Atlanticus Holdings Corp - Quarter Report: 2020 March (Form 10-Q)

 

 

Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended March 31, 2020

 

of

ATLANTICUS HOLDINGS 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

 

Atlanticus’ common stock, no par value per share, is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”) and trades on the NASDAQ Global Select Market under the ticker symbol "ATLC".

 

Atlanticus (1) is required to file reports pursuant to Section 13 of the Act, (2) has filed all reports required to be filed by Section 13 of the Act during the preceding 12 months and (3) has been subject to such filing requirements for the past 90 days.

 

Atlanticus has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.

 

Atlanticus is a smaller reporting company and is not a shell company or an emerging growth company.

 

As of May 8, 2020, 15,866,506 shares of common stock, no par value, of Atlanticus were outstanding, including 1,459,233 loaned shares to be returned.

 

Table of Contents

Page
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)	1
		Consolidated Balance Sheets	1
		Consolidated Statements of Operations	2
		Consolidated Statements of Comprehensive Income (Loss)	3
		Consolidated Statement of Shareholders’ Equity (Deficit)	4
		Consolidated Statements of Cash Flows	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
	Item 4.	Controls and Procedures	54
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	44
	Item 1A.	Risk Factors	44
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
	Item 3.	Defaults Upon Senior Securities	54
	Item 4.	Mine Safety Disclosure	54
	Item 5.	Other Information	54
	Item 6.	Exhibits	54
		Signatures	55

 

 

 

		March 31,				December 31,
		2020				2019
Assets
Unrestricted cash and cash equivalents (including $73.5 million and $78.7 million associated with variable interest entities at March 31, 2020 and December 31, 2019, respectively)		$	177,311			$	135,379
Restricted cash and cash equivalents (including $18.9 million and $25.9 million associated with variable interest entities at March 31, 2020 and December 31, 2019, respectively)			25,590				41,015
Loans, interest and fees receivable:
Loans, interest and fees receivable, at fair value (including $68.3 million and $3.9 million associated with variable interest entities at March 31, 2020 and December 31, 2019, respectively)			89,394				4,386
Loans, interest and fees receivable, gross (including $823.0 million and $857.2 million associated with variable interest entities at March 31, 2020 and December 31, 2019, respectively)			900,808				998,209
Allowances for uncollectible loans, interest and fees receivable (including $169.6 million and $168.8 million associated with variable interest entities at March 31, 2020 and December 31, 2019, respectively)			(186,908	)			(186,329	)
Deferred revenue (including $24.5 million and $40.7 million associated with variable interest entities at March 31, 2020 and December 31, 2019, respectively)			(66,534	)			(90,307	)
Net loans, interest and fees receivable			736,760				725,959
Property at cost, net of depreciation			2,552				2,738
Investments in equity-method investee			1,606				1,957
Deposits			102				104
Operating lease right-of-use assets			12,999				14,091
Prepaid expenses and other assets			14,964				15,023
Total assets		$	971,884			$	936,266
Liabilities
Accounts payable and accrued expenses		$	36,198			$	41,617
Operating lease liabilities			20,304				22,259
Notes payable, at face value (including $682.7 million and $701.1 million associated with variable interest entities at March 31, 2020 and December 31, 2019, respectively)			738,993				749,209
Notes payable associated with structured financings, at fair value (associated with variable interest entities)			3,358				3,920
Convertible senior notes			24,162				24,091
Income tax liability			6,991				5,785
Total liabilities			830,006				846,881
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 March 31, 2020 (liquidation preference - $40.0 million); 400,000 shares issued and outstanding at December 31, 2019 (Note 4)			40,000				40,000
Class B preferred units issued to noncontrolling interests (Note 4)			99,125				49,050
Shareholders' Equity
Common stock, no par value, 150,000,000 shares authorized: 15,877,505 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at March 31, 2020; and 15,885,314 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2019			—				—
Paid-in capital			209,748				212,692
Accumulated other comprehensive income			—				—
Retained deficit			(206,361	)			(211,786	)
Total shareholders’ equity			3,387				906
Noncontrolling interests			(634	)			(571	)
Total equity			2,753				335
Total liabilities, preferred stock and shareholders' equity		$	971,884			$	936,266

 

		For the Three Months Ended
		March 31,
		2020				2019
Interest income:
Consumer loans, including past due fees		$	103,056			$	50,390
Other			91				69
Total interest income			103,147				50,459
Interest expense			(13,584	)			(11,146	)
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable			89,563				39,313
Fees and related income on earning assets			19,776				11,264
Net losses upon impairment of loans, interest and fees receivable recorded at fair value			(266	)			(254	)
Provision for losses on loans, interest and fees receivable recorded at net realizable value			(67,336	)			(34,598	)
Net interest income, fees and related income on earning assets			41,737				15,725
Other operating income:
Servicing income			604				686
Other income			2,122				16,844
Equity in (loss) income of equity-method investee			(66	)			227
Total other operating income			2,660				17,757
Other operating expense:
Salaries and benefits			7,510				6,591
Card and loan servicing			15,837				10,444
Marketing and solicitation			9,317				6,387
Depreciation			285				289
Other			4,801				3,878
Total other operating expense			37,750				27,589
Income before income taxes			6,647				5,893
Income tax (expense) benefit			(1,285	)			(238	)
Net income			5,362				5,655
Net loss attributable to noncontrolling interests			63				58
Net income attributable to controlling interests		$	5,425			$	5,713
Preferred dividends		$	(2,759	)		$	—
Net income attributable to common shareholders		$	2,666			$	5,713
Net income attributable to common shareholders per common share—basic		$	0.18			$	0.40
Net income attributable to common shareholders per common share—diluted		$	0.17			$	0.39

 

		For the Three Months Ended
		March 31,
		2020				2019
Net income		$	5,362			$	5,655
Other comprehensive income (loss):
Foreign currency translation adjustment			—				(1,513	)
Comprehensive income			5,362				4,142
Comprehensive loss attributable to noncontrolling interests			63				58
Comprehensive income attributable to controlling interests		$	5,425			$	4,200
Comprehensive income attributable to controlling interests to common shareholders		$	2,666			$	4,200

 

 

		Common Stock																												Temporary Equity
		Shares Issued				Amount				Paid-In Capital				Accumulated Other Comprehensive Income (Loss)				Retained Deficit				Noncontrolling Interests				Total Equity (Deficit)				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			—				—				(75	)			—				—				—				(75	)			75				—
Preferred dividends			—				—				(2,684	)			—				—				—				(2,684	)			—				—
Stock option exercises and proceeds related thereto			2,000				—				6				—				—				—				6				—				—
Compensatory stock issuances, net of forfeitures			64,915				—				—				—				—				—				—				—				—
Contributions by preferred unit holders			—				—				—				—				—				—				—				50,000				—
Deferred stock-based compensation costs			—				—				368				—				—				—				368				—				—
Redemption and retirement of shares			(74,724	)			—				(559	)			—				—				—				(559	)			—				—
Comprehensive income			—				—				—				—				5,425				(63	)			5,362				—				—
Balance at March 31, 2020			15,877,505			$	—			$	209,748			$	—			$	(206,361	)		$	(634	)		$	2,753			$	99,125			$	40,000

		Common Stock																												Temporary Equity
		Shares Issued				Amount				Paid-In Capital				Accumulated Other Comprehensive Income (Loss)				Retained Deficit				Noncontrolling Interests				Total Equity (Deficit)				Class B Preferred Units				Series A Preferred Stock
Balance at December 31, 2018			15,563,574			$	—			$	213,435			$	3,558			$	(238,784	)		$	(338	)		$	(22,129	)		$	—			$	—
Cumulative effects from adoption of new lease standard			—				—				—				—				555				—				555				—				—
Stock option exercises and proceeds related thereto			419,500				—				1,065				—				—				—				1,065				—				—
Deferred stock-based compensation costs			—				—				412				—				—				—				412				—				—
Redemption and retirement of shares			(5,944	)			—				(21	)			—				—				—				(21	)			—				—
Comprehensive income			—				—				—				(1,513	)			5,713				(58	)			4,142				—				—
Balance at March 31, 2019			15,977,130			$	—			$	214,891			$	2,045			$	(232,516	)		$	(396	)		$	(15,976	)		$	—			$	—

 

		For the Three Months Ended March 31,
		2020				2019
Operating activities
Net income		$	5,362			$	5,655
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net			1,962				1,769
Losses upon impairment of loans, interest and fees receivable recorded at fair value			266				254
Provision for losses on loans, interest and fees receivable			67,336				34,598
Interest expense from accretion of discount on notes			143				233
Income from accretion of merchant fees and discount associated with receivables purchases			(35,763	)			(21,862	)
Unrealized losses (gains) on loans, interest and fees receivable and underlying notes payable held at fair value			14,925				(874	)
Amortization of deferred loan costs			1,326				696
Losses (income) from equity-method investments			66				(227	)
Deferred stock-based compensation costs			368				412
Lease liability payments			(2,540	)			(2,492	)
Changes in assets and liabilities:
Increase in uncollected fees on earning assets			(13,206	)			(165	)
(Decrease) increase in income tax liability			1,206				48
Decrease (increase) in deposits			2				(1	)
(Decrease) increase in accounts payable and accrued expenses			(6,605	)			13,710
Other			99				(1,769	)
Net cash provided by operating activities			34,947				29,985
Investing activities
Proceeds from equity-method investee			285				443
Investments in earning assets			(276,219	)			(164,935	)
Proceeds from earning assets			231,298				141,354
Purchases and development of property, net of disposals			(99	)			(48	)
Net cash used in investing activities			(44,735	)			(23,186	)
Financing activities
Proceeds from issuance of preferred units			50,000				—
Preferred dividends			(1,497	)			—
Proceeds from exercise of stock options			6				1,065
Purchase and retirement of outstanding stock			(559	)			(21	)
Proceeds from borrowings			61,074				89,661
Repayment of borrowings			(72,687	)			(73,105	)
Net cash provided by financing activities			36,337				17,600
Effect of exchange rate changes on cash			(42	)			80
Net increase in cash and cash equivalents			26,507				24,479
Cash and cash equivalents and restricted cash at beginning of period			176,394				141,754
Cash and cash equivalents and restricted cash at end of period		$	202,901			$	166,233
Supplemental cash flow information
Cash paid for interest		$	13,542			$	3,894
Net cash income tax payments		$	79			$	190

 

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 primarily focused on facilitating consumer credit through 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 under traditional financing options.

 

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.  References to "receivables" include receivables purchased from our bank partners and from third parties. As discussed further below, we reflect our business lines within two reportable segments: Credit and Other Investments; and Auto Finance. See also Note 3, “Segment Reporting,” for further details.

 

Within our Credit and Other Investments segment, we facilitate consumer finance programs offered by our bank partner to originate consumer loans through multiple channels, including retail point-of-sale, direct mail solicitation, digital marketing and through partner relationships. In the retail credit (the “point-of-sale” operations) channel, we partner with retailers and service providers in various industries across the United States (“U.S.”) to enable them to provide credit to their customers for the purchase of goods and services. These services of our bank partner are often extended to consumers who may have been declined under traditional financing options. We specialize in supporting this “second look” credit service in various market segments across the U.S. Additionally, we support lenders who market general purpose credit cards directly to consumers (collectively, the “direct-to-consumer” operations) through additional channels enabling them to reach consumers through a diverse origination platform that includes retail point-of-sale, direct mail solicitation, digital marketing and partnerships with third parties. Using our infrastructure and technology platform, we also provide loan servicing, including risk management and customer service outsourcing, for third parties.

 

Additionally, we report within our Credit and Other Investments segment: 1) the servicing income from our legacy credit card receivables, 2) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and 3) gains or losses associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at the lower of cost or market valuation. None of these companies are publicly-traded and there are no material pending liquidity events.

 

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.

 

On March 13, 2020, President Trump declared a national emergency under the National Emergencies Act due to the novel coronavirus pandemic (referred to as “COVID-19”).  Nationwide responses to the COVID-19 pandemic have included restrictions on “non-essential” businesses imposed by state and local governments.  Consumer spending behavior has been significantly impacted by the COVID-19 pandemic, principally due to the restrictions on “non-essential” businesses, issuances of stay-at-home orders, increased unemployment and uncertainties about the extent and duration of the pandemic.

 

The duration and severity of the effects of COVID-19 on our financial condition, results of operations and liquidity remain highly uncertain.  Likewise, we do not know the duration and severity of the impact of COVID-19 on all members of the Company’s ecosystem – our bank partner, merchants and consumers – as well as our employees. We continue to monitor the ongoing pandemic and are modifying certain business practices by restricting employee travel and executing on a company-wide remote work program which has also been adopted by certain of our third party service partners. 

 

 

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 differ materially from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on credit card receivables, significantly affect the reported amount of credit card receivables that we report at fair value and our notes payable associated with structured financings, at fair value; these estimates likewise affect the changes in these amounts reflected within our fees and related income on earning assets line item on our consolidated statements of operations. Additionally, estimates of future credit losses have a significant effect on loans, interest and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans, interest and fees receivable within our consolidated statements of operations.

 

We have eliminated all significant intercompany balances and transactions for financial reporting purposes.

 

 

Loans, Interest and Fees Receivable

 

We maintain two categories of Loans, Interest and Fees Receivable on our consolidated balance sheet: those that are carried at fair value (Loans, interest and fees receivable, at fair value) and those that are carried at net amortized cost (Loans, interest and fees receivable, gross). For both categories of loans, interest and fees receivable, other than our Auto Finance receivables, interest and fees are discontinued when loans, interest 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. 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 enough to pay the debt in full.

 

Loans, Interest and Fees Receivable, at Fair Value. Loans, interest and fees receivable held at fair value represent both the receivables underlying credit card securitization trusts (the "Securitized Receivables") and those receivables for which we elected the fair value option on January 1, 2020 (the "Fair Value Receivables"). Both the Securitized Receivables and the Fair Value Receivables are held by entities that qualify as variable interest entities ("VIE"), and are consolidated onto our consolidated balance sheets, some portfolios of which are unencumbered and some of which are still encumbered under structured or other financing facilities.

 

Under the fair value option for both our Securitized Receivables and our Fair Value Receivables, 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 fair value are recorded in "Changes in fair value of loans, interest and fees receivable recorded at fair value" as a component of "Fees and Related income on earning assets" in the consolidated statements of operations in the period of the fair value changes.

 

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. Our loans, interest and fees receivable, gross, currently consist of receivables associated with (a) a portion (those which are not part of our Fair Value Receivables) of our U.S. point-of-sale and direct-to-consumer financing and other credit products platform within our Credit and Other Investments segment and (b) our Auto Finance segment’s operations. Our Credit and Other Investments segment loans, interest and fees receivable generally are unsecured, while our Auto Finance segment loans, interest and fees receivable generally are secured by the underlying automobiles in which we hold the vehicle title. We purchased auto loans with outstanding principal of $47.4 million and $49.4 million for the three months ended March 31, 2020 and 2019, respectively, through our pre-qualified network of independent automotive dealers and automotive finance companies.

 

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 that are not carried 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. 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 loan losses. Each portfolio segment is 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 attributes for 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 a consumer; changes in underwriting criteria; and estimated recoveries. For our Auto Finance segment 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. Conversely, for receivables in our Credit and Other Investments segment, which generally do not have a secured interest in collateral, we look to reserve for the gross expected exposure to charge-offs.

 

These reserves are considered in conjunction with (and potentially reduced by) any unearned fees and discounts that may be applicable for an outstanding loan receivable. 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 if circumstances indicate that the receivable or pool of receivables may be at higher risk for non-performance than other receivables (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).

 

Certain of our loans, interest and fees receivable also contain components of deferred revenue including merchant fees on the purchases of receivables for our point-of-sale receivables and annual fee billings for our direct-to-consumer credit card receivables. Our point-of-sale 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 and loan discounts. Additionally, many of our direct-to-consumer credit card receivables have an annual membership fee that is billed to the consumer on card activation and on each anniversary of that date thereafter. As of March 31, 2020 and December 31, 2019, the weighted average remaining accretion period for the $66.5 million and $90.3 million of deferred revenue reflected in the consolidated balance sheets was 11 months. Included within deferred revenue, are merchant fees and discounts on purchased loans of $40.9 million and $48.1 million as of March 31, 2020 and December 31, 2019, respectively.

 

 

A roll-forward (in millions) of our allowance for uncollectible loans, interest and fees receivable by class of receivable is as follows: 

 

 

 

 

 

 

An aging of our delinquent loans, interest and fees receivable, gross (in millions) by class of receivable as of March 31, 2020 and December 31, 2019 is as follows:

 

 

 

Troubled Debt Restructurings. As part of ongoing collection efforts, once an account, the receivable of which is included in our Credit and Other Investments segment, is 90 days or more past due, the related receivable is placed on a non-accrual status. Placement on a non-accrual status results in the use of programs under which the contractual interest associated with a receivable may be reduced or eliminated, or a certain amount of accrued fees is waived, provided a minimum number or amount of payments have been made. Following this adjustment, if a customer demonstrates a willingness and ability to resume making monthly payments and meets certain additional criteria, we will re-age the customer’s account. When we re-age an account, we adjust the status of the account to bring a delinquent account current, but generally do not make any further modifications to the payment terms or amount owed. Once an account is placed on a non-accrual status, it is closed for further purchases. Accounts that are placed on a non-accrual status and thereafter make at least one payment qualify as troubled debt restructurings (“TDRs”). As a result of the recent COVID-19 pandemic and subsequent declaration of a national emergency by the President on March 13, 2020 under the National Emergencies Act, we have offered certain consumers the ability to defer their payment without penalty during the national emergency period. On March 22, 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.” This 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. The guidance goes on to explain that, in consultation with the FASB staff, the federal bank regulatory agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were impacted by COVID-19 and who were less than 30 days past due as of the implementation date of a relief program are not TDRs.  Although we are not a financial institution, we believe this constitutes an interpretation of GAAP and therefore should be applied to our accounting circumstances.  As of April 30, 2020, the number of customers who were granted concessions that qualified under this guidance was not material.

 

 

The following table details by class of receivable, the number and amount of modified loans, including TDRs that have been re-aged, as of March 31, 2020 and December 31, 2019:

 

*“TDRs - Performing” include accounts that are current on all amounts owed, while “TDRs - Nonperforming” include all accounts with past due amounts owed.

 

Given that the above TDRs have a high reserve rate prior to modification as TDRs, we do not separately reserve or impair these receivables outside of our general reserve process.

 

The Company modified 43,466 and 19,383 accounts in the amount of $55.3 million and $29.2 million during the twelve month periods ended March 31, 2020 and March 31, 2019, respectively, that qualified as TDRs. The following table details by class of receivable, the number of accounts and balance of loans that completed a modification (including those that were classified as TDRs) within the prior twelve months and subsequently defaulted.

 

 

 

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. Commencing in July 2019, accounts payable and accrued expenses includes payments owed under a deferred payment program started with an unrelated third-party for a portion of our marketing expenditures. As a result of this agreement, we were able to extend the payment terms associated with our growing marketing spend between 10-37 months. 

 

Income Taxes

 

We experienced an effective income tax expense rate of 19.3% for the three months ended March 31, 2020, compared to an effective income tax expense rate of 4.0% for the three months ended March 31, 2019.  Our effective income tax expense rate for the three months ended March 31, 2020 is below the statutory rate principally due to 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. The aforementioned was partially offset by accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during this period. Our effective income tax expense rate for the three months ended March 31, 2019 is below the statutory rate principally due to reductions in our valuation allowances against net federal deferred tax assets during such period—the effect of such reductions being partially offset by accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during such period.

 

We report income tax-related interest and penalties (including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities) within our income tax line item on our consolidated statements of operations. We likewise report the reversal of income tax-related interest and penalties within such line item to the extent we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During the three months ended March 31, 2020, and 2019, we reported $0.0 million and $0.1 million, respectively, of net income-tax related interest and penalties within those periods’ respective income tax expense line items.

 

In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. In 2015, we filed an amended return claim that, if accepted, would have eliminated the $7.4 million assessment (and corresponding interest and penalties) under a negotiated provision of the December 2014 IRS settlement. The IRS filed a lien (as is customarily the case) associated with the assessment. Subsequently, an IRS examination team denied our amended return claims, and we filed a protest with IRS Appeals. Following correspondence and conferences held with IRS Appeals, we received and accepted a settlement offer from IRS Appeals in June 2018 that reduced our $7.4 million net unpaid income tax assessment referenced above to $3.7 million (such $3.7 million remaining unpaid assessment relating to the 2006 year to which we had originally carried back the aforementioned net operating losses). In July 2018, we paid $5.4 million to the IRS to cover the $3.7 million unpaid income tax assessment and most of the interest that had accrued thereon. Subsequently, during the three months ended September 30, 2018, the IRS refunded $0.5 million of our $5.4 million payment, and in 2019, we paid $0.7 million to the IRS to cover the interest on the 2006 income tax liability. Although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for failure-to-pay penalties (and accrued interest thereon) related to this matter. We are pursuing complete abatement of the failure-to-pay penalties of $0.9 million, and once this matter is resolved through either abatement or payment, we expect the IRS to remove the aforementioned lien in due course.

 

Revenue Recognition and Revenue from Contracts with Customers

 

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 customer agreements. Premiums, discounts and merchant fees paid or received associated with installment or auto loans that are not 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 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 based upon the contractual terms of the loans.

 

Fees and Related Income on Earning Assets

 

Fees and related income on earning assets primarily include: (1) fees associated with the credit products, including the receivables underlying our U.S. point-of-sale finance and direct-to-consumer platform, and our legacy credit card receivables; (2) changes in the fair value of loans, interest and fees receivable recorded at fair value; (3) changes in fair value of notes payable associated with structured financings recorded at fair value; and (4) gains or losses associated with our investments in securities. 

 

We assess fees 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 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 which is generally 12 months for receivables that are not included as part of our Fair Value Receivables, and when billed for those receivables that are included as part of our Fair Value Receivables. 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 based upon the contractual terms of the loans.  The election of the fair value option to account for certain loans receivable that are acquired on or after January 1, 2020 resulted in increased fees recognized on credit products for the first quarter of 2020. 

 

The components (in thousands) of our fees and related income on earning assets are as follows:

 

 

The above changes in the fair value of loans, interest and fees receivable recorded at fair value category exclude the impact of current period charge offs associated with these receivables which are separately stated in Net losses upon impairment of loans, interest and fees receivable recorded at fair value on our consolidated statements of operations. See Note 6, “Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.

 

 

Other income

 

Other income includes revenues associated with ancillary product offerings and interchange revenues.  We recognize these fees as income in the period earned. Included in Other income for the three months ended March 31, 2019 is $15.5 million associated with reductions in accruals related to one of our portfolios. The accrual was based upon our estimate of the amount that may be claimed by customers and was based upon several factors including customer claims volume, average claim amount and a determination of the amount, if any, which may be offered to resolve such claims. The assumptions used in the accrual estimate were subjective, mainly due to uncertainty associated with future claims volumes and the resolution costs, if any, per claim. 

 

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 Credit and Other Investments segment and servicing revenue and other customer-related fees in both our Credit and Other Investments segment and our Auto Finance segment. Servicing revenue is generated by meeting contractual performance obligations related to the collection of amounts due on receivables, and is settled with the customer net of our fee. Revenue from these contracts with customers is included as a component of Other income on our consolidated statements of operations. Service charges and other customer related fees are earned from customers based on the occurrence of specific services that do not result in an ongoing obligation beyond what has already been rendered. Components (in thousands) of our revenue from contracts with customers is as follows:

 

(1) Interchange revenue is presented net of customer reward expense.

 

(1) Interchange revenue is presented net of customer reward expense.

 

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance requires an assessment of credit losses based on expected rather than incurred 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 FASB 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. The standard will 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 (and ASU 2019-05) was initially effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The FASB recently delayed the effective date of this standard until annual and interim periods beginning after December 15, 2022 for non-accelerated and smaller reporting company filers, with early adoption permitted for smaller reporting companies (among others). We are currently in the process of reviewing accounting interpretations, including the recently added fair value option, expected data requirements and necessary changes to our loss estimation methods, processes and systems. This standard is expected to result in an increase to our allowance for loan losses (unless the fair value option is elected) given the change to expected losses for the estimated life of the financial asset. If the fair value option is elected for some or all of our eligible receivables, we would expect more potential volatility in the recorded value of the assets as these receivables are remeasured each period. The extent of the financial statement impact will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.

 

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The ASU is effective for all entities for fiscal years beginning after December 15, 2019. The amendments address changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty and should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

 

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 March 31, 2020, 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.

 

 

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: Credit and Other Investments, and Auto Finance.

 

As of both March 31, 2020 and December 31, 2019, we did not have a material amount of long-lived assets located outside of the U.S., and only a negligible portion of our revenues for the three months ended March 31, 2020 and 2019 were generated outside of the U.S.

 

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:

 

 

 

4.	Shareholders’ Equity and 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 (10,000,000 shares authorized, 400,000 shares outstanding) 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, non-compounding) 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 a majority of the holders of the 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 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—basic.  The assumed redemption of Series A Preferred Stock in exchange for shares of common stock is included in our calculation of diluted EPS as part of the Net income attributable to common shareholders per share—diluted. See Note 12, “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. 

 

During the three months ended March 31, 2020 and 2019, we repurchased and contemporaneously retired 74,724 and 5,944 shares of our common stock at an aggregate cost of $559,000 and $21,000, respectively, pursuant to both open market and private purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations.

 

We had 1,459,233 loaned shares outstanding at March 31, 2020 and December 31, 2019, which were originally lent in connection with our November 2005 issuance of convertible senior notes. We retire lent shares as they are returned to us.

 

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. On March 30, 2020, the subsidiary issued an additional 50.0 million Class B preferred units under the same terms. The proceeds from the transaction will be used for general corporate purposes.  We have included the issuance of these Class B preferred units as temporary noncontrolling interest on the consolidated balance sheets. Dividends paid on the Class B preferred units are deducted from Net income attributable to controlling interests to derive Net income attributable to common shareholders—basic.  See Note 12, “Net Income Attributable to Controlling Interests Per Common Share” for more information.

 

5.	Investment in Equity-Method Investee

 

Our equity-method investment outstanding at March 31, 2020 consists of our 66.7% interest in a joint venture formed to purchase a credit card receivable portfolio.

 

In the following tables, we summarize (in thousands) balance sheet and results of operations data for our equity-method investee:

 

 

 

 

6.	Fair Values of Assets and Liabilities

 

As previously discussed, as of January 1, 2020, we elected the fair value option to account for certain loans receivable associated with our point-of-sale and direct-to-consumer platform that are acquired on or after January 1, 2020. We estimate the fair value of these receivables using a discounted cash flow model, and reevaluate the fair value of our Fair Value Receivables at the end of each quarter. Additionally, we may adjust our models to reflect macro events that we believe market participants would consider relevant. With the aforementioned market impacts of COVID-19 we have included some expected market degradation in our model to reflect the possibility of delinquency rates increasing in the near term (and the corresponding increase in chargeoffs and decrease in payments) above what historical trends would suggest. We continue to monitor the impact that COVID-19 has on our receivables and will adjust our models accordingly as the situation develops. 

 

We previously elected the fair value option with respect to our investments in equity securities, included in other assets, as well as our credit card loans, interest and fees receivable portfolios, the retained interests in which we historically recorded at fair value under securitization structures that were off balance sheet prior to accounting rules changes requiring their consolidation into our financial statements. 

 

Fair value differs from amortized cost accounting in various ways. Under the fair value option credit losses are recognized through income as they are incurred rather than through the establishment of an allowance and provision for losses. We update our fair value analysis each quarter, with changes since the prior reporting period reflected as a component of Fees and related income on earning assets in the consolidated statements of operations. Changes in interest rates, credit spreads, realized and projected credit losses and cash flow timing will lead to changes in the fair value of our Loans, interest and fees receivable, at fair value and therefore impact earnings. 

 

The primary differences between fair value and amortized cost accounting are:

	•	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 loan 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;
	•	Changes in the fair value of loans and notes impact recorded revenues; and
	•	Net charge-offs are recognized as they occur.

 

For all of our other debt (other than the notes payable underlying our formerly off-balance sheet credit card securitization structures), we have not elected the fair value option. Nevertheless, pursuant to applicable requirements, we include disclosures of the fair value of this other debt 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-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 March 31, 2020 and December 31, 2019 fair values and carrying amounts of (1) our assets that are required to be carried at fair value in our consolidated financial statements and (2) our assets not carried at fair value, but for which fair value disclosures are required:

 

 

 

(1)

For cash, deposits and investments in equity securities, the carrying amount is a reasonable estimate of fair value.

 

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 fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.” For our loans, interest and fees receivable included in the above tables, 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 three months ended March 31, 2020 and 2019:

 

 

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 when recognized.

 

 

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 fees and related income on earning assets category in our consolidated statements of operations, specifically as changes in fair value of loans, interest and fees receivable recorded at fair value. The net revaluation of loans, interest and fees receivable is based on the present value of future cash flows using a valuation model of expected cash flows and the estimated cost to service and collect those cash flows. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including estimates of gross yield, payment rates, expected credit loss rates, servicing costs, and discount rates. Interest income on receivables underlying our asset classes that are carried at fair value in our consolidated financial statements is recorded in Interest income - Consumer loans, including past due fees in our consolidated statements of operations.

 

For 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 March 31, 2020 and December 31, 2019:

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

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 March 31, 2020 and December 31, 2019 fair values and carrying amounts of (1) our liabilities that are required to be carried at fair value in our consolidated financial statements and (2) our liabilities not carried at fair value, but for which fair value disclosures are required:

 

 

 

 

For our notes payable, 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 related 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 (“convertible senior notes”), we assess fair value based upon the most recent trade data available from third-party providers. We have evaluated the fair value of our third party debt by analyzing the expected repayment terms and credit 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, “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 three months ended March 31, 2020 and 2019.

 

 

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 changes in fair value of notes payable associated with structured financings line item within the fees and related income on earning assets category of our consolidated statements of operations. The legal entity associated with the securitization transaction is consolidated as a VIE as the Company is deemed the primary beneficiary of the entity.  The Company is not liable for the full face value of the liability in the VIE so it is carried at fair value based upon amounts the borrower will receive from the legal entity. The net revaluation of these notes is based on the present value of future cash flows utilized in repayment of the outstanding principal and interest under the facilities using a valuation model of expected cash flows net of the contractual service expenses within the facilities. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including: estimates of  gross yield, payment rates, expected credit loss rates, servicing costs, and discount rates on the credit card receivables that secure the non-recourse notes payable; costs of funds; discount rates; and contractual servicing fees. Accrued interest expense on notes payable underlying our notes payable associated with structured financings, at fair value is recorded in Interest expense in our consolidated statements of operations.

 

For material Level 3 liabilities 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 March 31, 2020 and December 31, 2019:

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

 

Other Relevant Data

 

Other relevant data (in thousands) as of March 31, 2020 and December 31, 2019 concerning certain assets and liabilities we carry at fair value are as follows:

 

 

 

 

 

7.	Variable Interest Entities

 

The Company contributes certain receivables to VIEs.  These entities are sometimes established to facilitate third party financing. When assets are contributed to the VIE, they serve as collateral for the debt securities issued by the 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 are the primary beneficiary. 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 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 or held a variable interest (in millions):

 

 

 

8.

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 terms of 1 to 5 years, some of which include options, at 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 associated with our lease liabilities and supplemental cash flow information related to those leases were as follows:

 

 

As of March 31, 2020, maturities of lease liabilities were as follows:

 

 

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 March 31, 2020, we had no material non-cancelable capital leases with initial or remaining terms of more than one year.

 

9.	Notes Payable

 

Notes Payable Associated with Structured Financings, at Fair Value

 

Scheduled (in millions) in the table below are (1) the carrying amount of our structured financing note secured by certain credit card receivables and reported at fair value as of March 31, 2020 and December 31, 2019, (2) the outstanding face amount of our structured financing note secured by certain credit card receivables and reported at fair value as of March 31, 2020 and December 31, 2019, and (3) the carrying amount of the credit card receivables and restricted cash that provide the exclusive means of repayment for the note (i.e., lenders have recourse only to the specific credit card receivables and restricted cash underlying each respective facility and cannot look to our general credit for repayment) as of March 31, 2020 and December 31, 2019.

 

 

Contractual payment allocations within this credit card receivables structured financing provide for a priority distribution of cash flows to us to service the credit card receivables, a distribution of cash flows to pay interest and principal due on the notes, and a distribution of all excess cash flows (if any) to us. The structured financing facility included in the above table is amortizing down along with collections of the underlying receivables and there are no provisions within the debt agreement that allow for acceleration or bullet repayment of the facility prior to its scheduled expiration date. The aggregate carrying amount of the credit card receivables and restricted cash that provide security for the $3.4 million in fair value of the structured financing facility indicated in the above table is $3.4 million, which means that we have no aggregate exposure to pre-tax equity loss associated with the above structured financing arrangement at March 31, 2020.

 

As discussed elsewhere, the legal entity holding the securitization facility discussed in the table above, is a VIE.  Beyond our role as servicer of the underlying assets within the credit cards receivables structured financing, we have provided no other financial or other support to the structure, and we have no explicit or implicit arrangements that could require us to provide financial support to the structure.

 

 

Notes Payable, at Face Value and Notes Payable to Related Parties

 

Other notes payable outstanding as of March 31, 2020 and December 31, 2019 that are secured by the financial and operating assets of either the borrower, another of our subsidiaries or both, include the following, scheduled (in millions); except as otherwise noted, the assets of our holding company (Atlanticus Holdings Corporation) are subject to creditor claims under these scheduled facilities:

 

 

(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.
(4)	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 associated with variable interest entities.

(6)	Creditors do not have recourse against the general assets of the Company but only to the collateral within the VIEs.
*	As of March 31, 2020, the LIBOR rate was 0.99% and the prime rate was 3.25%.

 

In October 2015, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $50.0 million revolving borrowing limit that can be drawn to the extent of outstanding eligible principal receivables (of which $49.4 million was drawn as of March 31, 2020). 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 3.0%. The facility matures on October 30, 2022 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 facility is guaranteed by Atlanticus who is required to maintain certain minimum liquidity levels.

 

In October 2016, we (through a wholly owned subsidiary) entered a revolving credit facility with an initial $40.0 million borrowing limit available to the extent of outstanding eligible principal receivables of our CAR subsidiary (of which $38.3 million was drawn as of March 31, 2020). 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 March 31, 2020, the borrowing limit was $55.0 million and the maturity was November 1, 2021. 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 December 2016, we (through a wholly owned subsidiary) entered a credit facility with a $20.0 million borrowing limit available to the extent of outstanding eligible principal receivables (of which $13.1 million was drawn as of March 31, 2020). In periods subsequent to December 2016, we amended the original agreement to either extend the maturity date and/or reduce the capacity of this credit facility. As of March 31, 2020, the facility matures on December 31, 2020 and the borrowing limit was $13.8 million. The 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 5.0%. The note is guaranteed by Atlanticus. 

 

In February 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million (subsequently reduced to $70.0 million) of such notes (of which $15.8 million was outstanding as of March 31, 2020) to an unaffiliated third party pursuant to a facility that can be drawn upon to the extent of outstanding eligible receivables. The interest rate on the notes is fixed at 14.0%. The facility matures on February 8, 2022 and is subject to certain affirmative covenants and collateral performance tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance of notes. The facility also may be prepaid subject to payment of a prepayment or other fee.

 

In December 2017, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $15.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $9.0 million was drawn as of March 31, 2020). 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 3.5%. The facility matures on December 21, 2020 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 portion of the outstanding balance. The note is guaranteed by Atlanticus.

 

In 2018, we (through a wholly owned subsidiary) entered into two separate facilities associated with the above mentioned program to sell up to an aggregate $200.0 million of notes which are secured by the receivables and other assets of the trust (of which $0.0 million was outstanding as of March 31, 2020) to separate unaffiliated third parties pursuant to facilities that can be drawn upon to the extent of outstanding eligible receivables. Interest rates on the notes are based on commercial paper rates plus 3.75% and LIBOR plus 4.875%, respectively. The facilities mature on June 11, 2021 and November 16, 2020, respectively, and are subject to certain affirmative covenants and collateral performance tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance of notes. The facilities also may be prepaid subject to payment of a prepayment or other fee.

 

In September 2018, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $50.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $13.3 million was drawn as of March 31, 2020). 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 6.5%. The loan is subject to certain affirmative covenants, including a charge-off and delinquency 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.

 

In November 2018, we sold $167.3 million of asset backed securities (“ABS”) secured by certain retail point-of-sale receivables. A portion of the proceeds from the sale were used to pay-down our existing term and revolving facilities associated with our point-of-sale receivables, noted in the table above, and the remaining proceeds are available to fund the acquisition of future receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.76%.

 

In June 2019, we (through a wholly owned subsidiary) entered a revolving credit facility with a $15.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $14.3 million was drawn as of March 31, 2020). 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 June 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.37%.

 

In August 2019, we repurchased $54.4 million in face amount of our outstanding convertible senior notes for $16.3 million in cash (including accrued interest) and the issuance of a $17.4 million term note, which bears interest at a fixed rate of 8.0% and is due in August 2024. See Note 10 “Convertible Senior Notes” for additional information.

 

 

In September 2019, we (through a wholly owned subsidiary) entered a term facility with a $30.0 million revolving borrowing limit (of which $8.7 million was drawn as of March 31, 2020) 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 4.5%. The facility matures on September 30, 2021 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 November 2019, we sold $200.0 million of ABS secured by certain credit card receivables. 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 available 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%.

 

As of March 31, 2020, we were in compliance with the covenants underlying our various notes payable.

 

 

10.	Convertible Senior Notes

 

In November 2005, we issued $300.0 million aggregate principal amount of 5.875% convertible senior notes due November 30, 2035. The convertible senior notes are unsecured, subordinate to existing and future secured obligations and structurally subordinate to existing and future claims of our subsidiaries’ creditors. These notes (net of repurchases since the issuance dates) are reflected within convertible senior notes on our consolidated balance sheets. No put rights exist under our convertible senior notes.

 

On August 26, 2019, we repurchased $54.4 million in face amount of our outstanding convertible senior notes for $16.3 million in cash (including accrued interest) and the issuance of a $17.4 million term note, which bears interest at a fixed rate of 8.0% and is due in August 2024. The repurchase resulted in a gain of approximately $5.1 million (net of the convertible senior notes’ applicable share of deferred costs, which were written off in connection with the repurchase). Upon acquisition, the notes were retired. See Note 9 "Notes Payable" for further information regarding the note issuance.

 

The following summarizes (in thousands) components of our consolidated balance sheets associated with our convertible senior notes:

 

 

 

 

11.	Commitments and Contingencies

 

General

 

Under finance products available in the point-of-sale and direct-to-consumer 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 $1.2 billion at March 31, 2020. We have never experienced a situation in which all borrowers have exercised their entire available lines of credit at any given point in time, nor do we anticipate this will ever occur in the future. Moreover, there would be a concurrent increase in assets should there be any exercise of these lines of credit. We also have the effective right to reduce or cancel these available lines of credit at any time.

 

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 floor plan financing allows dealers and finance companies to borrow up to the maximum pre-approved credit limit allowed in order to finance ongoing inventory needs. These loans are secured by the underlying auto inventory and, in certain cases where we have other lending products outstanding with the dealer, are secured by the collateral under those lending arrangements as well, including any outstanding dealer reserves. As of March 31, 2020, CAR had unfunded outstanding floor-plan financing commitments totaling $9.1 million. Each draw against unused commitments is reviewed for conformity to pre-established guidelines.

 

Under agreements with third-party originating and other financial institutions, we have pledged security (collateral) related to their issuance of consumer credit and purchases thereunder, of which $6.6 million remains pledged as of March 31, 2020 to support various ongoing contractual obligations. 

 

Under agreements with third-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 March 31, 2020, we have assessed the likelihood of any potential payments related to the aforementioned contingencies as remote. We will accrue liabilities related to these contingencies in any future period if and in which we assess the likelihood of an estimable payment as probable.

 

Under the account terms, consumers have the option of enrolling in a credit protection program with our lending partner which would make the minimum payments owed on their accounts for a period of up to six months upon the occurrence of an eligible event.  Eligible events typically include loss of life, job loss, disability, or hospitalization. As an acquirer of receivables, our potential exposure under this program was $20.2 million as of March 31, 2020 (of which we have accrued $1.4 million as of March 31, 2020). We have never experienced a situation in which all eligible participants have applied for this benefit at any given point in time, nor do we anticipate this will ever occur in the future. 

   

We also are subject to certain minimum payments under cancelable and non-cancelable lease arrangements. For further information regarding these commitments, see Note 8, “Leases”.

 

Litigation

 

We are involved in various legal proceedings that are incidental to the conduct of our business. There are currently no pending legal proceedings that are expected to be material to us.

 

12.	Net Income Attributable to Controlling Interests Per Common Share

 

The following table sets forth the computations of net income attributable to controlling interests per share of common stock (in thousands, except per share data): 

 

 

(1)

Shares related to unvested share-based payment awards included in our basic and diluted share counts were 473,887 for the three months ended March 31, 2020, compared to 397,566 for the three months ended March 31, 2019.

 

As their effects were anti-dilutive, we excluded stock options to purchase 0.0 million and 1.0 million shares from our net income attributable to controlling interests per share of common stock calculations for the three months ended March 31, 2020 and 2019, respectively.  

 

For the three months ended March 31, 2020 and 2019, there were no shares potentially issuable and thus includible in the diluted net income attributable to controlling interests per share of common stock calculations pursuant to our convertible senior notes. However, in future reporting periods during which our closing stock price is above the $24.61 conversion price for the convertible senior notes, and depending on the closing stock price at conversion, the maximum potential dilution under the conversion provisions of such notes is 1.4 million shares, which could be included in diluted share counts in net income per share of common stock calculations. See Note 10, “Convertible Senior Notes,” for a further discussion of these convertible securities.

 

13.	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 (the “Fourth Amended 2014 Plan”). The Fourth Amended 2014 Plan was approved by our shareholders in May 2019. Among other things, the Fourth Amended 2014 Plan (i) increased the number of shares of Common Stock available for issuance under the plan by 2,000,000 shares and (ii) extended the term of the plan by approximately two years. As of March 31, 2020, 62,032 shares remained available for issuance under the ESPP and 1,735,430 shares remained available for issuance under the Fourth Amended 2014 Plan.

 

Exercises and vestings under our stock-based compensation plans resulted in no income tax-related charges to paid-in capital during the three months ended March 31, 2020 and 2019.

 

Restricted Stock and Restricted Stock Units

 

During the three months ended March 31, 2020 and 2019, we granted 58,248 and 205,000 shares of restricted stock and restricted stock units (net of any forfeitures), respectively, with aggregate grant date fair values of $0.6 million and $0.7 million, respectively. We incurred expenses of $0.3 million and $0.2 million during the three months ended March 31, 2020 and 2019, 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 March 31, 2020, our unamortized deferred compensation costs associated with unvested restricted stock awards were $1.0 million with a weighted-average remaining amortization period of 1.6 years.

 

Stock Options

 

Our Fourth Amended 2014 Plan provides that we may grant options on or shares of our common stock (and other types of equity awards) to members of our Board of Directors, employees, consultants and advisors. The exercise price per share of the options must be equal to or greater than the market price on the date the option is granted. The option period may not exceed 10 years from the date of grant. The vesting requirements for options are determined by the Compensation Committee of the Board of Directors. We had expense of $0.1 million and $0.2 million related to stock option-related compensation costs during the three months ended March 31, 2020 and 2019, respectively. When applicable, we recognize stock option-related compensation expense for any awards with graded vesting on a straight-line basis over the vesting period for the entire award. The table below includes additional information about outstanding options:

 

 

We had $0.4 million and $0.5 million of unamortized deferred compensation costs associated with unvested stock options as of March 31, 2020 and December 31, 2019, respectively.