true000158086400015808642022-02-012022-02-01

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

____________________

FORM 8-K/A

(Amendment No. 2)

____________________

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): February 1, 2022

____________________

VROOM, INC.

(Exact name of registrant as specified in its charter)

____________________

Delaware	001-39315	90-1112566
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(IRS Employer Identification No.)
3600 W Sam Houston Pkwy S, Floor 4 Houston, Texas 77042
(Address of principal executive offices) (Zip Code)

(518) 535-9125
(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

____________________

Check the appropriate box below if the Form 8‑K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a‑12 under the Exchange Act (17 CFR 240.14a‑12)

☐ Pre‑commencement communications pursuant to Rule 14d‑2(b) under the Exchange Act (17 CFR 240.14d‑2(b))

☐ Pre‑commencement communications pursuant to Rule 13e‑4(c) under the Exchange Act (17 CFR 240.13e‑4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, $0.001 par value per share		VRM		The Nasdaq Global Select Market

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b–2 of the Securities Exchange Act of 1934 (§240.12b‑2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

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Introductory Note

 

On February 1, 2022, Vroom, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K”) reporting that on that date, the Company completed the acquisition of Unitas Holdings Corp. (now known as Vroom Finance Corporation), a Delaware corporation, including its wholly owned subsidiaries United Auto Credit Corporation and United PanAm Financial Corp. (the direct parent of United Auto Credit Corporation and now known as Vroom Automotive Financial Corporation). Unitas Holdings Corp., United PanAm Financial Corp. and United Auto Credit Corporation, as well as their other subsidiaries, are now wholly owned subsidiaries of the Company.

 

On April 8, 2022, the Company filed Amendment No. 1 to the Original Form 8-K to include the financial statements required by Item 9.01(a) of Form 8-K and the pro forma financial information required by Item 9.01(b) of Form 8-K, which were not included in the Original Form 8-K pursuant to Items 9.01(a)(3) and (b)(2) of Form 8-K.

 

This Current Report on Form 8-K/A amends Amendment No.1 to the Original Form 8-K to include updated financial statements of United PanAm Financial Corp. and its subsidiaries and updated pro forma financial information for the combined business, which were not included in the Original Form 8-K. Except as provided herein, the disclosures made in the Original Form 8-K remain unchanged.

 

Item 9.01 Financial Statements and Exhibits.

 

(a) Financial Statements of Businesses or Funds Acquired.

 

The historical audited consolidated financial statements of United PanAm Financial Corp. and its subsidiaries as of and for the year ended December 31, 2021 and 2020, as well as the accompanying notes thereto and the related Report of Independent Auditor issued by RSM US LLP, dated May 19, 2022, are filed hereto as Exhibit 99.1 and incorporated herein by reference.

 

Unitas Holdings Corp.'s financial statements are not material on a stand-alone basis.

 

(b) Pro Forma Financial Information.

 

The unaudited pro forma condensed combined statement of operations of the Company for the six months ended June 30, 2022, the unaudited pro forma condensed combined statement of operations of the Company for the year ended December 31, 2021, and the notes related thereto, are filed as Exhibit 99.2 hereto and are incorporated herein by reference. The unaudited pro forma condensed combined financial information combines the Company’s financial statements with United PanAm Financial Corp.’s financial statements.

 

(d) Exhibits.

 

23.1	Consent of RSM US LLP, Independent Auditor.
99.1	Audited Consolidated Financial Statements of United PanAm Financial Corp. and its subsidiaries as of and for the year ended December 31, 2021.
99.2	Unaudited Pro Forma Condensed Combined Statement of Operations of the Company for the six months ended June 30, 2022 and Unaudited Pro Forma Condensed Combined Statement of Operations of the Company for the year ended December 31, 2021.
104	Cover Page Interactive Data File (embedded within the Inline XBRL document).

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: September 9, 2022	VROOM, INC.
	By:	/s/ Robert R. Krakowiak
	Name: Robert R. Krakowiak
	Title: Chief Financial Officer

 

 

 

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Exhibit 23.1

Consent of Independent Auditor

 

We consent to the incorporation by reference in Registration Statements (No. 333-239093, No. 333-263121 and No. 333-265233) on Form S-8 of Vroom, Inc. of our report dated May 19, 2022, relating to the December 31, 2021 and 2020 consolidated financial statements of United PanAm Financial Corp. and its subsidiaries, appearing in this Current Report on Form 8-K/A filed by Vroom, Inc. on September 9, 2022.

 

 

/s/ RSM US LLP

 

Los Angeles, California

September 9, 2022

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Exhibit 99.1

 

 

United PanAm Financial Corp. and Subsidiaries

 

Consolidated Financial Report

December 31, 2021 and 2020

 

 

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Contents

 

Independent Auditor’s Report	1-2
Consolidated Financial Statements
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Changes in Stockholder’s Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7-25

 

 

 

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Independent Auditor’s Report

 

 

Board of Directors

United PanAm Financial Corp. and Subsidiaries

 

 

Opinion

We have audited the consolidated financial statements of United PanAm Financial Corp. and its subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

 

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued.

 

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

 

In performing an audit in accordance with GAAS, we:

 

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We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.

 

/s/ RSM US LLP

 

Los Angeles, California

May 19, 2022

 

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United PanAm Financial Corp. and Subsidiaries
Consolidated Balance Sheets
December 31, 2021 and 2020
(Dollars in thousands, except per share data)
	2021			2020
Assets
Cash and cash equivalents	$	3,658		$	4,224
Restricted cash (held entirely through consolidated VIEs)		42,922			40,532
Total cash, cash equivalents and restricted cash		46,580			44,756
Finance receivables, net (including finance receivables of consolidated VIEs
of $443.9 million in 2021 and $407.1 million in 2020)		519,156			452,483
Premises and equipment, net		4,099			4,962
Interest receivable		9,400			8,650
Deferred tax assets		15,703			15,583
Cash surrender value of life insurance		1,289			1,256
Tax receivable		2,513			492
Other assets		6,903			6,468
Total assets	$	605,643		$	534,650
Liabilities and Stockholder’s Equity
Liabilities
Notes payable of consolidated VIE's	$	163,041		$	102,872
Securitization debt of consolidated VIE's		290,765			315,209
Senior loan		-			7,000
Junior subordinated debentures		10,310			10,310
Accrued expenses and other liabilities		27,865			24,062
Total liabilities		491,981			459,453
Commitments and Contingencies (Note 11)
Stockholder’s Equity
Common stock, $0.01 par value, 100 shares authorized,
issued, and outstanding		-			-
Paid-in capital		17,985			17,985
Retained earnings		95,677			57,212
Total stockholder’s equity		113,662			75,197
Total liabilities and stockholder’s equity	$	605,643		$	534,650
See Notes to Consolidated Financial Statements.

 

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United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2021 and 2020
(Dollars in thousands)
	2021			2020
Interest income	$	162,423		$	160,458
Interest expense:
Notes payable		3,422			4,952
Securitization debt		11,290			14,016
Senior loan		89			1,053
Junior subordinated debentures		326			400
Total interest expense		15,127			20,421
Net interest income		147,296			140,037
Provision for finance receivable losses		43,349			80,173
Net interest income after provision for
finance receivable losses		103,947			59,864
Noninterest income		4,983			6,172
Noninterest expense:
Compensation and benefits		39,334			34,238
Occupancy		3,189			3,056
Other noninterest expense		15,497			12,410
Total noninterest expense		58,020			49,704
Income before income tax expense		50,910			16,332
Income tax expense		12,445			3,707
Net income	$	38,465		$	12,625
See Notes to Consolidated Financial Statements.

 

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United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholder’s Equity
Years Ended December 31, 2021 and 2020
(Dollars in thousands, except per share data)
	Paid-In			Retained
	Capital			Earnings			Total
Balance, December 31, 2019	$	17,691		$	44,587		$	62,278
Net income		-			12,625			12,625
Stock bonus award		294			-			294
Balance, December 31, 2020		17,985			57,212			75,197
Net income		-			38,465			38,465
Balance, December 31, 2021	$	17,985		$	95,677		$	113,662
See Notes to Consolidated Financial Statements.

 

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United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2021 and 2020
(Dollars in thousands)
	2021			2020
Cash flows from operating activities
Net income	$	38,465		$	12,625
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for finance receivable losses		43,349			80,173
Loss on asset disposal		-			217
Amortization of debt issuance costs		2,754			2,774
Deferred income taxes		(120	)		(3,970	)
Depreciation and amortization		1,687			1,367
Capitalized internal development costs		(483	)		(607	)
Stock bonus award		-			294
Amortization of deferred acquisition costs		5,125			5,424
Decrease / (increase) in accrued interest receivable		(750	)		367
Increase in other assets and tax receivable		(2,240	)		(54	)
Increase in accrued expenses and other liabilities		5,361			2,939
Net cash provided by operating activities		93,148			101,549
Cash flows from investing activities
Acquisition of finance receivables, net of collections received		(116,953	)		(42,979	)
Purchase of premises and equipment		(342	)		(1,244	)
Net cash used in investing activities		(117,295	)		(44,223	)
Cash flows from financing activities
Net (decrease) / increase in notes payable		59,976			(31,501	)
Proceeds from securitization debt		249,340			239,520
Principal payments on securitization debt		(274,087	)		(263,058	)
Payments for debt issuance costs		(2,258	)		(2,392	)
Repayments for senior loan		(7,000	)		-
Net cash (used in) / provided by financing activities		25,971			(57,431	)
Net (decrease) / increase in cash and cash equivalents		1,824			(105	)
Cash, cash equivalents and restricted cash, beginning of year		44,756			44,861
Cash, cash equivalents and restricted cash, end of year	$	46,580		$	44,756
Supplemental disclosures of cash flow information
Cash payments made for:
Interest	$	12,098		$	17,639
Income taxes paid, net	$	16,279		$	4,560
See Notes to Consolidated Financial Statements.

 

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Nature of organization: United PanAm Financial Corp. and subsidiaries (the Company) was incorporated in California on April 9, 1998. The Company is a wholly owned subsidiary of Unitas Holdings Corp. (Parent Company). The Company’s primary business involves the purchase and collection of automobile installment contracts from new and used car dealers, with an emphasis on the independent, nonfranchise dealer. Retail obligations are secured by liens on vehicle titles. The Company can repossess the vehicle if the borrower fails to meet the obligation of the contract. The Company is currently authorized to operate in 49 states, with its primary markets in Florida, California and Texas.

 

The Company specializes in receivables from borrowers who generally would not be expected to qualify for traditional financing such as that provided by commercial banks or automobile manufacturers’ finance companies. The finance receivables are secured primarily by used automobiles.

 

A summary of the Company’s significant accounting policies is as follows:

 

Basis of accounting and principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, UPFC Trust I and United Auto Credit Corporation (UACC). Additionally, the Company has several variable interest entities (VIEs) for which UACC is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

One of the Company’s subsidiaries, UPFC Trust I, is an unconsolidated statutory business trust, which was formed for the exclusive purpose of issuing and selling trust preferred securities and holding subordinated debentures issued by the Company. In accordance with Accounting Standards Codification (ASC) 810, Consolidation, this trust does not meet the criteria for consolidation. The accompanying consolidated balance sheets include in other assets the investment in the trust of $310 thousand as of December 31, 2021 and 2020.

 

These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to industry practice.

 

Use of estimates: In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in the Company’s consolidated financial statements relate to the allowance for finance receivable losses, valuation of deferred tax assets and net realizable value of repossessed assets.

 

Cash and cash equivalents, cash flows and cash concentrations: Cash and cash equivalents include cash on hand and interest- and noninterest-bearing deposits. The Company periodically maintains balances in various operating accounts in excess of federally insured deposit limits. The Company has not experienced any losses in such accounts. Cash flows from the purchases of and payments related to finance receivables and borrowings and repayments on short-term notes payable are recorded net.

 

Restricted cash: The Company collects and services all receivables under the revolving and term securitizations and warehouse facilities. These collections are restricted for use until properly remitted each month under the terms of the servicing agreement.

 

Finance receivables and income recognition: The Company generally purchases automobile installment contracts for investment at a discount. The discount is consideration for the credit risk associated with the contracts. Finance receivables and contracts held for investment are reported at cost, net of unearned acquisition discounts and allowance for finance receivable losses, as well as deferred acquisition costs. Unearned acquisition discounts are recognized over the contractual life of the finance receivables using the interest method.

 

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The Company’s policy is generally to charge off finance receivables at the earlier of (1) the end of the month in which the collateral has been repossessed and sold, or (2) the end of the month in which the account is delinquent in excess of 120 days, if not pending sale. If the collateral has been repossessed and sold, the charge-off represents the difference between the net sales proceeds and the net amount of the delinquent contract. If the account is delinquent in excess of 120 days, the charge-off represents the net amount of the delinquent contract. Interest income deemed uncollectible is reversed at the time the finance receivable is charged off.

 

An account is considered delinquent if a scheduled payment has not been received by the date such payment was contractually due. Finance receivables over 90 days delinquent are considered nonaccrual finance receivables. Income is subsequently recognized only to the extent cash payments are received until, in management’s judgment, the borrower is able to make periodic interest and principal payments in accordance with the finance receivable terms.

 

The Company considers a finance receivable impaired when it is probable that it will be unable to collect all amounts due (principal and interest) according to the original terms of the contract. As the finance receivable portfolio is homogenous, the Company evaluates finance receivables for impairment collectively.

 

Late charges and other fees are calculated at predetermined amounts or percentages of overdue finance receivable balances and are recorded on a cash basis.

 

Deferred acquisition costs: Certain direct receivable acquisition costs are deferred and amortized as an adjustment to the related receivable’s yield. The Company is amortizing these amounts over the contractual life of the receivable using a method that approximates the effective interest rate method.

 

Allowance for finance receivable losses: The allowance for finance receivable losses is calculated based on incurred loss methodology for the amount of probable incurred finance receivable losses inherent in finance receivables as of the reporting date. The Company’s finance receivable loss allowance is estimated by management based upon a variety of factors, including an assessment of the credit risk inherent in the portfolio and prior loss experience.

 

The allowance for finance receivable losses is established through a provision for finance receivable losses recorded as necessary to provide for probable incurred finance receivable losses on existing finance receivables. The Company’s methodology to estimate incurred losses uses static pool which stratifies finance receivables and losses based upon the period of origination. The credit risk in each individual static pool is evaluated independently in order to estimate the future losses within each pool. The Company evaluates the adequacy of unearned discounts to absorb estimated finance receivable losses on a regular basis. To the extent the unearned discount is not considered adequate to absorb estimated losses; an increase in the allowance for finance receivable losses is established by a charge to the provision for finance receivable losses. The Company evaluates the adequacy of the allowance by examining current delinquencies, the characteristics of the portfolio, prospective liquidation values of the underlying collateral, and general economic and market conditions. As circumstances change, the Company’s level of provisioning and/or allowance may change as well.

 

Despite these analyses, the Company recognizes that establishing an allowance is an estimate, which is inherently uncertain and depends on the outcome of future events. The Company’s operating results and financial condition are sensitive to changes in its estimate for finance receivable losses and the estimate’s underlying assumptions. The Company’s operating results and financial condition are immediately impacted as changes in estimates for calculating the allowance for finance receivable losses are recorded in its consolidated statement of operations as an addition or reduction in provision expense. Any such adjustment is recorded in the current period as the assessment is made.

 

Troubled debt restructured finance receivables: Finance receivables associated with customers in bankruptcy may be considered troubled debt restructured finance receivables. The Company follows its standard charge-off and nonaccrual policies for the accounts of customers in a confirmed bankruptcy under Chapters 7 and 13 of the bankruptcy code. For customers in a Chapter 13 bankruptcy plan, the bankruptcy

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

court reduces the interest rate the Company can charge, as it does for most creditors. Once the customer is in a confirmed Chapter 13 bankruptcy plan, the Company receives payments with respect to the remaining amount of the finance receivable at the reduced interest rate from the bankruptcy trustee. The Company does not believe that accounts in a confirmed Chapter 13 plan have a higher level of risk than non-bankrupt accounts. If a customer fails to comply with the terms of the bankruptcy order, the Company will petition the trustee to have the customer dismissed from bankruptcy. Upon dismissal, the Company restores the account to the original terms and pursues collection through its normal collection activities.

 

Securitizations and variable interest entities: The Company enters into agreements to securitize, sell and service certain automobile contracts. Securitization transactions typically involve the use of VIEs and are accounted for as secured financings. Economic interests in the securitized and sold assets are generally retained in the form of senior or subordinated interests, cash reserve accounts, residual interests and servicing rights. Prior to securitization, the Company will typically hold finance receivables in separate VIEs.

 

Securitizations are transactions in which the Company sells a specified pool of automobile contracts to a VIE, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from the Company. The securitization involves identification of specific automobile contracts, sale of those contracts to a VIE, and issuance of asset-backed securities to fund the transactions.

 

In order to conclude whether or not a VIE is required to be consolidated, careful consideration and judgment must be given to the continuing involvement with the VIE. In circumstances where the Company has both the power to direct the activities of the entity that most significantly impact the entity’s performance and the obligation to absorb losses or the right to receive benefits of the entity that could be significant, the Company would conclude that it was the primary beneficiary, and as a result, it would consolidate the entity. This would preclude the Company from recording an accounting sale on the transaction. In the case of a consolidated VIE, the accounting is consistent with a secured financing (i.e., the Company continues to carry the finance receivables and record the securitized debt on the balance sheet). There is no specific accounting record of economic interests, but rather, they are captured as the difference between the finance receivable and debt accounting. The Company recognizes interest income on the contracts and interest expense on the securities issued in the securitization and records as expense a provision for probable finance receivable losses on the contracts.

 

In transactions where either one or both of the power or economic criteria mentioned above are not met, the Company must determine whether or not there is a sale for accounting purposes. In order to achieve a sale for accounting purposes, the assets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond the Company’s control. If the Company were to fail any of the three criteria for accounting for a sale, the accounting would be consistent with the preceding paragraph (i.e., a secured borrowing). However, if the criteria is met, the transaction would be recorded as a sale and the VIE would not be consolidated. Presently, the Company has several special purpose entities of which were determined to be VIEs.

 

The Company retains servicing responsibilities for the automobile contracts included in the securitization. The Company also serves as the collateral manager for the securitization. The Company is the primary beneficiary and has consolidated all of the VIEs.

 

Servicing costs are charged to expense as incurred but are eliminated with servicing fees in consolidation of the VIEs.

 

The investors in the securitization trust generally have no recourse to the Company’s other assets outside of customary market representation and warranty repurchase provisions.

 

Premises and equipment: Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the shorter of the estimated useful lives of the related assets or terms of the leases. Furniture, equipment, computer hardware, software and data processing equipment are generally depreciated over three to five years, unless another useful life most closely relates to the asset benefit period. Leasehold improvements on

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

operating leases are amortized over a period not exceeding the term of the lease. Additions and major replacements are added to the assets at cost. Maintenance and repair costs and minor replacements are charged to expense when incurred. When assets are replaced or otherwise disposed, the cost and accumulated depreciation are removed from the accounts and the gains or losses, if any, are reflected in the consolidated statements of operations. The cost of fully depreciated assets and the related accumulated depreciation are removed from the accounts.

 

Impairment of long-lived assets: The Company estimates the future undiscounted cash flows to be derived from an asset (the estimated fair value) to assess whether or not a potential impairment exists but only done when events or circumstances indicate the carrying value of a long-lived asset may be impaired. If the carrying value exceeds the Company’s estimate of fair value and the Company determines that carrying value would not be recovered from undiscounted future cash flows, the Company then calculates the impairment as the excess of the carrying value of the asset over the estimate of its fair value. The Company determined that there were no circumstances requiring evaluation for impairment at December 31, 2021 and 2020.

 

Leases: The Company leases office space under noncancelable operating lease agreements, which expire at various dates through 2024. These leases are recorded as operating leases because they do not meet the accounting criteria for capital leases. These leases generally contain scheduled rent increases or escalation clauses, renewal options, rent allowances and other rent incentives. The Company recognizes rent expense on the Company’s operating leases, excluding these allowances and incentives, which are considered immaterial, on a straight-line basis over the lease term.

 

Repossessed assets: Repossessed assets consist of vehicles and are recorded at their net realizable value (which represents estimated fair value less costs to sell). Vehicles are repossessed in the event of nonpayment of indebtedness and sold shortly thereafter. Any difference between the estimated sales price (net of expenses) and the finance receivable (net of unearned finance charges) is treated as a charge-off first against the related finance receivable’s unearned acquisition discount and the remaining balance, if any, is charged against the allowance for finance receivable losses. Repossessed assets are included in other assets in the accompanying consolidated balance sheets.

 

Debt issuance costs: Debt issuance costs incurred with the issuance of the Company’s debt are deferred and amortized to interest expense over the estimated life of the debt using a method that approximates the effective interest rate method. Debt issuance costs are presented as a direct deduction from the carrying amount of debt liabilities in the accompanying consolidated balance sheets.

 

Fair value of financial instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect the estimates. The Company is not required to, nor has it elected to, carry any recurring financial assets or liabilities at fair value. The Company has nonrecurring financial assets, such as repossessed assets, which are required to be carried at fair value less cost to sell.

 

Fair value determination: ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and requires disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

 

 

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

 

 

Given the nature of some of the Company’s assets and liabilities, clearly determinable market-based valuation inputs are often not available; therefore, these assets and liabilities are valued using internal estimates. As subjectivity exists with respect to the valuation estimates used, the fair values disclosed may not equal prices that can ultimately be realized if the assets are sold or the liabilities are settled with third parties.

 

Loss contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the consolidated financial statements.

 

Stock-based compensation: The Black-Scholes model was utilized to estimate the fair value of stock options as equity awards. Compensation cost is recognized over the required service period, generally defined as the vesting period.

 

Income taxes: The Company is a member of a group that files consolidated federal (and state) tax returns. Accordingly, income taxes payable to (refundable from) the tax authorities is recognized on the financial statements of the Parent Company who is the taxpayer for income tax purposes. The members of the consolidated group allocate payments to any member of the group for the income tax reduction resulting from the member’s inclusion in the consolidated return, or the member makes payments to the Parent Company for its allocated share of the consolidated income tax liability. This allocation approximates the amounts that would be reported if the Company was separately filing its tax returns.

 

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable to the future period in which the temporary differences are expected to reverse.

 

In assessing the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical income and projections for future income over the periods in which the deferred tax assets are expected to be deductible, management believes it is more likely than not that the Company will realize the benefits of almost all of the deductible differences at December 31, 2021.

 

The Company is subject to the guidance for accounting for uncertainty in tax positions taken or expected to be taken on a tax return. The tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions, if any, are recorded as part of other expenses. Management believes that all tax positions taken to date are highly certain and, accordingly, no provision has been made to the consolidated financial statements. The Company is subject to California and other state income tax in all states in which it operates. In addition to 2021, the federal income tax returns for the years ended December 31, 2018 through 2020 are open to audit by the federal authorities, and the California and other state tax returns for the years ended December 31, 2017 through 2020 are open to audit by state authorities. The Company files consolidated U.S. federal and state income tax returns with its Parent Company.

 

11

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Concentration of credit risk: Concentration of credit risk with respect to finance receivables is limited due to the large number of customers comprising the Company’s customer base and their dispersion among different industries and geographical areas. However, the Company is exposed to a concentration of credit risk inherent in providing alternative financing programs to borrowers who cannot obtain traditional bank financing.

 

Reclassification: Certain amounts in the prior-year financial statements have been reclassified to conform to the current-year presentation. No effect on the previously reported net income or stockholder’s equity occurred as a result of the reclassifications.

 

Recently issued accounting standards: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle for lessee accounting covered in ASU 2016-02 is that a lessee should recognize the assets and liabilities that arise from leases. The main resulting change in this update will require lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. Lessor accounting will remain largely unchanged from previous GAAP. See ASUs 2019-10 and 2020-05 below. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases).

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Amendments in this update were effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021 for nonpublic entities (See ASU 2019-10 below).

 

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, to address issues raised by stakeholders during the implementation of ASU 2016-13. ASU 2019-11 clarifies the treatment of expected recoveries for amounts previously written off on purchased receivables, among other items.

 

In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), and Leases (Topic 842): Effective Dates, which delays the effective dates of ASU 2016-13 and 2016-02 for certain entities. With the delay in the effective dates of ASU 2016-13 and 2016-02 resulting from ASU 2019-10, ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, and ASU 2016-02 is effective for the Company for fiscal years beginning after December 15, 2020. In May 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, which further delays the effective date of ASU 2016-02 for the Company for fiscal years beginning after December 15, 2021. The Company is currently evaluating the effects of these ASUs on its consolidated financial statements and disclosures.

 

In November 2021, the FASB issued ASU 2021-09, Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities, which allows the election of the risk-free rate by class of underlying asset, rather than at the entity-wide level. An entity that makes the risk-free rate election is required to disclose which asset classes it has elected to apply a risk-free rate. The lessee is required to use the implicit rate when is readily determinable in the lease, rather than a risk-free rate or an incremental borrowing rate.

 

Other accounting pronouncements issued but not yet effective are not expected to have a material impact on the Company’s financial condition, liquidity or results of operations.

 

12

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The Company’s typical borrower has a credit history that may fail to meet the lending standards of most banks, credit unions and captive automobile finance companies. Substantially all of the Company’s automobile contracts involve finance receivables made to individuals with limited or impaired credit histories. The Company believes that its borrower credit profile is similar to that of its direct competitors in the subprime automobile finance business. The Company also believes that the underwriting criteria and risk management system, coupled with close senior management supervision, enhances its risk management and collection functions.

 

In deciding whether to acquire a particular contract, the Company considers various factors, including:

 

 

Borrowers under the contracts typically make down payments, in the form of cash or trade-in, ranging from 6 percent to 30 percent of the sale price of the vehicle financed. The balance of the purchase price of the vehicle plus taxes, title fees and, if applicable, premiums are generally financed over a period of 24 to 66 months.

 

Finance receivables are summarized as follows at December 31 (dollars in thousands):

 

	2021			2020
Finance receivables:
Finance receivables	$	629,273		$	542,410
Unearned acquisition discounts		(63,774	)		(49,627	)
Allowance for finance receivable losses		(52,637	)		(45,360	)
Deferred acquisition costs		6,294			5,060
Total finance receivables, net	$	519,156		$	452,483
Allowance for finance receivable losses to gross finance receivables,
net of unearned acquisition discounts		9.3	%		9.2	%
Unearned acquisition discounts to gross finance receivables		10.1	%		9.1	%

 

The activity in the unearned acquisition discounts consists of the following as of and for the years ended December 31 (dollars in thousands):

 

	2021			2020
Unearned acquisition discounts at beginning of year	$	49,627		$	56,741
Acquisition of new finance receivables		65,457			48,179
Amortization of unearned acquisition discounts		(44,753	)		(46,801	)
Charge-offs		(6,557	)		(8,492	)
Unearned acquisition discounts at end of year	$	63,774		$	49,627

 

Unearned acquisition discounts include discounts of consolidated VIEs of $48.9 million and $42.8 million at December 31, 2021 and 2020, respectively.

13

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

 

The activity in the allowance for finance receivable losses consists of the following as of and for the years ended December 31 (dollars in thousands):

 

	2021			2020
Allowance for finance receivable losses at beginning of year	$	45,360		$	26,366
Provision for finance receivable losses		43,349			80,173
Net charge-offs		(36,072	)		(61,179	)
Allowance for finance receivable losses at end of year	$	52,637		$	45,360

 

Allowance for finance receivable losses includes allowance of consolidated VIEs of $45.0 million and $40.8 million at December 31, 2021 and 2020, respectively.

 

The Company records the direct costs incurred in the repossession process as a component of the charge-off of the related finance receivable. During the years ended December 31, 2021 and 2020, the total amount of such repossession expenses included with charge-offs in the schedule above totaled $4.3 million and $4.8 million, respectively.

 

Nonaccrual finance receivables represent the aggregate amount of finance receivables over 90 days delinquent. Total finance receivables on nonaccrual were $9.2 million and $8.3 million at December 31, 2021 and 2020, respectively. Total foregone interest related to nonaccrual finance receivables was $0.6 million at December 31, 2021 and 2020. It is not practical to compute the amount of interest earned on impaired finance receivables.

 

The following is an assessment of the credit quality of the finance receivables as of December 31 (dollars in thousands):

 

	2021						2020
	Amount			Percent			Amount			Percent
Finance receivables, gross	$	629,273					$	542,410
Delinquencies:														Check
31 to 60 days	$	45,860			7.3	%	$	32,257			5.9	%			7.3	%
61 to 90 days		16,514			2.6	%		13,083			2.4	%			2.6	%
More than 90 days		8,824			1.4	%		7,931			1.5	%			1.4	%
Total delinquencies	$	71,198			11.3	%	$	53,271			9.8	%			11.3	%

 

The Company’s finance receivables associated with customers in bankruptcy include $3.6 million and $4.2 million at December 31, 2021 and 2020, respectively.

 

Allowance for finance receivable losses is based on the credit risk and actual performance of individual static pools, which includes impaired finance receivables. As such, there is no specific allowance for impaired finance receivables.

 

While the ultimate magnitude and duration of the impact from COVID-19 on the Company’s business remains uncertain, it may negatively affect the Company’s business and financial condition. However, the Company did continue to experience strong cash collections and experienced positive trending on net charge-off balances.

 

The length and scope of the restrictions imposed by various governments, success of efforts to find and implement suitable vaccines, and scope and duration of special government benefits to the unemployed, among other factors, will determine the ultimate severity of the COVID-19 impact on the Company’s

14

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

business. It is likely that prolonged periods of difficult market conditions could have an adverse impact on the Company’s business, financial condition, results of operations and cash flows. However, the Company is unable to accurately predict the overall impact at this time.

 

Premises and equipment are as follows at December 31 (dollars in thousands):

 

	2021			2020
Furniture and equipment	$	20,210		$	19,413
Leasehold improvements		2,166			2,138
		22,376			21,551
Less accumulated depreciation and amortization		(18,277	)		(16,589	)
Total premises and equipment, net	$	4,099		$	4,962

 

Depreciation and amortization expense included in occupancy expense in the consolidated statements of operations was $1.7 million and $1.4 million for the years ended December 31, 2021 and 2020, respectively.

 

Additionally, $0.5 million and $0.6 million of expenses related to internally developed software were capitalized in 2021 and 2020, respectively. Construction-in-progress included in furniture and equipment was $46 thousand and $0.7 million at December 31, 2021 and 2020, respectively.

 

Other assets consist of the following at December 31 (dollars in thousands):

 

	2021			2020
Prepaid expenses	$	2,130		$	1,942
Other receivable		763			764
Security deposits		34			34
Repossessed assets		3,666			3,418
Other		310			310
Total other assets	$	6,903		$	6,468

 

The Company’s subsidiary, UACC, has three senior secured warehouse facility agreements (the First Facility, Second Facility and Third Facility) with banking institutions.

 

The First Facility dated May 30, 2012, as amended, is with a bank that provides for an aggregate borrowing limit of $150 million as of December 31, 2021. As of December 31, 2021, the First Facility bears interest at LIBOR plus a margin of interest of 1.75 percent. Interest is payable monthly. The First Facility is collateralized by eligible finance receivables. Available borrowings are computed based on a percentage of eligible finance receivables. There were $82.6 million and $87.0 million of eligible finance receivables pledged to this facility as of December 31, 2021 and 2020, respectively. There was an outstanding balance of $59.1 million and $69.4 million at December 31, 2021 and 2020, respectively. There were unamortized debt issuance costs of $0.3 million and $0.2 million related to the First Facility at December 31, 2021 and 2020, respectively. There was restricted cash of $3.8 million and $4.8 million related to this facility at December 31, 2021 and 2020, respectively. The First Facility matures on October 20, 2023 and is subject to certain financial and other covenants that restrict certain operating activities and require certain reporting activities by the Company.

 

15

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The Second Facility dated November 19, 2013, as amended, is with a bank that provides for an aggregate borrowing limit of $100 million as of December 31, 2021. As of December 31, 2021, the Second Facility bears interest at LIBOR plus a margin of interest of 1.60 percent. Interest is payable monthly. The Second Facility is collateralized by eligible finance receivables. Available borrowings are computed based on a percentage of eligible finance receivables. There were $77.6 million and $0 of eligible finance receivables pledged to this facility as of December 31, 2021 and 2020, respectively. There was an outstanding balance of $58.3 million and $0 at December 31, 2021 and 2020, respectively. There were unamortized debt issuance costs of $0.4 million and $0.5 million related to the Second Facility at December 31, 2021 and 2020, respectively. There was restricted cash of $3.2 million and $0 related to this facility at December 31, 2021 and 2020, respectively. The Second Facility is also required to have a hedge cash reserve amount that is the greater of $50,000 or the quoted price for an interest rate cap with a cap rate of 5 percent. Currently, the hedge reserve restricted cash account is $50,180. The Second Facility matures on May 19, 2023 and is subject to certain financial and other covenants that restrict certain operating activities and require certain reporting activities by the Company.

 

The Third Facility dated July 11, 2019, as amended, is with a bank that provides for an aggregate borrowing limit of $100 million as of December 31, 2021. As of December 31, 2021, the Third Facility bears interest at LIBOR plus a margin of interest of 1.75 percent. Interest is payable monthly. The Third Facility is collateralized by eligible finance receivables. Available borrowings are computed based on a percentage of eligible finance receivables. There were $59.0 million and $50.0 million of eligible finance receivables pledged to this facility as of December 31, 2021 and 2020, respectively. There was an outstanding balance of $46.6 million and $34.6 million at December 31, 2021 and 2020, respectively. There were unamortized debt issuance costs of $0.3 million and $0.5 million related to the Third Facility at December 31, 2021 and 2020, respectively. There was restricted cash of $3.2 million and $3.6 million related to this facility at December 31, 2021 and 2020, respectively. The Third Facility matures on March 29, 2023 and is subject to certain financial and other covenants that restrict certain operating activities and require certain reporting activities by the Company.

 

The securitization debt is structured as on-balance-sheet transactions and recorded as secured financings. The debt was issued through wholly owned bankruptcy remote subsidiaries of UACC and is secured by the assets of such subsidiaries, but not by other assets of the Company.

 

The use of these securitizations is an integral part of the Company’s business plan in order to increase the liquidity and reduce risks associated with interest rate fluctuations. The Company has developed a securitization program that involves selling interests in pools of the automobile contracts to investors through the private issuance of Money Market/AAA/AA/A/BBB/BB/B-rated asset-backed securities to qualified institutional investors. The Company retains the servicing rights for the finance receivables that have been securitized; therefore, the Company is responsible for the administration and collection of the contracts. The securitization agreements also require certain funds to be held in restricted cash accounts to provide additional collateral for the borrowings or to be applied to make payments on the securitization debt. Restricted cash under the various agreements totaled approximately $32.7 million and $32.2 million at December 31, 2021 and 2020, respectively. Interest expense on the securitization debt is composed of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of borrowing include facility fees, insurance premiums, amortization of transaction costs and amortization of discounts required on the notes at the time of issuance. Debt issuance costs related to the securitization debt are amortized using a method that approximates the effective interest rate method. There were $1.4 million and $1.7 million unamortized debt issuance costs related to the securitization debt at December 31, 2021 and 2020, respectively. Accordingly, the effective cost of borrowing of the securitization debt is greater than the stated rate of interest.

 

Upon the issuance of securitization debt, the Company retains the right to receive over time excess cash flows from the underlying pool of securitized automobile contracts. In the Company’s securitizations to date, it has transferred automobile contracts the Company purchased from automobile dealers to a newly formed owner trust for each transaction. The trust then issued the securitization debt. The net proceeds of the

16

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Company’s securitizations are first used to pay off certain borrowings under warehouse facilities and the remaining net proceeds are used to fund the Company’s operations.

 

The wholly owned bankruptcy remote subsidiaries of UACC were formed to facilitate the above asset- backed financing transactions. Bankruptcy remote refers to a legal structure in which it is expected that the applicable entity would not be included in any bankruptcy filing by its parent or affiliates. All of the assets of these subsidiaries have been pledged as collateral for the related debt. All such transactions, treated as secured financings for accounting and tax purposes, are treated as sales for all other purposes, including legal and bankruptcy purposes. None of the assets of these subsidiaries are available to pay other creditors of the Company or its affiliates.

 

The Company has completed several term securitizations that have been structured as secured financings for financial reporting purposes. The remaining securitized transactions outstanding are noted below. The debt issued is included in securitization debt on the consolidated balance sheets for 2021 and 2020 and comprises the following components (dollars in thousands):

 

Aggregate Principal Balance of Finance Receivables at December 31,

 

	2021			2020
United Auto Credit 2018-2	$	-		$	36,420
United Auto Credit 2019-1		46,571			111,314
United Auto Credit 2020-1		96,298			200,803
United Auto Credit 2021-1		170,105			-
	$	312,974		$	348,537

 

17

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United PanAm Financial Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

						Contractual			Outstanding			Outstanding
						Interest Rate at			Principal at			Principal at
	Initial Date of	Final Scheduled	Initial			December 31,			December 31,			December 31,
Series	Securitization	Payment Date *	Principal			2021			2021			2020
United Auto Credit 2018-2-D	August 8, 2018	May 10, 2023	$	26,000			4.26	%	$	-		$	11,750
United Auto Credit 2018-2-E	August 8, 2018	May 10, 2023		17,000			5.26	%		-			17,000
United Auto Credit 2018-2-F	August 8, 2018	June 10, 2025		7,000			6.82	%		-			7,000
United Auto Credit 2019-1-C	May 22, 2019	August 12, 2024		33,700			3.16	%		-			31,270
United Auto Credit 2019-1-D	May 22, 2019	August 12, 2024		39,840			3.47	%		8,967			39,840
United Auto Credit 2019-1-E	May 22, 2019	August 12, 2024		21,920			4.29	%		21,920			21,920
United Auto Credit 2019-1-F	May 22, 2019	January 12, 2026		14,860			6.05	%		14,860			14,860
United Auto Credit 2020-1-A	June 30, 2020	May 10, 2022		116,420			0.85	%		-			50,165
United Auto Credit 2020-1-B	June 30, 2020	November 10, 2022		32,780			1.47	%		-			32,780
United Auto Credit 2020-1-C	June 30, 2020	February 10, 2025		32,780			2.15	%		26,805			32,780
United Auto Credit 2020-1-D	June 30, 2020	February 10, 2025		31,450			2.88	%		31,450			31,450
United Auto Credit 2020-1-E	June 30, 2020	February 10, 2025		18,730			5.19	%		18,730			18,730
United Auto Credit 2020-1-F	June 30, 2020	January 12, 2026		7,360			9.08	%		7,360			7,360
United Auto Credit 2021-1-A	March 11, 2021	July 10, 2023		122,070			0.34	%		34,795			-
United Auto Credit 2021-1-B	March 11, 2021	March 11, 2024		33,540			0.68	%		33,540			-
United Auto Credit 2021-1-C	March 11, 2021	June 10, 2026		29,640			0.84	%		29,640			-
United Auto Credit 2021-1-D