OppFi Inc. (OPFI) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
OVERVIEW
OppFi is a mission-driven fintech platform that helps everyday Americans gain access to credit with digital specialty finance products. The Company’s platform powers banks to offer accessible lending products through its proprietary technology and top-rated customer experience. OppFi’s primary mission is to facilitate financial inclusion and credit access to the 60 million everyday Americans who lack access to traditional credit with digital specialty finance products and an unwavering commitment to its customers.
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OppFi works with banks to facilitate short-term lending options for everyday Americans who lack access to mainstream financial products. OppFi’s financial technology platform focuses on helping these consumers build a better financial path. Customers on OppFi’s platform benefit from a highly automated, transparent, efficient, and fully digital experience. The banks that work with OppFi benefit from its turn-key, outsourced marketing, data science, and proprietary technology to digitally acquire, underwrite and service these consumers.
OppFi’s primary products are offered by its OppLoans lending platform. Customers on this platform are U.S. consumers, who are employed, have bank accounts, and generally earn median wages. The average installment loan facilitated by OppFi is approximately $1,500, payable in installments and with an average contractual term of 11 months. Neither SalaryTap nor OppFi Card contributed meaningfully to OppFi’s results during the year ended December 31, 2022.
Unless the context otherwise requires, all references in this section to “OppFi” or the “Company” refers to Opportunity Financial, LLC (“OppFi-LLC”) and its subsidiaries prior to the closing (the “Closing”) of the Business Combination, or to OppFi Inc. and its subsidiaries from and after the Business Combination.
On July 20, 2021 (“Closing Date”), OppFi completed a business combination pursuant to the Business Combination Agreement (“Business Combination Agreement”), dated as of February 9, 2021, by and among FG New America Acquisition Corp. (“FGNA”), OppFi-LLC, a Delaware limited liability company, OppFi Shares, LLC (“OFS”), a Delaware limited liability company, and Todd Schwartz (“Members’ Representative”), in his capacity as the representative of the members of OppFi-LLC (“Members”) immediately prior to the closing (“Closing”) of the transactions contemplated by the Business Combination Agreement (“Business Combination”). At the Closing, FGNA changed its name to “OppFi Inc.” OppFi’s Class A common stock, par value $0.0001 per share (“Class A Common Stock”) and redeemable warrants exercisable for Class A Common Stock (“Public Warrants”) are listed on the New York Stock Exchange (“NYSE”) under the symbols “OPFI” and “OPFI WS,” respectively.
Following the Closing, OppFi is organized in an “Up-C” structure in which substantially all of the assets and the business of the Company are held by OppFi-LLC and its subsidiaries, and OppFi’s only direct assets consist of Class A common units of OppFi-LLC (“OppFi Units”). As of December 31, 2022, OppFi owned approximately 13.5% of the OppFi Units and controls OppFi-LLC as the sole manager of OppFi-LLC in accordance with the terms of the Third Amended and Restated Limited Liability Company Agreement of OppFi-LLC (“OppFi A&R LLCA”). All remaining OppFi Units (“Retained OppFi Units”) are beneficially owned by the Members. Each Retained OppFi Unit held by the Members may be exchanged, subject to certain conditions, for either one share of Class A Common Stock or, at the election of OppFi, in its capacity as the sole manager of OppFi-LLC, the cash equivalent of the market value of one share of Class A Common Stock, pursuant to the terms and conditions of the Third Amended and Restated Limited Liability Company Agreement of OppFi-LLC (the “Exchange Rights”). OFS holds a controlling voting interest in OppFi through its ownership of shares of Class V common stock, par value $0.0001 per share, of OppFi (“Class V Voting Stock”) in an amount equal to the number of Retained OppFi Units and therefore has the ability to control OppFi-LLC. Each share of Class V Voting Stock entitles OFS to one vote per share at any annual or special meeting of the stockholders of OppFi, voting together with the holders of Class A Common Stock as a single class, but the shares of Class V Voting Stock do not entitle OFS to any economic rights in OppFi.
RECENT DEVELOPMENTS
Key recent events impacting our business are as follows:
•On December 14, 2022, the Company entered into a revolving line of credit agreement with an affiliate of Castlelake L.P. that provides maximum borrowings of $150.0 million at an interest rate equal to the Term Secured Overnight Financing Rate plus 7.50% and a maturity date of December 14, 2026. This facility is intended to finance receivables growth and repay outstanding borrowings under the revolving line of credit with Ares Agent Service, L.P., originally entered into on January 23, 2018. Accordingly, on December 14, 2022, the Company terminated its revolving credit agreement with Ares Agent Service, L.P., and repaid the approximately $109.0 million in related outstanding obligations.
•On December 31, 2022, the Company reclassified OppFi Card finance receivables as held for sale. Assets held for sale are assets in which management has the intent to sell in the foreseeable future. There are no assurances regarding the timing or conclusion of a potential sale of OppFi Card finance receivables.
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HIGHLIGHTS
Our financial results as of and for the year ended December 31, 2022 are summarized below:
•Basic and diluted earnings per share (“EPS”) of $0.51 and $0.05 for the year ended December 31, 2022, respectively;
•Adjusted EPS(1) of $0.06 for the year ended December 31, 2022;
•Net originations increased 27% to $758.2 million from $595.1 million for the years ended December 31, 2022 and 2021, respectively;
•Ending receivables increased 19% to $402.9 million from $337.5 million as of December 31, 2022 and 2021, respectively;
•Total revenue increased 29% to $452.9 million from $350.6 million for the years ended December 31, 2022 and 2021, respectively;
•Net income decreased 96% to $3.3 million from $89.8 million for the years ended December 31, 2022 and 2021 respectively; and
•Adjusted net income(1) decreased 92% to $5.0 million from $65.8 million for the years ended December 31, 2022 and 2021, respectively.
(1) Adjusted EPS and Adjusted Net Income are non-Generally Accepted Accounting Principles (“GAAP”) financial measures. For information regarding our uses and definitions of these measures and for reconciliations to the most directly comparable United States GAAP measures, see the section titled “Non-GAAP Financial Measures” below.
Key Performance Metrics
We regularly review the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions, which may also be useful to an investor. The following tables and related discussion set forth key financial and operating metrics for the Company’s operations as of and for the years ended December 31, 2022 and 2021.
All key performance metrics include the three products on the OppFi platform and are not shown separately as contributions from SalaryTap and OppFi Card were de minimis.
Total Net Originations
We measure originations to assess the growth trajectory and overall size of our loan portfolio. There is a direct correlation between origination growth and revenue growth. We include both bank partner originations as well as those originated by us directly. Loans are considered to be originated when the contract is signed between us and the prospective borrower. The vast majority of our originations ultimately disburse to a borrower, but disbursement timing lags that of originations. Originations may be useful to an investor because they help understand the growth trajectory of our revenues.
The following table presents total net originations (defined as gross originations net of transferred balance on refinanced loans), percentage of net originations by bank partners, and percentage of net originations by new loans for the years ended December 31, 2022 and 2021 (in thousands):
| Year Ended December 31, | Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | ||||||||||
| Total net originations | $ | 758,208 | $ | 595,079 | $ | 163,129 | 27.4 | % | |||||
| Percentage of net originations by bank partners | 94.6 | % | 90.6 | % | N/A | 4.4 | % | ||||||
| Percentage of net originations by new loans | 51.5 | % | 46.2 | % | N/A | 11.5 | % |
Net originations increased to $758.2 million for the year ended December 31, 2022, from $595.1 million for the year ended December 31, 2021. The 27.4% increase was driven by increased demand resulting in higher application volume and an increase in funded rate (defined as funded loans over qualified applications).
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Our origination mix continues to shift towards a servicing / facilitation model for bank partners from a direct origination model. Total net originations by our bank partners increased to 94.6% for the year ended December 31, 2022, from 90.6% for the year ended December 31, 2021.
In addition, our net originations saw an increase in the percentage of new loans compared to refinanced loans as we continued to drive growth through increased marketing spend and tightened credit criteria on refinanced loans earlier in the year. Total net originations of new loans as percentage of total loans increased to 51.5% for the year ended December 31, 2022 from 46.2% for the year ended December 31, 2021.
Ending Receivables
Ending receivables are defined as the unpaid principal balances of loans at the end of the reporting period. The following table presents ending receivables as of December 31, 2022 and 2021 (in thousands):
| Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | ||||||||||||
| Ending receivables | $ | 402,910 | $ | 337,529 | $ | 65,381 | 19.4 | % |
Ending receivables increased to $402.9 million as of December 31, 2022 from $337.5 million as of December 31, 2021. The 19.4% increase was primarily driven by growth in originations in 2022. Ending receivables as of December 31, 2022 do not include OppFi Card receivables due to their reclassification as held for sale.
Average Yield
Average yield represents interest income from the period as a percent of average receivables. Receivables are defined as the unpaid principal balances of loans. The following table presents average yield for the years ended December 31, 2022 and 2021:
| Year Ended December 31, | Change | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % | |||||||
| Average yield | 118.9 | % | 126.9 | % | (6.3) | % |
Average yield decreased to 118.9% for the year ended December 31, 2022, from 126.9% for the year ended December 31, 2021. The 6.3% decrease was driven by an increase in delinquent loans in the portfolio as a result of lower quality loans originated prior to credit adjustments implemented earlier in 2022 that were not accruing interest and an increase in enrollment in our hardship and assistance programs, which provide payment relief due to natural disasters, loss of income, increase in expenses, or other unpredictable events such as COVID-19.
Net Charge-Offs as a Percentage of Average Receivables
Net charge-offs as a percentage of average receivables represents total charge-offs from the period less recoveries as a percent of average receivables. Receivables are defined as the unpaid principal balances of loans. Our charge-off policy is based on a review of delinquent finance receivables on a loan by loan basis. Finance receivables are charged off at the earlier of the time when accounts reach 90 days past due on a recency basis, when we receive notification of a customer bankruptcy, or when finance receivables are otherwise deemed uncollectible.
The following table presents net charge-offs as a percentage of average receivables for the years ended December 31, 2022 and 2021:
| Year Ended December 31, | Change | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % | |||||||
| Net charge-offs as % of average receivables | 61.7 | % | 37.5 | % | 64.5 | % |
Net charge-offs as a percentage of average receivables increased by 64.5% to 61.7% for the year ended December 31, 2022, from 37.5% for the year ended December 31, 2021. The increase for the year ended December 31, 2022 is a result of the
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cumulative effects of elevated inflation and the charge off of lower quality loans originated prior to credit adjustments implemented earlier in 2022. Additionally, credit adjustments decelerated origination growth in the second half of the year and therefore impacted the denominator of the net charge-off rate.
Auto-Approval Rate
Auto-approval rate is calculated by taking the number of approved loans that are not decisioned by a loan advocate or underwriter (auto-approval) divided by the total number of loans approved. The following table presents auto approval rate as of December 31, 2022 and 2021:
| Year Ended December 31, | Change | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % | |||||||
| Auto-approval rate | 67.8 | % | 60.0 | % | 13.0 | % |
Auto-approval rate increased by 13.0% as of December 31, 2022 to 67.8%, from 60.0% as of December 31, 2021, driven by the continued application of algorithmic automation projects that streamline frictional steps of the origination process.
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RESULTS OF OPERATIONS
Comparison of the years ended December 31, 2022 and 2021
The following table presents our consolidated results of operations for the years ended December 31, 2022 and 2021 (in thousands, except number of shares and per share data).
| Year Ended December 31, | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | ||||||||||||
| Interest and loan related income | $ | 451,448 | $ | 349,029 | $ | 102,419 | 29.3 | % | |||||||
| Other revenue | 1,411 | 1,539 | (128) | (8.3) | |||||||||||
| Total revenue | 452,859 | 350,568 | 102,291 | 29.2 | |||||||||||
| Change in fair value of finance receivables | (233,959) | (85,960) | (147,999) | 172.2 | |||||||||||
| Provision for credit losses on finance receivables | (1,940) | (929) | (1,011) | 108.8 | |||||||||||
| Net revenue | 216,960 | 263,679 | (46,719) | (17.7) | |||||||||||
| Expenses: | |||||||||||||||
| Sales and marketing | 54,407 | 52,622 | 1,785 | 3.4 | |||||||||||
| Customer operations | 42,314 | 40,260 | 2,054 | 5.1 | |||||||||||
| Technology, products, and analytics | 33,439 | 27,442 | 5,997 | 21.9 | |||||||||||
| General, administrative, and other | 57,980 | 61,842 | (3,862) | (6.2) | |||||||||||
| Total expenses before interest expense | 188,140 | 182,166 | 5,974 | 3.3 | |||||||||||
| Interest expense | 35,162 | 24,256 | 10,906 | 45.0 | |||||||||||
| Total expenses | 223,302 | 206,422 | 16,880 | 8.2 | |||||||||||
| (Loss) income from operations | (6,342) | 57,257 | (63,599) | (111.1) | |||||||||||
| Change in fair value of warrant liability | 9,352 | 26,405 | (17,053) | (64.6) | |||||||||||
| Gain on forgiveness of PPP loan | — | 6,444 | (6,444) | (100.0) | |||||||||||
| Other income | 53 | — | 53 | — | |||||||||||
| Income before income taxes | 3,063 | 90,106 | (87,043) | (96.6) | |||||||||||
| Income tax (benefit) expense | (277) | 311 | (588) | (189.1) | |||||||||||
| Net income | 3,340 | 89,795 | (86,455) | (96.3) | |||||||||||
| Less: net (loss) income attributable to noncontrolling interest | (3,758) | 64,241 | (67,999) | (105.8) | |||||||||||
| Net income attributable to OppFi Inc. | $ | 7,098 | $ | 25,554 | $ | (18,456) | (72.2) | % | |||||||
| Earnings per share attributable to OppFi Inc.: | |||||||||||||||
| Earnings per common share: | |||||||||||||||
| Basic | $ | 0.51 | $ | 1.93 | |||||||||||
| Diluted | $ | 0.05 | $ | 0.48 | |||||||||||
| Weighted average common shares outstanding: | |||||||||||||||
| Basic | 13,913,626 | 13,218,119 | |||||||||||||
| Diluted | 84,256,084 | 84,474,039 |
Total Revenue
Total revenue consists mainly of revenue earned from interest on receivables from outstanding loans based only on the interest method. We also earn revenue from referral fees related primarily to our turn-up program, which represented 0.2 % of total revenue for the year ended December 31, 2022.
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Total revenue increased by $102.3 million, or 29.2%, to $452.9 million for the year ended December 31, 2022 from $350.6 million for the year ended December 31, 2021. The increase was due to higher receivables balances throughout the year, which was driven by both higher beginning balances and origination growth.
Change in Fair Value and Total Provision
Commencing on January 1, 2021, we elected the fair value option on the OppLoan installment product. To derive the fair value, we generally utilize discounted cash flow analyses that factor in estimated losses and prepayments over the estimated duration of the underlying assets. Loss and prepayment assumptions are determined using historical loss data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that we believe a market participant would require based on the risk characteristics of the loans. We did not elect the fair value option on our SalaryTap and OppFi Card finance receivables as these products launched in November 2020 and August 2021, respectively, and inputs for fair value are not yet determined. Accordingly, the related finance receivables are carried at amortized cost, net of allowance for credit losses.
Change in fair value consists of gross charge-offs incurred in the period on the OppLoans installment product, net of recoveries, plus the change in the fair value on the installment loans portfolio. Change in fair value totaled $234.0 million for the year ended December 31, 2022, which was comprised of $232.3 million of net charge-offs and a fair market value adjustment of $1.7 million, up from $86.0 million for the year ended December 31, 2021, which was comprised of $103.4 million of net charge-offs partially offset by a fair market value adjustment of $17.4 million. The fair value mark decreased primarily due to an increase in the loss rate as a result of an increase in delinquent loans in the portfolio, as well as an increase in the discount rate, partially offset by an increase in the weighted average interest rate of the portfolio.
For the year ended December 31, 2021, total provision consists of gross charge-offs incurred in the period, net of recoveries, plus the change in the allowance for credit losses for our SalaryTap and OppFi Card products. For the year ended December 31, 2022, total provision consists of gross charge-offs incurred in the period, net of recoveries, plus the change in the allowance for credit losses for our SalaryTap product only, due to the reversal of the provision related to OppFi Card as a result of its reclassification as held for sale. Total provision increased by $1.0 million, or 108.8%, to $1.9 million for the year ended December 31, 2022 from $0.9 million for the year ended December 31, 2021 due to the increase in gross charge-offs on the SalaryTap product from its launch.
Net Revenue
Net revenue is equal to total revenue less the change in fair value and total provision costs. Total net revenue decreased by $46.7 million, or 17.7%, to $217.0 million for the year ended December 31, 2022 from $263.7 million for the year ended December 31, 2021. This decrease was due to the rise in gross charge-offs, which offset higher total revenues.
Expenses
Expenses include costs related to salaries and employee benefits, interest expense and amortized debt issuance costs, sales and marketing, customer operations, technology, products, and analytics, and other general and administrative expenses.
Expenses increased by $16.9 million, or 8.2%, to $223.3 million for the year ended December 31, 2022, from $206.4 million for the year ended December 31, 2021. The increase in expenses was primarily related to elevated interest expense as a result of increased debt draws to support higher receivables balances and a rising interest rate environment, higher direct marketing costs to drive higher new originations, higher payment processing fees as a result of higher volume, and further investment in technology infrastructure. Despite the overall increase in expenses, expenses as a percent of total revenue decreased from 58.9% to 49.3% for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to headcount reductions and vendor savings implemented in the first half of 2022.
(Loss) Income from Operations
(Loss) income from operations is the difference between net revenue and expenses. Total income from operations decreased by $63.6 million, or 111.1%, to $(6.3) million for the year ended December 31, 2022, from $57.3 million for the year ended December 31, 2021. This decrease was due to lower net revenue and higher expenses for the year ended December 31, 2022 as a result of the reasons discussed above.
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Gain on Forgiveness of PPP Loan
Gain on forgiveness of PPP Loan for the year ended December 31, 2021 included the gain from an unsecured loan of $6.4 million in connection with the U.S. Small Business Administration's (“SBA”) Paycheck Protection Program (the “PPP Loan”).
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability totaled $9.4 million for the year ended December 31, 2022 and $26.4 million for the year ended December 31, 2021. This warrant liability arose with respect to warrants issued in connection with the initial public offering of FGNA and is subject to re-measurement at each balance sheet date.
Other Income
Other income totaled $0.1 million for the year ended December 31, 2022 and $0.0 million for the year ended December 31, 2021. Other income includes the income related to the Company subleasing one floor of its office space.
Income Before Income Taxes
Income before income taxes is the sum of (loss) income from operations, the gain on forgiveness of PPP Loan, the change in fair value of warrant liability, and other income. Income before income tax decreased by $87.0 million, or 96.6%, to $3.1 million for the year ended December 31, 2022, from $90.1 million for the year ended December 31, 2021.
Income Tax (Benefit) Expense
OppFi Inc. recorded an income tax benefit of $0.3 million for the year ended December 31, 2022, an increase of $0.6 million from income tax expense of $0.3 million for the year ended December 31, 2021.
Net Income
Net income decreased by $86.5 million, or 96.3%, to $3.3 million for the year ended December 31, 2022, from $89.8 million for the year ended December 31, 2021.
Net Income Attributable to OppFi Inc.
Net income attributable to OppFi Inc. decreased by $18.5 million, or 72.2%, to $7.1 million for the year ended December 31, 2022, from $25.6 million for the year ended December 31, 2021. Net income attributable to OppFi Inc. represents the income solely attributable to stockholders of OppFi Inc. As a result of the Company’s Up-C structure, the underlying income or expense components that are attributable to OppFi Inc. are generally expense items related to OppFi Inc.’s status as a public company, the income or expense for the change in fair value of warrant liabilities related to the Company’s warrants, and the Company’s approximate percentage interest in the non-controlling interest. For the year ended December 31, 2022, the underlying income or expense components that are attributable to OppFi Inc. include the gain on change in fair value of warrant liabilities of $9.4 million and tax benefit of $0.3 million, partially offset by payroll and stock compensation expense of $0.8 million, general and administrative expense of $0.7 million, and board fees of $0.4 million, for total income attributable to OppFi Inc. of $7.8 million. The income also includes OppFi Inc.’s percentage interest in the income attributable to non-controlling interest of $(0.7) million, for net income attributable to OppFi Inc. of $7.1 million. For the year ended December 31, 2021, the underlying income or expense components that are attributable to OppFi Inc. include gain on change in fair value of warrant liabilities of $26.4 million and tax benefit of $0.2 million, partially offset by payroll and stock compensation expense of $2.5 million, general and administrative expense of $1.1 million, and board fees of $0.2 million, for total income attributable to OppFi Inc. of $22.8 million. The income also includes OppFi Inc.’s percentage interest in the income attributable to non-controlling interest of $2.7 million, for net income attributable to OppFi Inc. of $25.6 million. Prior to the consummation of the Business Combination on July 20, 2021, there was no income attributable to OppFi Inc. as OppFi-LLC was the only reportable entity.
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Condensed Balance Sheets
Comparison of the years ended December 31, 2022 and 2021
The following table presents our condensed balance sheet as of December 31, 2022 and 2021 (in thousands):
| Year Ended December 31, | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | ||||||||||||
| Assets | |||||||||||||||
| Cash and restricted cash | $ | 49,670 | $ | 62,362 | $ | (12,692) | (20.4) | % | |||||||
| Finance receivables at fair value | 457,296 | 383,890 | 73,406 | 19.1 | |||||||||||
| Finance receivables at amortized cost, net | 643 | 4,220 | (3,577) | (84.8) | |||||||||||
| Other assets | 72,230 | 51,634 | 20,596 | 39.9 | |||||||||||
| Total assets | $ | 579,839 | $ | 502,106 | $ | 77,733 | 15.5 | % | |||||||
| Liabilities and stockholders’ equity | |||||||||||||||
| Current liabilities | $ | 29,558 | $ | 35,695 | $ | (6,137) | (17.2) | % | |||||||
| Other liabilities | 42,183 | 23,272 | 18,911 | 81.3 | |||||||||||
| Total debt | 347,060 | 274,021 | 73,039 | 26.7 | |||||||||||
| Warrant liability | 1,888 | 11,240 | (9,352) | (83.2) | |||||||||||
| Total liabilities | 420,689 | 344,228 | 76,461 | 22.2 | |||||||||||
| Total stockholders’ equity | 159,150 | 157,878 | 1,272 | 0.8 | |||||||||||
| Total liabilities and stockholders’ equity | $ | 579,839 | $ | 502,106 | $ | 77,733 | 15.5 | % |
Total cash and restricted cash decreased by $12.7 million as of December 31, 2022 compared to December 31, 2021, driven by an increase in originated loans relative to the timing of received payments. Finance receivables at fair value increased by $73.4 million as of December 31, 2022 compared to December 31, 2021 due to high demand and origination volume for the year ended December 31, 2022. Finance receivables at amortized cost decreased by $3.6 million primarily due to the reclassification of OppFi Card finance receivables as held for sale under other assets. Other assets as of December 31, 2022 increased by $20.6 million compared to December 31, 2021, primarily driven by the addition of an operating lease right of use asset of $13.6 million related to the Company’s headquarters due to the adoption of a new accounting standard, the reclassification of OppFi Card finance receivables as held for sale, and an increase in amortized debt issuance costs of $2.5 million.
Current liabilities decreased by $6.1 million as of December 31, 2022 compared to December 31, 2021, driven by the decrease in accrued expenses of $6.4 million. Other liabilities increased by $18.9 million as of December 31, 2022 compared to December 31, 2021, driven by the addition of an operating lease liability of $16.6 million and an increase in the tax receivable agreement liability of $2.4 million. Total debt increased by $73.0 million as of December 31, 2022 compared to December 31, 2021, driven by an increase in utilization of revolving lines of credit of $93.1 million and new notes payable related to insurance premium financing of $1.6 million, which was partially offset by lower secured borrowing payables of $21.7 million. Total equity increased by $1.3 million as of December 31, 2022 compared to December 31, 2021, driven by net income and stock-based compensation, partially offset by treasury stock as a result of repurchases made under the Company’s share repurchase program.
NON-GAAP FINANCIAL MEASURES
Comparison of the years ended December 31, 2022 and 2021
We believe that the provision of non-GAAP financial measures in this report, including Adjusted EPS, Adjusted EBITDA, Adjusted EBT, and Adjusted Net Income can provide useful measures for period-to-period comparisons of our business and useful information to investors and others in understanding and evaluating our operating results. However, non-GAAP financial measures are not calculated in accordance with GAAP measures, should not be considered an alternative to any measure of financial performance calculated and presented in accordance with GAAP, and may not be comparable to the non-GAAP financial measures of other companies.
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Adjusted EBT, Adjusted Net Income, and Adjusted EBITDA
Adjusted EBT is a non-GAAP measure defined as our GAAP net income adjusted to eliminate the effect of certain items as shown below, including provision for income taxes, debt issuance cost amortization, and other addbacks and one-time expenses. Adjusted Net Income is a non-GAAP measure defined as our Adjusted EBT less pro forma taxes for comparison purposes. We believe that Adjusted EBT and Adjusted Net Income are important measures because they allows management, investors, and our board of directors to evaluate and compare our operating results from period-to-period by making the adjustments described below.
Adjusted EBITDA is a non-GAAP measure defined as our Adjusted Net Income adjusted for the items as shown below, including pro forma and business (non-income) taxes, depreciation and amortization, and interest expense. We believe that Adjusted EBITDA is an important measure because it allows management, investors, and our board of directors to evaluate and compare our operating results from period-to-period by making the adjustments described below. In addition, it provides a useful measure for period-to-period comparisons of our business, as it removes the effect of taxes, certain non-cash items, variable charges, and timing differences.
Adjusted EBITDA excludes certain expenses that are required in accordance with GAAP because they are non-recurring items (such as transaction-related costs with respect to our business combination), non-cash expenditures (such as depreciation and amortization, changes in the fair value of warrant liabilities, and expenses related to stock compensation), or are not related to our underlying business performance (such as interest expense). We believe these adjustments provide investors with a comparative view of expenses that the Company expects to incur on an ongoing basis.
| Year Ended December 31, | Variance | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except share and per share data) Unaudited | 2022 | 2021 | % | ||||||||
| Net income | $ | 3,340 | $ | 89,795 | (96.3) | % | |||||
| (Benefit) provision for income taxes | (277) | 311 | (189.1) | ||||||||
| Debt issuance cost amortization | 2,372 | 2,310 | 2.7 | ||||||||
| Other addbacks and one-time expenses, net(a) | 1,127 | (8,452) | (113.3) | ||||||||
| Adjusted EBT | 6,562 | 83,964 | (92.2) | ||||||||
| Less: pro forma taxes(b) | (1,586) | (18,145) | (91.3) | ||||||||
| Adjusted net income | 4,976 | 65,819 | (92.4) | ||||||||
| Pro forma taxes(b) | 1,586 | 18,145 | (91.3) | ||||||||
| Depreciation and amortization | 13,581 | 10,282 | 32.1 | ||||||||
| Interest expense | 32,789 | 21,946 | 49.4 | ||||||||
| Business (non-income) taxes | 934 | 665 | 40.5 | ||||||||
| Adjusted EBITDA | $ | 53,866 | $ | 116,857 | (53.9) | % | |||||
| Adjusted EPS | $ | 0.06 | $ | 0.78 | |||||||
| Weighted average diluted shares outstanding | 84,256,084 | 84,474,039 | |||||||||
| (a) For the year ended December 31, 2022, other addbacks and one-time expenses of $1.1 million included a $(9.4) million addback due to the change in fair value of the warrant liabilities, $0.1 million in income related to the sublease of Company office space, $0.1 million in expenses related to one-time legal costs, $2.0 million in expenses related to severance, $1.0 million in expenses related to retention, $3.6 million in expenses related to the impairment of OppFi Card finance receivables as a result of their reclassification as held for sale, $0.5 million in expenses related to the impairment of the operating lease right of use asset, and $3.4 million in stock-based compensation. For the year ended December 31, 2021, other addbacks and one-time expenses of $(8.5) million included a $(26.4) million addback due to the change in fair value of the warrant liabilities, a $(6.4) million addback due to the gain on forgiveness of PPP Loan, $6.6 million in public company readiness costs prior to the Business Combination, $5.3 million in expenses related to one-time legal, accounting, and other costs related to the Business Combination, $4.2 million in expenses related to warrant valuation, $3.0 million in expenses related to severance, $0.6 million in management and board fees, $1.8 million in recruiting and salary expense, and $3.0 million in profit interest and stock compensation. | |||||||||||
| (b) Assumes a tax rate of 24.17% for the year ended December 31, 2022 and a tax rate of 21.61% for the year ended December 31, 2021, reflecting the U.S. federal statutory rate of 21% and a blended statutory rate for state income taxes, in order to allow for a comparison with other publicly traded companies. |
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Adjusted Earnings Per Share
Adjusted EPS is defined as adjusted net income divided by weighted average diluted shares outstanding, which represent shares of both classes of common stock outstanding, excluding 25,500,000 shares related to earnout obligations and including the impact of restricted stock units, performance stock units, and the employee stock purchase plan. We believe that presenting Adjusted EPS is useful to investors and others because, due to the Company’s Up-C structure, Basic EPS calculated on a GAAP basis excludes a large percentage of the Company’s outstanding shares of common stock, which are Class V Voting Stock, and Diluted EPS calculated on a GAAP basis excludes dilutive securities, including Class V Voting Stock, in any period in which the Company reports a loss as dilutive securities are considered to be antidilutive. Shares of the Company’s Class V Voting Stock may be exchanged, together with OppFi Units, into shares of the Company’s Class A Common Stock. We believe that presenting Adjusted EPS is useful to investors and others because it presents the Company’s Adjusted Net Income on a per share basis based on the shares of the Company’s common stock that would be issued but for, and can be issued as a result of, the Company’s Up-C structure, excluding the forfeitable earnout shares from the Company’s Business Combination. The earnout shares issued in the Business Combination are excluded from the calculation of Adjusted EPS because such earnout shares are subject to potential forfeiture pending the achievement (if any) of certain earnout targets pursuant to the terms of the Business Combination, and we believe that, until such shares are forfeited or no longer subject to forfeiture, it is useful to investors and others to provide per share earnings information based only on those shares that are not subject to forfeiture.
| Year Ended December 31, | |||
|---|---|---|---|
| (unaudited) | 2022 | 2021 | |
| Weighted average Class A Common Stock outstanding | 13,913,626 | 13,218,119 | |
| Weighted average Class V Voting Stock outstanding | 95,724,487 | 96,746,990 | |
| Elimination of earnouts at period end | (25,500,000) | (25,500,000) | |
| Dilutive impact of restricted stock units | 105,928 | 8,930 | |
| Dilutive impact of performance stock units | 9,492 | — | |
| Dilutive impact of employee stock purchase plan | 2,551 | — | |
| Weighted average diluted shares outstanding | 84,256,084 | 84,474,039 |
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (unaudited) | 2022 | 2021 | ||||
| Adjusted net income (in thousands) | $ | 4,976 | $ | 65,819 | ||
| Weighted average diluted shares outstanding | 84,256,084 | 84,474,039 | ||||
| Adjusted EPS | $ | 0.06 | $ | 0.78 |
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LIQUIDITY AND CAPITAL RESOURCES
To date, the funds received from operating income and our ability to obtain lending commitments have provided the liquidity necessary for us to fund our operations.
Maturities of our financing facilities are staggered over three years to help minimize refinance risk.
The following table presents our unrestricted cash and undrawn debt as of December 31, 2022 and 2021 (in thousands):
| December 31, 2022 | December 31, 2021 | ||||||
|---|---|---|---|---|---|---|---|
| Unrestricted cash | $ | 16,239 | $ | 25,064 | |||
| Undrawn debt | $ | 136,800 | $ | 158,100 |
As of December 31, 2022, OppFi had $16.2 million in unrestricted cash, a decrease of $8.8 million from December 31, 2021. As of December 31, 2022, OppFi had an additional $136.8 million of unused debt capacity under its financing facilities for future availability, representing a 28% overall undrawn capacity, a decrease from $158.1 million as of December 31, 2021. The reduction in undrawn debt was primarily due to funding of receivables growth. Including total financing commitments of $482.5 million, and cash on the balance sheet of $49.7 million, OppFi had approximately $532.2 million in funding capacity as of December 31, 2022.
We believe that our unrestricted cash, undrawn debt and funds from operating income will be sufficient to meet our liquidity needs for at least the next 12 months from the date of this Annual Report. Our future capital requirements will depend on multiple factors, including our revenue growth, aggregate receivables balance, interest expense, working capital requirements, cash provided by and used in operating, investing and financing activities and capital expenditures.
To the extent our unrestricted cash balances, funds from operating income and funds from undrawn debt are insufficient to satisfy our liquidity needs in the future, we may need to raise additional capital through equity or debt financing and may not be able to do so on terms acceptable to it, if at all. If we are unable to raise additional capital when needed, our results of operations and financial condition could be materially and adversely impacted.
Cash Flows
The following table presents cash provided by (used in) operating, investing and financing activities during the years ended December 31, 2022 and 2021 (in thousands):
| Year Ended December 31, | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | ||||||||||||
| Net cash provided by operating activities | $ | 243,297 | $ | 167,346 | $ | 75,951 | 45.4 | % | |||||||
| Net cash used in investing activities | (317,244) | (199,470) | (117,774) | (59.0) | |||||||||||
| Net cash provided by financing activities | 61,255 | 48,829 | 12,426 | (25.4) | |||||||||||
| Net (decrease) increase in cash and restricted cash | $ | (12,692) | $ | 16,705 | $ | (29,397) | (176.0) | % |
Operating Activities
Net cash provided by operating activities was $243.3 million for the year ended December 31, 2022. This was an increase of $76.0 million when compared to net cash provided by operating activities of $167.3 million for the year ended December 31, 2021. Cash provided by operating activities increased due to additional interest and loan related income generated from higher receivables balances compared to the prior year.
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Investing Activities
Net cash used in investing activities was $317.2 million for the year ended December 31, 2022. This was an increase of $117.8 million when compared to net cash used in investing activities of $199.5 million for the year ended December 31, 2021, due to higher finance receivables originated and acquired, partially offset by higher finance receivables repaid and recovered.
Financing Activities
Net cash provided by financing activities was $61.3 million for the year ended December 31, 2022. This was an increase of $12.4 million when compared to net cash provided by financing activities of $48.8 million for the year ended December 31, 2021, primarily due to a decrease in member distributions and payment of capitalized transaction costs related to the Business Combination, partially offset by an increase in net payments of secured borrowing payable and decrease in net advances of senior debt.
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Financing Arrangements
Our corporate credit facilities consist of term loans and revolving loan facilities that we have drawn on to finance our operations and for other corporate purposes. These borrowings are generally secured by all the assets of OppFi-LLC that have not otherwise been sold or pledged to secure our structured finance facilities, such as assets belonging to certain of the special purpose entity subsidiaries of OppFi-LLC (“SPEs”). In addition, we, through our SPEs, have entered into warehouse credit facilities to partially finance the origination of loans by us on our platform or the purchase of participation rights in loans originated by our bank partners through our platform, which credit facilities are secured by the loans or participation rights. The following is a summary of OppFi’s borrowings as of December 31, 2022 and 2021 (in thousands):
| Borrowing | December 31, | December 31, | Interest Rate as of | Maturity | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Purpose | Borrower(s) | Capacity | 2022 | 2021 | December 31, 2022 | Date | |||||||||||||
| Secured borrowing payable | Opportunity Funding SPE II, LLC | $ | 756 | $ | 756 | $ | 22,443 | 15.00% | — | (1) | |||||||||
| Senior debt | |||||||||||||||||||
| Revolving line of credit | Opportunity Funding SPE III, LLC | $ | — | $ | — | $ | 119,000 | LIBOR plus 6.00% | January 2024 | ||||||||||
| Revolving line of credit | Opportunity Funding SPE V, LLC; Opportunity Funding SPE VII, LLC (Tranche A) | 75,000 | 37,500 | 45,900 | SOFR plus 7.36% | April 2024 | |||||||||||||
| Revolving line of credit | Opportunity Funding SPE V, LLC; Opportunity Funding SPE VII, LLC (Tranche B) | 125,000 | 121,647 | — | SOFR plus 6.75% | June 2026 | |||||||||||||
| Revolving line of credit | Opportunity Funding SPE VI, LLC | — | — | 30,600 | LIBOR plus 7.25% | April 2023 | |||||||||||||
| Revolving line of credit | Opportunity Funding SPE IV, LLC; SalaryTap Funding SPE, LLC | 7,500 | — | 7,500 | SOFR plus 0.11% plus 3.85% | February 2024 | |||||||||||||
| Revolving line of credit | Opportunity Funding SPE IX, LLC | 150,000 | 91,871 | — | SOFR plus 7.50% | December 2026 | |||||||||||||
| Revolving line of credit | Gray Rock SPV, LLC | 75,000 | 44,716 | — | SOFR plus 7.25% | April 2025 | |||||||||||||
| Total revolving lines of credit | 432,500 | 295,734 | 203,000 | ||||||||||||||||
| Term loan, net | OppFi-LLC | 50,000 | 48,954 | 48,578 | LIBOR plus 10.00% | March 2025 | |||||||||||||
| Total senior debt | $ | 482,500 | $ | 344,688 | $ | 251,578 | |||||||||||||
| Note payable | OppFi-LLC | $ | 1,616 | $ | 1,616 | $ | — | 7.07% | July 2023 | ||||||||||
| (1) | Maturity date extended indefinitely until borrowing capacity is depleted. |
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LIBOR Transition
In July 2017, the FCA, which regulates LIBOR, announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. On December 31, 2021, IBA, the administrator of LIBOR, announced plans to cease publication for all USD LIBOR tenors (except the one- and two-week tenors, which ceased on December 31, 2021) on June 30, 2023. The Federal Reserve Board and the Federal Reserve Bank of New York have identified the SOFR as its preferred alternative to LIBOR in derivatives and other financial contracts. Each of our credit facilities provides for the replacement of LIBOR as discussed above in “Financing Arrangements.” We do not expect the replacement of LIBOR to have any effect on our liquidity or the financial terms of our credit facilities.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance with GAAP requires OppFi to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosures. OppFi bases estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. To the extent that there are differences between OppFi’s estimates and actual results, OppFi’s future financial statement presentation, financial condition, results of operations and cash flows will be affected.
Accounting policies, as described in detail in the notes to the Company’s consolidated financial statements, are an integral part of the OppFi’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing OppFi’s reported results of operations and financial position. Management believes that the critical accounting policies and estimates listed below require OppFi to make difficult, subjective, or complex judgments about matters that are inherently uncertain:
–Valuation of installment finance receivables accounted for under the fair value option;
–Determination of the allowance for credit losses; and
–Valuation of the public and private warrants.
Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Fair value is determined using different inputs and assumptions based upon the instrument being valued. Where observable market prices from transactions for identical assets or liabilities are not available, we identify market prices for similar assets or liabilities. If observable market prices are unavailable or impracticable to obtain for any such similar assets or liabilities, we look to other modeling techniques, which often incorporate unobservable inputs which are inherently subjective and require significant judgment. Fair value estimates requiring significant judgments are determined using various inputs developed by management with the appropriate skills, understanding and knowledge of the underlying asset or liability to ensure the development of fair value estimates is reasonable. In certain cases, our assessments, with respect to assumptions market participants would make, may be inherently difficult to determine, and the use of different assumptions could result in material changes to these fair value measurements.
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Installment Finance Receivables: To derive the fair value, the Company generally utilizes discounted cash flow analyses that factor in estimated losses and prepayments over the estimated duration of the underlying assets. Loss and prepayment assumptions are determined using historical loss data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that the Company believes a market participant would require.
The following describes the primary inputs to the discounted cash flow analyses that require significant judgement:
•Discount rate: The discount rate utilized in the discounted cash flow analyses reflects our estimate of the rate of return that a market participant would require when investing in financial instruments with similar risk and return characteristics.
•Servicing cost: The servicing cost percentage that is applied to portfolio’s expected cash flows reflects our estimate of the amount we would incur to service the underlying assets over the assets’ remaining lives. Servicing costs are derived from an internal analysis of our cost structure considering the characteristics of our installment finance receivables and have been benchmarked against observable information on comparable assets in the marketplace.
•Remaining life: Remaining life is the time weighted average of the remaining contractual loan term divided by the principal balance at the measurement date. The timing of estimated principal payments is impacted by scheduled amortization of loans, charge-offs, and prepayments.
•Default rate: The default rate reflects our estimate of principal payments that will not be repaid over the remaining life of an installment finance receivable. Charge-off expectations are developed using the historical performance of our installment finance receivable portfolio but also incorporate discretionary adjustments based on our expectations of future credit performance.
•Prepayment rate: The prepayment rate is the estimated percentage of principal payments that will occur earlier than contractually required over the remaining life of an installment finance receivable. Prepayments accelerate the timing of principal repayment and reduce interest payments. Prepayment rates in our discounted cash flow models are developed using historical results but may also incorporate discretionary adjustments based on our expectations of future performance.
Warrants: OppFi holds public and private placement warrants that are recorded as a liability on the consolidated balance sheets. These liabilities are subjected to remeasurement at each balance sheet date and are recorded at fair value. We value Public Warrants at market price based on a quoted price in the marketplace. For Private Placement Warrants, Private Units Warrants and Underwriter Warrants, we estimate the fair value using a Monte Carlo simulation model. This model utilizes unobservable inputs, including expected volatility, risk-free interest rate, and expected term. These inputs may be influenced by several factors that can change significantly and are difficult to predict. These estimates are inherently risky and require significant judgment on the part of management.
Allowance for Credit Losses: Effective, January 1, 2021, OppFi adopted ASU 2016-13, replacing their incurred loss impairment methodology with the current expected credit losses methodology for their SalaryTap and OppFi Card finance receivables. The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of these portfolios. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses on finance receivables. The allowance is currently estimated using market data for determining anticipated credit losses of its SalaryTap and OppFi Card finance receivables until sufficient internal data exists. Management believes its allowance is adequate to absorb the expected life of loan credit losses as of the balance sheet date. Actual losses incurred may differ materially from management’s estimates.
Changes in these estimates, that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, would have a material impact on the Company’s financial position, results of operations or liquidity.