Atlanticus Holdings Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in millions of dollars unless otherwise noted. Atlanticus provides technology and servicing to consumer lenders, invests in receivables, and operates Credit and Other Investments and Auto Finance segments.
Financial results and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total interest income | $24.1 | $16.9 | $63.9 | $51.2 |
| Net interest income before fees and loan-loss provision | $18.8 | $12.2 | $49.2 | $37.5 |
| Net interest, fees and related income after provision and fair-value receivable charge-offs/recoveries | $3.0 | $28.4 | $42.6 | $90.9 |
| Pre-tax income (loss) | $(13.7) | $(0.5) | $(8.1) | $3.7 |
| Net income (loss) attributable to controlling interests | $(9.1) | $0.4 | $(4.2) | $3.8 |
| EPS, basic and diluted | $(0.65) | $0.03 | $(0.31) | $0.27 |
Interest expense was $5.3 million in Q3 and $14.7 million for the nine months. The loan-loss provision for receivables at net realizable value was $17.5 million in Q3 and $33.0 million year to date. The filing does not provide a single directly comparable overall revenue or operating-margin measure; results include material fair-value, charge-off/recovery and rental-income effects.
At September 30, assets were $335.8 million, including $58.7 million unrestricted cash and $17.2 million restricted cash. Net loans and fees receivable were $226.9 million. Total liabilities were $328.4 million and total equity was $7.4 million. Debt included $117.9 million of notes payable at face value, $40.0 million owed to related parties, $14.4 million of structured-financing notes at fair value, and $62.0 million carrying value of convertible notes.
Nine-month operating cash flow was $24.7 million, versus cash used of $7.2 million in 2015; investing used $56.6 million, versus $12.0 million provided; financing provided $40.8 million, versus $5.9 million used. Unrestricted cash increased $7.7 million to $58.7 million.
Changes versus prior comparable periods
- Interest income rose 43% in Q3 and 25% year to date, principally reflecting growth in point-of-sale and direct-to-consumer receivables. Those receivables grew to $187.0 million from $95.6 million a year earlier.
- Despite higher interest income, Q3 net loss attributable to controlling interests was $9.1 million, compared with $0.4 million income a year earlier. The main reported pressures included a $17.5 million provision, lower rental revenue and less favorable fair-value and recovery-related income.
- Nine-month net loss was $4.2 million versus $3.8 million income in 2015. Rental revenue fell to $8.1 million from $28.8 million as the company curtailed and then stopped new rent-to-own originations; related depreciation also declined.
- Credit and Other Investments recorded pre-tax losses of $15.7 million in Q3 and $13.0 million for the nine months; Auto Finance reported pre-tax income of $2.0 million and $5.0 million, respectively.
- Gross loans and fees receivable increased to $264.3 million from $180.1 million at year-end 2015. The allowance rose to $34.6 million from $21.5 million. Credit and Other Investments managed receivables were $221.7 million, up from $151.1 million at September 2015; Auto Finance managed receivables were $76.6 million, up from $75.4 million.
Outlook, risks and unusual items
- Management expected modest managed-receivables growth through the remainder of 2016 and into 2017, dependent on new retail partners, existing partnerships, direct-to-consumer growth and available financing. It anticipated higher interest expense as the business expanded.
- Management expected credit losses and delinquency measures to rise as newer point-of-sale and direct-to-consumer receivables season and reach peak charge-off periods. Credit and Other Investments managed receivables were 10.9% 30 or more days past due at quarter-end, versus 10.5% a year earlier; its adjusted charge-off ratio was 10.7% in Q3, versus 16.5%. Auto Finance’s 30-plus-day delinquency rate was 12.7%, versus 13.3%, and gross charge-off ratio was 2.8%, versus 3.0%.
- The company cited a substantial fixed-cost infrastructure and said Credit and Other Investments cash inflows covered direct variable costs and only part of allocated overhead. Failure to grow revenues or contain costs could continue to pressure consistent profitability.
- At quarter-end, a $40.0 million related-party secured term loan bearing 9% interest was due November 22, 2016; management said it was discussing an extension and anticipated similar terms. The CAR revolving facility was repaid in October 2016 and replaced with a $40.0 million facility maturing November 1, 2018, subject to eligibility and covenants.
- An IRS assessment remained under dispute: $7.3 million tax principal plus $3.3 million accrued interest and penalties. The IRS had indicated it intended to deny the company’s amended-return claims; the company planned to appeal and, if needed, litigate. The IRS had filed a lien.
- Other items include a $1.0 million gain from repurchasing $4.5 million face amount of convertible notes for $2.0 million in June, and reversal of a $5.0 million U.K. VAT-related reserve after HMRC ended its review and refunds were received. The filing says the IRS matter remains unresolved; it reports no pending legal proceedings expected to be material.
- Unfunded consumer credit commitments were $165.5 million and floor-plan commitments were $8.8 million. Management reported no current off-balance-sheet arrangements and assessed indemnification payments as remote. It also disclosed material contractual termination penalties for certain processing services.
- Key risks include subprime borrower credit performance, dependence on financing and bank/merchant relationships, regulatory and consumer-protection changes, fair-value estimation uncertainty, competition, foreign-exchange exposure, and cybersecurity and third-party processing disruptions.
Important facts for investors to verify
- Whether the related-party $40.0 million term loan was extended or refinanced by its November 22, 2016 maturity, and on what terms.
- Subsequent credit performance of newer receivables, including delinquency, charge-off and loss-provision trends relative to portfolio growth.
- Progress in achieving sustainable profitability after overhead costs, servicing expenses and funding costs.
- Outcome and cash impact of the IRS dispute, including the assessment, interest and penalties.
- Availability, covenant compliance and collateral capacity of borrowing facilities as receivables grow; also assess the extent of related-party debt and the company’s low reported equity.
- Reliability of Level 3 fair-value assumptions and the timing and sustainability of portfolio reimbursement income.
- Potential dilution: the 5.875% convertible notes had a $24.61 conversion price and could add up to 3.6 million shares under specified conditions; 1,459,233 loaned shares were also disclosed as outstanding to be returned.