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1. Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2019

Summary of Significant Accounting Policies

(1) Summary of Significant Accounting Policies

Description of Business

We were formed in California on March 8, 1991. We specialize in purchasing and servicing retail automobile installment sale contracts (“automobile contracts” or “finance receivables”) originated by licensed motor vehicle dealers located throughout the United States (“dealers”) in the sale of new and used automobiles, light trucks and passenger vans. Through our purchases, we provide indirect financing to dealer customers for borrowers with limited credit histories or past credit problems (“sub-prime customers”). We serve as an alternative source of financing for dealers, allowing sales to customers who otherwise might not be able to obtain financing. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) lent money directly to consumers for loans secured by vehicles, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) acquired installment purchase contracts in four merger and acquisition transactions. In this report, we refer to all of such contracts and loans as "automobile contracts."

Basis of Presentation

Our Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with the instructions to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the six month period ended June 30, 2019 are not necessarily indicative of the operating results to be expected for the full year.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these Unaudited Condensed Consolidated Financial Statements. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods.

Finance Receivables Measured at Fair Value

Effective January 1, 2018, we adopted the fair value method of accounting for finance receivables acquired on or after that date. For each finance receivable acquired after 2017, we consider the price paid on the purchase date as the fair value for such receivable. We estimate the cash to be received in the future with respect to such receivables, based on our experience with similar receivables acquired in the past. We then compute the internal rate of return that results in the present value of those estimated cash receipts being equal to the purchase date fair value. Thereafter, we recognize interest income on such receivables on a level yield basis using that internal rate of return as the applicable interest rate. Cash received with respect to such receivables is applied first against such interest income, and then to reduce the carrying value of the receivables.

We re-evaluate the fair value of such receivables at the close of each measurement period. If the reevaluation were to yield a value materially different from the carrying value, an adjustment would be required.

Anticipated credit losses are included in our estimation of cash to be received with respect to receivables. Because such credit losses are included in our computation of the appropriate level yield, we do not thereafter make periodic provision for credit losses, as our best estimate of the lifetime aggregate of credit losses is included in that initial computation. Also because we include anticipated credit losses in our computation of the level yield, the computed level yield is materially lower than the average contractual rate applicable to the receivables. Because our initial carrying value is fixed as the price we pay for the receivable, rather than as the contractual principal balance, we do not record acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of acquiring the receivables. Rather we recognize the costs of acquisition as expenses in the period incurred.

Other Income

The following table presents the primary components of Other Income for the three-month and six-month periods ending June 30, 2019 and 2018:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
		2019		2018		2019		2018
		(In thousands)				(In thousands)
Direct mail revenues	$	1,051	$	1,708	$	2,387	$	3,504
Convenience fee revenue		570		390		1,270		840
Recoveries on previously charged-off contracts		45		36		102		154
Sales tax refunds		204		204		431		438
Other		6		12		71		72
Other income for the period	$	1,876	$	2,350	$	4,261	$	5,008

On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. The majority of the Company’s revenues come from interest income which is outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within Other Income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include revenue associated with direct mail and other related products and services that we offer to our dealers.

Leases

Effective January 1, 2019, the Company adopted guidance Accounting Standards Update (“ASU 2016-02”) Topic 842, “Leases” using the modified retrospective transition method. Prior comparable periods are presented accordance with previous guidance under Accounting Standards Codification (“ASC”) Topic 840, “Leases.” The Company also elected the package of practical expedients, ASU 2018-11. This election allowed the Company to not reassess if expired or existing contracts contain leases, to not reassess lease classifications for any expired or existing leases and to not reassess existing leases initial direct costs.

We determine if a contract contains a lease at contract inception. Right-of-use assets and liabilities are recognized based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use the Company’s incremental borrowing rate. Right-of-use assets are included in other assets and lease liabilities are included in accounts payable and accrued expenses in our Unaudited Condensed Consolidated Balance Sheet at June 30, 2019.

The Company has operating leases for corporate offices, equipment, software and hardware. The Company has entered into operating leases for the majority of its real estate locations, primarily office space. These leases are generally for periods of three to seven years with various renewal options. The depreciable life of leased assets is limited by the expected lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.

The following table presents the supplemental balance sheet information related to leases:

	Six Months Ended,
	June 30, 2019
		(In thousands)
Operating Leases
Operating lease right-of-use assets	$	23,555
Less: Accumulated amortization right-of-use assets		(3,348	)
Operating lease right-of-use assets, net	$	20,207
Operating lease liabilities	$	(21,660	)

Finance Leases
Property and equipment, at cost	$	545
Less: Accumulated depreciation		(42	)
Property and equipment, net	$	503
Finance lease liabilities	$	(485	)

Weighted Average Discount Rate
Operating lease		5.0%
Finance lease		6.7%

Maturities of lease liabilities were as follows:
(In thousands)		Operating		Finance
Year Ending December 31,		Lease		Lease
2019 (excluding the six months ended June 30, 2019)		3,809		91
2020		7,500		183
2021		7,391		183
2022		6,125		60
2023		1,389		18
Thereafter		689		6
Total undiscounted lease payments		26,903		541
Less amounts representing interest		(5,243	)	(56	)
Lease Liability		21,660		485

The following table presents the leases expense included in Occupancy, General and administrative on our Unaudited Condensed Consolidated Statement of Operations:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
		2019		2018		2019		2018
		(In thousands)				(In thousands)
Operating lease cost	$	1,886	$	1,795	$	3,775	$	3,505
Finance lease cost		44		–		44		–
Total lease cost	$	1,930	$	1,795	$	3,819	$	3,505

The following table presents the supplemental cash flow information related to leases:

	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:	$
Operating cash flows from operating leases	$	1,890	$	3,776
Operating cash flows from finance leases		36		36
Financing cash flows from finance leases		8		8

Stock-based Compensation

We recognize compensation costs in the financial statements for all share-based payments based on the grant date fair value estimated in accordance with the provisions of ASC 718 “Stock Compensation”.

For the three and six months ended June 30, 2019, we recorded stock-based compensation costs in the amount of $481,000 and $1.1 million, respectively. These stock-based compensation costs were $1.0 million and $2.2 million for the three and six months ended June 30, 2018. As of June 30, 2019, unrecognized stock-based compensation costs to be recognized over future periods equaled $2.5 million. This amount will be recognized as expense over a weighted-average period of 2.0 years.

The following represents stock option activity for the six months ended June 30, 2019:

Weighted

Number

Weighted

Average

Remaining

Exercise

Contractual

(in thousands)

Price

Term

Options outstanding at the beginning of period

14,421

4.57

N/A

Granted

–

N/A

Exercised

(483

)

0.86

N/A

Forfeited

–

N/A

Options outstanding at the end of period

13,938

4.69

3.52 years

Options exercisable at the end of period

11,742

4.87

3.22 years

At June 30, 2019, the aggregate intrinsic value of options outstanding and exercisable was $7.0 million and $6.5 million, respectively. There were 482,500 options exercised for the six months ended June 30, 2019 compared to 312,500 for the comparable period in 2018. The total intrinsic value of options exercised was $1.4 million and $860,000 for the six-month periods ended June 30, 2019 and 2018. There were 2,873,000 shares available for future stock option grants under existing plans as of June 30, 2019.

Purchases of Company Stock

The table below describes the purchase of our common stock for the six-month ended June 30, 2019 and 2018:

	Six Months Ended
	June 30, 2019				June 30, 2018
		Shares		Avg. Price		Shares		Avg. Price
Open market purchases		335,546	$	3.95		714,898	$	3.81
Shares redeemed upon net exercise of stock options		18,424		3.76		33,599		4.37
Other purchases		24,500		4.20		90,000		4.13
Total stock purchases		378,470	$	3.97		838,497	$	3.87

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on net income or shareholders’ equity.

Financial Covenants

Certain of our securitization transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. As of June 30, 2019, we were in compliance with all such covenants. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness.

Provision for Contingent Liabilities

We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Our legal counsel has advised us on such matters where, based on information available at the time of this report, there is an indication that it is both probable that a liability has been incurred and the amount of the loss can be reasonably determined.

We record at each measurement date, most recently as of June 30, 2019, our best estimate of probable incurred losses for legal contingencies. The amount of losses that may ultimately be incurred cannot be estimated with certainty.

Adoption of New Accounting Standards

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The revised accounting guidance changes the criteria under which credit losses are measured. The amendment introduces a new credit reserving model known as the Current Expected Credit Loss (CECL) model, which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to establish credit loss estimates. ASU 2016-13 was initially scheduled to become effective for interim and annual reporting periods beginning after December 15, 2019, however on July 17, 2019, the FASB proposed a tentative effective date for smaller reporting companies. If the FASB approves the tentative decision, ASU 2016-13 would become effective for interim and annual reporting periods beginning after December 15, 2021. Early adoption would still be permitted for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the provisions of ASU 2016-13, however, it is expected that the new CECL model will alter the assumptions used in calculating the Company's credit losses, given the change to estimated losses for the estimated life of the financial asset, and will likely result in a material effect on the Company’s financial position and results of operations.