Atlanticus Holdings Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise. Atlanticus provides technology and services to consumer lenders and invests in receivables, primarily serving financially underserved borrowers. Its reportable segments are Credit and Other Investments and Auto Finance.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest income | $26.7 million | $21.5 million | $52.6 million | $39.8 million |
| Interest expense | $6.4 million | $4.8 million | $12.2 million | $9.4 million |
| Net interest, fees and related income on earning assets, after provision and fair-value charge-off recovery | $9.0 million | $17.9 million | $29.1 million | $39.6 million |
| Operating expenses | $23.7 million | $19.4 million | $44.0 million | $38.9 million |
| Net income (loss) attributable to controlling interests | $(8.8) million | $0.3 million | $(8.1) million | $4.8 million |
| Basic and diluted earnings (loss) per share | $(0.63) | $0.02 | $(0.58) | $0.35 |
Revenue growth in interest income reflected expansion in point-of-sale and direct-to-consumer receivables; these receivables reached $247.0 million at June 30, 2017, versus $167.0 million a year earlier. The growth was outweighed by higher loan-loss provisions and lower net recovery benefits on fair-value receivables. Six-month provision for losses rose to $26.4 million from $15.5 million. Operating expenses increased, including marketing and other costs, while rental-related depreciation fell as the rent-to-own business wound down. No conventional operating-margin measure is presented in the filing.
Balance sheet, liquidity and cash flow
- Total assets were $399.6 million at June 30, 2017, up from $362.5 million at year-end 2016. Net loans and fees receivable were $264.2 million, versus $239.4 million.
- Total liabilities of $401.0 million exceeded assets, leaving shareholders’ equity of $(1.3) million, compared with $5.8 million at December 31, 2016.
- Unrestricted cash was $74.5 million, down from $76.1 million; restricted cash was $28.9 million, up from $16.6 million. Restricted cash should not be treated as freely available liquidity.
- Balance-sheet debt included $165.7 million of notes payable, net, $40.0 million of related-party notes, $10.0 million of structured-financing notes at fair value, and $61.1 million of convertible senior notes. The filing reports $205.7 million total notes payable, net of issuance costs and discounts, before separately presented structured-financing and convertible debt.
- For the first six months, operating cash flow was $10.4 million (versus $12.7 million); investing cash outflow was $36.4 million (versus $40.0 million); financing cash inflow was $24.1 million (versus $7.6 million). Unrestricted cash decreased by $1.6 million.
Material changes, outlook and risks
- Management expected continued growth in point-of-sale and direct-to-consumer receivables during 2017, subject to adding retail partners and sustaining direct-to-consumer originations. Growth was expected to require additional financing and to raise interest expense.
- Management anticipated higher charge-off rates in coming quarters as newer, higher-yielding loan vintages matured. It attributed much of the increased provision to portfolio growth and maturation, while also noting credit quality changes contributed to a lesser degree. Credit and Other Investments managed receivables delinquent 30 or more days were 10.9%, versus 8.2% a year earlier; its combined gross charge-off ratio was 21.6%, versus 14.9%.
- Management identified $124.8 million of facilities with potential near-term refinancing needs, including a $40.0 million related-party term loan due November 22, 2017 and a $34.6 million revolving facility expiring October 29, 2017. It viewed imminent refinancing risk as low, but noted facilities carry covenants and collateral-performance tests that can trigger early repayment.
- An IRS dispute remained unresolved: the assessment was $7.3 million, plus $3.8 million of accrued interest and penalties. IRS Appeals conference was scheduled for October 2017; the company said it intended to litigate if the matter was not resolved satisfactorily.
- The filing cites subprime borrower exposure, reliance on lending-bank and retail-partner relationships, funding availability, regulatory and litigation exposure, credit-loss estimation, and information-security risks. The five largest retail partners represented over half of point-of-sale receivables at December 31, 2016.
- Other notable comparison effects include the prior-year $1.0 million gain on repurchase of convertible notes and a $5.0 million reversal of a U.K. VAT-related reserve in the first half of 2016. The rent-to-own offering had been discontinued for new acquisitions.
No specific earnings or revenue guidance was provided. Management cautioned that actual results could differ materially from forward-looking expectations. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No pending legal proceedings were expected to be material.
Key facts investors should verify
- Whether receivables growth can produce sustained profitability after higher provisions, charge-offs, marketing costs and funding expense.
- Available liquidity and refinancing outcomes for the facilities maturing in 2017, including the related-party term loan and revolving facility.
- Performance of newer point-of-sale and direct-to-consumer loan vintages as they season, including delinquency and charge-off trends.
- Resolution and potential cash impact of the IRS assessment, interest and penalties.
- Concentration in large retail partners and reliance on bank partners, as well as any changes in those relationships or regulatory requirements.