Atlanticus Holdings Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are to 2016. This is an annual filing, not a standalone fourth-quarter report.
Business context
Atlanticus provides technology, servicing and credit-related services focused primarily on financially underserved consumers. Its two segments are Credit and Other Investments, including point-of-sale and direct-to-consumer lending and legacy credit-card portfolios, and Auto Finance, which purchases and services used-car loans and provides dealer floor-plan financing. The company generally invests in receivables originated by lending partners and relies substantially on borrowing to fund those investments.
Financial and operating results
| Metric | 2017 | 2016 |
|---|---|---|
| Total interest income | $114.7 million | $88.6 million |
| Interest expense | $27.7 million | $20.2 million |
| Fees and related income on earning assets | $14.3 million | $17.3 million |
| Net loss attributable to controlling interests | $40.8 million; $2.93 per share | $6.3 million; $0.46 per share |
| Net cash from (used in) operating activities | $(25.5) million | $39.0 million |
| Net cash used in investing activities | $(92.9) million | $(75.8) million |
| Net cash provided by financing activities | $84.6 million | $63.5 million |
Losses widened as the provision for losses on loans and fees receivable rose to $77.6 million from $53.7 million. Operating expenses increased to $86.8 million from $74.2 million, including higher marketing and other costs. The filing attributes much of the provision increase to growth and seasoning of newer receivables, rather than specifically to credit deterioration. Credit and Other Investments reported a $54.4 million pretax loss; Auto Finance reported $7.1 million pretax income.
Point-of-sale and direct-to-consumer receivables increased to $316.7 million from $214.3 million. Total Credit and Other Investments managed receivables reached $333.3 million at year-end; Auto Finance managed receivables were $77.2 million. Credit-segment combined gross charge-off ratios were elevated, reaching 20.1% in the fourth quarter; management expected higher charge-offs as newer vintages matured. Auto Finance’s fourth-quarter gross charge-off ratio was 3.0%.
At December 31, 2017, total assets were $425.6 million, total liabilities $461.7 million and total equity negative $36.1 million, compared with positive equity of $5.8 million at year-end 2016. Net loans and fees receivable were $305.1 million, after a $63.0 million allowance and $37.0 million of deferred revenue. Unrestricted cash was reported as $41.5 million on the balance sheet; the cash-flow statement reports $42.5 million at year-end, so the filing text presents inconsistent values. Restricted cash was $29.2 million.
Debt included $266.2 million of notes payable, net, and $61.4 million carrying value of convertible senior notes, plus $9.2 million of structured-financing notes carried at fair value. The filing identifies $137.8 million of facilities as potentially significant near-term refinancing obligations as of year-end, including a $40.0 million related-party term loan maturing November 2018. Cash flows from operations turned negative, while growth investments were funded in part by increased borrowing.
Changes, outlook and material matters
- Interest income rose with growth in point-of-sale and direct-to-consumer receivables, partly offset by liquidation of legacy credit-card portfolios. Related point-of-sale/direct-to-consumer borrowings increased to $204.0 million from $112.4 million.
- Fees and related income declined overall, principally as rent-to-own activity wound down; new acquisitions in that business had ceased. A $2.1 million write-down of a consumer-finance technology investment was recorded in fourth-quarter 2017.
- Management anticipated continued receivables growth in 2018, dependent on new and existing retail partnerships, direct-to-consumer marketing and available funding. It expected higher interest expense and marketing/servicing costs, and higher charge-offs as recent loan vintages matured. No formal earnings or revenue guidance was provided.
- Five largest retail partners represented over 50% of point-of-sale receivables, creating partner-concentration risk. The business also depends on bank issuing partners and external financing facilities, and operates under extensive consumer-finance regulation.
- Atlanticus sued Barclays in the U.K. seeking reimbursement and other damages related to a 2007 credit-card portfolio purchase and payment-break-plan remediation; Barclays counterclaimed. The company recorded no liability for the counterclaim and stated its belief that it lacked merit.
- An IRS assessment of $7.4 million, plus $4.1 million accrued interest and penalties, remained disputed through IRS Appeals. An adverse resolution could reduce liquidity.
- On February 20, 2018, Nasdaq notified the company it did not meet the $15 million minimum market value of publicly held shares standard. It had until August 20, 2018 to regain compliance; delisting or transfer to another Nasdaq market could affect share liquidity and capital access.
- Management reported effective disclosure controls and internal control over financial reporting at year-end; the auditor did not provide an internal-control attestation. The financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Reconcile the filing’s differing year-end unrestricted cash figures ($41.5 million on the balance sheet versus $42.5 million in the cash-flow statement).
- Track receivables’ delinquency, charge-off and vintage performance as newer point-of-sale and direct-to-consumer accounts season, and compare losses with reserve assumptions.
- Assess refinancing and covenant exposure, especially the $40.0 million related-party loan due November 2018 and other facilities identified as near-term funding risks.
- Monitor retail-partner concentration, bank-partner continuity, funding availability and Nasdaq public-float compliance.
- Follow the Barclays litigation and IRS Appeals outcome, including potential cash impacts and any changes to recorded estimates or liabilities.