | 1,713 | (7 | ) | 2,947 | ||||||||||||||||||
| Balance at December 31, 2015 | 15,332,041 | $ | — | $ | 211,083 | $ | (600 | ) | $ | (199,524 | ) | $ | (8 | ) | $ | 10,951 | ||||||||||
| Stock options exercises and proceeds related thereto | 5,999 | — | 14 | — | — | — | 14 | |||||||||||||||||||
| Compensatory stock issuances, net of forfeitures | 321,068 | — | — | — | — | — | — | |||||||||||||||||||
| Contributions from owners of noncontrolling interests | — | — | — | — | — | 4 | 4 | |||||||||||||||||||
| Amortization of deferred stock-based compensation costs | — | — | 1,416 | — | — | — | 1,416 | |||||||||||||||||||
| Redemption and retirement of shares | (311,022 | ) | — | (949 | ) | — | — | — | (949 | ) | ||||||||||||||||
| Tax effects of stock-based compensation plans | — | — | 82 | — | — | — | 82 | |||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 600 | (6,335 | ) | (6 | ) | (5,741 | ) | ||||||||||||||||
| Balance at December 31, 2016 | 15,348,086 | $ | — | $ | 211,646 | $ | — | $ | (205,859 | ) | $ | (10 | ) | $ | 5,777 | |||||||||||
| For the Year Ended December 31, | |||||||
| 2016 | 2015 | ||||||
| Operating activities | |||||||
| Net (loss) income | $ | (6,341 | ) | $ | 1,706 | ||
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | |||||||
| Depreciation of rental merchandise | 5,273 | 38,565 | |||||
| Depreciation, amortization and accretion, net | 2,204 | 2,000 | |||||
| Losses upon charge off of loans and fees receivable recorded at fair value | 6,110 | 7,440 | |||||
| Provision for losses on loans and fees receivable | 53,721 | 26,608 | |||||
| Interest expense from accretion of discount on convertible senior notes | 515 | 481 | |||||
| Income from accretion of discount associated with receivables purchases | (41,953 | ) | (40,777 | ) | |||
| Unrealized gain on loans and fees receivable and underlying notes payable held at fair value | (5,360 | ) | (7,527 | ) | |||
| Income from equity-method investments | (2,150 | ) | (2,780 | ) | |||
| Gain on repurchase of convertible senior notes | (1,151 | ) | — | ||||
| Changes in assets and liabilities: | |||||||
| Increase in uncollected fees on earning assets | (4,687 | ) | (2,962 | ) | |||
| (Decrease) increase in income tax liability | (6,452 | ) | 719 | ||||
| Decrease in deposits | 320 | 764 | |||||
| Increase in accounts payable and accrued expenses | 41,436 | 12,752 | |||||
| Additions to rental merchandise | (634 | ) | (29,053 | ) | |||
| Other | (1,836 | ) | (7,072 | ) | |||
| Net cash provided by operating activities | 39,015 | 864 | |||||
| Investing activities | |||||||
| Decrease in restricted cash | 3,869 | 2,167 | |||||
| Proceeds from equity-method investee | 5,548 | 8,490 | |||||
| Investments in earning assets | (381,212 | ) | (271,061 | ) | |||
| Proceeds from earning assets | 296,304 | 275,825 | |||||
| Purchases and development of property, net of disposals | (349 | ) | (884 | ) | |||
| Net cash (used in) provided by investing activities | (75,840 | ) | 14,537 | ||||
| Financing activities | |||||||
| Noncontrolling interests contributions (distributions), net | 4 | (2 | ) | ||||
| Purchase and retirement of outstanding stock | (949 | ) | (259 | ) | |||
| Proceeds from borrowings | 242,388 | 164,897 | |||||
| Repayment of borrowings | (177,984 | ) | (168,208 | ) | |||
| Net cash provided by (used in) financing activities | 63,459 | (3,572 | ) | ||||
| Effect of exchange rate changes on cash | (1,615 | ) | (721 | ) | |||
| Net increase in unrestricted cash | 25,019 | 11,108 | |||||
| Unrestricted cash and cash equivalents at beginning of period | 51,033 | 39,925 | |||||
| Unrestricted cash and cash equivalents at end of period | $ | 76,052 | $ | 51,033 | |||
| Supplemental cash flow information | |||||||
| Cash paid for interest | $ | 19,481 | $ | 17,922 | |||
| Net cash income tax payments | $ | 437 | $ | 1,117 | |||
| Supplemental non-cash information | |||||||
| Issuance of stock options and restricted stock | $ | 2,310 | $ | 532 | |||
2. | |
Significant Accounting Policies and Consolidated Financial Statement Components |
The following is a summary of significant accounting policies we follow in preparing our consolidated financial statements, as well as a description of significant components of our consolidated financial statements.
Basis of Presentation and Use of Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during each reporting period. We base these estimates on information available to us as of the date of the financial statements. Actual results could
We have eliminated all significant intercompany balances and transactions for financial reporting purposes.
Unrestricted cash and cash equivalents consist of cash, money market investments and overnight deposits. We consider all highly liquid cash investments with low interest rate risk and original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market. We maintain unrestricted cash and cash equivalents for general operating purposes and to meet our longer term debt obligations. The majorityWe maintain our cash and cash equivalents in accounts at regulated domestic financial institutions in amounts that exceed FDIC insured amounts of these cash balances are not insured.
Restricted Cash
Restricted cash as of December 31, 2016 2022 and 20152021 includes certain collections on loans, interest and fees receivable, the cash balances of which are required to be distributed to noteholders under our debt facilities. Our restricted cash balances also include minimum cash balances held in accounts at the request of certain of our business partners.
Loans, Interest and Fees Receivable
We maintain two categories of Loans, Interest and fees receivable include loansFees Receivable on our consolidated balance sheets: those that are carried at fair value (Loans, interest and fees receivable, at fair valuevalue) and loansthose that are carried at net amortized cost (Loans, interest and fees receivable, gross.
We adopted Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments on January 1, 2022. This ASU requires the use of an impairment model (the current expected credit loss (“CECL”) model) that is based on expected rather than incurred losses. The ASU also allows for a one-time fair value election for receivables. Upon adoption, we elected the fair value option for all remaining loans receivable associated with our private label credit and general purpose credit card platform previously measured at amortized cost and recorded an increase to our Allowances for uncollectible loans, interest and fees receivable for our remaining Loans, interest and fees receivable associated with our Auto Finance segment. The adoption of CECL resulted in an increase to our opening balance of retained earnings of $8.6 million.
Loans, Interest and Fees Receivable, at Fair Value.
Loans, interest and fees receivable held at fair value represent receivablesUnder the fair value option, direct loan origination fees (such as annual and merchant fees) are taken into income when billed to the consumer or upon loan acquisition and direct loan origination costs are expensed in the period incurred. The Company estimates the fair value of the loans using a discounted cash flow model, which considers various unobservable inputs such as remaining cumulative charge-offs, remaining cumulative prepayments, average life and discount rate. The Company re-evaluates the fair value of loans receivable at the close of each measurement period. Changes in the fair value of loans, interest and fees receivable are recorded as a component of "Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value" in the consolidated statements of income in the period of the fair value changes. Changes in the fair value of loans, interest and fees receivable recorded at fair value include the impact of current period charge-offs associated with these receivables.
Further details concerning our loans, interest and fees receivable held at fair value are presented within Note 6, “Fair Values of Assets and Liabilities.”
Loans, Interest and Fees Receivable, Gross
We show both an allowance for uncollectible loans, interest and fees receivable and unearned fees (or “deferred revenue”) for our loans, interest and fees receivable gross (i.e., as opposed to thosethat are not carried at fair value).value. Upon adoption of CECL, the allowance is an estimate of the expected losses (rather than incurred losses) inherent within loans, interest and fees receivable that the Company does not report at fair value. Our loans, interest and fees receivable consist of smaller-balance, homogeneous loans, divided into two portfolio segments: Credit and Other Investments; and Auto Finance. Eachloans. While each of these categories has unique features, they share many of the same credit risk characteristics and thus share a similar approach to the establishment of an allowance for credit losses. Each portfolio segments is further divided into pools based on common characteristics such as contract or acquisition channel. For each pool, we determine the necessary allowance for uncollectible loans, interest and fees receivable by analyzing some or all of the following unique toattributes for each type of receivable pool: historical loss rates;rates; current delinquency and roll-rate trends;trends; vintage analyses based on the number of months an account has been in existence;existence; the effects of changes in the economy on our customers;consumers; changes in underwriting criteria;criteria; and estimated recoveries. We may further reduce the expected charge-off, taking into consideration specific dealer level reserves which may allow us to offset our losses and, in the case of secured loans, the impact of collateral available to offset a potential loss.
A considerable amount of judgment is required to assess the ultimate amount of uncollectible loans, interest and fees receivable, and we continuously evaluate and update our methodologies to determine the most appropriate allowance necessary. We may individually evaluate a receivable or pool of receivables for impairment (as indicated in the table below) if circumstances indicate that the receivable or pool of receivables may be at higher risk for non-performancenonperformance than other receivables. This may occurreceivables (e.g., if a particular retail or auto-finance partner has indications of non-performance (such as a bankruptcy) that could impact the underlying pool of receivables we purchased from the partner.partner).
Certain of our loans, interest and fees receivable (including those receivables associated with our private label credit and general purpose credit card receivables prior to their adoption of fair value accounting) also contain components of deferred revenue. For example,revenue including merchant fees on the purchases of receivables for our point-of-saleprivate label credit receivables, loan discounts on the purchase of our auto finance receivables and annual fee billings for our general purpose credit card receivables. Our private label credit, general purpose credit card and auto finance loans, interest and fees receivable include principal balances and associated fees and interest due from customers which are earned each period a loan is outstanding, net of the unearned portion of merchant fees, annual fees and loan discounts which we recognize over the life of each loan using the effective interest method.discounts. As of December 31, 2016 2022 and December 31, 2015, 2021, the weighted average
As a result of the COVID-19 pandemic and subsequent declaration of a national emergency in March 2020 under the National Emergencies Act and the associated government policy responses and corresponding inflation, certain consumers have been offered the ability to defer their payment without penalty during the national emergency period. In March 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” ("COVID-19 Guidance"). The COVID-19 Guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. In accordance with the COVID-19 Guidance, certain consumers negatively impacted by COVID-19 have been provided short-term payment deferrals and fee waivers. Receivables enrolled in these short-term payment deferrals continue to accrue interest and their delinquency status will not change through the deferment period. Through December 31, 2022 we continued to actively work with consumers that indicated hardship as a result of COVID-19 and inflation pressure; however, the number of impacted consumers is a small part of our overall receivable base. In order to establish appropriate reserves for this population, we considered various factors such as subsequent payment behavior and additional requests by the consumer for further deferrals or hardship claims.
Our CaaS segment consists of two classes of receivable: credit cards and other unsecured lending products. A roll-forward (in millions) of our allowance for uncollectible loans, interest and fees receivable by class of receivable is as follows:
For the Year Ended December 31, 2022 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans, interest and fees receivable: | ||||||||||||||||
Balance at beginning of period | $ | (43.4 | ) | $ | (1.4 | ) | $ | (12.4 | ) | $ | (57.2 | ) | ||||
Cumulative effects from adoption of fair value under the CECL standard | 43.4 | — | 12.4 | 55.8 | ||||||||||||
Cumulative effects from adoption of the CECL standard | — | (0.2 | ) | — | (0.2 | ) | ||||||||||
Provision for credit losses | — | (1.3 | ) | — | (1.3 | ) | ||||||||||
Charge-offs | — | 2.6 | — | 2.6 | ||||||||||||
Recoveries | — | (1.3 | ) | — | (1.3 | ) | ||||||||||
Balance at end of period | $ | — | $ | (1.6 | ) | $ | — | $ | (1.6 | ) | ||||||
As of December 31, 2022 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans, interest and fees receivable: | ||||||||||||||||
Balance at end of period individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | ||||||||
Balance at end of period collectively evaluated for impairment | $ | — | $ | (1.6 | ) | $ | — | $ | (1.6 | ) | ||||||
Loans, interest and fees receivable: | ||||||||||||||||
Loans, interest and fees receivable, gross | $ | — | $ | 105.3 | $ | — | $ | 105.3 | ||||||||
Loans, interest and fees receivable individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | ||||||||
Loans, interest and fees receivable collectively evaluated for impairment | $ | — | $ | 105.3 | $ | — | $ | 105.3 | ||||||||
For the Year Ended December 31, 2021 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans, interest and fees receivable: | ||||||||||||||||
Balance at beginning of period | $ | (88.2 | ) | $ | (1.7 | ) | $ | (35.1 | ) | $ | (125.0 | ) | ||||
Provision for credit losses | (34.9 | ) | (0.2 | ) | (1.4 | ) | (36.5 | ) | ||||||||
Charge-offs | 88.6 | 1.5 | 31.1 | 121.2 | ||||||||||||
Recoveries | (8.9 | ) | (1.0 | ) | (7.0 | ) | (16.9 | ) | ||||||||
Balance at end of period | $ | (43.4 | ) | $ | (1.4 | ) | $ | (12.4 | ) | $ | (57.2 | ) | ||||
| For the Year Ended December 31, 2016 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
| Allowance for uncollectible loans and fees receivable: | ||||||||||||||||
| Balance at beginning of period | $ | (1.2 | ) | $ | (1.7 | ) | $ | (18.6 | ) | $ | (21.5 | ) | ||||
| Provision for loan losses | 0.7 | (2.6 | ) | (51.8 | ) | (53.7 | ) | |||||||||
| Charge offs | 1.8 | 3.3 | 32.6 | 37.7 | ||||||||||||
| Recoveries | (2.7 | ) | (1.1 | ) | (2.0 | ) | (5.8 | ) | ||||||||
| Balance at end of period | $ | (1.4 | ) | $ | (2.1 | ) | $ | (39.8 | ) | $ | (43.3 | ) | ||||
| As of December 31, 2016 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
| Allowance for uncollectible loans and fees receivable: | ||||||||||||||||
| Balance at end of period individually evaluated for impairment | $ | — | $ | (0.3 | ) | $ | (0.3 | ) | $ | (0.6 | ) | |||||
| Balance at end of period collectively evaluated for impairment | $ | (1.4 | ) | $ | (1.8 | ) | $ | (39.5 | ) | $ | (42.7 | ) | ||||
| Loans and fees receivable: | ||||||||||||||||
| Loans and fees receivable, gross | $ | 11.0 | $ | 77.1 | $ | 202.6 | $ | 290.7 | ||||||||
| Loans and fees receivable individually evaluated for impairment | $ | — | $ | 0.7 | $ | 0.3 | $ | 1.0 | ||||||||
| Loans and fees receivable collectively evaluated for impairment | $ | 11.0 | $ | 76.4 | $ | 202.3 | $ | 289.7 | ||||||||
| For the Year Ended December 31, 2015 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
| Allowance for uncollectible loans and fees receivable: | ||||||||||||||||
| Balance at beginning of period | $ | (2.7 | ) | $ | (1.2 | ) | $ | (16.1 | ) | $ | (20.0 | ) | ||||
| Provision for loan losses | (1.7 | ) | (2.2 | ) | (22.7 | ) | (26.6 | ) | ||||||||
| Charge offs | 3.7 | 2.6 | 21.5 | 27.8 | ||||||||||||
| Recoveries | (0.5 | ) | (0.9 | ) | (1.3 | ) | (2.7 | ) | ||||||||
| Balance at end of period | $ | (1.2 | ) | $ | (1.7 | ) | $ | (18.6 | ) | $ | (21.5 | ) | ||||
| As of December 31, 2015 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
| Allowance for uncollectible loans and fees receivable: | ||||||||||||||||
| Balance at end of period individually evaluated for impairment | $ | — | $ | (0.1 | ) | $ | (1.3 | ) | $ | (1.4 | ) | |||||
| Balance at end of period collectively evaluated for impairment | $ | (1.2 | ) | $ | (1.6 | ) | $ | (17.3 | ) | $ | (20.1 | ) | ||||
| Loans and fees receivable: | ||||||||||||||||
| Loans and fees receivable, gross | $ | 5.2 | $ | 76.0 | $ | 98.9 | $ | 180.1 | ||||||||
| Loans and fees receivable individually evaluated for impairment | $ | — | $ | 0.2 | $ | 1.5 | $ | 1.7 | ||||||||
| Loans and fees receivable collectively evaluated for impairment | $ | 5.2 | $ | 75.8 | $ | 97.4 | $ | 178.4 | ||||||||
As of December 31, 2021 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans, interest and fees receivable: | ||||||||||||||||
Balance at end of period individually evaluated for impairment | $ | — | $ | (0.1 | ) | $ | — | $ | (0.1 | ) | ||||||
Balance at end of period collectively evaluated for impairment | $ | (43.4 | ) | $ | (1.3 | ) | $ | (12.4 | ) | $ | (57.1 | ) | ||||
Loans, interest and fees receivable: | ||||||||||||||||
Loans, interest and fees receivable, gross | $ | 259.5 | $ | 94.6 | $ | 116.2 | $ | 470.3 | ||||||||
Loans, interest and fees receivable individually evaluated for impairment | $ | — | $ | 0.4 | $ | — | $ | 0.4 | ||||||||
Loans, interest and fees receivable collectively evaluated for impairment | $ | 259.5 | $ | 94.2 | $ | 116.2 | $ | 469.9 | ||||||||
For the Year Ended December 31, 2020 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans, interest and fees receivable: | ||||||||||||||||
Balance at beginning of period | $ | (121.3 | ) | $ | (1.6 | ) | $ | (63.4 | ) | $ | (186.3 | ) | ||||
Provision for credit losses | (112.1 | ) | (2.0 | ) | (28.6 | ) | (142.7 | ) | ||||||||
Charge-offs | 155.1 | 3.0 | 72.1 | 230.2 | ||||||||||||
Recoveries | (9.9 | ) | (1.1 | ) | (15.2 | ) | (26.2 | ) | ||||||||
Balance at end of period | $ | (88.2 | ) | $ | (1.7 | ) | $ | (35.1 | ) | $ | (125.0 | ) | ||||
As of December 31, 2020 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans, interest and fees receivable: | ||||||||||||||||
Balance at end of period individually evaluated for impairment | $ | — | $ | (0.3 | ) | $ | — | $ | (0.3 | ) | ||||||
Balance at end of period collectively evaluated for impairment | $ | (88.2 | ) | $ | (1.4 | ) | $ | (35.1 | ) | $ | (124.7 | ) | ||||
Loans, interest and fees receivable: | ||||||||||||||||
Loans, interest and fees receivable, gross | $ | 364.2 | $ | 93.2 | $ | 210.2 | $ | 667.6 | ||||||||
Loans, interest and fees receivable individually evaluated for impairment | $ | — | $ | 2.3 | $ | — | $ | 2.3 | ||||||||
Loans, interest and fees receivable collectively evaluated for impairment | $ | 364.2 | $ | 90.9 | $ | 210.2 | $ | 665.3 | ||||||||
Delinquent loans, interest and fees receivable reflect the principal, fee and interest components of loans we did not collect on or prior to the contractual due date. Amounts we believe we will not ultimately collect are included as a component in our overall allowance for uncollectible loans, interest and fees receivable. We discontinue charging interest
Recoveries, noted above, consist of amounts received from the efforts of third-party collectors and fees for mostthrough the sale of our credit products when loans and fees receivable become contractually 90 or more days past due. We charge off our Credit and Other Investments and Auto Finance segment receivables when they become contractually more than 180 days past due or 120 days past due for the direct-to-consumer personal loan product. For all of our products, we charge off receivables within 30 days of notification and confirmation of a customer’s bankruptcy or death. However, in some cases of death, we do not charge off receivables if there is a surviving, contractually liable individual or an estate large enoughcharged-off accounts to pay the debt in full.
We consider loan delinquencies a key indicator of credit quality because this measure provides the best ongoing estimate of how a particular class of receivables is performing. An aging of our delinquent loans, interest and fees receivable, gross (in millions) by class of receivable as of
As of December 31, 2022 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
30-59 days past due | $ | — | $ | 8.5 | $ | — | $ | 8.5 | ||||||||
60-89 days past due | — | 3.0 | — | 3.0 | ||||||||||||
90 or more days past due | — | 2.1 | — | 2.1 | ||||||||||||
Delinquent loans, interest and fees receivable, gross | — | 13.6 | — | 13.6 | ||||||||||||
Current loans, interest and fees receivable, gross | — | 91.7 | — | 91.7 | ||||||||||||
Total loans, interest and fees receivable, gross | $ | — | $ | 105.3 | $ | — | $ | 105.3 | ||||||||
Balance of loans greater than 90-days delinquent still accruing interest and fees | $ | — | $ | 1.7 | $ | — | $ | 1.7 | ||||||||
As of December 31, 2021 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
30-59 days past due | $ | 7.3 | $ | 7.0 | $ | 3.3 | $ | 17.6 | ||||||||
60-89 days past due | 6.9 | 2.5 | 2.6 | 12.0 | ||||||||||||
90 or more days past due | 17.9 | 1.8 | 6.8 | 26.5 | ||||||||||||
Delinquent loans, interest and fees receivable, gross | 32.1 | 11.3 | 12.7 | 56.1 | ||||||||||||
Current loans, interest and fees receivable, gross | 227.4 | 83.3 | 103.5 | 414.2 | ||||||||||||
Total loans, interest and fees receivable, gross | $ | 259.5 | $ | 94.6 | $ | 116.2 | $ | 470.3 | ||||||||
Balance of loans greater than 90-days delinquent still accruing interest and fees | $ | — | $ | 1.5 | $ | — | $ | 1.5 | ||||||||
As of December 31, 2020 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
30-59 days past due | $ | 12.4 | $ | 7.6 | $ | 5.1 | $ | 25.1 | ||||||||
60-89 days past due | 8.0 | 2.8 | 3.8 | 14.6 | ||||||||||||
90 or more days past due | 19.9 | 2.1 | 9.5 | 31.5 | ||||||||||||
Delinquent loans, interest and fees receivable, gross | 40.3 | 12.5 | 18.4 | 71.2 | ||||||||||||
Current loans, interest and fees receivable, gross | 323.9 | 80.7 | 191.8 | 596.4 | ||||||||||||
Total loans, interest and fees receivable, gross | $ | 364.2 | $ | 93.2 | $ | 210.2 | $ | 667.6 | ||||||||
Balance of loans greater than 90-days delinquent still accruing interest and fees | $ | — | $ | 1.5 | $ | — | $ | 1.5 | ||||||||
| Balance at December 31, 2016 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
| 30-59 days past due | $ | 0.2 | $ | 7.0 | $ | 8.2 | $ | 15.4 | ||||||||
| 60-89 days past due | 0.2 | 2.4 | 6.7 | 9.3 | ||||||||||||
| 90 or more days past due | 0.4 | 1.9 | 11.4 | 13.7 | ||||||||||||
| Delinquent loans and fees receivable, gross | 0.8 | 11.3 | 26.3 | 38.4 | ||||||||||||
| Current loans and fees receivable, gross | 10.2 | 65.8 | 176.3 | 252.3 | ||||||||||||
| Total loans and fees receivable, gross | $ | 11.0 | $ | 77.1 | $ | 202.6 | $ | 290.7 | ||||||||
| Balance of loans 90 or more days past due and still accruing interest and fees | $ | — | $ | 1.5 | $ | — | $ | 1.5 | ||||||||
| Balance at December 31, 2015 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | |||||||||||
| 30-59 days past due | $ | 0.2 | $ | 6.9 | $ | 4.4 | $ | 11.5 | |||||||
| 60-89 days past due | 0.1 | 2.2 | 3.1 | 5.4 | |||||||||||
| 90 or more days past due | 0.4 | 1.8 | 6.5 | 8.7 | |||||||||||
| Delinquent loans and fees receivable, gross | 0.7 | 10.9 | 14.0 | 25.6 | |||||||||||
| Current loans and fees receivable, gross | 4.5 | 65.1 | 84.9 | 154.5 | |||||||||||
| Total loans and fees receivable, gross | $ | 5.2 | $ | 76.0 | $ | 98.9 | $ | 180.1 | |||||||
| Balance of loans 90 or more days past due and still accruing interest and fees | $ | — | $ | 1.5 | $ | — | $ | 1.5 | |||||||
Troubled Debt Restructurings
As part of Depreciation
The following table details by class of receivable, the number and amount of modified loans, including TDRs that have been re-aged:
As of | ||||||||||||||||||||||||
December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
Private label credit | General purpose credit card | Private label credit | General purpose credit card | Private label credit | General purpose credit card | |||||||||||||||||||
Number of TDRs | 24,594 | 171,729 | 14,919 | 39,322 | 12,394 | 37,784 | ||||||||||||||||||
Number of TDRs that have been re-aged | 2,499 | 28,598 | 812 | 2,035 | 2,788 | 7,846 | ||||||||||||||||||
Amount of TDRs on non-accrual status (in thousands) | $ | 31,350 | $ | 119,785 | $ | 17,152 | $ | 25,154 | $ | 14,537 | $ | 26,989 | ||||||||||||
Amount of TDRs on non-accrual status above that have been re-aged (in thousands) | $ | 4,606 | $ | 24,440 | $ | 1,205 | $ | 1,553 | $ | 4,662 | $ | 6,890 | ||||||||||||
Carrying value of TDRs (in thousands) | $ | 18,827 | $ | 70,519 | $ | 11,173 | $ | 15,502 | $ | 9,583 | $ | 14,287 | ||||||||||||
TDRs - Performing (carrying value, in thousands)* | $ | 15,001 | $ | 59,735 | $ | 8,797 | $ | 13,387 | $ | 7,420 | $ | 11,855 | ||||||||||||
TDRs - Nonperforming (carrying value, in thousands)* | $ | 3,826 | $ | 10,784 | $ | 2,376 | $ | 2,115 | $ | 2,163 | $ | 2,432 | ||||||||||||
We do not separately reserve or impair these receivables outside of our contracts with them. We includegeneral reserve process.
The Company modified 232,086, 65,125 and 60,908 accounts in the amount of $230.4 million, $70.0 million and $70.3 million during the twelve month periods ended December 31, 2022, 2021 and 2020, respectively, that qualified as TDRs. The following table details by class of receivable, the number of accounts and balance of loans that completed a “Rental revenue” line itemmodification (including those that were classified as TDRs) within our table below detailing our feesthe prior twelve months and related income on earning assets category on our consolidated statements of operations.
Twelve Months Ended | ||||||||||||||||||||||||
December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
Private label credit | General purpose credit card | Private label credit | General purpose credit card | Private label credit | General purpose credit card | |||||||||||||||||||
Number of accounts | 7,049 | 28,714 | 3,119 | 7,765 | 3,065 | 7,665 | ||||||||||||||||||
Loan balance at time of charge off (in thousands) | $ | 11,302 | $ | 22,679 | $ | 4,642 | $ | 6,455 | $ | 4,352 | $ | 6,745 | ||||||||||||
Property at Cost, Net of Depreciation
We capitalize costs related to internal development and implementation of software used in our operating activities in accordance with applicable accounting literature. These capitalized costs consist almost exclusively of fees paid to third-partythird-party consultants to develop code and install and test software specific to our needs and to customize purchased software to maximize its benefit to us.
We record our property at cost less accumulated depreciation or amortization. We compute depreciation expense using the straight-line method over the estimated useful lives of our assets, which are approximately five5 years for furniture, fixtures and equipment, and three3 years for computers and software. We amortize leasehold improvements over the shorter of their estimated useful lives or the terms of their respective underlying leases.
We periodically review our property to determine if it is impaired. We incurred $0.6 million ofno impairment costs in 20162022 and no such impairment costs in 2015.2021.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets include amounts paid to third parties for marketing and other services. These prepaidservices as well as amounts owed to us by third parties. Prepaid amounts are expensed as the underlying related services are performed. Also included are (1)(1) commissions paid associated with our various office leases which we amortize into expense over the lease terms, (2) amounts due associated with reimbursements in respect of one of our portfolios and (3)(2) ongoing deferred costs associated with service contracts.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses reflect both the billed and unbilled amounts owed at the end of a period for services rendered. Also included within accounts payable
Revenue Recognition and accrued expenses are amounts ultimately owed to consumers associatedRevenue from Contracts with reimbursements in respect of one of our portfolios.
Consumer Loans, Including Past Due Fees
Consumer loans, including past due fees reflect interest income, including finance charges, and late fees on loans in accordance with the terms of the related cardholdercustomer agreements. Premiums and discounts paid orDiscounts received associated with a loanauto loans that are generallynot included as part of our Fair Value Receivables are deferred and amortized over the average life of the related loans using the effective interest method. Premiums, discounts, annual fees and merchant fees paid or received associated with Fair Value Receivables are recognized upon receivable acquisition. Finance charges and fees, net of amounts that we consider uncollectible, are included in loans, interest and fees receivable and revenue when the fees are earned.
Fees and Related Income on Earning Assets
Fees and related income on earning assets primarily include: (1)include fees associated with our credit products, including the receivables underlying our U.S. point-of-sale financethe private label and direct-to-consumer activities,general purpose credit cards we service, and our historicallegacy credit card receivables; (2) changes inreceivables which include the fair valuerecognition of loansannual fee billings and cash advance fees receivable recorded at fair value; (3) changes in fair value of notes payable associated with structured financings recorded at fair value; (4) revenues associated with rent payments on rental merchandise; and (5) gains or losses associated with our investments in securities.
Fees are assessed on credit card accounts underlying our credit card receivables according to the terms of the related cardholder agreements and except for annual membership fees, we recognize these fees as income when they are charged to the cardholders’customers’ accounts. We accrete annual membership fees associated with our credit card receivables into income on a straight-line basis over the cardholder privilege period. Similarly, fees on our other credit products are recognized when earned, which coincides with the time they are charged to the customer’s account. Fees and related income on earning assets, net of amounts that we consider uncollectible, are included in loans, interest and fees receivable and revenue when the fees are earned.
| Year ended December 31, | |||||||
| 2016 | 2015 | ||||||
| Fees on credit products | $ | 3,526 | $ | 6,907 | |||
| Changes in fair value of loans and fees receivable recorded at fair value | 1,587 | 6,265 | |||||
| Changes in fair value of notes payable associated with structured financings recorded at fair value | 3,773 | 1,262 | |||||
| Rental revenue | 8,235 | 36,032 | |||||
| Other | 195 | 2,716 | |||||
| Total fees and related income on earning assets | $ | 17,316 | $ | 53,182 | |||
Other revenue
Other revenue includes revenues associated with interchange revenues, servicing income and ancillary product offerings (primarily associated with a credit protection program offered by our issuing bank partner). We recognize these fees as income in the period earned.
Other non-operating revenue
Other non-operating revenue includes revenues associated with investments in equity method investees and other revenues not associated with our ongoing business operations.
Revenue from Contracts with Customers
The majority of our revenue is earned from financial instruments and is not included within the scope of ASU No.2014-09, "Revenue from Contracts with Customers". We have determined that revenue from contracts with customers would primarily consist of interchange revenues in our CaaS segment and servicing revenue and other customer-related fees in both our CaaS segment and our Auto Finance segment. Interchange fees are earned when our customer's cards are used over established card networks. We earn a portion of the interchange fee the card networks charge merchants for the transaction. Servicing revenue is generated by meeting contractual performance obligations related to the collection of amounts due on receivables, whichand is settled with the customer net of our fee. Service charges and other customer related fees are separately statedearned from customers based on the occurrence of specific services. None of these revenue streams result in Net recoveryan ongoing obligation beyond what has already been rendered. Revenue from these contracts with customers is included as a component of (losses upon) charge off of loans and fees receivable recorded at fair valueOther revenue on our consolidated statements of operations. See Note 6, “Fair Valuesincome. Components (in thousands) of Assets and Liabilities,” for further discussionour revenue from contracts with customers is as follows:
For the Year Ended December 31, 2022 | CaaS | Auto Finance | Total | |||||||||
Interchange revenues, net (1) | $ | 24,926 | $ | — | $ | 24,926 | ||||||
Servicing income | 3,259 | 888 | 4,147 | |||||||||
Service charges and other customer related fees | 13,658 | 67 | 13,725 | |||||||||
Total revenue from contracts with customers | $ | 41,843 | $ | 955 | $ | 42,798 | ||||||
For the Year Ended December 31, 2021 | CaaS | Auto Finance | Total | |||||||||
Interchange revenues, net (1) | $ | 18,134 | $ | — | $ | 18,134 | ||||||
Servicing income | 1,871 | 1,224 | 3,095 | |||||||||
Service charges and other customer related fees | 9,317 | 60 | 9,377 | |||||||||
Total revenue from contracts with customers | $ | 29,322 | $ | 1,284 | $ | 30,606 | ||||||
For the Year Ended December 31, 2020 | CaaS | Auto Finance | Total | |||||||||
Interchange revenues, net (1) | $ | 9,500 | $ | — | $ | 9,500 | ||||||
Servicing income | 1,187 | 994 | 2,181 | |||||||||
Service charges and other customer related fees | 3,685 | 65 | 3,750 | |||||||||
Total revenue from contracts with customers | $ | 14,372 | $ | 1,059 | $ | 15,431 | ||||||
(1) Interchange revenue is presented net of customer reward expense.
Card and Loan Servicing Expenses
Card and loan servicing costs primarily include collections and customer service expenses. Within this category of expenses are personnel, service bureau, cardholder correspondence and other direct costs associated with our collections and customer service efforts. Card and loan servicing costs also include outsourced collections and customer service expenses. We expense card and loan servicing costs as we incur them, with the exception of prepaid costs, which we expense over respective service periods.
Marketing and Solicitation Expenses
We expense product solicitation costs, including printing, credit bureaus, list processing, telemarketing, postage, and Internetinternet marketing fees, as we incur these costs or expend resources.
Loss on repurchase and redemption of convertible senior notes
In periods where we repurchased or redeemed outstanding 5.875% convertible senior notes (“convertible senior notes”), we recorded any discount or premium paid for the repurchase or redemption (including accrued interest) relative to the amortized book value of the notes. For the year ended December 31, 2021, we repurchased or redeemed $33.8 million in face amount of our convertible senior notes for $54.3 million in cash (including accrued interest). The repurchase and redemption resulted in an aggregate loss of approximately $29.4 million (including the convertible senior notes’ applicable share of deferred costs, which were written off in connection with the repurchase). Upon acquisition, the notes were retired.
In June 2016, the FASB issued Accounting Standards Update (“ASU”("ASU") 2016-13,2016-13, Measurement of Credit Losses on Financial Instruments. The guidance requires an assessment of credit losses based on expected rather than incurred losses.losses (known as the current expected credit loss model). This generally will result in the recognition of allowances for losses earlier than under current accounting guidance for trade and other receivables, held to maturity debt securities and other instruments. The standard willFASB has added several technical amendments (ASU 2018-19,2019-04,2019-10 and 2019-11) to clarify technical aspects of the guidance and applicability to specific financial instruments or transactions. In May 2019, the FASB issued ASU 2019-05, which allows entities to measure assets in the scope of ASC 326-20, except held to maturity securities, using the fair value option when they adopt the new credit impairment standard. The election can be made on an instrument by instrument basis. We adopted ASU 2016-13 beginning January 1, 2022, using the modified retrospective method of adoption. We elected the fair value option for all receivables in our CaaS segment previously measured at amortized cost. For all other receivables, we recorded an increase to our Allowances for uncollectible loans, interest and fees receivable using the current expected credit loss model. As a result of our adoption, we increased our Loans, interest and fees receivable (net of the related revaluation), at fair value by $315.0 million (with a corresponding decrease to Loans, interest and fees receivable, gross of $375.7 million), a decrease to our Allowances for uncollectible loans, interest and fees receivable of $55.6 million, a decrease to our Deferred revenue of $15.6 million, a decrease to Accounts payable and accrued expenses of $600 thousand, an increase to our deferred tax liability of $2.5 million, and an increase to our retained earnings of $8.6 million. The aforementioned impacts associated with our adoption of ASU 2016-13 primarily relate to those assets within our CaaS segment with an immaterial impact to our Auto Finance segment receivables.
In March 2020, the FASB issued ASU No.2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance provides an optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The ASU can be adopted on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for annual and interim periods beginning after no later than December 15, 2019, 1, 2022, with early adoption permitted. While weIn January 2021, FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which refines the scope of ASC 848 and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate reform. We have not yet adopted this ASU and are continuing to evaluateevaluating the effect that ASU 2016-13 will haveof adopting this new accounting guidance. Based on our consolidated financial statements andpreliminary analysis, the London Interbank Offered Rate ("LIBOR") impacts us in limited circumstances primarily related disclosures, this standard is expected to result in an increase to our allowance for loan losses given the change to expected losses for the estimated life of the financial asset. The extent of the increaseexisting debt agreements and will depend on the asset quality of the portfolio, and economic conditions and forecasts atnot have a material impact upon adoption.
On March 2016, 31, 2022, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting.2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the requirement thataccounting guidance for troubled debt restructurings by creditors while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. This guidance requires an investment qualifies for use of the equity method asentity to determine whether a resultmodification results in a new loan or a continuation of an increase inexisting loan. Additionally, the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively, as if the equity method had been in effect during all previous periods that the investment had been held. The ASU requires that the costdisclosure of acquiring the additional interest in the investee should be combined with the current basisperiod gross writeoffs by year of the investor’s previously held interest and the equity method of accounting should be adopted as of the date the investment becomes qualifiedorigination for equity method accounting. No retroactive adjustment of the investment is required. The ASU also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings, the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.financing receivables. The ASU is effective January 1, 2017. for the Company for fiscal years beginning after December 15, 2022. The impactdisclosures required by this ASU are required for receivables held at amortized cost. As the significant majority of the Company's receivables are held at fair value, the Company does not believe the adoption of this authoritative guidance is not expected to result in a material impact on our consolidated financial statements.
3. | |
Segment Reporting |
We operate primarily within
one industry consisting of two reportable segments by which we manage our business. Our two reportable segments are:As of both
December 31,We measure the profitability of our reportable segments based on their income after allocation of specific costs and corporate overhead; however, our segment results do not reflect any charges for internal capital allocations among our segments. Overhead costs are allocated based on headcounts and other applicable measures to better align costs with the associated revenues.
Summary operating segment information (in thousands) is as follows:
Year Ended December 31, 2022 | CaaS | Auto Finance | Total | |||||||||
Revenue: | ||||||||||||
Consumer loans, including past due fees | $ | 751,052 | $ | 35,183 | $ | 786,235 | ||||||
Fees and related income on earning assets | 216,989 | 82 | 217,071 | |||||||||
Other revenue | 41,843 | 955 | 42,798 | |||||||||
Other non-operating revenue | 698 | 111 | 809 | |||||||||
Total revenue | 1,010,582 | 36,331 | 1,046,913 | |||||||||
Interest expense | (79,875 | ) | (1,976 | ) | (81,851 | ) | ||||||
Provision for losses on loans, interest and fees receivable recorded at amortized cost | — | (1,252 | ) | (1,252 | ) | |||||||
Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value | (577,069 | ) | — | (577,069 | ) | |||||||
Net margin | $ | 353,638 | $ | 33,103 | $ | 386,741 | ||||||
Income before income taxes | $ | 146,577 | $ | 2,695 | $ | 149,272 | ||||||
Income tax expense | $ | (14,122 | ) | $ | (538 | ) | $ | (14,660 | ) | |||
Total assets | $ | 2,295,092 | $ | 92,722 | $ | 2,387,814 | ||||||
Year Ended December 31, 2021 | CaaS | Auto Finance | Total | |||||||||
Revenue: | ||||||||||||
Consumer loans, including past due fees | $ | 485,241 | $ | 33,542 | $ | 518,783 | ||||||
Fees and related income on earning assets | 194,392 | 74 | 194,466 | |||||||||
Other revenue | 29,322 | 1,284 | 30,606 | |||||||||
Other non-operating revenue | 4,135 | 66 | 4,201 | |||||||||
Total revenue | 713,090 | 34,966 | 748,056 | |||||||||
Interest expense | (53,093 | ) | (1,034 | ) | (54,127 | ) | ||||||
Provision for losses on loans, interest and fees receivable recorded at amortized cost | (36,262 | ) | (193 | ) | (36,455 | ) | ||||||
Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value | (218,733 | ) | — | (218,733 | ) | |||||||
Net margin | $ | 405,002 | $ | 33,739 | $ | 438,741 | ||||||
Income before income taxes | $ | 208,926 | $ | 10,647 | $ | 219,573 | ||||||
Income tax expense | $ | (39,221 | ) | $ | (2,563 | ) | $ | (41,784 | ) | |||
Total assets | $ | 1,859,950 | $ | 83,913 | $ | 1,943,863 | ||||||
Year Ended December 31, 2020 | CaaS | Auto Finance | Total | |||||||||
Revenue: | ||||||||||||
Consumer loans, including past due fees | $ | 378,817 | $ | 31,799 | $ | 410,616 | ||||||
Fees and related income on earning assets | 133,891 | 69 | 133,960 | |||||||||
Other revenue | 14,372 | 1,059 | 15,431 | |||||||||
Other non-operating revenue | 3,360 | 43 | 3,403 | |||||||||
Total revenue | 530,440 | 32,970 | 563,410 | |||||||||
Interest expense | (50,387 | ) | (1,161 | ) | (51,548 | ) | ||||||
Provision for losses on loans, interest and fees receivable recorded at amortized cost | (140,683 | ) | (2,036 | ) | (142,719 | ) | ||||||
Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value | (108,548 | ) | — | (108,548 | ) | |||||||
Net margin | $ | 230,822 | $ | 29,773 | $ | 260,595 | ||||||
Income before income taxes | $ | 105,429 | $ | 8,962 | $ | 114,391 | ||||||
Income tax expense | $ | (18,257 | ) | $ | (2,217 | ) | $ | (20,474 | ) | |||
Total assets | $ | 1,124,618 | $ | 82,596 | $ | 1,207,214 | ||||||
| Year ended December 31, 2016 | Credit and Other Investments | Auto Finance | Total | |||||||||
| Interest income: | ||||||||||||
| Consumer loans, including past due fees | $ | 59,614 | $ | 28,775 | $ | 88,389 | ||||||
| Other | 233 | — | 233 | |||||||||
| Total interest income | 59,847 | 28,775 | 88,622 | |||||||||
| Interest expense | (19,011 | ) | (1,196 | ) | (20,207 | ) | ||||||
| Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable | $ | 40,836 | $ | 27,579 | $ | 68,415 | ||||||
| Fees and related income on earning assets | $ | 17,214 | $ | 102 | $ | 17,316 | ||||||
| Servicing income | $ | 3,115 | $ | 972 | $ | 4,087 | ||||||
| Gain on repurchase of convertible senior notes | $ | 1,151 | $ | — | $ | 1,151 | ||||||
| Depreciation of rental merchandise | $ | (5,273 | ) | $ | — | $ | (5,273 | ) | ||||
| Equity in income of equity-method investee | $ | 2,150 | $ | — | $ | 2,150 | ||||||
| (Loss) income before income taxes | $ | (18,915 | ) | $ | 6,559 | $ | (12,356 | ) | ||||
| Income tax benefit (expense) | $ | 8,390 | $ | (2,375 | ) | $ | 6,015 | |||||
| Total assets | $ | 295,018 | $ | 68,971 | $ | 363,989 | ||||||
| Year ended December 31, 2015 | Credit and Other Investments | Auto Finance | Total | |||||||||
| Interest income: | ||||||||||||
| Consumer loans, including past due fees | $ | 42,140 | $ | 27,690 | $ | 69,830 | ||||||
| Other | 87 | — | 87 | |||||||||
| Total interest income | 42,227 | 27,690 | 69,917 | |||||||||
| Interest expense | (17,130 | ) | (1,200 | ) | (18,330 | ) | ||||||
| Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable | $ | 25,097 | $ | 26,490 | $ | 51,587 | ||||||
| Fees and related income on earning assets | $ | 50,817 | $ | 2,365 | $ | 53,182 | ||||||
| Servicing income | $ | 4,136 | $ | 868 | $ | 5,004 | ||||||
| Depreciation of rental merchandise | $ | (38,565 | ) | $ | — | $ | (38,565 | ) | ||||
| Equity in income of equity-method investee | $ | 2,780 | $ | — | $ | 2,780 | ||||||
| (Loss) income before income taxes | $ | (4,689 | ) | $ | 8,224 | $ | 3,535 | |||||
| Income tax benefit (expense) | $ | 500 | $ | (2,329 | ) | $ | (1,829 | ) | ||||
| Total assets | $ | 211,227 | $ | 69,502 | $ | 280,729 | ||||||
4. | |
Shareholders’ Equity and Preferred Stock |
During the years ended December 31, 20162022, 2021 and 2015,2020, we repurchased and contemporaneously retired
During 2021, we had 1,459,233 loaned shares of common stock outstanding, at
In June and July 2021, we issued an aggregate of 3,188,533 shares of 7.625% Series B Cumulative Perpetual Preferred Stock, liquidation preference of $25.00 per share (the “Series B Preferred Stock”), for net proceeds of approximately $76.5 million after deducting underwriting discounts and commissions, but before deducting expenses and the structuring fee. We pay cumulative cash dividends on the Series B Preferred Stock, when and as declared by our Board of Directors, in the amount of $1.90625 per share each year, which is equivalent to 7.625% of the $25.00 liquidation preference per share.
During the year ending December 31, 2016 consists2022, we sold 19,607 shares of our 66.7%Series B Preferred Stock under our “at-the-market” offering program (the “ATM Program”) for net proceeds of $0.4 million. During the year ended December 31, 2022, we repurchased and contemporaneously retired 3,500 shares of Series B Preferred Stock at an aggregate cost of $69,000. For further information regarding the ATM Program, see Note 15 “ATM Program.”
5. | Redeemable Preferred Stock |
On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provided for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. On December 27, 2019, the Company issued 400,000 shares of its Series A Preferred Stock with an aggregate initial liquidation preference of $40.0 million, in exchange for full satisfaction of the $40.0 million that the Company owed Dove under the Loan and Security Agreement. Dividends on the preferred stock are 6% per annum (cumulative, noncompounding) and are payable as declared, and in preference to any common stock dividends, in cash. The Series A Preferred Stock is perpetual and has no maturity date. The Company may, at its option, redeem the shares of Series A Preferred Stock on or after January 1, 2025 at a redemption price equal to $100 per share, plus any accumulated and unpaid dividends. At the request of holders of a majority of the shares of Series A Preferred Stock, the Company shall offer to redeem all of the Series A Preferred Stock at a redemption price equal to $100 per share, plus any accumulated and unpaid dividends, at the option of the holders thereof, on or after January 1, 2024. Upon the election by the holders of a majority of the shares of Series A Preferred Stock, each share of the Series A Preferred Stock is convertible into the number of shares of the Company’s common stock as is determined by dividing (i) the sum of (a) $100 and (b) any accumulated and unpaid dividends on such share by (ii) an initial conversion price equal to $10 per share, subject to certain adjustment in certain circumstances to prevent dilution. Given the redemption rights contained within the Series A Preferred Stock, we account for the outstanding preferred stock as temporary equity in the consolidated balance sheets. Dividends paid on the Series A Preferred Stock are deducted from Net income attributable to controlling interests to derive Net income attributable to common shareholders. The common stock issuable upon conversion of Series A Preferred Stock is included in our calculation of Net income attributable to common shareholders per share—diluted. See Note 13, “Net Income Attributable to Controlling Interests Per Common Share” for more information.
Dove is a limited liability company owned by three trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of one of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other two trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.
On November 14, 2019, a wholly-owned subsidiary issued 50.5 million Class B preferred units at a purchase price of $1.00 per unit to an unrelated third party. The units carry a 16% preferred return to be paid quarterly, with up to 6 percentage points of the preferred return to be paid through the issuance of additional units or cash, at our election. The units have both call and put rights and are also subject to various covenants including a minimum book value, which if not satisfied, could allow for the securities to be put back to the subsidiary. A holder of the Class B Preferred Units may, at its election, require the Company to redeem part or all of such holder’s Class B Preferred Units for cash on October 14, 2024. In March 2020, the subsidiary issued an additional 50.0 million Class B preferred units under the same terms. The proceeds from the transaction are being used for general corporate purposes. We have included the issuance of these Class B preferred units as temporary noncontrolling interest in a joint venture formedon the consolidated balance sheets. Dividends paid on the Class B preferred units are deducted from Net income attributable to purchase a credit card receivable portfolio.controlling interests to derive Net income attributable to common shareholders. See Note 13, “Net Income Attributable to Controlling Interests Per Common Share” for more information.
| As of | |||||||
| December 31, 2016 | December 31, 2015 | ||||||
| Loans and fees receivable, at fair value | $ | 9,650 | $ | 14,470 | |||
| Total assets | $ | 10,291 | $ | 15,237 | |||
| Total liabilities | $ | 204 | $ | 54 | |||
| Members’ capital | $ | 10,087 | $ | 15,183 | |||
| Year ended December 31, | |||||||
| 2016 | 2015 | ||||||
| Net interest income, fees and related income on earning assets | $ | 3,249 | $ | 4,200 | |||
| Net income | $ | 2,714 | $ | 3,447 | |||
| Net income attributable to our equity investment in investee | $ | 2,150 | $ | 2,780 | |||
6. | |
Fair Values of Assets and Liabilities |
As previously discussed, we adopted ASU 2016-13, electing the fair value option for all remaining loans receivable associated with respect to our investments in equity securities as well as ourprivate label credit and general purpose credit card loans and fees receivable portfolios, the retained interests in which we historically recordedplatform previously measured at fair value under securitization structures that were off balance sheet prior to accounting rules changes requiring their consolidation into our financial statements. With respect to our equity securities, we decided to carry these assets at fair value due to our intent to invest and redeem these investments with expected frequency. For our credit card loans and fees receivable portfolios underlying our formerly off-balance-sheet securitization structures, we elected the fair value option because, in contrast to substantially all of our other assets, we had significant experiences in determiningamortized cost. We estimate the fair value of these assets in connection with our historicalreceivables using a discounted cash flow model, and reevaluate the fair value accounting forof our retained interestsFair Value Receivables at the end of each quarter. Additionally, we may adjust our models to reflect macroeconomic events. With the aforementioned market impacts of COVID-19 and related economic impacts, we continue to include market degradation in theirour models to reflect the possibility of delinquency rates increasing in the near term (and the corresponding increase in charge-offs and decrease in payments) above the level that historical and current trends would suggest.
We update our fair value analysis each quarter, with changes since the prior reporting period reflected as a component of "Changes in fair value of loans, interest and fees receivable and notes payable associated securitization structures. Because we electedwith structured financings recorded at fair value" in the consolidated statements of income. Changes in interest rates, credit spreads, discount rates, realized and projected credit losses and cash flow timing will lead to account forchanges in the credit card receivables underlying our formerly off-balance-sheet securitization structuresfair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value and therefore impact earnings.
Fair value differs from amortized cost accounting rules require that we account forin the notes payable issued by such securitization structures at fair value as well. For our other credit card receivables that have never been owned by our formerly off-balance-sheet securitization structures, we have not elected the fair value option, and we record such receivables at net realizable value within loans and fees receivable, net on our consolidated balance sheets.
• | Receivables and notes are recorded at their fair value, not their principal and fee balance or cost basis; |
• | The fair value of the loans takes into consideration net charge-offs for the remaining life of the loans with no separate allowance for credit loss calculation; |
• | Certain fee billings (such as annual or merchant fees) and expenses of loans and notes are no longer deferred but recognized (when billed or incurred) in income or expense, respectively; |
• | The net present value of cash flows associated with future fee billings on existing receivables are included in fair value; |
• | Changes in the fair value of loans and notes impact net margins; and |
• | Net charge-offs are recognized as they occur rather than through the establishment of an allowance and provision for losses for those loans, interest and fees receivable carried at amortized cost. |
For all of our other debt other than the notes payable underlying our formerly off-balance sheet credit card securitization structures,receivables, we have not elected the fair value option. Nevertheless, pursuant to applicable requirements, we include disclosures of the fair value of thisthese other debtreceivables to the extent practicable within the disclosures below. Additionally, we have other liabilities, associated with consolidated legacy credit card securitization trusts, that we are required to carry at fair value in our consolidated financial statements, and they also are addressed within the disclosures below.
Where applicable as noted above, we account for our financial assets and liabilities at fair value based upon a three-tieredthree-tiered valuation system. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Where inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input that is significant to the fair value measurement in its entirety.
Valuations and Techniques for Assets
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The table below summarizes (in thousands) by fair value hierarchy the
| Assets – As of December 31, 2016 (1) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount of Assets | ||||||||||||
| Loans and fees receivable, net for which it is practicable to estimate fair value | $ | — | $ | — | $ | 248,171 | $ | 223,783 | ||||||||
| Loans and fees receivable, at fair value | $ | — | $ | — | $ | 15,648 | $ | 15,648 | ||||||||
| Assets – As of December 31, 2015 (1) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount of Assets | ||||||||||||
| Loans and fees receivable, net for which it is practicable to estimate fair value | $ | — | $ | — | $ | 161,199 | $ | 141,949 | ||||||||
| Loans and fees receivable, at fair value | $ | — | $ | — | $ | 26,706 | $ | 26,706 | ||||||||
Assets – As of December 31, 2022 (1) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount of Assets | ||||||||||||
Loans, interest and fees receivable, net for which it is practicable to estimate fair value and which are carried at net amortized cost | $ | — | $ | — | $ | 94,968 | $ | 87,434 | ||||||||
Loans, interest and fees receivable, at fair value | $ | — | $ | — | $ | 1,817,976 | $ | 1,817,976 | ||||||||
Assets – As of December 31, 2021 (1) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount of Assets | ||||||||||||
Loans, interest and fees receivable, net for which it is practicable to estimate fair value and which are carried at net amortized cost | $ | — | $ | — | $ | 402,380 | $ | 383,811 | ||||||||
Loans, interest and fees receivable, at fair value | $ | — | $ | — | $ | 1,026,424 | $ | 1,026,424 | ||||||||
(1) | For cash, deposits and |
For those asset classes above that are required to be carried at fair value in our consolidated financial statements, gains and losses associated with fair value changes are detailed on our consolidated statements of income as a component of "Changes in fair value of loans, interest and fees receivable and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.”notes payable associated with structured financings recorded at fair value". For our loans, interest and fees receivable included in the above tables,table, we assess the fair value of these assets based on our estimate of future cash flows net of servicing costs, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk.
For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the years ended December 31, 20162022,2021 and 2015:
| Loans and Fees Receivable, at Fair Value | |||||||
| 2016 | 2015 | ||||||
| Balance at January 1, | $ | 26,706 | $ | 53,160 | |||
| Total gains—realized/unrealized: | |||||||
| Net revaluations of loans and fees receivable, at fair value | 1,587 | 6,265 | |||||
| Settlements, net | (12,335 | ) | (32,440 | ) | |||
| Impact of foreign currency translation | (310 | ) | (279 | ) | |||
| Balance at December 31, | $ | 15,648 | $ | 26,706 | |||
Loans, Interest and Fees Receivables, at Fair Value | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Balance at January 1, | $ | 1,026,424 | $ | 417,098 | $ | 4,386 | ||||||
Cumulative effects from adoption of fair value under the CECL standard | 314,985 | — | — | |||||||||
Net revaluations of loans, interest and fees receivable, at fair value, included in earnings | (32,574 | ) | (110,283 | ) | (96,948 | ) | ||||||
Principal charge-offs, net of recoveries, included in earnings | (367,213 | ) | (78,463 | ) | (9,855 | ) | ||||||
Finance and fees, included in earnings | 874,749 | 366,307 | 103,983 | |||||||||
Finance charge-offs, included in earnings | (177,282 | ) | (30,794 | ) | (2,746 | ) | ||||||
Purchases | 2,466,676 | 1,626,062 | 713,579 | |||||||||
Settlements | (2,287,789 | ) | (1,163,503 | ) | (295,301 | ) | ||||||
Balance at December 31, | $ | 1,817,976 | $ | 1,026,424 | $ | 417,098 | ||||||
The unrealized gains and losses for assets within the Level 3 category presented in the tables above include changes in fair value that are attributable to both observable and unobservable inputs. Impacts related to foreign currency translation are included as a component of other operating expense on the consolidated statements of operations.
Net Revaluation of Loans, Interest and Fees Receivable.
We record the net revaluation of loans, interest and fees receivable (including those pledged as collateral) in the Changes in fair value of loans, interest and fees receivable andFor Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of
December 31,| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
| Fair Value Measurements | Fair Value at December 31, 2016 | Valuation Technique | Unobservable Input | Range (Weighted Average)(1) | ||||||
| Loans and fees receivable, at fair value | $ | 15,648 | Discounted cash flows | Gross yield | 24.2% to 35.8% (26.1%) | |||||
| Principal payment rate | 2.2% to 3.5% (2.4%) | |||||||||
| Expected credit loss rate | 11.8% to 18.0% (12.9%) | |||||||||
| Servicing rate | 8.6% to 9.6% (8.8%) | |||||||||
| Discount rate | 5.8% to 13.6% (12.5%) | |||||||||
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
| Fair Value Measurements | Fair Value at December 31, 2015 | Valuation Technique | Unobservable Input | Range (Weighted Average)(1) | ||||||
| Loans and fees receivable, at fair value | $ | 26,706 | Discounted cash flows | Gross yield | 15.8% to 28.5% (26.3%) | |||||
| Principal payment rate | 2.1% to 3.1% (2.9%) | |||||||||
| Expected credit loss rate | 12.5% to 22.7% (13.6%) | |||||||||
| Servicing rate | 8.4% to 12.9% (12.4%) | |||||||||
| Discount rate | 16.0% to 16.2% (16.0%) | |||||||||
Quantitative Information about Level 3 Fair Value Measurement
Fair Value Measurement | Fair Value at December 31, 2022 (in thousands) | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||||||
Loans, interest and fees receivable, at fair value | $ | 1,817,976 | Discounted cash flows | Gross yield, net of finance charge charge-offs | 24.7% to 36.1% (31.6%) | ||||||
Payment rate | 5.0% to 11.4% (10.3%) | ||||||||||
Expected principal credit loss rate | 9.2% to 30.3% (30.2%) | ||||||||||
Servicing rate | 3.5% to 6.4% (3.6%) | ||||||||||
Discount rate | 9.8% to 10.5% (10.1%) | ||||||||||
Quantitative Information about Level 3 Fair Value Measurement
Fair Value Measurement | Fair Value at December 31, 2021 (in thousands) | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||||||
Loans, interest and fees receivable, at fair value | $ | 1,026,424 | Discounted cash flows | Gross yield, net of finance charge charge-offs | 27.8% to 46.9% (40.9%) | ||||||
Payment rate | 5.4% to 12.9% (10.6%) | ||||||||||
Expected principal credit loss rate | 7.8% to 26.4% (23.5%) | ||||||||||
Servicing rate | 3.4% to 5.7% (4.6%) | ||||||||||
Discount rate | 12.3% to 13.5% (12.9%) | ||||||||||
Quantitative Information about Level 3 Fair Value Measurement | |||||||||||
Fair Value Measurement | Fair Value at December 31, 2020 (in thousands) | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||||||
Loans, interest and fees receivable, at fair value | $ | 417,098 | Discounted cash flows | Gross yield, net of finance charge charge-offs | 22.7% to 56.5% (43.3%) | ||||||
Payment rate | 3.9% to 11.4% (8.5%) | ||||||||||
Expected principal credit loss rate | 6.9% to 31.4% (24.8%) | ||||||||||
Servicing rate | 2.9% to 14.2% (4.3%) | ||||||||||
Discount rate | 12.8% to 13.5% (13.3%) | ||||||||||
Valuations and Techniques for Liabilities
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the liability. The table below summarizes (in thousands) by fair value hierarchy the
December 31,Liabilities – As of December 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount of Liabilities | ||||||||||||
Liabilities not carried at fair value | ||||||||||||||||
Revolving credit facilities | $ | — | $ | — | $ | 1,630,111 | $ | 1,630,111 | ||||||||
Amortizing debt facilities | $ | — | $ | — | $ | 23,195 | $ | 23,195 | ||||||||
Senior notes, net | $ | 125,640 | $ | — | $ | — | $ | 144,385 | ||||||||
Liabilities – As of December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount of Liabilities | ||||||||||||
Liabilities not carried at fair value | ||||||||||||||||
Revolving credit facilities | $ | — | $ | — | $ | 1,255,518 | $ | 1,255,518 | ||||||||
Amortizing debt facilities | $ | — | $ | — | $ | 23,346 | $ | 23,346 | ||||||||
Senior notes, net | $ | 153,000 | $ | — | $ | — | $ | 142,951 | ||||||||
| Liabilities – As of December 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount of Liabilities | ||||||||||||
| Liabilities not carried at fair value | ||||||||||||||||
| Revolving credit facilities | $ | — | $ | — | $ | 83,399 | $ | 83,399 | ||||||||
| Amortizing debt facilities | $ | — | $ | — | $ | 58,190 | $ | 58,190 | ||||||||
| Senior secured term loan | $ | — | $ | — | $ | 40,000 | $ | 40,000 | ||||||||
| 5.875% convertible senior notes | $ | — | $ | 40,609 | $ | — | $ | 61,810 | ||||||||
| Liabilities carried at fair value | ||||||||||||||||
| Notes payable associated with structured financings, at fair value | $ | — | $ | — | $ | 12,276 | $ | 12,276 | ||||||||
| Liabilities - As of December 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount of Liabilities | ||||||||||||
| Liabilities not carried at fair value | ||||||||||||||||
| Revolving credit facilities | $ | — | $ | — | $ | 53,800 | $ | 53,800 | ||||||||
| Amortizing debt facilities | $ | — | $ | — | $ | 36,200 | $ | 36,200 | ||||||||
| Senior secured term loan | $ | — | $ | — | $ | 20,000 | $ | 20,000 | ||||||||
| 5.875% convertible senior notes | $ | — | $ | 42,734 | $ | — | $ | 64,783 | ||||||||
| Liabilities carried at fair value | ||||||||||||||||
| Notes payable associated with structured financings, at fair value | $ | — | $ | — | $ | 20,970 | $ | 20,970 | ||||||||
For our material notes payable where market prices are not available, we assess the fair value of these liabilities based on our estimate of future cash flows generated from their underlying credit card receivables collateral, net of servicing compensation required under the note facilities, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk. Gains and losses associated with fair value changes for our notes payable associated with structured financing liabilities that are carried at fair value are detailed on our fees and relatedconsolidated statements of income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.” For our 5.875% convertible senior notes due 2035 (“5.875% convertible senior notes”), we assessas a component of "Changes in fair value based upon the most recent trade data available from third-party providers.of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value". We have seen no data that would suggest thatevaluated the fair value of our other Creditthird party debt by analyzing the expected repayment terms and Other Investments segment debt is materially different from its carrying amount as evidencedcredit spreads included in our recent financing arrangements obtained with similar terms. These recent financing arrangements provide positive evidence that the underlying data used in our assessment of fair value has not changed relative to the general market and therefore the fair value of our debt continues to be the same as the carrying value. See Note 9,10, “Notes Payable,” for further discussion on our other notes payable.
For our material Level 3 liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the yearsyear ended December 31, 2016 and 2015.
| Notes Payable Associated with Structured Financings, at Fair Value | |||||||
| 2016 | 2015 | ||||||
| Beginning balance, January 1 | $ | 20,970 | $ | 36,511 | |||
| Total (gains) losses—realized/unrealized: | |||||||
| Net revaluations of notes payable associated with structured financings, at fair value | (3,773 | ) | (1,262 | ) | |||
| Repayments on outstanding notes payable, net | (4,921 | ) | (14,279 | ) | |||
| Ending balance, December 31 | $ | 12,276 | $ | 20,970 | |||
Notes Payable Associated with Structured Financings, at Fair Value | ||||||||
2021 | 2020 | |||||||
Balance at January 1, | $ | 2,919 | $ | 3,920 | ||||
Net revaluations of notes payable associated with structured financings, at fair value, included in earnings | (807 | ) | (1,001 | ) | ||||
Repayments on outstanding notes payable, net | (2,112 | ) | — | |||||
Balance at December 31, | $ | — | $ | 2,919 | ||||
The unrealized gains and losses for liabilities within the Level 3 category presented in the table above include changes in fair value that are attributable to both observable and unobservable inputs. We provide below a brief description of the valuation techniques used for Level 3 liabilities.
Net Revaluation of Notes Payable Associated with Structured Financings, at Fair Value.
We record the net revaluations of notes payable associated with structured financings, at fair value, in the| Quantitative Information about Level 3 Fair Value Measurements | |||||||||||
| Fair Value Measurements | Fair Value at December 31, 2016 (in Thousands) | Valuation Technique | Unobservable Input | Weighted Average | |||||||
| Notes payable associated with structured financings, at fair value | $ | 12,276 | Discounted cash flows | Gross yield | 24.6 | % | |||||
| Principal payment rate | 2.2 | % | |||||||||
| Expected credit loss rate | 11.8 | % | |||||||||
| Discount rate | 13.6 | % | |||||||||
| Quantitative Information about Level 3 Fair Value Measurements | |||||||||||
| Fair Value Measurements | Fair Value at December 31, 2015 (in Thousands) | Valuation Technique | Unobservable Input | Weighted Average | |||||||
| Notes payable associated with structured financings, at fair value | $ | 20,970 | Discounted cash flows | Gross yield | 28.5 | % | |||||
| Principal payment rate | 2.9 | % | |||||||||
| Expected credit loss rate | 12.5 | % | |||||||||
| Discount rate | 16.0 | % | |||||||||
Other Relevant Data
Other relevant data (in thousands) as of
December 31,As of December 31, 2022 | Loans, Interest and Fees Receivable at Fair Value | Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value | ||||||
Aggregate unpaid gross balance of loans, interest and fees receivable that are reported at fair value | $ | 786 | $ | 2,119,340 | ||||
Aggregate unpaid principal balance included within loans, interest and fees receivable that are reported at fair value | $ | 760 | $ | 1,910,090 | ||||
Aggregate fair value of loans, interest and fees receivable that are reported at fair value | $ | 765 | $ | 1,817,211 | ||||
Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) | $ | 3 | $ | 8,362 | ||||
Unpaid principal balance of receivables within loans, interest and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans, interest and fees receivable | $ | 4 | $ | 144,767 | ||||
As of December 31, 2021 | Loans, Interest and Fees Receivable at Fair Value | Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value | ||||||
Aggregate unpaid gross balance of loans, interest and fees receivable that are reported at fair value | $ | 1,249 | $ | 1,234,039 | ||||
Aggregate unpaid principal balance included within loans, interest and fees receivable that are reported at fair value | $ | 1,204 | $ | 1,131,895 | ||||
Aggregate fair value of loans, interest and fees receivable that are reported at fair value | $ | 1,215 | $ | 1,025,209 | ||||
Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) | $ | 8 | $ | 4,640 | ||||
Unpaid principal balance of receivables within loans, interest and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans, interest and fees receivable | $ | 13 | $ | 59,656 | ||||
| As of December 31, 2016 | Loans and Fees Receivable at Fair Value | Loans and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value | ||||||
| Aggregate unpaid principal balance within loans and fees receivable that are reported at fair value | $ | 6,251 | $ | 16,614 | ||||
| Aggregate fair value of loans and fees receivable that are reported at fair value | $ | 3,484 | $ | 12,164 | ||||
| Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) | $ | 6 | $ | 22 | ||||
| Aggregate excess of balance of unpaid principal receivables within loans and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans and fees receivable | $ | 204 | $ | 562 | ||||
| As of December 31, 2015 | Loans and Fees Receivable at Fair Value | Loans and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value | ||||||
| Aggregate unpaid principal balance within loans and fees receivable that are reported at fair value | $ | 8,560 | $ | 25,837 | ||||
| Aggregate fair value of loans and fees receivable that are reported at fair value | $ | 6,353 | $ | 20,353 | ||||
| Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) | $ | 12 | $ | 31 | ||||
| Aggregate excess of balance of unpaid principal receivables within loans and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans and fees receivable | $ | 374 | $ | 889 | ||||
| Notes Payable | Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2016 | Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2015 | ||||||
| Aggregate unpaid principal balance of notes payable | $ | 102,035 | $ | 106,956 | ||||
| Aggregate fair value of notes payable | $ | 12,276 | $ | 20,970 | ||||
7. | Property |
Details (in thousands) of our property on our consolidated balance sheets are as follows:
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Software | $ | 5,194 | $ | 10,665 | ||||
| Furniture and fixtures | 6,191 | 6,037 | ||||||
| Data processing and telephone equipment | 11,008 | 11,064 | ||||||
| Leasehold improvements | 10,638 | 10,649 | ||||||
| Total cost | 33,031 | 38,415 | ||||||
| Less accumulated depreciation | (29,202 | ) | (32,729 | ) | ||||
| Property, net | $ | 3,829 | $ | 5,686 | ||||
As of December 31, | ||||||||
2022 | 2021 | |||||||
Software | $ | 850 | $ | 1,695 | ||||
Furniture and fixtures | 2,872 | 3,540 | ||||||
Data processing and telephone equipment | 502 | 692 | ||||||
Leasehold improvements | 3,437 | 10,539 | ||||||
Other | 6,910 | 6,909 | ||||||
Total cost | 14,571 | 23,375 | ||||||
Less accumulated depreciation | (4,558 | ) | (16,040 | ) | ||||
Property, net | $ | 10,013 | $ | 7,335 | ||||
Depreciation expense totaled $2.2 million and $2.2$1.5 million for the years ended December 31, 2016 2022 and 2015,2021, respectively.
8. | Variable Interest Entities |
The Company contributes the vast majority of receivables to VIEs. These entities are sometimes established to facilitate third party financing. When assets are contributed to a VIE, they serve as collateral for the debt securities issued by that VIE. The evaluation of whether the entity qualifies as a VIE is based upon the sufficiency of the equity at risk in the legal entity. This evaluation is generally a function of the level of excess collateral in the legal entity. We consolidate VIEs when we hold a variable interest and we retain significant exposure to certain receivables and therefore, are the primary beneficiary. Through our role as servicer, we are the primary beneficiary when we have the power to direct activities that most significantly affect the economic performance and have the obligation to absorb the majority of the losses or benefits. In all of our VIEs, we continue to service the receivables (in accordance with defined servicing procedures), and as such, have the ability to significantly impact the economic performance of those VIEs. In certain circumstances we guarantee the performance of the underlying debt or agree to contribute additional collateral when necessary. When collateral is pledged, it is not available for the general use of the Company and can only be used to satisfy the related debt obligation. The results of operations and financial position of consolidated VIEs are included in our consolidated financial statements.
The following table presents a summary of VIEs in which we had continuing involvement and held a variable interest (in millions):
As of | ||||||||
December 31, 2022 | December 31, 2021 | |||||||
Unrestricted cash and cash equivalents | $ | 202.2 | $ | 209.5 | ||||
Restricted cash and cash equivalents | 27.6 | 75.9 | ||||||
Loans, interest and fees receivable, at fair value | 1,735.9 | 925.5 | ||||||
Loans, interest and fees receivable, gross | — | 369.6 | ||||||
Allowances for uncollectible loans, interest and fees receivable | — | (55.1 | ) | |||||
Deferred revenue | — | (8.2 | ) | |||||
Total Assets held by VIEs | $ | 1,965.7 | $ | 1,517.2 | ||||
Notes Payable, net held by VIEs | $ | 1,586.0 | $ | 1,223.4 | ||||
Maximum exposure to loss due to involvement with VIEs | $ | 1,756.0 | $ | 1,289.1 | ||||
| 9. | Leases |
We have operating leases primarily associated with our corporate offices and regional service centers as well as for certain equipment. Our leases have remaining lease premises and certain equipment under cancelable and non-cancelable leases,terms of 1 to 12 years, some of which contain renewalinclude options, under various terms. Total rentalat our discretion, to extend the leases for additional periods generally on one-year revolving periods. Other leases allow for us to terminate the lease based on appropriate notification periods. For certain of our leased offices, we sublease a portion of the unoccupied space. The terms of the sublease arrangement generally coincide with the underlying lease. The components of lease expense for continuing operations associated with these operatingour lease liabilities and supplemental cash flow information related to those leases was $1.5 millionwere as follows (dollar amounts in 2016 and $2.9 million in 2015. During the fourth quarterthousands):
For the Year Ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Operating lease cost, gross | $ | 4,431 | $ | 6,905 | $ | 6,879 | ||||||
Sublease income | (2,165 | ) | (5,234 | ) | (5,133 | ) | ||||||
Net Operating lease cost | $ | 2,266 | $ | 1,671 | $ | 1,746 | ||||||
Cash paid under operating leases, gross | $ | 4,053 | $ | 10,470 | $ | 10,278 | ||||||
Weighted average remaining lease term - months | 133 | |||||||||||
Weighted average discount rate | 6.5 | % | ||||||||||
As of 2006, December 31, 2022, maturities of lease liabilities were as follows (in thousands):
Gross Lease Payment | Payments received from Sublease | Net Lease Payment | ||||||||||
2023 | $ | 1,662 | $ | (39 | ) | $ | 1,623 | |||||
2024 | 2,777 | — | 2,777 | |||||||||
2025 | 2,629 | — | 2,629 | |||||||||
2026 | 2,489 | — | 2,489 | |||||||||
2027 | 2,466 | — | 2,466 | |||||||||
Thereafter | 17,338 | — | 17,338 | |||||||||
Total lease payments | 29,361 | (39 | ) | 29,322 | ||||||||
Less imputed interest | (9,249 | ) | ||||||||||
Total | $ | 20,112 | ||||||||||
In August 2021, we entered into a 15-yearan operating lease agreement for our corporate headquarters in Atlanta, Georgia for 335,372with an unaffiliated third party. The new lease covers approximately 73,000 square feet (net of space which was surrendered toand commenced in June 2022 for a 146 month term. The total commitment under the landlord through our exercise of a termination option), 255,110 square feet of which we have subleased,new lease is approximately $27.8 million and is included in the remainder of which houses our corporate offices.table above. In connection with the commencement of this new lease, we received a $21.2 million construction allowance for the build-out of our new corporate offices. We are amortizing the construction allowance as a reduction of rent expense over the termdiscontinued most of the lease. Assubleasing arrangements with third parties for space at our corporate headquarters. A right-of-use asset and liability was recorded at the commencement date of December 31, 2016, the future minimum rental commitments (in thousands) for all non-cancelable operating leases with initial or remaining terms of more than one year (both gross and net of any sublease income) are as follows:
| Gross | Sublease Income | Net | ||||||||||
| 2017 | $ | 8,493 | $ | (6,643 | ) | $ | 1,850 | |||||
| 2018 | 9,756 | (6,441 | ) | 3,315 | ||||||||
| 2019 | 9,734 | (6,324 | ) | 3,410 | ||||||||
| 2020 | 9,778 | (6,499 | ) | 3,279 | ||||||||
| 2021 | 9,832 | (6,678 | ) | 3,154 | ||||||||
| Thereafter | 4,157 | (2,838 | ) | 1,319 | ||||||||
| Total | $ | 51,750 | $ | (35,423 | ) | $ | 16,327 | |||||
In addition, we occasionally lease certain equipment under cancelable and non-cancelable leases, which are accounted for as capital leases in our consolidated financial statements. As of December 31, 2016, 2022, we had no material non-cancelable capital leases with initial or remaining terms of more than one year.
| Carrying Amounts at Fair Value as of | |||||||
| December 31, 2016 | December 31, 2015 | ||||||
| Amortizing securitization facility issued out of our upper-tier portfolio master trust (stated maturity of December 2021), outstanding face amount of $102.0 million ($107.0 million as of December 31, 2015) bearing interest at a weighted average 6.1% interest rate (5.6% as of December 31, 2015), which is secured by credit card receivables and restricted cash aggregating $12.3 million ($21.0 million as of December 31, 2015) in carrying amount | $ | 12.3 | $ | 21.0 | |||
| 10. | Notes Payable |
Notes Payable, at Face Value and Notes Payable to Related Parties
Other notes payable outstanding as of
December 31,| As of | |||||||
| December 31, 2016 | December 31, 2015 | ||||||
| Revolving credit facilities at a weighted average interest rate equal to 4.8% (4.4% at December 31, 2015) secured by the financial and operating assets of CAR and/or certain receivables and restricted cash with a combined aggregate carrying amount of $127.9 million ($97.4 million at December 31, 2015) | |||||||
| Revolving credit facility (repaid in October 2016) (1) | $ | — | $ | 28.9 | |||
| Revolving credit facility (expiring December 31, 2019) (2) (3) | 19.5 | — | |||||
| Revolving credit facility (expiring November 1, 2018) (1) | 29.2 | — | |||||
| Revolving credit facility (expiring October 29, 2017) (2) (3) | 34.7 | 24.9 | |||||
| Amortizing facilities at a weighted average interest rate equal to 5.4% (5.4% at December 31, 2015) secured by certain receivables and restricted cash with a combined aggregate carrying amount of $69.9 million ($41.6 million as of December 31, 2015) | |||||||
| Amortizing debt facility (expiring March 31, 2018) (2) (3) (4) | 14.6 | — | |||||
| Amortizing debt facility (expiring July 15, 2017) (2) (3) (4) | 20.4 | 23.0 | |||||
| Amortizing debt facility (repaid in June 2016) | — | 9.2 | |||||
| Amortizing debt facility (expiring August 17, 2018) (2) (3) | 6.0 | 4.0 | |||||
| Amortizing debt facility (expiring August 24, 2018) (2) (3) | 9.7 | — | |||||
| Amortizing debt facility (expiring September 1, 2017) (2) (3) | 7.5 | — | |||||
| Other facilities | |||||||
| Senior secured term loan from related parties (expiring November 22, 2017) that is secured by certain assets of the Company with an annual interest rate equal to 9.0% (5) | 40.0 | 20.0 | |||||
| Total notes payable outstanding | $ | 181.6 | $ | 110.0 | |||
As of | ||||||||
December 31, 2022 | December 31, 2021 | |||||||
Revolving credit facilities at a weighted average interest rate equal to 5.1% as of December 31, 2022 (4.3% as of December 31, 2021) secured by the financial and operating assets of CAR and/or certain receivables and restricted cash with a combined aggregate carrying amount of $1,856.2 million as of December 31, 2022 ($1,391.6 million as of December 31, 2021) | ||||||||
Revolving credit facility, not to exceed $55.0 million (expiring November 1, 2024) (1) (2) (3) | $ | 44.1 | $ | 32.1 | ||||
Revolving credit facility, not to exceed $50.0 million (expiring October 30, 2024) (2) (3) (4) (5) | 50.0 | 48.7 | ||||||
Revolving credit facility, not to exceed $20.0 million (expiring July 15, 2023) (2) (3) (4) (5) | 11.1 | 5.7 | ||||||
Revolving credit facility, not to exceed $100.0 million (expiring March 15, 2024) (2) (3) (4) (5) (6) | — | — | ||||||
Revolving credit facility, not to exceed $200.0 million (expiring May 15, 2024) (3) (4) (5) (6) | 188.9 | 200.0 | ||||||
Revolving credit facility, not to exceed $25.0 million (expiring April 21, 2023) (2) (3) (4) (5) | 24.6 | 19.2 | ||||||
Revolving credit facility, not to exceed $100.0 million (expiring January 15, 2025) (3) (4) (5) (6) | 100.0 | 100.0 | ||||||
Revolving credit facility, not to exceed $250.0 million (expiring October 15, 2025) (3) (4) (5) (6) | 250.0 | 250.0 | ||||||
Revolving credit facility, not to exceed $25.0 million (expiring June 16, 2025) (3) (4) (5) | 25.0 | 10.0 | ||||||
Revolving credit facility, not to exceed $300.0 million (expiring December 15, 2026) (3) (4) (5) (6) | 300.0 | 300.0 | ||||||
Revolving credit facility, not to exceed $75.0 million (expiring March 15, 2025) (3) (4) (5) (6) | — | — | ||||||
Revolving credit facility, not to exceed $300.0 million (expiring May 15, 2026) (3) (4) (5) (6) | 300.0 | 300.0 | ||||||
Revolving credit facility, not to exceed $250.0 million (expiring May 15, 2030) (3) (4) (5) (6) | 250.0 | — | ||||||
Revolving credit facility, not to exceed $100.0 million (expiring August 5, 2024) (3) (4) (5) (6) | — | — | ||||||
Revolving credit facility, not to exceed $100.0 million (expiring March 15, 2028) (3) (4) (5) (6) | 100.0 | — | ||||||
Other facilities | ||||||||
Other debt | 5.8 | 5.9 | ||||||
Unsecured term debt (expiring August 26, 2024) with a weighted average interest rate equal to 8.0% (3) | 17.4 | 17.4 | ||||||
Total notes payable before unamortized debt issuance costs and discounts | 1,666.9 | 1,289.0 | ||||||
Unamortized debt issuance costs and discounts | (13.6 | ) | (10.1 | ) | ||||
Total notes payable outstanding, net | $ | 1,653.3 | $ | 1,278.9 | ||||
(1) | |
Loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance by our CAR Auto Finance operations. |
(2) | These notes reflect modifications to either extend the maturity date, increase the loan amount or both, and are treated as accounting modifications. |
(3) | See below for additional information. |
| Loans are subject to certain affirmative covenants tied to default rates and other performance metrics the failure of which could result in required early repayment of the remaining unamortized balances of the notes. |
(5) | Loans are |
(6) | Creditors do not have recourse against the general assets of |
| VIEs. | |
In November 2016, the agreement was amended to extend the maturity date of the term loan to November 22, 2017. All other terms remain unchanged.
In October 2016, we (through a wholly owned subsidiary) entered a revolving credit facility available to the extent of outstanding eligible principal receivables of our CAR subsidiary (of which $44.1 million was drawn as of December 31, 2022). This facility is secured by the financial and operating assets of CAR and accrues interest at an annual rate equal to LIBOR plus a range between 2.4% and 3.0% based on certain ratios. The loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. In periods subsequent to October 2016, we amended the original agreement to either extend the maturity date and/or expand the capacity of this revolving credit facility. As of December 31, 2022, the facility's borrowing limit was $55.0 million and the facility matures on November 1, 2024. There were no other material changes to the existing terms or conditions as a result of these amendments and the new maturity date and borrowing limit are reflected in the table above. In January 2023, the note was amended to change the underlying reference rate from LIBOR to SOFR, the facility size was increased to $65.0 million and the maturity date was extended to November 1, 2025. All other terms remained materially consistent with the amended facility.
In 2018, we (through a wholly owned subsidiary) entered into a revolving credit facility to sell up to an aggregate $100.0 million of notes that are secured by the receivables and other assets of the trust. Simultaneously with the establishmenttrust (of which $0.0 million was outstanding as of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million
In December 2017, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $25.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $24.6 million was drawn as of December 31, 2022). This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to SOFR plus 3.6%. The facility also may be prepaidmatures on April 21, 2023 and is subject to certain affirmative covenants, including payment, delinquency and charge-off tests, the failure of which could result in required early repayment of all or a prepayment fee.
In May 2005, June 2019, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $20.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $11.1 million was drawn as of December 31, 2022). This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to the Prime Rate. The note is guaranteed by Atlanticus.
In August 2019, we issued a $17.4 million term note, which bears interest at a fixed rate of 8.0% and is due in August 2024.
In November 2019, we sold $200.0 million of ABS secured by certain credit card receivables (expiring May 15, 2024). A portion of the proceeds from the sale was used to pay down our existing facilities associated with our credit card receivables and the remaining proceeds were used to fund the acquisition of future receivables. The terms of the ABS allow for a three-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 4.91%. This facility is currently in contractual scheduled amortization.
In July 2020, we sold $100.0 million of ABS secured by certain private label credit receivables. A portion of the proceeds from the sale were used to pay down some of our existing revolving facilities associated with our private label credit receivables, and the remaining proceeds were used to fund the acquisition of receivables. The terms of the ABS allow for a three-year revolving structure with a subsequent 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.47%.
In October 2020, we sold $250.0 million of ABS secured by certain private label credit receivables. A portion of the proceeds from the sale was used to pay down our existing term ABS associated with our private label credit receivables, noted above, and the remaining proceeds were used to fund the acquisition of receivables. The terms of the ABS allow for a 41-month revolving structure with an 18-month amortization period, and the securities mature between August 2025 and October 2025. The weighted average interest rate on the securities is fixed at 4.1%.
In January 2021, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $25.0 million borrowing limit (of which $25.0 million was drawn as of December 31, 2022) that is available to the extent of outstanding eligible principal receivables. This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to the greater of the Prime Rate or 4%. The facility matures on June 16, 2025 and is subject to certain affirmative covenants, including a liquidity test and an eligibility test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The note is guaranteed by Atlanticus, which is required to maintain certain minimum liquidity levels.
In June 2021, we sold $300.0 million of ABS secured by certain credit card receivables (expiring May 15, 2026 through December 15, 2026). The terms of the ABS allow for a four-year revolving structure with a subsequent 11-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 4.24%.
In September 2021, we entered a term facility with a $75.0 million limit (of which $0.0 million was outstanding of December 31, 2022) that is available to the extent of outstanding eligible principal receivables. This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to LIBOR plus 2.75%. The terms of the facility allow for a 24-month revolving structure with an 18-month amortization period and the facility matures in March 2025.
In November 2021, we sold $300.0 million of ABS secured by certain credit card receivables (expiring May 15, 2026). The terms of the ABS allow for a three-year revolving structure with a subsequent 18-month amortization period. The weighted average interest rate on the securities is fixed at 3.53%.
In May 2022, we entered a $250.0 million ABS agreement (of which $250.0 million was drawn as of December 31, 2022) secured by certain credit card receivables (expiring May 15, 2030). The terms of the ABS allow for a five-year revolving structure with a subsequent 18-month amortization period. The weighted average interest rate on the securities is fixed at 6.33%.
In August 2022, we entered a $100.0 million ABS agreement secured by certain credit card receivables (of which $0.0 million was outstanding as of December 31, 2022) that can be drawn upon to the extent of outstanding eligible receivables. The interest rate on the notes is based on the Term Secured Overnight Financing Rate ("Term SOFR") plus 1.8%. The facility matures on August 5, 2024.
In September 2022, we sold $100.0 million of ABS secured by certain private label credit receivables. A portion of the proceeds from the sale was used to pay down other revolving facilities associated with our private label credit receivables, noted above, and the remaining proceeds have been invested in the acquisition of receivables. The terms of the ABS allow for a 3-year revolving structure with an 18-month amortization period. The weighted average interest rate on the securities is fixed at 7.3%.
As of December 31, 2022, we were in compliance with the covenants underlying our various notes payable and credit facilities.
Senior Notes, net
In November 2021, we issued $150.0 million aggregate principal amount of 3.625% convertible senior notes due 2025 (“3.625% convertible senior notes”), and in November 2005, we issued $300.0 million aggregate principal amount of 5.875% convertible senior(included on our consolidated balance sheet as "Senior notes, due November 30, 2035 (“5.875% convertible senior notes”net"). The 5.875% convertible senior notes are (and, priorgeneral unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness, and will rank senior in right of payment to redemption, the 3.625% convertibleCompany’s future subordinated indebtedness, if any. The senior notes were) unsecured, subordinateare effectively subordinated to all of the Company’s existing and future secured obligationsindebtedness, to the extent of the value of the assets securing such indebtedness, and the senior notes are structurally subordinatesubordinated to all existing and future claimsindebtedness and other liabilities (including trade payables) of our subsidiaries’ creditors. These notes (net of repurchases since the issuance dates) are reflected within convertibleCompany’s subsidiaries (excluding any amounts owed by such subsidiaries to the Company). The senior notes bear interest at the rate of 6.125% per annum. Interest on our consolidated balance sheets. No put rights exist under our 5.875% convertible senior notes.
| As of | |||||||
| December 31, 2016 | December 31, 2015 | ||||||
| Face amount of 5.875% convertible senior notes | $ | 88,280 | $ | 93,280 | |||
| Discount | (26,470 | ) | (28,497 | ) | |||
| Net carrying value | $ | 61,810 | $ | 64,783 | |||
| Carrying amount of equity component included in additional paid-in capital | $ | 108,714 | $ | 108,714 | |||
| Excess of instruments’ if-converted values over face principal amounts | $ | — | $ | — | |||
11. | |
Commitments and Contingencies |
General
Under finance products available in the point-of-saleprivate label credit and direct-to-consumergeneral purpose credit card channels, consumers have the ability to borrow up to the maximum credit limit assigned to each individual’s account. Unfunded commitments under these products aggregated
Additionally, our CAR operations provide floor-plan financing for a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here used car business. The financings allowfloor plan financing allows dealers and finance companies to borrow up to the maximum pre-approved credit limit allowed in order to finance ongoing inventory
Under agreements with third-partythird-party originating and other financial institutions, we have pledged security (collateral) related to their issuance of consumer credit and purchases thereunder, of which $9.3$20.6 million remains pledged as of December 31, 2016 2022 to support various ongoing contractual obligations. Those obligations include, among other things, compliance with one of the European payment system’s operating regulations and by-laws.
Under agreements with third-partythird-party originating and other financial institutions, we have agreed to indemnify the financial institutions for certain liabilities associated with the services we provide on behalf of the financial institutions—such indemnification obligations generally being limited to instances in which we either (a) have been afforded the opportunity to defend against any potentially indemnifiable claims or (b) have reached agreement with the financial institutions regarding settlement of potentially indemnifiable claims. As of
Under the account terms, consumers have the option of enrolling in a credit protection program with our issuing bank partner which would make the minimum payments owed on their accounts for a period of up to Atlanticus Services Corporation in bothsix months upon the U.S. and the U.K. as a systemoccurrence of record provideran eligible event. Eligible events typically include loss of life, job loss, disability, or hospitalization. As an acquirer of receivables, our potential exposure under agreements that extend through October 2022 and April 2017, respectively. If Atlanticus Services Corporation were to terminate its U.S. or U.K. relationship with Total System Services, Inc. prior to the contractual termination period, it would incur significant penalties (
We also are subject to certain minimum payments under cancelable and non-cancelable lease arrangements. For further information regarding these commitments, see Note 8,9, “Leases”.
Litigation
We are involved in various legal proceedings that are incidental to the conduct of our business, none of whichbusiness. There are currently no pending legal proceedings that are expected to be material to us. Included in the first quarter of 2022 is an $8.5 million expense related to a settlement of outstanding litigation associated with our Auto Finance segment.
12. | |
Income Taxes |
Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The current and deferred portions (in thousands) of our federal, foreign, and state and other income tax benefitexpenses or expensebenefits are as follows:
| For the Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Federal income tax benefit (expense): | ||||||||
| Current tax benefit (expense) | $ | 59 | $ | 3,421 | ||||
| Deferred tax benefit (expense) | 5,884 | (3,824 | ) | |||||
| Total federal income tax benefit (expense) | $ | 5,943 | $ | (403 | ) | |||
| Foreign income tax benefit (expense): | ||||||||
| Current tax expense | $ | (41 | ) | $ | (53 | ) | ||
| Deferred tax benefit (expense) | 3 | (1,775 | ) | |||||
| Total foreign income tax expense | $ | (38 | ) | $ | (1,828 | ) | ||
| State and other income tax benefit (expense): | ||||||||
| Current tax benefit (expense) | $ | (116 | ) | $ | 28 | |||
| Deferred tax benefit | 226 | 374 | ||||||
| Total state and other income tax benefit | $ | 110 | $ | 402 | ||||
| Total income tax benefit (expense) | $ | 6,015 | $ | (1,829 | ) | |||
For the Year Ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Federal income tax (expense) benefit: | ||||||||||||
Current tax benefit (expense) | $ | 4,352 | $ | (34,910 | ) | $ | 1,351 | |||||
Deferred tax (expense) | (16,623 | ) | (2,369 | ) | (21,752 | ) | ||||||
Total federal income tax (expense) | $ | (12,271 | ) | $ | (37,279 | ) | $ | (20,401 | ) | |||
Foreign income tax (expense) benefit: | ||||||||||||
Current tax (expense) | $ | (183 | ) | $ | (107 | ) | $ | (143 | ) | |||
Deferred tax benefit (expense) | 3 | 1 | (5 | ) | ||||||||
Total foreign income tax (expense) | $ | (180 | ) | $ | (106 | ) | $ | (148 | ) | |||
State and other income tax benefit (expense): | ||||||||||||
Current tax benefit (expense) | $ | 2,146 | $ | (4,910 | ) | $ | (1,228 | ) | ||||
Deferred tax (expense) benefit | (4,355 | ) | 511 | 1,303 | ||||||||
Total state and other income tax (expense) benefit | $ | (2,209 | ) | $ | (4,399 | ) | $ | 75 | ||||
Total income tax (expense) | $ | (14,660 | ) | $ | (41,784 | ) | $ | (20,474 | ) | |||
We experienced an effective income tax benefit rate of 48.7% for the year ended December 31, 2016, compared to an effective income tax expense rate of 51.7%9.8% and 19.0% for the yearyears ended December 31, 2015.2022, and December 31, 2021, respectively. Our effective income tax benefit rateexpense rates for the year ended December 31, 2016 is abovethese years are below the statutory rate principally due to (1) deductions associated with the incomeexercise of stock options and the vesting of restricted stock at times when the fair value of our U.K. subsidiary (1) that is not subjectstock exceeded such share-based awards’ grant date values—such deductions being significantly higher in 2022 than in 2021 given stock option exercises in 2022 by the Executive Chairman of our Board of Directors, such options being grandfathered from executive compensation deduction limitations under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) and (2) our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes. Offsetting the above factors are the effects on our effective tax rate of state and foreign income tax expense, taxes on global intangible low-taxed income, and executive compensation deduction limitations under Section 162(m) of the Code. Further details related to taxthe above are reflected in the U.S., and (2) the U.K. tax on which was fully offset by the release of U.K. valuation allowances. Ourtable below reconciling our effective income tax expense rate forto the year ended December 31, 2015 reflects in part, the establishment of a valuation allowance against our U.K.-related deferred tax assets.
We report potential accruedincome tax-related interest and penalties related to(including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities, as well as any net paymentsliabilities) within our income tax line item on our consolidated statements of income. We likewise report the reversal of income tax-related interest and penalties within our income tax benefit or expense line item on our consolidated statements of operations. We likewise report the reversal of such accrued interest and penalties within the income tax benefit or expense line item to the extent that we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During the years ended December 31, 2016For 2022 and 2015, $0.4 million2021, we experienced only de minimis interest expense and $0.3 million, respectively, of net income tax-related interest and penalties are includedreversals within those years’ respectiveour income tax benefit and expense line items.
The following table reconciles our effective income tax benefitexpense rate to the statutory rate for 20162022 and our effective income tax expense rate for 2015 to the federal statutory rate:
For the Year Ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Statutory federal expense rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
(Decrease) increase in statutory federal tax expense rate resulting from: | ||||||||||||
Share-based compensation | (10.5 | ) | (3.1 | ) | — | |||||||
Section 162(m) of the Code executive compensation deduction limitations | 0.2 | 1.7 | — | |||||||||
Net interest and penalties related to uncertain tax positions and unpaid tax liabilities | 0.1 | — | (0.6 | ) | ||||||||
Interest expense on preferred stock classified as debt for tax purposes | (2.3 | ) | (1.6 | ) | (2.6 | ) | ||||||
Foreign taxes, net of valuation allowance effects | (0.2 | ) | (0.1 | ) | (0.2 | ) | ||||||
State taxes, net of valuation allowance effects | 1.4 | 1.6 | (0.1 | ) | ||||||||
Prior year provision to return reconciling items, tax effects of non-controlling interests, and other | (0.1 | ) | (0.6 | ) | 0.2 | |||||||
Global intangible low-taxed income tax | 0.2 | 0.1 | 0.2 | |||||||||
Effective tax expense rate | 9.8 | % | 19.0 | % | 17.9 | % | ||||||
| For the Year Ended December 31, | ||||||
| 2016 | 2015 | |||||
| Statutory benefit (expense) rate | 35.0 | % | (35.0 | )% | ||
| (Increase) decrease in statutory tax rate and increase (decrease) in statutory tax benefit rate resulting from: | ||||||
| Changes in valuation allowances | 6.2 | (46.8 | ) | |||
| Interest and penalties related to uncertain tax positions | (0.1 | ) | 21.2 | |||
| Foreign income taxes | 7.5 | (1.5 | ) | |||
| Permanent and other differences | (0.5 | ) | 3.1 | |||
| State and other income taxes, net | 0.6 | 7.3 | ||||
| Effective benefit (expense) rate | 48.7 | % | (51.7 | )% | ||
As of December 31, 2016 2022, and December 31, 2015, 2021, the respective significant components (in thousands) of our deferred tax assets and liabilities (which are included as a component of our Income tax liability on our consolidated balance sheets) were:
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Deferred tax assets: | ||||||||
| Software development costs/fixed assets | $ | — | $ | 345 | ||||
| Goodwill and intangible assets | 3,798 | 3,455 | ||||||
| Provision for loan loss | 18,353 | 16,107 | ||||||
| Equity-based compensation | 670 | 287 | ||||||
| Accrued expenses | 1,678 | 1,249 | ||||||
| Other | — | 288 | ||||||
| Accruals for state taxes and interest associated with unrecognized tax benefits | 286 | 610 | ||||||
| Federal net operating loss carry-forward | 70,778 | 75,687 | ||||||
| Federal credit carry-forward | 2,145 | 2,381 | ||||||
| Foreign net operating loss carry-forward | 374 | 637 | ||||||
| State tax benefits | 35,409 | 36,384 | ||||||
| Deferred tax assets, gross | $ | 133,491 | $ | 137,430 | ||||
| Valuation allowances | (33,924 | ) | (35,971 | ) | ||||
| Deferred tax assets net of valuation allowance | $ | 99,567 | $ | 101,459 | ||||
| Deferred tax liabilities: | ||||||||
| Prepaid expenses and other | $ | (184 | ) | $ | (267 | ) | ||
| Software development costs/fixed assets | (157 | ) | — | |||||
| Equity in income of equity-method investee | (1,455 | ) | (1,347 | ) | ||||
| Other | (58 | ) | — | |||||
| Credit card fair value election differences | (42,939 | ) | (38,717 | ) | ||||
| Deferred costs | (696 | ) | (681 | ) | ||||
| Convertible senior notes | (28,921 | ) | (28,154 | ) | ||||
| Cancellation of indebtedness income | (29,491 | ) | (42,822 | ) | ||||
| Deferred tax liabilities, gross | $ | (103,901 | ) | $ | (111,988 | ) | ||
| Deferred tax liabilities, net | $ | (4,334 | ) | $ | (10,529 | ) | ||
As of December 31, | ||||||||
2022 | 2021 | |||||||
Deferred tax assets: | ||||||||
Capitalized research and experimentation expenditures and fixed assets | $ | 1,445 | $ | — | ||||
Provision for credit loss | 1,716 | 14,647 | ||||||
Credit card and other loans receivable fair value election differences | 70,966 | 48,730 | ||||||
Equity-based compensation | 1,327 | 967 | ||||||
Accrued expenses | 156 | 159 | ||||||
Accruals for state taxes and interest associated with unrecognized tax benefits and unpaid accrued tax liabilities | 195 | 149 | ||||||
Federal net operating loss and capital loss carry-forwards | 22,626 | — | ||||||
Foreign net operating loss carry-forward | 304 | 304 | ||||||
Other | 1,056 | 506 | ||||||
State tax benefits, primarily from net operating losses | 28,796 | 27,081 | ||||||
Deferred tax assets, gross | $ | 128,587 | $ | 92,543 | ||||
Valuation allowances | (20,699 | ) | (22,716 | ) | ||||
Deferred tax assets, net of valuation allowances | $ | 107,888 | $ | 69,827 | ||||
Deferred tax (liabilities): | ||||||||
Prepaid expenses and other | $ | (1,030 | ) | $ | (513 | ) | ||
Software development costs and fixed assets | — | (41 | ) | |||||
Equity in income of equity-method investee | (792 | ) | (697 | ) | ||||
Market discount on acquired marked discount bonds | (155,879 | ) | (94,958 | ) | ||||
Deferred costs | (641 | ) | (590 | ) | ||||
Deferred tax (liabilities), gross | $ | (158,342 | ) | $ | (96,799 | ) | ||
Deferred tax (liabilities), net | $ | (50,454 | ) | $ | (26,972 | ) | ||
We undertook a detailed review of our deferred taxes and determined that a valuation allowance was required for certain deferred tax assets in state tax jurisdictions within the U.S. and in the U.K. We reduce our deferred tax assets by valuation allowances if it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making our valuation allowance determinations, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods, and the implementation of tax planning strategies. Because our valuation allowance evaluations require consideration of future events, significant judgment is required in making the evaluations, and our conclusions could be materially different if our expectations are not met. Our valuation allowances totaled $20.7 million and $22.7 million as of December 31, 2022, and December 31, 2021, respectively.
Certain of our deferred tax assets relate to federal, foreign, and state net operating losses, as noted in the above table, and we have no other net operating losses, capital losses, or credit carry-forwardscarryforwards other than those noted herein. We have recorded a federal deferred tax asset of $70.8$22.6 million reflecting the tax benefit of(based on indefinite-lived federal net operating loss carryforwards of $104.0 million). We have recorded state deferred tax assets of $28.6 million based on state net operating loss carryforwards, some of which are indefinite-lived and some which expire in varying amounts between 2029 and 2033. Our $33.9 millionvarious years beginning in 2023.
Our subsidiaries file federal, stateforeign, and/or foreignstate and other income tax returns. In the normal course of our business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., the U.K., and various U.S. states and territories. With a few exceptions of a non-material nature, and with the exception of our 2008 tax-settlement-related claims discussed previously, we are no longer subject to federal, state, local, or foreign income tax examinations for years prior to 2012.
Reconciliations (in thousands) of our unrecognized tax benefits from the beginning to the end of 20162022 and 2015,2021, respectively, are as follows:
| 2016 | 2015 | |||||||
| Balance at January 1, | $ | (1,798 | ) | $ | (5,245 | ) | ||
| Reductions based on tax positions related to prior years | 1,167 | 2,658 | ||||||
| Additions based on tax positions related to prior years | — | (160 | ) | |||||
| Additions based on tax positions related to the current year | (82 | ) | (70 | ) | ||||
| Interest and penalties accrued | (105 | ) | (197 | ) | ||||
| Settlement | — | 1,216 | ||||||
| Balance at December 31, | $ | (818 | ) | $ | (1,798 | ) | ||
2022 | 2021 | 2020 | ||||||||||
Balance at January 1, | $ | (605 | ) | $ | (495 | ) | $ | (445 | ) | |||
Reductions based on tax positions related to prior years | 79 | 23 | — | |||||||||
(Additions) based on tax positions related to prior years | (11,965 | ) | (26 | ) | 32 | |||||||
(Additions) based on tax positions related to the current year | (10,201 | ) | (107 | ) | (82 | ) | ||||||
Balance at December 31, | $ | (22,692 | ) | $ | (605 | ) | $ | (495 | ) | |||
Our unrecognized tax benefits that, if recognized, would affect the effective tax rate totaled $0.8are not material at only $0.9 million, $0.7 million and $1.8$0.6 million at as of December 31, 20162022, 2021 and 2015,2020, respectively.
13. | |
Net |
We compute net income attributable to controlling interests per common share by dividing net income attributable to controlling interests by the weighted-average number of shares of common sharesstock (including participating securities) outstanding during the period, as discussed below. Diluted computations applicable in financial reporting periods in which we report income reflect the potential dilution to the basic income per share of common sharestock computations that could occur if securities or other contracts to issue common stock were exercised, were converted into common stock or were to result in the issuance of common stock that would share in our results of operations. In performing our net income attributable to controlling interests per share of common sharestock computations, we apply accounting rules that require us to include all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted calculations. Common stock and certain unvested share-based payment awards earn dividends equally, and we have included all outstanding restricted stock awards in our basic and diluted calculations for current and prior periods.
The following table sets forth the computations of net income attributable to controlling interests per share of common sharestock (in thousands, except per share data):
| �� | For the Year Ended December 31, | ||||||
| 2016 | 2015 | ||||||
| Numerator: | |||||||
| Net (loss) income attributable to controlling interests | $ | (6,335 | ) | $ | 1,713 | ||
| Denominator: | |||||||
| Basic (including unvested share-based payment awards) (1) | 13,867 | 13,906 | |||||
| Effect of dilutive stock compensation arrangements (2) | 70 | 55 | |||||
| Diluted (including unvested share-based payment awards) (1) | 13,937 | 13,961 | |||||
| Net (loss) income attributable to controlling interests per common share—basic | $ | (0.46 | ) | $ | 0.12 | ||
| Net (loss) income attributable to controlling interests per common share—diluted | $ | (0.46 | ) | $ | 0.12 | ||
December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Numerator: | ||||||||||||
Net income attributable to controlling interests | $ | 135,597 | $ | 177,902 | $ | 94,120 | ||||||
Preferred stock and preferred unit dividends and accretion | (25,076 | ) | (22,363 | ) | (17,070 | ) | ||||||
Net income attributable to common shareholders—basic | 110,521 | 155,539 | 77,050 | |||||||||
Effect of dilutive preferred stock dividends and accretion | 2,400 | 2,400 | 2,400 | |||||||||
Net income attributable to common shareholders—diluted | $ | 112,921 | $ | 157,939 | $ | 79,450 | ||||||
Denominator: | ||||||||||||
Basic (including unvested share-based payment awards) (1) | 14,629 | 15,074 | 14,486 | |||||||||
Effect of dilutive stock compensation arrangements and exchange of preferred stock | 4,747 | 5,824 | 5,616 | |||||||||
Diluted (including unvested share-based payment awards) (1) | 19,376 | 20,898 | 20,102 | |||||||||
Net income attributable to common shareholders per share—basic | $ | 7.55 | $ | 10.32 | $ | 5.32 | ||||||
Net income attributable to common shareholders per share—diluted | $ | 5.83 | $ | 7.56 | $ | 3.95 | ||||||
(1) | Shares related to unvested share-based payment awards included in our basic and diluted share counts were |
As their effects were anti-dilutive, we excluded stock options to purchase 0.1 million shares from our net income attributable to controlling interests per share of common stock calculations for the year ended December 31, 2022. No shares were excluded from our net income attributable to controlling interests per share of common stock calculations for the year ended December 31, 2021. We excluded stock options to purchase 0.1 million shares from our net income attributable to controlling interests per share of common stock calculations for the year ended December 31, 2020.
For the years ended
December 31,For the year ended December 31, 2021, we included 0.1 million shares potentially issuable and thus includibleof common stock in the diluted net income attributable to controlling interests per share of common sharestock calculations pursuant toassociated with our
14. | |
Stock-Based Compensation |
We currently have
two stock-based compensation plans, the Second Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Fourth Amended and Restated 2014 Equity Incentive Plan (theExercises and vestings under our stock-based compensation plans resulted in no income tax-related charges to paid-in capital during the years ended December 31, 2022 and 2021.
Restricted Stock and Restricted Stock Units
During the years ended December 31, 2022, 2021 and 2020, we granted 105,360 shares, 49,988 shares and 61,373 shares of restricted stock and restricted stock units (net of any forfeitures), respectively, with aggregate grant date fair values of $4.9 million, $1.7 million and $0.6 million, respectively. We incurred expenses of $2.6 million, $1.2 million and $0.8 million during the years ended December 31, 2022, 2021 and 2020, respectively, related to restricted stock awards. When we grant restricted stock and restricted stock units, we defer the grant date value of the restricted stock and restricted stock unit and amortize that value (net of the value of anticipated forfeitures) as compensation expense with an offsetting entry to the paid-in capital component of our consolidated shareholders’ equity. Our restricted stock awards typically vest over a range of 12 to 60 months (or other term as specified in the grant which may include the achievement of performance measures) and are amortized to salaries and benefits expense ratably over applicable vesting periods. As of December 31, 2022, our unamortized deferred compensation costs associated with non-vested restricted stock awards were $3.3 million with a weighted-average remaining amortization period of 2.8 years. No forfeitures have been included in our compensation cost estimates based on historical forfeiture rates.
Stock Options
The exercise price per share of the options
Number of Shares | Weighted-Average Exercise Price | Weighted-Average of Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2021 | 2,017,969 | $ | 6.74 | |||||||||||||
Issued | — | $ | — | |||||||||||||
Exercised | (1,211,141 | ) | $ | 3.08 | ||||||||||||
Expired/Forfeited | (4,665 | ) | $ | 15.30 | ||||||||||||
Outstanding at December 31, 2022 | 802,163 | $ | 12.23 | 1.6 | $ | 12,704,473 | ||||||||||
Exercisable at December 31, 2022 | 673,137 | $ | 8.71 | 1.2 | $ | 12,270,696 | ||||||||||
Information related toon stock options outstandinggranted, exercised and vested is as follows:
| December 31, 2016 | ||||||||||||
| Number of Shares | Weighted- Average Exercise Price | Weighted- Average of Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||
| Outstanding at December 31, 2015 | 551,666 | $ | 2.80 | |||||||||
| Issued | 886,000 | $ | 3.26 | |||||||||
| Exercised | (5,999 | ) | $ | 2.27 | ||||||||
| Cancelled/Forfeited | (20,000 | ) | $ | 3.04 | ||||||||
| Outstanding at December 31, 2016 | 1,411,667 | $ | 3.09 | 3.5 | $ | 135,905 | ||||||
| Exercisable at December 31, 2016 | 428,164 | $ | 2.67 | 2.5 | $ | 111,677 | ||||||
Year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
Weighted average fair value per share of options granted | N/A | $ | 24.00 | |||||
Cash received from options exercised, net | $ | 3,731 | $ | 1,885 | ||||
Aggregate intrinsic value of options exercised | $ | 74,296 | $ | 13,673 | ||||
Grant date fair value of shares vested | $ | 1,802 | $ | 834 | ||||
Options issued during the years ended December 31, 2021 and 2020 had aggregate grant-date fair values of $3.1 million and $1.4 million, respectively. No options were issued during the year ended December 31, 2022. We had $0.7$0.8 million and $0.2$2.4 million of unamortized deferred compensation costs associated with non-vested stock options as of December 31, 2016 2022 and 2015, respectively.December 31, 2021, respectively, with a weighted average remaining amortization period of 1.1 years as of December 31, 2022. Upon exercise of outstanding options, the Company issues new shares.
| 15. | ATM Program |
On August 10, 2022, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) providing for the sale by the Company of up to an aggregate offering price of $100,000,000 of our (i) Series B Preferred Stock and (ii) senior notes, from time to time through a sales agent, in connection with the ATM Program. Sales pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on or through the NASDAQ Global Select Market. The sales agent will make all sales using commercially reasonable efforts consistent with its normal trading and sales practices up to the amount specified in, and otherwise in accordance with the terms of, the placement notice.
For further information regarding the ATM Program, see Note 4, “Shareholders’ Equity and Preferred Stock.”
16. | |
Employee Benefit Plans |
We maintain a defined contribution retirement plan (“401(k)(“401(k) plan”) for our U.S. employees that provides for a matching contribution by us. All full time U.S. employees are eligible to participate in the 401(k) plan. Our U.K. credit card subsidiary offers eligible employees membership in a Group Personal Pension Plan which is set up with Friends Provident. This plan is a defined contribution plan in which all permanent employees who have completed three months of continuous service are eligible to join the plan. Company matching contributions are available to U.K. employees who contribute a minimum of 3% of their salaries under our Group Personal Pension Plan and to U.S. employees who participate in our 401(k)401(k) plan. We made matching contributions under our U.S.of $341,245, $274,759 and U.K. plans of $307,361$197,214 for the years ended December 31, 2022,2021 and $317,300 in 2016 and 2015,2020, respectively.
Also, all employees, excluding executive officers, are eligible to participate in the ESPP to which we referred above.ESPP. Under the ESPP, employees can elect to have up to 10% of their annual wages withheld to purchase our common stock up to a fair market value of $10,000. The amounts deducted and accumulated by each participant are used to purchase shares of common stock on or as promptly as practicable after the last business day of each month. The price of stock purchased under the ESPP is approximately 85% of the fair market value per share of our common stock on the purchase date. Employees contributed $28,541$107,995 to purchase 11,0533,280 shares of common stock in 2016 and $15,3052022, $79,095 to purchase 5,7632,241 shares of common stock in 20152021 and $106,775 to purchase 9,209 shares of common stock in 2020 under the ESPP. The ESPP covers up to 150,000100,000 shares of common stock. Our charge to expense associated with the ESPP was $16,930$35,348, $28,937 and $17,948$31,748 in 20162022,2021, and 2015,2020 respectively.
17. | |
Related Party Transactions |
Under a shareholders’ agreement into which we entered into with certain shareholders, including David G. Hanna, Frank J. Hanna, III Richard R. House, Jr., Richard W. Gilbert and certain trusts that were Hanna affiliates, following our initial public offering (1)(1) if one or more of the shareholders accepts a bona fide offer from a third party to purchase more than 50% of the outstanding common stock, each of the other shareholders that is a party to the agreement may elect to sell his shares to the purchaser on the same terms and conditions, and (2)(2) if shareholders that are a party to the agreement owning more than 50% of the common stock propose to transfer all of their shares to a third party, then such transferring shareholders may require the other shareholders that are a party to the agreement to sell all of the shares owned by them to the proposed transferee on the same terms and conditions.
In June 2007, we entered into a sublease for 1,000 square feet (as later adjusted to 3,100 square feet) of excess office space at our Atlanta headquarters with HBR Capital, Ltd. (“HBR”), a company co-owned by David G. Hanna and his brother Frank J. Hanna, III. The sublease rate per square foot is the same as the rate that we pay under the prime lease. Under the sublease, HBR paid us $26,103$62,422, $17,299 and $25,588$16,960 for 20162022,2021 and 2015,2020, respectively. The aggregate amount of payments required under the sublease from January 1, 2017 2023 to the expiration of the sublease in May 2022 2023 is $150,717.
In January 2013, HBR began leasing the services of four employees from us. HBR reimburses us for the full cost of the employees, based on the amount of time devoted to HBR. In the years ended December 31, 20162022, 2021 and 2015,2020, we received $260,586$404,302, $380,733 and $200,234,$334,526, respectively, of reimbursed costs from HBR associated with these leased employees.
On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”).Dove. The agreement providesprovided for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding, consistingoutstanding. On December 27, 2019, the Company issued 400,000 shares of (i)its Series A Preferred Stock with an aggregate initial term loanliquidation preference of $20.0$40.0 million, and (ii) additional term loans available in exchange for full satisfaction of the sole discretion of Dove and upon our request, provided$40.0 million that the aggregate amount of all outstanding term loans does not exceed $40.0 million. On November 26, 2014,Company owed Dove funded the initial term loan of $20.0 million. In November 2016, the agreement was amended to extend the maturity date of the term loan to November 22, 2017
During 2022, the Company utilized Axiom Bank, NA to provide legal and other services related to various commercial opportunities. David G. Hanna, Frank J. Hanna, III and members of their immediate families, control and own Axiom Bancshares, Inc., which is the bank holding company for Axiom Bank, NA. The aggregate amount of payments made to Axiom Bank during 2022 was $1.0 million.
18. | Subsequent Events |
We evaluate subsequent events that occur after our consolidated balance sheet date but before our consolidated financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements; and (2) nonrecognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date.
We have evaluated subsequent events occurring after December 31, 2022, and based on our evaluation we did not identify any recognized or nonrecognized subsequent events that would have required further adjustments to our consolidated financial statements other than the developments described below.
We purchased 16,313 shares of common stock through February 28, 2023, which were subsequently retired.