Cautionary Notice Regarding Forward-Looking Statements
We make forward-looking statements here and in other materials we file with the Securities
and Exchange Commission (“SEC”) or otherwise make public. In our Report on Form 10-K filed with the SEC on
March 30, 2020, both Item 1, “Business,” and Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” contain forward-looking statements. In addition, our senior management
might make forward-looking statements to analysts, investors, the media and others. Statements with respect
to expected revenue; income; receivables; income ratios; net interest margins; long-term shareholder
returns; acquisitions of financial assets and other growth opportunities; divestitures and discontinuations
of businesses; loss exposure and loss provisions; delinquency and charge-off rates; changes in collection
programs and practices; changes in the credit quality and fair value of our credit card loans, interest and
fees receivable and the fair value of their underlying structured financing facilities; the impact of
actions by the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Board, Federal Trade
Commission (“FTC”), Consumer Financial Protection Bureau (“CFPB”) and other regulators on both us, banks
that issue credit cards and other credit products on our behalf, and merchants that participate in our
point-of-sale finance operations; account growth; the performance of investments that we have made;
operating expenses; the impact of bankruptcy law changes; marketing plans and expenses; the performance of
our Auto Finance segment; the impact of our credit card receivables on our financial performance; the
sufficiency of available capital; future interest costs; sources of funding operations and acquisitions;
growth and profitability of our point-of-sale finance operations; our ability to raise funds or renew
financing facilities; share repurchases or issuances; debt retirement; the results associated with our
equity-method investee; our servicing income levels; gains and losses from investments in securities;
experimentation with new products and other statements of our plans, beliefs or expectations are
forward-looking statements. These and other statements using words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,”
“would” and similar expressions also are forward-looking statements. Each forward-looking statement speaks
only as of the date of the particular statement. The forward-looking statements we make are not guarantees
of future performance, and we have based these statements on our assumptions and analyses in light of our
experience and perception of historical trends, current conditions, expected future developments and other
factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve
substantial risks and uncertainties that could significantly affect expected results, and actual future
results could differ materially from those described in such statements. Management cautions against putting
undue reliance on forward-looking statements or projecting any future results based on such statements or
present or historical earnings levels.
Although it is not possible to identify all factors, we continue to face many risks and
uncertainties. Among the factors that could cause actual future results to differ materially from our
expectations are the risks and uncertainties described under “Risk Factors” set forth in Part I, Item 1A, in
our Report on Form 10-K filed with the SEC on March 30, 2020 and the risk factors and other cautionary
statements in other documents we file with the SEC, including the following:
- the availability of adequate financing to support growth;
- the extent to which federal, state, local and foreign governmental regulation of our various business
lines and the products we service for others limits or prohibits the operation of our businesses;
- current and future litigation and regulatory proceedings against us;
- the effect of adverse economic conditions on our revenues, loss rates and cash flows;
- competition from various sources providing similar financial products, or other alternative sources of
credit, to consumers;
- the adequacy of our allowances for uncollectible loans, interest and fees receivable and estimates of
loan losses used within our risk management and analyses;
- the possible impairment of assets;
- the duration and magnitude of the impact the novel coronavirus, or COVID-19 ("COVID-19"), could have on
credit usage and payments;
- our ability to manage costs in line with the expansion or contraction of our various business lines;
- our relationship with (i) the merchants that participate in point-of-sale finance operations and (ii)
the banks that issue credit cards and provide certain other credit products utilizing our technology
platform and related services; and
- theft and employee errors.
Most of these factors are beyond our ability to predict or control. Any of these factors,
or a combination of these factors, could materially affect our future financial condition or results of
operations and the ultimate accuracy of our forward-looking statements. There also are other factors that we
may not describe (because we currently do not perceive them to be material) that could cause actual results
to differ materially from our expectations.
We expressly disclaim any obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as required by law.
RISK FACTORS
An investment in our common stock or other securities involves a number of risks. You
should carefully consider each of the risks described below before deciding to invest in our common stock or
other securities. If any of the following risks develops into actual events, our business, financial
condition or results of operations could be negatively affected, the market price of our common stock or
other securities could decline and you may lose all or part of your investment.
Investors should be particularly cautious regarding investments in our common stock or
other securities at the present time in light of uncertainties as to the profitability of our business model
going forward and our inability to achieve consistent earnings from our operations in recent years.
Our Cash Flows and Net Income Are Dependent Upon Payments from Our Investments in
Receivables
The collectibility of our investments in receivables is a function of many factors
including the criteria used to select who is issued credit, the pricing of the credit products, the lengths
of the relationships, general economic conditions, the rate at which consumers repay their accounts or
become delinquent, and the rate at which consumers borrow funds. Deterioration in these factors would
adversely impact our business. In addition, to the extent we have over-estimated collectibility, in all
likelihood we have over-estimated our financial performance. Some of these concerns are discussed more fully
below.
Our portfolio of receivables is not diversified and primarily originates from
consumers whose creditworthiness is considered sub-prime. Historically, we have
invested in receivables in one of two ways—we have either (i) invested in receivables originated by lenders
who utilize our services or (ii) invested in or purchased pools of receivables from other issuers. In either
case, substantially all of our receivables are from financially underserved borrowers—borrowers represented
by credit risks that regulators classify as “sub-prime.” Our reliance on sub-prime receivables has
negatively impacted and may in the future negatively impact, our performance. Our past losses may have been
mitigated had our portfolios consisted of higher-grade receivables in addition to our sub-prime receivables.
Economic slowdowns increase our credit losses. During periods of
economic slowdown or recession, we experience an increase in rates of delinquencies and frequency and
severity of credit losses. Our actual rates of delinquencies and frequency and severity of credit losses may
be comparatively higher during periods of economic slowdown or recession than those experienced by more
traditional providers of consumer credit because of our focus on the financially underserved consumer
market, which may be disproportionately impacted.
Because a significant portion of our reported income is based on management’s
estimates of the future performance of receivables, differences between actual and expected
performance of the receivables may cause fluctuations in net income. Significant
portions of our reported income (or losses) are based on management’s estimates of cash flows we expect to
receive on receivables, particularly for such assets that we report based on fair value. The expected cash
flows are based on management’s estimates of interest rates, default rates, payment rates, cardholder
purchases, servicing costs, and discount rates. These estimates are based on a variety of factors, many of
which are not within our control. Substantial differences between actual and expected performance of the
receivables will occur and cause fluctuations in our net income. For instance, higher than expected rates of
delinquencies and losses could cause our net income to be lower than expected. Similarly, levels of loss and
delinquency can result in our being required to repay lenders earlier than expected, thereby reducing funds
available to us for future growth.
Due to our relative lack of historical experience with Internet consumers, we
may not be able to evaluate their creditworthiness. We have less historical experience
with respect to the credit risk and performance of receivables owed by consumers acquired over the Internet
and other digital channels. As a result, we may not be able to evaluate successfully the creditworthiness of
these potential consumers. Therefore, we may encounter difficulties managing the expected delinquencies and
losses.
We Are Substantially Dependent Upon Borrowed Funds to Fund Receivables We Purchase
We finance receivables that we acquire in large part through financing facilities. All of
our financing facilities are of finite duration (and ultimately will need to be extended or replaced) and
contain financial covenants and other conditions that must be fulfilled in order for funding to be
available. Moreover, some of our facilities currently are in amortization stages (and are not allowing for
the funding of any new loans) based on their original terms. The cost and availability of equity and
borrowed funds is dependent upon our financial performance, the performance of our industry overall and
general economic and market conditions, and at times equity and borrowed funds have been both expensive and
difficult to obtain.
If additional financing facilities are not available in the future on terms we consider
acceptable—an issue that was made even more acute in the U.S. given regulatory changes that reduced
asset-level returns on credit card lending—we will not be able to purchase additional receivables and those
receivables may contract in size.
Capital markets may experience periods of disruption and instability, which
could limit our ability to grow our receivables. From time-to-time, capital markets
may experience periods of disruption and instability. For example, from 2008 to 2009, the global capital
markets were unstable as evidenced by the lack of liquidity in the debt capital markets, significant
write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit
market and the failure of major financial institutions. Despite actions of the U.S. federal government and
various foreign governments, these events contributed to worsening general economic conditions that
materially and adversely impacted the broader financial and credit markets and reduced the availability of
debt and equity capital for the market as a whole and financial services firms in particular. If similar
adverse and volatile market conditions repeat in the future, we and other companies in the financial
services sector may have to access, if available, alternative markets for debt and equity capital in order
to grow our receivables.
Moreover, the re-appearance of market conditions similar to those experienced from 2008
through 2009 for any substantial length of time or worsened market conditions could make it difficult for us
to borrow money or to extend the maturity of or refinance any indebtedness we may have under similar terms
and any failure to do so could have a material adverse effect on our business. Unfavorable economic and
political conditions, including future recessions, political instability, geopolitical turmoil and foreign
hostilities, and disease, pandemics and other serious health events, also could increase our funding costs,
limit our access to the capital markets or result in a decision by lenders not to extend credit to us.
Recently, the outbreak of the novel coronavirus, or COVID-19, in many countries continues
to adversely impact global commercial activity and has contributed to significant volatility in financial
markets. The global impact of the outbreak has been rapidly evolving, and as cases of the virus have
continued to be identified in additional countries, many countries have reacted by instituting quarantines
and restrictions on travel. Such actions are creating disruption in global supply chains, and adversely
impacting a number of industries, such as transportation, hospitality and entertainment. The outbreak could
have a continued adverse impact on economic and market conditions and trigger a period of global economic
slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate
adverse impact of the coronavirus. Nevertheless, the coronavirus presents material uncertainty and risk with
respect to our performance and financial results.
We may in the future have difficulty accessing debt and equity capital on attractive
terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations
in credit and financing conditions may cause us to reduce the volume of receivables we purchase or otherwise
have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our Financial Performance Is, in Part, a Function of the Aggregate Amount of Receivables That Are
Outstanding
The aggregate amount of outstanding receivables is a function of many factors including
purchase rates, payment rates, interest rates, seasonality, general economic conditions, competition from
credit card issuers and other sources of consumer financing, access to funding, and the timing and extent of
our receivable purchases.
The recent growth of our investments in point-of-sale finance and
direct-to-consumer receivables may not be indicative of our ability to grow such receivables in the
future. Our investments in point-of-sale finance and direct-to-consumer receivables
grew to $908.4 million for the year ended December 31, 2019 from $453.3 million for the year ended December
31, 2018. The amount of such receivables has fluctuated significantly over the course of our operating
history. Furthermore, even if such receivables continue to increase, the rate of such growth could decline.
If we cannot manage the growth in receivables effectively, it could have a material adverse effect on our
business, prospects, results of operations, financial condition or cash flows.
Reliance upon relationships with a few large retailers in the point-of-sale
finance operations may adversely affect our revenues and operating results from these operations.
Our five largest retail partners accounted for over 50% of our outstanding point-of-sale
receivables as of December 31, 2019. Although we are adding new retail partners on a regular basis, it is
likely that we will continue to derive a significant portion of this operations’ receivables base and
corresponding revenue from a relatively small number of partners in the future. If a significant partner
reduces or terminates its relationship with us, these operations’ revenue could decline significantly and
our operating results and financial condition could be harmed.
We Operate in a Heavily Regulated Industry
Changes in bankruptcy, privacy or other consumer protection laws, or to the prevailing
interpretation thereof, may expose us to litigation, adversely affect our ability to collect receivables, or
otherwise adversely affect our operations. Similarly, regulatory changes could adversely affect the ability
or willingness of lenders who utilize our technology platform and related services to market credit products
and services to consumers. While the Presidential Administration supports reducing regulatory burdens, the
prospects for significant modifications are uncertain. Also, the accounting rules that apply to our business
are exceedingly complex, difficult to apply and in a state of flux. As a result, how we value our
receivables and otherwise account for our business is subject to change depending upon the changes in, and,
interpretation of, those rules. Some of these issues are discussed more fully below.
Reviews and enforcement actions by regulatory authorities under banking and
consumer protection laws and regulations may result in changes to our business practices, may make
collection of receivables more difficult or may expose us to the risk of fines, restitution and
litigation. Our operations and the operations of the issuing banks through which the
credit products we service are originated are subject to the jurisdiction of federal, state and local
government authorities, including the CFPB, the SEC, the FDIC, the Office of the Comptroller of the
Currency, the FTC, U.K. banking and licensing authorities, state regulators having jurisdiction over
financial institutions and debt origination and collection and state attorneys general. Our business
practices and the practices of issuing banks, including the terms of products, servicing and collection
practices, are subject to both periodic and special reviews by these regulatory and enforcement authorities.
These reviews can range from investigations of specific consumer complaints or concerns to broader
inquiries. If as part of these reviews the regulatory authorities conclude that we or issuing banks are not
complying with applicable law, they could request or impose a wide range of remedies including requiring
changes in advertising and collection practices, changes in the terms of products (such as decreases in
interest rates or fees), the imposition of fines or penalties, or the paying of restitution or the taking of
other remedial action with respect to affected consumers. They also could require us or issuing banks to
stop offering some credit products or obtain licenses to do so, either nationally or in selected states. To
the extent that these remedies are imposed on the issuing banks that originate credit products using our
platform, under certain circumstances we are responsible for the remedies as a result of our indemnification
obligations with those banks. We or our issuing banks also may elect to change practices that we believe are
compliant with law in order to respond to regulatory concerns. Furthermore, negative publicity relating to
any specific inquiry or investigation could hurt our ability to conduct business with various industry
participants or to generate new receivables and could negatively affect our stock price, which would
adversely affect our ability to raise additional capital and would raise our costs of doing business.
If any deficiencies or violations of law or regulations are identified by us or asserted
by any regulator, or if the CFPB, the FDIC, the FTC or any other regulator requires us or issuing banks to
change any practices, the correction of such deficiencies or violations, or the making of such changes,
could have a material adverse effect on our financial condition, results of operations or business. In
addition, whether or not these practices are modified when a regulatory or enforcement authority requests or
requires, there is a risk that we or other industry participants may be named as defendants in litigation
involving alleged violations of federal and state laws and regulations, including consumer protection laws.
Any failure to comply with legal requirements by us or the banks that originate credit products utilizing
our platform in connection with the issuance of those products, or by us or our agents as the servicer of
our accounts, could significantly impair our ability to collect the full amount of the account balances. The
institution of any litigation of this nature, or any judgment against us or any other industry participant
in any litigation of this nature, could adversely affect our business and financial condition in a variety
of ways.
The regulatory landscape in which we operate is continually changing due to
new rules, regulations and interpretations, as well as various legal actions that have been brought
against others that have sought to re-characterize certain loans made by federally insured banks as
loans made by third parties. If litigation on similar theories were brought against us when we work
with a federally insured bank that makes loans and were such an action successful, we could be
subject to state usury limits and/or state licensing requirements, loans in such states could be
deemed void and unenforceable, and we could be subject to substantial penalties in connection with
such loans.
The case law involving whether an originating lender, on the one hand, or third-parties,
on the other hand, are the “true lenders” of a loan is still developing and courts have come to different
conclusions and applied different analyses. The determination of whether a third-party service provider is
the “true lender” is significant because third-parties risk having the loans they service becoming subject
to a consumer’s state usury limits. A number of federal courts that have opined on the “true lender” issue
have looked to who is the lender identified on the borrower’s loan documents. A number of state courts and
at least one federal district court have considered a number of other factors when analyzing whether the
originating lender or a third party is the “true lender,” including looking at the economics of the
transaction to determine, among other things, who has the predominant economic interest in the loan being
made. If we were re-characterized as a “true lender” with respect to the receivables originated by the bank
that utilizes our technology platform and other services, such receivables could be deemed to be void and
unenforceable in some states, the right to collect finance charges could be affected, and we could be
subject to fines and penalties from state and federal regulatory agencies as well as claims by borrowers,
including class actions by private plaintiffs. Even if we were not required to change our business practices
to comply with applicable state laws and regulations or cease doing business in some states, we could be
required to register or obtain lending licenses or other regulatory approvals that could impose a
substantial cost on us. If the bank that originates loans utilizing our technology platform were subject to
such a lawsuit, it may elect to terminate its relationship with us voluntarily or at the direction of its
regulators, and if it lost the lawsuit, it could be forced to modify or terminate such relationship.
In addition to true lender challenges, a question regarding the applicability of state
usury rates may arise when a loan is sold from a bank to a non-bank entity. In Madden v. Midland Funding,
LLC, the U.S. Court of Appeals for the Second Circuit held that the federal preemption of state usury laws
did not extend to the purchaser of a loan issued by a national bank. In its brief urging the U.S. Supreme
Court to deny certiorari, the U.S. Solicitor General, joined by the Office of the Comptroller of the
Currency (“OCC”), noted that the Second Circuit (Connecticut, New York and Vermont) analysis was incorrect.
On remand, the U.S. District Court for the Southern District of New York concluded on February 27, 2017 that
New York’s state usury law, not Delaware’s state usury law, was applicable and that the plaintiff’s claims
under the FDCPA and state unfair and deceptive acts and practices could proceed. To that end, the court
granted Madden’s motion for class certification. At this time, it is unknown whether Madden will be applied
outside of the defaulted debt context in which it arose; however, recently two class actions, Cohen v.
Capital One Funding, LLC, et al. and Petersen v. Chase Card Funding, LLC, et al., have relied on Madden to
challenge the interest rate charged once debt was sold to securitization trusts. The facts in Madden are not
directly applicable to our business, as we do not engage in practices similar to those at issue in Madden.
However, to the extent that the holding in Madden was broadened to cover circumstances applicable to our
business, or if other litigation on related theories were brought against us and were successful, or we were
otherwise found to be the “true lender,” we could become subject to state usury limits and state licensing
laws, in addition to the state consumer protection laws to which we are already subject, in a greater number
of states, loans in such states could be deemed void and unenforceable, and we could be subject to
substantial penalties in connection with such loans.
In response to the uncertainty Madden created as to the validity of interest rates of
bank-originated loans sold in the secondary market, in November 2019, the OCC and the FDIC took action to
reaffirm the “valid when made” doctrine by issuing a notice of proposed rulemaking to clarify that when a
bank sells, assigns, or otherwise transfers a loan, the interest permissible prior to the transfer would
continue to be permissible following the transfer. The 60-day comment periods ended January 21, 2020 and
February 4, 2020, respectively, and it is anticipated that the agencies will issue final rules soon.
In September 2019, the FDIC and the OCC jointly submitted an amicus brief to the U.S.
District Court for the District of Colorado in support of a debt buyer, urging the District Court to uphold
the bank’s rights to enforce that debt to the debt buyer, including the bank’s right to charge interest as
authorized under the laws of its home state. The brief includes related discussions of (i) the rights of
federally regulated banks to “export” their home states’ interest rates by charging those rates to borrowers
nationwide, first with respect to national banks under section 85 of the National Bank Act and then with
respect to state banks under section 27 of the Federal Deposit Insurance Act and (ii) federal preemption of
state usury laws. The portion of the brief that discusses rate exportation strongly reaffirms the OCC and
the FDIC’s complete accord that section 27 and section 85 should be mirror images of each other. At the
conclusion of their brief, the agencies ask the District Court to affirm the bankruptcy court’s decision in
the case on the basis that affirmation would “preserve the banks’ longstanding ability to engage in loan
sales, would reaffirm the traditional protections that such loan sales have received under the law, would
ensure the proper functioning of the credit markets, and would promote safety and soundness in the banking
sector by supporting loan sales and securitizations, which are used to manage capital and liquidity
positions.”
We support a single bank that markets general purpose credit cards and certain
other credit products directly to consumers. We acquire interests in and service the
receivables originated by that bank. The bank could determine not to continue the relationship for various
business reasons, or its regulators could limit its ability to issue credit cards utilizing our technology
platform or to originate some or all of the other products that we service or require the bank to modify
those products significantly and could do either with little or no notice. Any significant interruption or
change of our bank relationship would result in our being unable to acquire new receivables or develop
certain other credit products. Unless we were able to timely replace our bank relationship, such an
interruption would prevent us from acquiring newly originated credit card receivables and growing our
investments in point-of-sale and direct-to-consumer receivables. In turn, it would materially adversely
impact our business.
The FDIC has issued examination guidance affecting the bank that utilizes our
technology platform to market general purpose credit cards and certain other credit products and
these or subsequent new rules and regulations could have a significant impact on such credit
products. The bank that utilizes our technology platform and other services to market
general purpose credit cards and certain other credit products is supervised and examined by both the state
that charters it and the FDIC. If the FDIC or a state supervisory body considers any aspect of the products
originated utilizing our technology platform to be inconsistent with its guidance, the bank may be required
to alter or terminate some or all of these products.
On July 29, 2016, the board of directors of the FDIC released examination guidance
relating to third-party lending as part of a package of materials designed to “improve the transparency and
clarity of the FDIC’s supervisory policies and practices” and consumer compliance measures that
FDIC-supervised institutions should follow when lending through a business relationship with a third party.
The proposed guidance, if finalized, would apply to all FDIC-supervised institutions that engage in
third-party lending programs, including the bank that utilizes our technology platform and other services to
market general purpose credit cards and certain other credit products.
The proposed guidance elaborates on previously issued agency guidance on managing
third-party risks and specifically addresses third-party lending arrangements where an FDIC-supervised
institution relies on a third party to perform a significant aspect of the lending process. The types of
relationships that would be covered by the guidance include (but are not limited to) relationships for
originating loans on behalf of, through or jointly with third parties, or using platforms developed by third
parties. If adopted as proposed, the guidance would result in increased supervisory attention of
institutions that engage in significant lending activities through third parties, including at least one
examination every 12 months, as well as supervisory expectations for a third-party lending risk management
program and third-party lending policies that contain certain minimum requirements, such as self-imposed
limits as a percentage of total capital for each third-party lending relationship and for the overall loan
program, relative to origination volumes, credit exposures (including pipeline risk), growth, loan types,
and acceptable credit quality. Comments on the guidance were due October 27, 2016. While the guidance has
never formally been adopted, it is our understanding that the FDIC has relied upon it in its examination of
third-party lending arrangements.
Changes to consumer protection laws or changes in their interpretation may
impede collection efforts or otherwise adversely impact our business practices.
Federal and state consumer protection laws regulate the creation and enforcement of
consumer credit card receivables and other loans. Many of these laws (and the related regulations) are
focused on sub-prime lenders and are intended to prohibit or curtail industry-standard practices as well as
non-standard practices. For instance, Congress enacted legislation that regulates loans to military
personnel through imposing interest rate and other limitations and requiring new disclosures, all as
regulated by the Department of Defense. Similarly, in 2009 Congress enacted legislation that required
changes to a variety of marketing, billing and collection practices, and the Federal Reserve adopted
significant changes to a number of practices through its issuance of regulations. While our practices are in
compliance with these changes, some of the changes (e.g., limitations on the ability to assess up-front
fees) have significantly affected the viability of certain credit products within the U.S. Changes in the
consumer protection laws could result in the following:
- receivables not originated in compliance with law (or revised interpretations) could become
unenforceable and uncollectible under their terms against the obligors;
- we may be required to credit or refund previously collected amounts;
- certain fees and finance charges could be limited, prohibited or restricted, which would reduce the
profitability of certain investments in receivables;
- certain collection methods could be prohibited, forcing us to revise our practices or adopt more costly
or less effective practices;
- limitations on our ability to recover on charged-off receivables regardless of any act or omission on
our part;
- some credit products and services could be banned in certain states or at the federal level;
- federal or state bankruptcy or debtor relief laws could offer additional protections to consumers
seeking bankruptcy protection, providing a court greater leeway to reduce or discharge amounts owed to
us; and
- a reduction in our ability or willingness to invest in receivables arising under loans to certain
consumers, such as military personnel.
Material regulatory developments may adversely impact our business and results from
operations.
Our Automobile Lending Activities Involve Risks in Addition to Others Described Herein
Automobile lending exposes us not only to most of the risks described above but also to
additional risks, including the regulatory scheme that governs installment loans and those attendant to
relying upon automobiles and their repossession and liquidation value as collateral. In addition, our Auto
Finance segment operation acquires loans on a wholesale basis from used car dealers, for which we rely upon
the legal compliance and credit determinations by those dealers.
Funding for automobile lending may become difficult to obtain and expensive.
In the event we are unable to renew or replace any Auto Finance segment facilities that
bear refunding or refinancing risks when they become due, our Auto Finance segment could experience
significant constraints and diminution in reported asset values as lenders retain significant cash flows
within underlying structured financings or otherwise under security arrangements for repayment of their
loans. If we cannot renew or replace future facilities or otherwise are unduly constrained from a liquidity
perspective, we may choose to sell part or all of our auto loan portfolios, possibly at less than favorable
prices.
Our automobile lending business is dependent upon referrals from
dealers.. Currently we provide substantially all of our automobile loans only to or
through used car dealers. Providers of automobile financing have traditionally competed based on the
interest rate charged, the quality of credit accepted and the flexibility of loan terms offered. In order to
be successful, we not only need to be competitive in these areas, but also need to establish and maintain
good relations with dealers and provide them with a level of service greater than what they can obtain from
our competitors.
The financial performance of our automobile loan portfolio is in part
dependent upon the liquidation of repossessed automobiles. In the event of certain
defaults, we may repossess automobiles and sell repossessed automobiles at wholesale auction markets located
throughout the U.S. Auction proceeds from these types of sales and other recoveries rarely are sufficient to
cover the outstanding balances of the contracts; where we experience these shortfalls, we will experience
credit losses. Decreased auction proceeds resulting from depressed prices at which used automobiles may be
sold would result in higher credit losses for us.
Repossession of automobiles entails the risk of litigation and other claims.
Although we have contracted with reputable repossession firms to repossess automobiles on
defaulted loans, it is not uncommon for consumers to assert that we were not entitled to repossess an
automobile or that the repossession was not conducted in accordance with applicable law. These claims
increase the cost of our collection efforts and, if correct, can result in awards against us.
We Routinely Explore Various Opportunities to Grow Our Business, to Make Investments and to Purchase
and Sell Assets
We routinely consider acquisitions of, or investments in, portfolios and other assets as
well as the sale of portfolios and portions of our business. There are a number of risks attendant to any
acquisition, including the possibility that we will overvalue the assets to be purchased and that we will
not be able to produce the expected level of profitability from the acquired business or assets. Similarly,
there are a number of risks attendant to sales, including the possibility that we will undervalue the assets
to be sold. As a result, the impact of any acquisition or sale on our future performance may not be as
favorable as expected and actually may be adverse.
Portfolio purchases may cause fluctuations in our reported Credit and Other Investments
segment’s managed receivables data, which may reduce the usefulness of this data in evaluating our business.
Our reported Credit and Other Investments segment managed receivables data may fluctuate substantially from
quarter to quarter as a result of recent and future credit card portfolio acquisitions.
Receivables included in purchased portfolios are likely to have been originated using
credit criteria different from the criteria of issuing bank partners that have originated accounts utilizing
our technology platform. Receivables included in any particular purchased portfolio may have significantly
different delinquency rates and charge-off rates than the receivables previously originated and purchased by
us. These receivables also may earn different interest rates and fees as compared to other similar
receivables in our receivables portfolio. These variables could cause our reported managed receivables data
to fluctuate substantially in future periods making the evaluation of our business more difficult.
Any acquisition or investment that we make will involve risks different from and in
addition to the risks to which our business is currently exposed. These include the risks that we will not
be able to integrate and operate successfully new businesses, that we will have to incur substantial
indebtedness and increase our leverage in order to pay for the acquisitions, that we will be exposed to, and
have to comply with, different regulatory regimes and that we will not be able to apply our traditional
analytical framework (which is what we expect to be able to do) in a successful and value-enhancing manner.
Other Risks of Our Business
We are a holding company with no operations of our own. As a
result, our cash flow and ability to service our debt is dependent upon distributions from our subsidiaries.
The distribution of subsidiary earnings, or advances or other distributions of funds by subsidiaries to us,
all of which are subject to statutory and could be subject to contractual restrictions, are contingent upon
the subsidiaries’ cash flows and earnings and are subject to various business and debt covenant
considerations.
We are party to litigation. We are party to certain legal
proceedings which include litigation customary for a business of our nature. In each case we believe that we
have meritorious defenses or that the positions we are asserting otherwise are correct. However, adverse
outcomes are possible in these matters, and we could decide to settle one or more of our litigation matters
in order to avoid the ongoing cost of litigation or to obtain certainty of outcome. Adverse outcomes or
settlements of these matters could require us to pay damages, make restitution, change our business
practices or take other actions at a level, or in a manner, that would adversely impact our business.
We may be unable to use some or all of our net operating loss (“NOL”)
carryforwards. At December 31, 2019, we had U.S. federal NOL carryforwards of $85.6
million the deferred tax assets on which were not offset by valuation allowances, and we had no material
U.S. state and local or foreign NOLs the deferred tax assets on which were not offset by valuation
allowances. Our NOLs have resulted from prior period losses and are available to offset future taxable
income. If not used, $18.1 million of the NOLs will expire in 2029, and $17.8 million of the NOLs will
expire in 2030. Under Section 382 of the Internal Revenue Code, our ability to use NOLs in any taxable year
may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if
one or more shareholders or groups of shareholders, who own at least 5% of our stock, increase their
ownership by more than 50 percentage points over their lowest ownership percentage within a rolling
three-year period. We have not completed a Section 382 analysis through December 31, 2019. If we have
previously had, or have in the future, one or more Section 382 “ownership changes,” or if we do not generate
sufficient taxable income, we may not be able to use a material portion of the NOLs. If we are limited in
our ability to use the NOLs in future years in which we have taxable income, we will pay more taxes than if
we were able to fully use our NOLs. This could materially and adversely affect our results of operations.
Because we outsource account-processing functions that are integral to our
business, any disruption or termination of that outsourcing relationship could harm our business.
We generally outsource account and payment processing. If these outsourcing relationships
were not renewed or were terminated or the services provided to us were otherwise disrupted, we would have
to obtain these services from an alternative provider. There is a risk that we would not be able to enter
into a similar outsourcing arrangement with an alternate provider on terms that we consider favorable or in
a timely manner without disruption of our business.
Failure to keep up with the rapid technological changes in financial services
and e-commerce could harm our business. The financial services industry is undergoing
rapid technological changes, with frequent introductions of new technology-driven products and services. The
effective use of technology increases efficiency and enables financial and lending institutions to better
serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the
needs of consumers by using technology to support products and services that will satisfy consumer demands
for convenience, as well as to create additional efficiencies in our operations. We may not be able to
effectively implement new technology-driven products and services as quickly as some of our competitors.
Failure to successfully keep pace with technological change affecting the financial services industry could
harm our ability to compete with our competitors. Any such failure to adapt to changes could have a material
adverse effect on our business, prospects, results of operations, financial condition or cash flows.
If we are unable to protect our information systems against service
interruption, our operations could be disrupted and our reputation may be damaged. We
rely heavily on networks and information systems and other technology, that are largely hosted by
third-parties to support our business processes and activities, including processes integral to the
origination and collection of loans and other financial products, and information systems to process
financial information and results of operations for internal reporting purposes and to comply with
regulatory financial reporting and legal and tax requirements. Because information systems are critical to
many of our operating activities, our business may be impacted by hosted system shutdowns, service
disruptions or security breaches. These incidents may be caused by failures during routine operations such
as system upgrades or user errors, as well as network or hardware failures, malicious or disruptive
software, computer hackers, rogue employees or contractors, cyber-attacks by criminal groups, geopolitical
events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic
events. If our information systems suffer severe damage, disruption or shutdown and our business continuity
plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting our
financial results, and we may lose revenue and profits as a result of our inability to collect payments in a
timely manner. We also could be required to spend significant financial and other resources to repair or
replace networks and information systems.
Unauthorized or unintentional disclosure of sensitive or confidential customer
data could expose us to protracted and costly litigation, and civil and criminal penalties.
To conduct our business, we are required to manage, use, and store large amounts of
personally identifiable information, consisting primarily of confidential personal and financial data
regarding consumers across all operations areas. We also depend on our IT networks and systems, and those of
third parties, to process, store, and transmit this information. As a result, we are subject to numerous
U.S. federal and state laws designed to protect this information. Security breaches involving our files and
infrastructure could lead to unauthorized disclosure of confidential information.
We take a number of measures to ensure the security of our hardware and software systems
and customer information. Advances in computer capabilities, new discoveries in the field of cryptography or
other developments may result in the technology used by us to protect data being breached or compromised. In
the past, banks and other financial service providers have been the subject of sophisticated and highly
targeted attacks on their information technology. An increasing number of websites have reported breaches of
their security.
If any person, including our employees or those of third-party vendors, negligently
disregards or intentionally breaches our established controls with respect to such data or otherwise
mismanages or misappropriates that data, we could be subject to costly litigation, monetary damages, fines,
and/or criminal prosecution. Any unauthorized disclosure of personally identifiable information could
subject us to liability under data privacy laws. Further, under credit card rules and our contracts with our
card processors, if there is a breach of credit card information that we store, we could be liable to the
credit card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail
to follow credit card industry security standards, even if there is no compromise of customer information,
we could incur significant fines. Security breaches also could harm our reputation, which could potentially
cause decreased revenues, the loss of existing merchant credit partners, or difficulty in adding new
merchant credit partners.
Internet and data security breaches also could impede our bank partners from
originating loans over the Internet, cause us to lose consumers or otherwise damage our reputation
or business. Consumers generally are concerned with security and privacy, particularly
on the Internet. As part of our growth strategy, we have enabled lenders to originate loans over the
Internet. The secure transmission of confidential information over the Internet is essential to maintaining
customer confidence in such products and services offered online.
Advances in computer capabilities, new discoveries or other developments could result in a
compromise or breach of the technology used by us to protect our client or consumer application and
transaction data transmitted over the Internet. In addition to the potential for litigation and civil
penalties described above, security breaches could damage our reputation and cause consumers to become
unwilling to do business with our clients or us, particularly over the Internet. Any publicized security
problems could inhibit the growth of the Internet as a means of conducting commercial transactions. Our
ability to service our clients’ needs over the Internet would be severely impeded if consumers become
unwilling to transmit confidential information online.
Also, a party that is able to circumvent our security measures could misappropriate
proprietary information, cause interruption in our operations, damage our computers or those of our users,
or otherwise damage our reputation and business.
Regulation in the areas of privacy and data security could increase our costs.
We are subject to various regulations related to privacy and data security/breach, and we
could be negatively impacted by these regulations. For example, we are subject to the Safeguards guidelines
under the Gramm-Leach-Bliley Act. The Safeguards guidelines require that each financial institution develop,
implement and maintain a written, comprehensive information security program containing safeguards that are
appropriate to the financial institution’s size and complexity, the nature and scope of the financial
institution’s activities and the sensitivity of any customer information at issue. Broad-ranging data
security laws that affect our business also have been adopted by various states. Compliance with these laws
regarding the protection of consumer and employee data could result in higher compliance and technology
costs for us, as well as potentially significant fines and penalties for non-compliance. Further, there are
various other statutes and regulations relevant to the direct email marketing, debt collection and
text-messaging industries including the Telephone Consumer Protection Act. The interpretation of many of
these statutes and regulations is evolving in the courts and administrative agencies and an inability to
comply with them may have an adverse impact on our business.
In addition to the foregoing enhanced data security requirements, various federal banking
regulatory agencies, and all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands, have
enacted data security regulations and laws requiring varying levels of consumer notification in the event of
a security breach.
Also, federal legislators and regulators are increasingly pursuing new guidelines, laws
and regulations that, if adopted, could further restrict how we collect, use, share and secure consumer
information, which could impact some of our current or planned business initiatives.
Unplanned system interruptions or system failures could harm our business and
reputation. Any interruption in the availability of our transactional processing
services due to hardware and operating system failures will reduce our revenues and profits. Any unscheduled
interruption in our services results in an immediate, and possibly substantial, loss of revenues. Frequent
or persistent interruptions in our services could cause current or potential consumers to believe that our
systems are unreliable, leading them to switch to our competitors or to avoid our websites or services, and
could permanently harm our reputation.
Although our systems have been designed around industry-standard architectures to reduce
downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or
interruption from earthquakes, floods, fires, power loss, telecommunication failures, computer viruses,
computer denial-of-service attacks, and similar events or disruptions. Some of our systems are not fully
redundant, and our disaster recovery planning may not be sufficient for all eventualities. Our systems also
are subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions we may take,
the occurrence of a natural disaster, a decision by any of our third-party hosting providers to close a
facility we use without adequate notice for financial or other reasons, or other unanticipated problems at
our hosting facilities could cause system interruptions, delays, and loss of critical data, and result in
lengthy interruptions in our services. Our business interruption insurance may not be sufficient to
compensate us for losses that may result from interruptions in our service as a result of system failures.
Climate change and related regulatory responses may impact our business.
Climate change as a result of emissions of greenhouse gases is a significant topic of
discussion and may generate federal and other regulatory responses. It is impracticable to predict with any
certainty the impact on our business of climate change or the regulatory responses to it, although we
recognize that they could be significant. The most direct impact is likely to be an increase in energy
costs, which would adversely impact consumers and their ability to incur and repay indebtedness. However, we
are uncertain of the ultimate impact, either directionally or quantitatively, of climate change and related
regulatory responses on our business.
We have elected the fair value option effective as of January 1, 2020, and we
use estimates in determining the fair value of our loans. If our estimates prove incorrect, we may
be required to write down the value of these assets, which could adversely affect our results of
operations. Our ability to measure and report our financial position and results of
operations is influenced by the need to estimate the impact or outcome of future events on the basis of
information available at the time of the issuance of the financial statements. Further, most of these
estimates are determined using Level 3 inputs for which changes could significantly impact our fair value
measurements. A variety of factors including, but not limited to, estimated yields on consumer receivables,
customer default rates, the timing of expected payments, estimated costs to service the portfolio, interest
rates, and valuations of comparable portfolios may ultimately affect the fair values of our loans and
finance receivables. If actual results differ from our judgments and assumptions, then it may have an
adverse impact on the results of operations and cash flows. Management has processes in place to monitor
these judgments and assumptions, but these processes may not ensure that our judgments and assumptions are
correct.
Our allowance for uncollectible loans is determined based upon both objective
and subjective factors and may not be adequate to absorb loan losses. We face the risk
that customers will fail to repay their loans in full. Through our analysis of loan performance, delinquency
data, charge-off data, economic trends and the potential effects of those economic trends on consumers, we
establish an allowance for uncollectible loans, interest and fees receivable as an estimate of the probable
losses inherent within those loans, interest and fees receivable that we do not report at fair value. We
determine the necessary allowance for uncollectible loans, interest and fees receivable by analyzing some or
all of the following unique to 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 our customers; changes in underwriting criteria; and estimated
recoveries. These inputs are considered in conjunction with (and potentially reduced by) any unearned fees
and discounts that may be applicable for an outstanding loan receivable. Actual losses are difficult to
forecast, especially if such losses are due to factors beyond our historical experience or control. As a
result, our allowance for uncollectible loans may not be adequate to absorb incurred losses or prevent a
material adverse effect on our business, financial condition and results of operations. Losses are the
largest cost as a percentage of revenues across all of our products. Fraud and customers not being able to
repay their loans are both significant drivers of loss rates. If we experienced rising credit or fraud
losses this would significantly reduce our earnings and profit margins and could have a material adverse
effect on our business, prospects, results of operations, financial condition or cash flows.
Risks Relating to an Investment in Our Securities
The price of our common stock may fluctuate significantly, and this may make
it difficult for you to resell your shares of our common stock when you want or at prices you find
attractive. The price of our common stock on the NASDAQ Global Select Market
constantly changes. We expect that the market price of our common stock will continue to fluctuate. The
market price of our common stock may fluctuate in response to numerous factors, many of which are beyond our
control. These factors include the following:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance, including financial estimates by
securities analysts and investors;
- the overall financing environment, which is critical to our value;
- the operating and stock performance of our competitors;
- announcements by us or our competitors of new products or services or significant contracts,
acquisitions, strategic partnerships, joint ventures or capital commitments;
- changes in interest rates;
- the announcement of enforcement actions or investigations against us or our competitors or other
negative publicity relating to us or our industry;
- changes in generally accepted accounting principles in the U.S. ("GAAP"), laws, regulations or the
interpretations thereof that affect our various business activities and segments;
- general domestic or international economic, market and political conditions;
- changes in ownership by executive officers, directors and parties related to them who control a majority
of our common stock;
- additions or departures of key personnel; and
- future sales of our common stock and the transfer or cancellation of shares of common stock pursuant to
a share lending agreement.
In addition, the stock markets from time to time experience extreme price and volume
fluctuations that may be unrelated or disproportionate to the operating performance of companies. These
broad fluctuations may adversely affect the trading price of our common stock, regardless of our actual
operating performance.
Future sales of our common stock or equity-related securities in the public
market, including sales of our common stock pursuant to share lending agreements or short sale
transactions by holders of convertible senior notes, could adversely affect the trading price of our
common stock and our ability to raise funds in new stock offerings. Sales of
significant amounts of our common stock or equity-related securities in the public market, including sales
pursuant to share lending agreements, or the perception that such sales will occur, could adversely affect
prevailing trading prices of our common stock and could impair our ability to raise capital through future
offerings of equity or equity-related securities. Future sales of shares of common stock or the availability
of shares of common stock for future sale, including sales of our common stock in short sale transactions by
holders of our convertible senior notes, may have a material adverse effect on the trading price of our
common stock.
The shares of Series A Convertible Preferred Stock are senior obligations,
rank prior to our common stock with respect to dividends, distributions and payments upon
liquidation and have other terms, such as a redemption right, that could negatively impact the value
of shares of our common stock. In December 2019, we issued 400,000 shares of Series A
Convertible Preferred Stock. The rights of the holders of our Series A Convertible Preferred Stock with
respect to dividends, distributions and payments upon liquidation rank senior to similar obligations to our
holders of common stock. Holders of the Series A Convertible Preferred Stock are entitled to receive
dividends on each share of such stock equal to 6% per annum on the liquidation preference of $100. The
dividends on the Series A Convertible Preferred Stock are cumulative and non-compounding and must be paid
before we pay any dividends on the common stock.
In the event of our liquidation, dissolution or the winding up of our affairs, the holders
of our Series A Convertible Preferred Stock have the right to receive a liquidation preference entitling
them to be paid out of our assets generally available for distribution to our equity holders and before any
payment may be made to holders of our common stock in an amount equal to $100 per share of Series A
Convertible Preferred Stock plus any accrued but unpaid dividends.
Further, on and after January 1, 2024, the holders of the Series A Convertible Preferred
Stock will have the right to require us to purchase outstanding shares of Series A Convertible Preferred
Stock for an amount equal to $100 per share plus any accrued but unpaid dividends. This redemption right
could expose us to a liquidity risk if we do not have sufficient cash resources at hand or are not able to
find financing on sufficiently attractive terms to comply with our obligations to repurchase the Series A
Convertible Preferred Stock upon exercise of such redemption right.
Our obligations to the holders of Series A Convertible Preferred Stock also could limit
our ability to obtain additional financing or increase our borrowing costs, which could have an adverse
effect on our financial condition and the value of our common stock.
Our outstanding Series A Convertible Preferred Stock has anti-dilution
protection that, if triggered, could cause substantial dilution to our then-existing holders of
common stock, which could adversely affect our stock price. The document governing the
terms of our outstanding Series A Convertible Preferred Stock contains anti-dilution provisions to benefit
the holders of such stock. As a result, if we, in the future, issue common stock or other derivative
securities, subject to specified exceptions, for a per share price less than the then existing conversion
price of the Series A Convertible Preferred Stock, an adjustment to the then current conversion price would
occur. This reduction in the conversion price could result in substantial dilution to our then-existing
holders of common stock, which could adversely affect the price of our common stock.
We have no current plans to pay cash dividends on our common stock for the
foreseeable future, and an increase in the market price of our common stock, if any, may be the sole
source of gain on your investment. With the exception of dividends payable on our
Series A Convertible Preferred Stock, we currently intend to retain any future earnings for use in the
operation and expansion of our business and do not expect to pay any dividends on our common stock in the
foreseeable future. The declaration and payment of all future dividends on our common stock, if any, will be
at the sole discretion of our board of directors, which retains the right to change our dividend policy at
any time. Any decision by our board of directors to declare and pay dividends in the future will depend on,
among other things, our results of operations, financial condition, cash requirements, contractual
restrictions, restrictions on dividends imposed by the document governing the terms of the Series A
Convertible Preferred Stock and other factors that our board of directors may deem relevant. Consequently,
appreciation in the market price of our common stock, if any, may be the sole source of gain on your
investment for the foreseeable future.
Holders of the Series A Convertible Preferred Stock are entitled to receive dividends on
each share of such stock equal to 6% per annum on the liquidation preference of $100. The dividends on the
Series A Convertible Preferred Stock are cumulative and non-compounding and must be paid before we pay any
dividends on the common stock.
We have the ability to issue additional preferred stock, warrants, convertible
debt and other securities without shareholder approval. Our common stock may be
subordinate to additional classes of preferred stock issued in the future in the payment of dividends and
other distributions made with respect to common stock, including distributions upon liquidation or
dissolution. Our articles of incorporation permit our Board of Directors to issue preferred stock without
first obtaining shareholder approval, which we did in December 2019 when we issued the Series A Convertible
Preferred Stock. If we issue additional classes of preferred stock, these additional securities may have
dividend or liquidation preferences senior to the common stock. If we issue additional classes of
convertible preferred stock, a subsequent conversion may dilute the current common shareholders’ interest.
We have similar abilities to issue convertible debt, warrants and other equity securities.
Our executive officers, directors and parties related to them, in the
aggregate, control a majority of our common stock and may have the ability to control matters
requiring shareholder approval. Our executive officers, directors and parties related
to them own a large enough share of our common stock to have an influence on, if not control of, the matters
presented to shareholders. As a result, these shareholders may have the ability to control matters requiring
shareholder approval, including the election and removal of directors, the approval of significant corporate
transactions, such as any reclassification, reorganization, merger, consolidation or sale of all or
substantially all of our assets and the control of our management and affairs. Accordingly, this
concentration of ownership may have the effect of delaying, deferring or preventing a change of control of
us, impede a merger, consolidation, takeover or other business combination involving us or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn
could have an adverse effect on the market price of our common stock.
The right to receive payments on our convertible senior notes is subordinate
to the rights of our existing and future secured creditors. Our convertible senior
notes are unsecured and are subordinate to existing and future secured obligations to the extent of the
value of the assets securing such obligations. As a result, in the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding of our company, our assets generally would be available to
satisfy obligations of our secured debt before any payment may be made on the convertible senior notes. To
the extent that such assets cannot satisfy in full our secured debt, the holders of such debt would have a
claim for any shortfall that would rank equally in right of payment (or effectively senior if the debt were
issued by a subsidiary) with the convertible senior notes. In such an event, we may not have sufficient
assets remaining to pay amounts on any or all of the convertible senior notes.
As of December 31, 2019, Atlanticus Holdings Corporation had outstanding: $745.3 million
of secured indebtedness, which would rank senior in right of payment to the convertible senior notes; $45.2
million of senior unsecured indebtedness in addition to the convertible senior notes that would rank equal
in right of payment to the convertible senior notes; and no subordinated indebtedness. Included in senior
secured indebtedness are certain guarantees we have executed in favor of our subsidiaries. For more
information on our outstanding indebtedness, See Note 9, “Notes Payable and Variable Interest Entities,” to
our consolidated financial statements included herein.
Our convertible senior notes are junior to the indebtedness of our
subsidiaries. Our convertible senior notes are structurally subordinated to the
existing and future claims of our subsidiaries’ creditors. Holders of the convertible senior notes are not
creditors of our subsidiaries. Any claims of holders of the convertible senior notes to the assets of our
subsidiaries derive from our own equity interests in those subsidiaries. Claims of our subsidiaries’
creditors will generally have priority as to the assets of our subsidiaries over our own equity interest
claims and will therefore have priority over the holders of the convertible senior notes. Consequently, the
convertible senior notes are effectively subordinate to all liabilities, whether or not secured, of any of
our subsidiaries and any subsidiaries that we may in the future acquire or establish. Our subsidiaries’
creditors also may include general creditors and taxing authorities. As of December 31, 2019, our
subsidiaries had total liabilities of approximately $792.3 million (including the $745.3 million of senior
secured indebtedness mentioned above), excluding intercompany indebtedness. In addition, in the future, we
may decide to increase the portion of our activities that we conduct through subsidiaries.
Note Regarding Risk Factors
The risk factors presented above are all of the ones that we currently consider material.
However, they are not the only ones facing our company. Additional risks not presently known to us, or which
we currently consider immaterial, also may adversely affect us. There may be risks that a particular
investor views differently from us, and our analysis might be wrong. If any of the risks that we face
actually occurs, our business, financial condition and operating results could be materially adversely
affected and could differ materially from any possible results suggested by any forward-looking statements
that we have made or might make. In such case, the trading price of our common stock or other securities
could decline, and you could lose part or all of your investment. We expressly disclaim any
obligation to update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.