SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the Fiscal Year Ended December 31, 2021
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from __________ to ___________
Commission file number 001-10960
FIRSTCASH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of incorporation or organization)||(I.R.S. Employer Identification No.)|
1600 West 7th Street, Fort Worth, Texas 76102
(Address of principal executive offices) (Zip code)
(Registrant’s telephone number, including area code)
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, par value $.01 per share||FCFS||The Nasdaq Stock Market|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|☒||Large accelerated filer||☐||Accelerated filer|
|☐||Non-accelerated filer||☐||Smaller reporting company|
|☐||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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
As of June 30, 2021, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $2,374,000,000 based on the closing price as reported on the Nasdaq Stock Market.
As of February 14, 2022, there were 48,487,979 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to its 2022 Annual Meeting of Stockholders to be held on or about June 9, 2022, is incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.
FIRSTCASH HOLDINGS, INC.
For the Year Ended December 31, 2021
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
This annual report contains forward-looking statements about the business, financial condition and prospects of FirstCash Holdings, Inc. and its wholly owned subsidiaries (together, the “Company”). Forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, can be identified by the use of forward-looking terminology such as “believes,” “projects,” “expects,” “may,” “estimates,” “should,” “plans,” “targets,” “intends,” “could,” “would,” “anticipates,” “potential,” “confident,” “optimistic” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy, objectives, estimates, guidance, expectations and future plans. Forward-looking statements can also be identified by the fact these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. The forward-looking statements contained in this annual report include, without limitation, statements related to the Company’s expectations for its performance and growth in 2022, the anticipated benefits of the American First Finance (“AFF”) transaction, the anticipated impact of the transaction on the combined company’s business and future financial and operating results and the Company’s goals, plans and projections with respect to its operations, financial position and business strategy.
While the Company believes the expectations reflected in forward-looking statements are reasonable, there can be no assurances such expectations will prove to be accurate. Security holders are cautioned that such forward-looking statements involve risks and uncertainties. Certain factors may cause results to differ materially from those anticipated by the forward-looking statements made in this annual report. Such factors may include, without limitation, risks associated with the Consumer Financial Protection Bureau (“CFPB”) lawsuit filed against the Company, including the incurrence of meaningful expenses, reputational damage, monetary damages and other penalties, risks relating to the AFF transaction, including the failure of the transaction to deliver the estimated value and benefits expected by the Company, the incurrence of unexpected future costs, liabilities or obligations as a result of the transaction, the effect of the transaction on the ability of the Company to retain and hire personnel and maintain relationships with retail partners, consumers and others with whom the Company and AFF do business, the ability of the Company to successfully integrate AFF’s operations, the ability of the Company to successfully implement its plans, forecasts and other expectations with respect to AFF’s business, risks related to the COVID-19 pandemic, which include risks and uncertainties related to the current unknown duration and severity of the COVID-19 pandemic, the governmental responses that have been, and may in the future be, imposed in response to the pandemic, including stimulus programs which could adversely impact demand for pawn loans and AFF’s lease-to-own and retail finance products, potential changes in consumer behavior and shopping patterns which could impact demand for both the Company’s pawn loan, retail, lease-to-own and retail finance products, labor shortages and increased labor costs, inflation, a deterioration in the economic conditions in the United States and Latin America which potentially could have an impact on discretionary consumer spending, currency fluctuations, primarily involving the Mexican peso and those other risks discussed and described in Part I, Item IA, “Risk Factors” hereof, and other reports filed with the SEC, including the Company’s Current Report on Form 8-K filed with the SEC on December 7, 2021. Many of these risks and uncertainties are beyond the ability of the Company to control, nor can the Company predict, in many cases, all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. The forward-looking statements contained in this annual report speak only as of the date of this annual report, and the Company expressly disclaims any obligation or undertaking to report any updates or revisions to any such statement to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which any such statement is based, except as required by law.
Item 1. Business
FirstCash Holdings, Inc. and its wholly owned subsidiaries (together, the “Company”) is the leading operator of pawn stores in the U.S. and Latin America, and following its acquisition of American First Finance (“AFF”) on December 17, 2021 (the “AFF Acquisition”), is a leading provider of technology-driven, retail point-of-sale (“POS”) payment solutions focused on serving credit-constrained consumers. See Note 3 of Notes to Consolidated Financial Statements for additional information about the AFF Acquisition.
With the AFF Acquisition, the Company now operates two business lines: pawn operations and retail POS payment solutions. Its business lines are organized into three reportable segments. The U.S. pawn segment consists of all pawn operations in the U.S. and the Latin America pawn segment consists of all pawn operations in Mexico, Guatemala, Colombia and El Salvador. The retail POS payment solutions segment consists of AFF operations in the U.S. and Puerto Rico.
The Company’s primary business line continues to be the operation of retail pawn stores, also known as “pawnshops,” which focus on serving cash and credit-constrained consumers. Pawn stores help customers meet small short-term cash needs by providing non-recourse pawn loans and buying merchandise directly from customers. Personal property, such as jewelry, electronics, tools, appliances, sporting goods and musical instruments, is pledged and held as collateral for the pawn loans over the typical 30-day term of the loan. Pawn stores also generate retail sales primarily from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers.
The Company’s retail POS payment solutions business line consists solely of the operations of AFF, which focuses on lease-to-own (“LTO”) products and facilitating other retail financing payment options across a large network of traditional and e-commerce merchant partners in all 50 states in the U.S., the District of Columbia and Puerto Rico. AFF’s retail partners provide consumer goods and services to their customers and use AFF’s LTO and retail finance solutions to facilitate payments on such transactions. As one of the largest omni-channel providers of “no credit required” payment options, AFF’s technology set provides consumers with seamless leasing and financing experiences in-store, online, in-cart and on mobile devices.
In connection with the completion of the AFF Acquisition, effective December 16, 2021, the Company completed a holding company reorganization creating a new holding company, FirstCash Holdings, Inc. In connection with the reorganization, FirstCash Holdings, Inc. succeeded FirstCash, Inc. as the public company trading on Nasdaq under the ticker symbol “FCFS” and each outstanding share of FirstCash, Inc. was converted into an equivalent corresponding share of common stock in FirstCash Holdings, Inc., having the same designations, rights, powers and preferences as the corresponding FirstCash, Inc. shares that were converted. FirstCash, Inc. now operates as a wholly-owned subsidiary of FirstCash Holdings, Inc.
The Company’s principal executive offices are located at 1600 West 7th Street, Fort Worth, Texas 76102, and its telephone number is (817) 335-1100. The Company’s primary websites are www.firstcash.com and www.americanfirstfinance.com.
Pawn stores are neighborhood-based retail locations that buy and sell pre-owned consumer products such as jewelry, electronics, tools, appliances, sporting goods and musical instruments. Pawn stores also provide a quick and convenient source of small, secured consumer loans, also known as pawn loans, to unbanked, under-banked and credit-constrained customers. Pawn loans are safe and affordable non-recourse loans for which the customer has no legal obligation to repay. The Company does not engage in post-default collection efforts, does not take legal actions against its customers for defaulted loans, does not ban its customers for nonpayment, nor does it report any negative credit information to credit reporting agencies, but rather, relies only on the resale of the pawn collateral for recovery. Pawnshop customers are typically value-conscious consumers and/or borrowers who are not effectively or efficiently served by traditional lenders such as banks, credit unions, credit card providers or other small loan providers.
The pawn industry in the U.S. is well established, with the highest concentration of pawn stores located in the Southeast, Midwest and Southwest regions of the country. The operation of pawn stores is governed primarily by state laws and accordingly, states that maintain regulations most conducive to profitable pawn operations have historically seen the greatest concentration of pawn stores.
Historically, competitor pawn stores in Latin America have limited square footage and focus on providing loans collateralized by gold jewelry or small electronics. In contrast, a majority of the Company’s pawn stores opened in Latin America are larger format, full-service stores similar to the U.S. stores, which lend on a wide array of collateral and have a larger retail sales floor. Accordingly, competition in Latin America with the Company’s larger format, full-service pawn stores is limited. A large percentage of the population in Mexico and other countries in Latin America is unbanked or under-banked and has limited access to traditional consumer credit. The Company believes there is significant opportunity for further expansion in Mexico and other Latin American countries due to the large potential consumer base and limited competition from other large format, full-service pawn store operators.
COVID-19 and U.S. government stimulus initiatives in response thereto significantly impacted the Company’s pawn business beginning in 2020, which continued throughout much of 2021. For a more detailed discussion of the impact of COVID-19 on the Company’s results of operations see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”
Services Offered by the Company’s Pawn Operations
Pawn Merchandise Sales
The Company’s pawn merchandise sales are primarily retail sales to the general public from its pawn store locations. The items sold generally consist of pre-owned consumer products such as jewelry, electronics, tools, appliances, sporting goods and musical instruments. The Company also melts certain quantities of scrap jewelry and sells the gold, silver and diamonds in the commodity markets. Merchandise sales accounted for approximately 70% of the Company’s revenue during 2021 or 52% on a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021.
Merchandise inventory is acquired primarily through forfeited pawn loan collateral and, to a lesser extent, through purchases of used goods directly from the general public. The Company also acquires limited quantities of new or refurbished general merchandise inventories directly from wholesalers and manufacturers. Merchandise acquired by the Company through forfeited pawn loan collateral is carried in inventory at the amount of the related pawn loan, exclusive of any accrued service fees, and purchased inventory is carried at cost.
The Company does not currently provide direct financing to customers for the purchase of merchandise in its pawn stores, but does allow customers to purchase merchandise on an interest-free “layaway” plan. Should the customer fail to make a required payment pursuant to a layaway plan, the item is returned to inventory and all or a portion of previous payments are typically forfeited to the Company. Deposits and interim payments from customers on layaway sales are recorded as deferred revenue and subsequently recorded as retail merchandise sales revenue when the merchandise is delivered to the customer upon receipt of final payment or when previous payments are forfeited to the Company. The Company anticipates it will provide AFF’s LTO payment option (as further described below) to retail customers in its U.S. pawn locations in the near future.
Retail sales are seasonally highest in the fourth quarter, associated with holiday shopping and, to a lesser extent, in the first quarter associated with tax refunds in the U.S.
Pawn Lending Activities
The Company’s stores make pawn loans, which are typically small, secured loans, to its customers in order to help them meet instant or short-term cash needs. All pawn loans are collateralized by personal property such as jewelry, electronics, tools, appliances, sporting goods and musical instruments. The pledged collateral provides the only security to the Company for the repayment of the loan. The Company does not investigate the creditworthiness of the borrower, primarily relying instead on the marketability and sales value of pledged goods as a basis for its credit decision. Pawn loans are non-recourse loans, and a customer does not have a legal obligation to repay a pawn loan. There is no collections process and the decision to not repay the loan will not affect the customer’s credit score with any credit reporting agency.
At the time a pawn loan transaction is entered into, an agreement or pawn contract, commonly referred to as a “pawn ticket,” is presented to the borrower for signature that includes, among other items, the borrower’s name and identification information, a description of the pledged goods, amount financed, pawn service fee, maturity date, total amount that must be paid to redeem the pledged goods on the maturity date and the annual percentage rate.
The term of a pawn loan is typically 30 days plus an additional grace period of 14 to 90 days, depending on geographic markets and local or state regulations. Pawn loans may be either paid in full with accrued pawn loan fees and service charges or, where permitted by law, may be renewed or extended by the customer’s payment of accrued pawn loan fees and service charges. If a
pawn loan is not repaid before the expiration of the grace period, the pawn collateral is forfeited to the Company and transferred to inventory at a value equal to the principal amount of the loan, exclusive of accrued service fees. Pledged property is held in a secured, non-public warehouse area of the pawn store for the term of the loan and the grace period, unless the loan is repaid earlier. The Company does not record pawn loan losses or charge-offs because the amount advanced becomes the carrying cost of the forfeited collateral that is to be recovered through the merchandise sales function described above.
Pawn loan fees are typically calculated as a percentage of the pawn loan amount based on the size, duration and type of collateral of the pawn loan, and generally range from 4% to 25% per month, as permitted by applicable law. As required by applicable law, the amounts of these charges are disclosed to the customer on the pawn ticket. Pawn loan fees accounted for approximately 28% of the Company’s revenue during 2021, or 21% on a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021.
The amount the Company is willing to finance for a pawn loan is primarily based on a percentage of the estimated retail value of the collateral. There are no minimum or maximum pawn loan to fair market value restrictions in connection with the Company’s lending activities. In order to estimate the value of the collateral, the Company utilizes its proprietary point-of-sale and loan management system to recall recent selling prices of similar merchandise in its own stores. The basis for the Company’s determination of the retail value also includes such sources as precious metals spot markets, catalogs, blue books, online auction sites and retailer advertisements. These sources, together with the employees’ skills and experience in selling similar items of merchandise in particular stores, influence the determination of the estimated retail value of such items.
The Company typically experiences seasonal growth in its pawn loan balances in the third and fourth quarters following lower balances in the first two quarters due to the typical repayment of pawn loans associated with statutory bonuses received by customers in the fourth quarter in Mexico and with tax refund proceeds typically received by customers in the first quarter in the U.S.
Pawn Business Strategy
The Company’s business strategy is to continue growing pawn revenues and income by opening new (“de novo”) retail pawn locations, acquiring existing pawn stores in strategic markets and increasing revenue and operating profits in existing stores. Over the last five years, 1,021 pawn stores have been opened or acquired with the net store count growing at a compound annual store growth rate of 6% over this period. The Company intends to open or acquire additional stores in locations where management believes appropriate consumer demand and other favorable conditions exist. The following table details stores opened and acquired over the five-year period ended December 31, 2021:
|Year Ended December 31,|
|U.S. pawn segment:|
|New locations opened||1 ||— ||— ||— ||2 |
|Locations acquired||46 ||22 ||27 ||27 ||1 |
|Total additions||47 ||22 ||27 ||27 ||3 |
|Latin America pawn segment:|
|New locations opened||60 ||75 ||89 ||52 ||45 |
|Locations acquired||— ||40 ||163 ||366 ||5 |
|Total additions||60 ||115 ||252 ||418 ||50 |
|New locations opened||61 ||75 ||89 ||52 ||47 |
|Locations acquired||46 ||62 ||190 ||393 ||6 |
|Total additions||107 ||137 ||279 ||445 ||53 |
For additional information on store count activity, see “Pawn Store Locations” below.
New Store Openings
The Company typically opens new stores in under-served markets and neighborhoods, primarily in Latin America. After a suitable location has been identified and a lease and the appropriate licenses are obtained, a new store can typically be open for business within six to 12 weeks. The investment required to open a new location includes store operating cash, inventory, funds for pawn loans, leasehold improvements, store fixtures, security systems, computer equipment and other start-up costs.
Due to the fragmented nature of the pawn industry, the Company believes attractive acquisition opportunities will continue to arise in both Latin America and the U.S. Specific pawn store acquisition criteria include an evaluation of the volume of merchandise sales and pawn transactions, outstanding customer pawn loan balances, historical pawn yields, merchandise sales margins, pawn loan redemption rates, the condition and quantity of inventory on hand, licensing restrictions or requirements, and the location, physical condition, and lease terms of the stores to be acquired.
Enhance Productivity of Existing and Newly Opened Stores
The primary factors affecting the profitability of the Company’s existing store base are the volume and gross profit of merchandise sales, the volume of and yield on pawn loans and store operating expenses. To encourage customer traffic and repeat business, which management believes is a key determinant of a store’s success, the Company has taken several steps to distinguish its stores and to make customers feel more comfortable and secure. In addition to a clean and secure physical store facility, the stores’ exteriors typically display attractive and distinctive signage similar to that used by contemporary specialty retailers.
The Company believes the profitability of its pawnshops is dependent, among other factors, upon its employees’ skills and ability to engage with customers and provide prompt and courteous service. The Company has employee-training programs that promote customer service, productivity, professionalism and regulatory compliance. The Company’s proprietary point-of-sale and loan management system tracks certain key transactional performance measures, including pawn loan yields and merchandise sales margins, and permits a store manager or clerk to instantly recall the cost of an item in inventory and the date it was purchased, including the prior transaction history of a particular customer. It also facilitates the timely valuation of goods by showing values assigned to similar goods. The Company has networked its stores to allow employees to more accurately determine the retail value of merchandise and to permit the Company’s headquarters to more efficiently monitor, in real time, each store’s operations, including merchandise sales, service charge revenue, pawn loans written and redeemed and changes in inventory.
The Company maintains a well-trained audit and loss prevention staff which conducts regular store visits to verify assets, loans and collateral, and test compliance with regulatory, financial and operational controls. Management believes the current operating and financial controls and systems are adequate for the Company’s existing store base and can accommodate reasonably foreseeable growth in the near term.
Pawn Store Locations
The Company’s typical large format pawn store is a freestanding building or part of a retail shopping center with dedicated available parking. The Company’s stores in Latin America tend to be smaller than its U.S. stores, located mostly in dense urban markets, which may not have dedicated parking. Management has established a standard store design intended to attract customers and distinguish the Company’s stores from the competition.
As of December 31, 2021, the Company had 2,825 pawn store locations composed of 1,081 stores in 25 U.S. states and the District of Columbia, 1,656 stores in 32 states in Mexico, 60 stores in Guatemala, 15 stores in Colombia and 13 stores in El Salvador.
The following table details store count activity for the twelve months ended December 31, 2021:
|U.S. ||Latin America||Total|
|Total locations, beginning of period||1,046 ||1,702 ||2,748 |
New locations opened (1)
|1 ||60 ||61 |
|Locations acquired||46 ||— ||46 |
Consolidation of existing pawn locations (2)
|Total locations, end of period||1,081 ||1,744 ||2,825 |
(1)In addition to new store openings, the Company strategically relocated five stores in the U.S. and two stores in Latin America during the twelve months ended December 31, 2021.
(2)Store consolidations were primarily acquired locations over the past five years which have been combined with overlapping stores and for which the Company expects to maintain a significant portion of the acquired customer base in the consolidated location.
As of December 31, 2021, the Company’s pawn stores were located in the following countries and states:
|Number of Locations|
|Florida||87 ||Estado de. Mexico (State of Mexico)||215 |
|Ohio||63 ||Veracruz||208 |
|North Carolina||50 ||Puebla||118 |
|Tennessee||49 ||Tamaulipas||97 |
|Georgia||43 ||Baja California||84 |
|Washington||31 ||Jalisco||78 |
|Louisiana||29 ||Nuevo Leon||77 |
|Maryland||29 ||Estado de Ciudad de Mexico (State of Mexico City)||65 |
|Arizona||27 ||Chiapas||64 |
|Nevada||27 ||Oaxaca||56 |
|South Carolina||27 ||Coahuila||49 |
|Colorado||26 ||Tabasco||49 |
|Illinois||25 ||Guanajuato||46 |
|Kentucky||24 ||Hidalgo||46 |
|Indiana||23 ||Chihuahua||45 |
|Missouri||23 ||Sonora||41 |
|Oklahoma||17 ||Quintana Roo||34 |
|Alabama||9 ||Sinaloa||31 |
|Alaska||6 ||Michoacan||26 |
|Utah||6 ||Morelos||26 |
|Virginia||6 ||Guerrero||25 |
|District of Columbia||3 ||San Luis Potosi||22 |
|Mississippi||2 ||Aguascalientes||21 |
|Nebraska||1 ||Durango||20 |
|Wyoming||1 ||Campeche||18 |
|U.S. total||1,081 ||Queretaro||18 |
|Baja California Sur||12 |
|El Salvador||13 |
|Latin America total||1,744 |
Pawn Operations Competitive Environment
The Company encounters significant competition in connection with all aspects of its pawn operations. These competitive conditions may adversely affect the Company’s pawn revenue and profitability and its ability to expand and execute its pawn business strategy. The Company believes the primary elements of competition in the pawn industry are store location, customer service, the ability to lend competitive amounts on pawn loans and to sell popular retail merchandise at competitive prices. In addition, the Company competes with other lenders and retailers to attract and retain employees with competitive compensation programs. Many of the competitors have significantly greater size, financial resources and human capital than the Company.
The Company’s retail business competitors include numerous retail and wholesale merchants, including jewelry stores, rent-to-own operators, discount retail stores, “second-hand” stores, consumer electronics stores, other specialty retailers, online retailers, online auction sites, online classified advertising sites and other pawnshops. Competitive factors in the Company’s retail operations include the ability to provide the customer with a variety of merchandise items at attractive prices.
The Company’s pawn lending business competes primarily with other pawn store operators and other specialty consumer finance operators, including online lenders. The pawnshop and other specialty consumer finance industries are characterized by a large number of independent owner-operators, some of whom own and operate multiple locations. In addition, the Company competes with other non-pawn lenders, such as banks and consumer finance companies, which generally lend on an unsecured as well as a secured basis. Other lenders may and do lend money on terms more favorable than those offered by the Company.
Management believes the pawn industry remains highly fragmented with an estimated 12,000 to 14,000 total pawnshops in the U.S. and 7,000 to 8,000 pawnshops in Mexico. Including the Company, there are two publicly-held, U.S.-based pawnshop operators, both of which have pawn operations in the U.S., Mexico, Guatemala and El Salvador. Of these two, the Company has the higher store count and the largest market capitalization as of December 31, 2021, and the Company believes it is the largest public or private operator of large format, full-service pawn stores in the U.S. and Mexico.
Retail POS Payment Solutions Operations
On December 17, 2021, the Company completed the AFF Acquisition, resulting in AFF becoming a wholly owned subsidiary of and new business line for the Company. AFF facilitates customized LTO and retail finance programs to its merchant partners that allows those merchant partners to complete sales by providing their customers with an attractive retail POS payment solution. Customers can apply for AFF’s products online or through their mobile devices and complete the process electronically or in person at one of AFF’s merchant partner locations. AFF primarily serves customers who are credit-constrained who may not qualify for prime or near prime retail payment options. On a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021, AFF would have accounted for 27% of the Company’s total revenues during 2021.
Products Offered by AFF
AFF’s merchant partners provide financing of consumer goods and services to their customers using one of AFF’s retail POS payment options, including an LTO product, a merchant-based retail installment sales agreement (“RISA”) or a bank-originated installment loan to facilitate payments on such transactions. The merchant partners generally choose a single solution from one of these three available options to offer to their customers at a given location. The merchant’s selection of the appropriate retail POS payment option depends upon which payment options are allowable under applicable state law, whether AFF’s bank partner makes loans in the state where the merchant is located and by the products or services offered by the merchant. The majority of AFF’s originations are facilitated with the LTO product, with retailers of tangible personal property most commonly using the LTO product. The RISA and bank-originated products are more commonly offered in situations where services are being offered by the merchant. Each of these retail POS payment options is subject to AFF’s (or AFF’s partner bank’s) proprietary technology-driven decisioning process as further described below. AFF’s ability to customize the technology and offer a choice between retail POS payment options gives its merchant partners the advantage of flexibility.
The following is a description of the three primary retail POS payment options offered by AFF:
•LTO - LTO transactions involve the purchase by AFF of tangible personal property directly from the merchant partner and a subsequent lease of that merchandise by AFF to the customer. The customer has the right to acquire ownership of the leased merchandise either through an early buyout option, another early purchase option after the early buyout option expires, or through payment of all required lease payments. To take advantage of the early buyout option, the customer generally has between 90 and 105 days to pay the cash price of the leased merchandise, plus a nominal early
buyout fee. The customer can still utilize an early purchase option after the 90 to 105-day period and obtain ownership early, while also saving money, by paying a certain percentage of the remaining lease payments (usually established by applicable state law). The customer can also obtain ownership of the merchandise by simply paying all of the remaining lease payments as they become due. Conversely, the customer has the right to cancel the lease at any time by returning the merchandise and making all scheduled payments due through the minimum lease holding period, which is typically 60 days. Leased merchandise contracts can typically be renewed for between six to 24 months. AFF offers the LTO retail POS payment option to merchant partners in 44 U.S. states, the District of Columbia and Puerto Rico and it accounted for 64% of AFF’s total revenues for the full year ended December 31, 2021 on a pro forma basis.
•RISA - The RISA transaction involves the purchase of either tangible personal property or services from the merchant partner by the customer. The customer enters into a RISA with the merchant and AFF subsequently purchases the RISA from the merchant partner and services the account through the end of the contractual term. The customer can take advantage of an early payoff discount whereby the customer generally has between 90 and 105 days to pay the original principal amount, plus a nominal early payoff discount fee (equal to or less than the accrued interest charges), without incurring any additional interest charges. RISA finance receivables typically have a term ranging from six to 24 months, and when utilized for the purchase of tangible personal property, are generally secured by such tangible personal property. AFF facilitates the RISA retail POS payment option with merchant partners in 20 U.S. states and it accounted for 18% of AFF’s total revenues for the full year ended December 31, 2021 on a pro forma basis.
•Bank-originated installment loans - The customer enters into an installment loan directly with FinWise Bank (the “Bank”) for the purchase of a good or service from the merchant partner. After origination of the loan by the Bank, AFF purchases the rights to the cash flows of the loan from the Bank, but does not purchase the loan itself. AFF then assumes responsibility for sub-servicing the loan on behalf of the Bank for the remaining term of the loan. The customer can take advantage of an early payoff discount, whereby the customer generally has between 90 and 105 days to pay the original principal amount (including any origination fee) without paying any interest charges. Bank-originated loans typically have a term ranging from six to 24 months and can be either secured by tangible personal property or unsecured. Approximately 28% of these loans are not related to the purchase of property or services but rather are loans with cash proceeds issued directly to the customer. The bank-originated installment loan retail POS payment option is made available to merchant partners in 34 U.S. states and it accounted for 18% of AFF’s total revenues for the full year ended December 31, 2021 on a pro forma basis.
AFF has made substantial investments in the development of its unique and proprietary decisioning platform that is customizable to individual merchants and/or merchandise categories. The platform is supported by an experienced and robust data science team that use data analytics to continually improve the performance of the decisioning platform. This proprietary decisioning platform is used to determine whether a particular applicant meets AFF’s (or the Bank’s as applicable) LTO, RISA or loan qualifications for a particular amount. The sophisticated algorithms consider external and internal data points beyond traditional credit scores, allowing AFF or the Bank to approve customers that do not have a credit score. Over 90% of AFF applications submitted are automatically decisioned within 10 seconds on average, creating a highly efficient, scalable model.
While the Bank partner utilizes AFF’s technology platform to process and evaluate consumer applications originated by the Bank, all credit underwriting and approval criteria used by the Bank to underwrite the loans are provided and approved by the Bank.
Servicing & Collections Process
The amount of a customer’s contractual periodic payment (i.e., weekly, bi-weekly, semi-monthly, or monthly) is generally based on a customer's pay frequency and the term of the contract. Customer payments are typically processed through automated clearing house payments or debits to the customer’s payment card (e.g., through a Visa or MasterCard network). Consumers can choose between scheduling automated payments to process on their accounts or make manual, non-recurring payments on each due date. If a payment attempt is unsuccessful, collection activities are managed through AFF’s call centers and/or AFF’s network of third-party debt collection agencies. The call center contacts customers through several communication channels to encourage the customer to keep their lease, RISA or loan current and discuss all available payment options. See “Item 1. Business—Government Regulation” for further information about applicable collections laws AFF is subject to.
AFF believes its strong focus on building a positive relationship with the customer and ensuring high levels of customer satisfaction generates repeat customer business and long-lasting relationships with its merchant partners. This focus on customer service begins on day one with a phone call or email from AFF’s customer service team to welcome new customers to AFF, answer any questions they may have about their new account and confirm they are aware of their repayment schedule. Existing customers have access to AFF’s customer service team at all times to answer questions about their lease, RISA or loan or to provide comments or complaints about merchant partners. For those customers that utilize AFF’s LTO solution and wish to cancel their lease, AFF’s customer service team can also assist with the cancellation process.
AFF has also made significant investments to make the application process for its LTO, RISA or loan products user-friendly for its customers. AFF customers can apply for the AFF products via text-2-apply, QR codes, web applications on merchant websites, merchant portal applications, in-cart plug-in experiences and third-party waterfall applications. Upon submission of an application, AFF’s platform typically communicates a decision within seconds, providing a near immediate response to the customer. The customer then purchases goods or services using one of AFF’s retail POS payment options and makes scheduled payments, which can be managed by the customer via phone or online.
AFF believes that its highly customizable LTO, RISA and loan products offer significant value to merchant partners. AFF’s products can help drive further sales for these merchants by helping these merchants reach credit-constrained customers through the offer of AFF’s financing solutions. AFF also constantly monitors consumer preferences and trends to ensure that the solutions offered through their merchant partners are aligned with the needs of the merchant partner and its customers.
AFF markets to new merchants through various channels including field sales representatives, national sales, independent sales representatives, buying groups, AFF’s website and strategic integrations via waterfall lending platforms. AFF takes great care in adding quality merchant partners that meet AFF’s high standards. To assure this quality, each prospective merchant goes through a rigorous vetting and approval process. Once a merchant partner is approved, they must sign a merchant agreement that identifies the roles and responsibilities of both the merchant and AFF. Merchants also receive appropriate training so they can properly represent AFF’s retail POS payment solutions to their customers and ensure regulatory compliance.
Existing merchant partners are subject to regular monitoring. AFF’s monitoring procedures are designed to identify merchant partners that do not meet AFF’s merchant standards. Merchant partners are subject to suspension and/or termination if, based upon the results of AFF’s monitoring, they are found to be out of compliance with the merchant agreement, have low lease or loan quality performance, have elevated customer complaint volume or fail to comply with applicable law.
AFF currently has a large network of over 6,500 active retail merchant partner stores and e-commerce platforms offering its leasing and financing products. Those merchant partners offer a wide array of goods and services spanning 26 vertical channels. The following table shows the percentage of AFF's pro forma 2021 originations attributable to these vertical channels:
|Year Ended December 31, 2021|
A significant portion of AFF’s revenue is concentrated with its top merchant partners. While this concentration has provided AFF with opportunities for growth, the increasing size and importance of individual merchant partners creates a certain degree of exposure to potential transaction volume loss. On a pro forma basis, after giving effect to the AFF Acquisition as if it had closed on January 1, 2021, AFF’s top five merchant partners accounted for an aggregate of 16% of combined pro forma 2021 revenues. For a discussion of the risks associated with the possible loss of one of AFF’s top merchant partners or a significant reduction in transaction volumes with one of its top merchant partners, refer to “Item 1A. Risk Factors.”
Retail POS Payment Solutions Business Strategy
AFF’s business model is primarily driven by a scalable technology-based platform that does not require significant increases in operating overhead to support incremental origination growth. Thus, AFF generally achieves more operating leverage as transaction volume grows. Additionally, AFF does not have any of the costs associated with operating physical stores, the personnel needed to operate physical store locations, or any of the costs associated with buying, storing and shipping inventory.
AFF’s business strategy is to continue building market share through additional expansion of both its brick-and-mortar and online merchant base, while increasing customer utilization rates by continuous improvement and enhancement of its omni-channel user experience. AFF continues to expand on its digital marketing and search engine optimization strategies to harvest more consumer searches and to drive quality repeat customers back to its merchant partners. With an ongoing focus toward improving application conversion rates combined with an enhanced risk segmentation of its applications, AFF believes that it has numerous opportunities to gain additional market share and expand its large and fast-growing merchant and customer base to achieve greater levels of revenue and profitability.
Expand Utilization with Existing Merchant Partners and Customers
AFF strives to be the preferred provider of retail POS payment solutions in all of its merchant partner locations. AFF will continue to promote and build relationships with existing customers and merchants and believes there is an opportunity to increase the share of existing merchants’ overall transaction volumes. AFF has made, and intends to continue to make, investments in its marketing team to drive awareness of AFF’s products at its merchant partners to increase utilization and encourage repeat business through increased marketing directly to AFF’s customers.
Pursue New Merchant Partners
AFF believes there are many more untapped traditional and e-commerce merchants providing goods and services to customers that could benefit from offering AFF’s retail POS payment solutions. Utilizing its dedicated national, regional and local sales teams, AFF will continue to pursue and add new merchant partners.
Increase E-Commerce Transaction Volume
AFF currently derives the majority of its transaction volume through traditional brick-and-mortar retail partners. With the continued growth of e-commerce, AFF believes there is significant opportunity to grow transaction volume through increased e-commerce penetration, both at existing e-commerce merchant partners and with new e-commerce merchants. AFF believes its customizable decisioning platform and customer experience is highly scalable for e-commerce retailers and provides these retailers with compelling financing solutions for credit-constrained consumers. AFF has made, and intends to continue to make, investments in its sales team to help capture these e-commerce opportunities.
Continue Enhancement of Proprietary Decisioning Platform
AFF employs a dedicated data science team to develop, monitor and effectively manage its proprietary data analytics and decisioning platform. As it continues to generate originations, the transaction volume is expected to increase AFF’s internal customer and transactional data set available for analysis, thereby improving the effectiveness of AFF’s decisioning model. As its dedicated data science team continues to further analyze both internal and external data, the Company believes there is room for continued improvement to the decisioning model that would allow for a greater percentage of applicants being approved, thereby increasing originations, while also becoming more effective in predicting the ability of its applicants to repay their lease, RISA or loan, thereby reducing charge-offs.
Retail POS Payment Solutions Competitive Environment
AFF’s retail POS payment solutions business competes with national, regional and local LTO stores, virtual LTO companies, rental stores that do not offer their customers a purchase option and various other types of consumer finance companies that may enable customers to shop at traditional or online retailers on credit. In addition, banks and consumer finance companies are developing POS payment products and services designed to compete for the credit-constrained customer. AFF also competes with traditional and e-commerce retailers and traditional and online sellers of new and used merchandise for customers desiring to purchase merchandise for cash or on credit. Competition is based primarily on product selection and availability, customer service, store location and lease and loan terms.
The Company relies on a combination of trademarks, trade dress, trade secrets, proprietary software, website domain names and other rights, including confidentiality procedures and contractual provisions, to protect its proprietary technology, processes and other intellectual property.
The Company’s competitors may develop products that are similar to its technology, such as the Company’s proprietary pawn point-of-sale and loan management software, AFF’s proprietary lease, financing and loan management software, AFF’s proprietary decisioning platform and other developed technology. The Company enters into agreements with its employees, consultants and partners, and through these and other confidentiality or non-compete agreements, the Company attempts to control access to and distribution of its software, documentation and other proprietary technology and information. Despite the Company’s efforts to protect its proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute its intellectual property rights or technology or otherwise develop products with the same functionality as its solutions. Policing all unauthorized use of the Company’s intellectual property rights is nearly impossible. The Company cannot be certain that the steps it has taken or will take in the future will prevent misappropriations of its technology or intellectual property rights.
Environmental, Social and Governance (ESG)
Pawnshops are neighborhood-based stores which contribute to the modern “circular economy.” Each of the Company’s 2,825 pawn locations provide a quick and convenient source of small, non-recourse pawn loans and a neighborhood-based market for consumers to buy and resell pre-owned and popular consumer products in a safe environment. The Company is committed to environmental sustainability, providing customers with rapid access to capital and operating its business in a manner that results in a positive impact on its employees, communities and the environment.
The Company’s pawn business extends the lifecycle and utilization of popular consumer products. Most of the Company’s merchandise inventories are pre-owned items sourced directly from local customers in each store’s immediate geographic neighborhood. In effect, the Company operates a large consumer product recycling business by acquiring pre-owned items, including unwanted or unneeded jewelry, electronics, tools, appliances, sporting goods and musical instruments from individual customers and resells them to other customers desiring such products within the same neighborhood. By being a large reseller of pre-owned items, the Company believes it extends the life of these products and helps reduce demand for newly manufactured and distributed products, thereby reducing carbon emissions and water usage, resulting in a positive impact to the environment.
The Company estimates that it resold approximately 11 million used or pre-owned consumer product items in its pawn stores during 2021, with a commercial value of approximately $1.1 billion. In addition, the Company recycles significant volumes of precious metals and diamonds whereby unwanted or broken jewelry is collected and melted/processed by the Company and then resold as a commodity for future commercial use. During 2021, the Company estimates that it recycled over 38,000 ounces of gold and over 19,000 carats of diamonds with a combined market value of approximately $57.2 million. This process helps reduce demand for mined precious metals and diamonds, thereby reducing carbon emissions and water usage.
Unlike most brick-and-mortar or online retailers, the Company does not rely on supply chains or manufacturing of its inventories as it sources the majority of its inventory from forfeited pawn loan collateral and merchandise purchased directly from customers. Accordingly, the Company does not own, operate or contract for any manufacturing, supply chain, warehousing or distribution facilities to support its pawn operations. Almost all retail sales and pawn loans are made to customers who live or work within a tight geographic radius of the Company’s stores, and only a very small percentage of sales require delivery service. The Company does not own, lease or operate any long-haul trucks to support its 2,825 pawn locations and, other than operating small storefront locations which are typically 5,000 square feet or less, the Company’s operations leave a limited carbon footprint compared to manufacturers and retailers selling new merchandise with extensive supply chain and distribution channels. The Company is working to further reduce energy consumption by retrofitting buildings with LED lighting and reducing corporate travel by utilizing remote work and meeting technologies.
Pawn Loans Offer Safe Lending Solutions in Underserved Communities
It is estimated by multiple studies and surveys that approximately 25% of U.S. households remain unbanked or under-banked. In Latin America, the number of unbanked or under-banked consumers can be as much as 75% of the population in countries such as Mexico. As a result, the majority of the Company’s customers have limited access to traditional forms of credit or capital. The Company contributes to its communities by providing these customers with instant access to capital through very small, non-recourse pawn loans or buying merchandise from its customers. The average credit provided by the Company’s pawn business to a customer is $222 in the U.S. and $77 in Latin America. Traditional lenders such as banks, credit unions, credit card providers or other small loan providers do not efficiently or effectively offer micro credit products of this size.
Obtaining a pawn loan is simple, requiring only a valid government ID and an item of personal property owned by the customer. The Company does not investigate the creditworthiness of a pawn customer, nor does it matter if the customer has defaulted on a previous pawn loan with the Company. Unlike most credit products, pawn customers are not required to have a bank account, a good credit history or the ability to document their level of income. The process of obtaining a pawn loan is extremely fast, generally taking 15 minutes or less. Loans are funded immediately by giving customers cash.
Pawn loans are highly transparent and responsible products. They are regulated, safe and affordable non-recourse loans for which the customer has no legal obligation to repay. All terms are provided in short, easy to read contracts that allow the Company’s customers to make well-informed decisions before taking out a loan.
Pawn loans differ from most other forms of small dollar lending because the Company does not engage in any post-default collection efforts on delinquent loans, does not take legal actions against its customers for defaulted loans, does not ban its customers for nonpayment, nor does it issue any negative credit information to external credit agencies but rather, relies only on the resale of the pawn collateral for recovery.
The Company promotes a strong corporate culture which emphasizes ethics, accountability and treating customers fairly. This culture is supported by a governance framework with board level oversight of the Company's compliance and internal audit functions and includes the following:
•The Company’s lending operations are licensed and supervised in every jurisdiction in which the Company operates, and it is subject to regular regulatory exams in almost all of these jurisdictions.
•A formal compliance management system is maintained by the Company in all markets in which it operates.
•A “single point of contact” issue resolution function is available to all customers.
•Strict data privacy and protection policies are maintained for personal information of customers and employees.
Focus on Social and Corporate Responsibility
The Company has significant operations in Mexico, where the majority of its employees and customers reside. Accordingly, the Company has focused significant time and resources on corporate and social responsibility initiatives in supporting disadvantaged people who live and work in this market.
The Company is certified as an Empresa Socialmente Responsable (“ESR”), or a socially responsible company, in Mexico under the XII Latin American Meeting of Corporate Social Responsibility Framework. This ESR certification is granted to companies that meet a series of criteria that generally cover the economic, social and environmental sustainability of its operations, which include corporate ethics, good governance, the quality of life of the Company’s employees and a proven commitment to the betterment of the community where it operates, including the care and preservation of the environment.
The Company has also established relationships and supports certain foundations and social programs in Mexico, which provide internships, reading initiatives and recycling programs for disadvantaged citizens.
Human Capital Resources
In managing its human capital resources, the Company aims to attract a qualified and diverse workforce through an inclusive and accessible recruiting process that utilizes online recruiting platforms, campus outreach, internships and job fairs. The workforce of the Company’s pawn business is composed primarily of employees who work on an hourly basis. The AFF business also relies on customer service personnel that are also primarily hourly employees. In order to increase retention among its hourly employees, the Company is focused on providing competitive and attractive wages and benefits, which includes a store-level profit-sharing program for its pawn store employees and extensive training and advancement opportunities as well as fostering a diverse, safe, healthy and secure workplace.
The Company believes that it complies with all applicable state, local and international laws governing nondiscrimination in employment in jurisdictions in which the Company operates. All applicants and employees are treated with the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation, gender identity, disability or protected veteran status.
Employee Profile and Diversity
As of December 31, 2021, the Company had approximately 17,000 employees across five countries (the U.S., Mexico, Guatemala, Colombia and El Salvador). The Company employed approximately 6,400 employees in the U.S. as of December 31, 2021, including approximately 800 persons employed in executive, supervisory, administrative and accounting functions. None of the Company’s U.S. employees are covered by collective bargaining agreements. The Company employed approximately 10,500 employees in Latin America as of December 31, 2021, including approximately 900 persons employed in executive, supervisory, administrative and accounting functions. The Company’s Mexico employees are covered by labor agreements as required under Mexico’s Federal Labor Law. None of the Company’s other Latin American employees are covered by collective bargaining agreements.
Global Gender Demographics
Among the Company’s global workforce as of December 31, 2021, 56% identify as women and 44% as men. In management positions for the Company’s global operations, 53% identify as women and 47% as men as of December 31, 2021.
U.S. Race and Ethnicity Demographics
Of all U.S. employees as of December 31, 2021, 48% identify as Hispanic, 17% as Black, 1% as Asian, 4% as two or more races or Other and 30% as White. Among managers in the Company’s U.S. operations, 47% identify as Hispanic, 14% as Black, 1% as Asian, 3% as two or more races or Other and 35% as White as of December 31, 2021.
The Company is committed to creating a safe, trusted and diverse environment in which its employees can thrive. Its employees’ wages are typically above the minimum wage standards in each country in which it operates. The Company also believes in fairly compensating its employees by providing the ability to share in the Company’s profitability. For example, the majority of the Company’s front-line, store-based employees participate in a non-qualified profit sharing program which pays up to 8% of the gross profit an employee personally produced through assigned customer service activities.
The Company also provides its employees with extensive training and advancement opportunities, demonstrated by its long history of employee advancement and promotion from within the organization. The Company maintains robust consumer compliance, anti-money laundering and anti-bribery training programs and requires its managers to adhere to a labor compliance program that meets or exceeds the standards established for coercion and harassment, discrimination and restrictions to freedom of association. The Company’s locations provide a safe, comfortable and healthy work environment and maintain compliance with all occupational safety, wage and hour laws and other workplace regulations.
Health and Safety
The Company is committed to the health, safety and wellness of its employees. The Company provides its employees and their families with access to a variety of flexible and convenient health and wellness programs, including benefits that provide protection and security so they can have peace of mind concerning events that may require time away from work or that impact their financial well-being, that support their physical and mental health by providing tools and resources to help them improve or maintain their health status and encourage engagement in healthy behaviors, and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.
The operation of the Company’s stores is critically dependent on the ability of customers and employees to safely conduct transactions at each location. The COVID-19 pandemic presented unprecedented challenges in many parts of the Company’s business and operations, including with respect to keeping employees safe. Accordingly, the Company developed and implemented new procedures and protocols to minimize the risk to the health and safety of its employees while allowing the Company to continue to operate its pawnshops and serve its customers. The Company implemented social distancing and mask-wearing protocols in its stores and corporate offices, remote working for its corporate employees, provided additional cleaning supplies to facilitate the sanitation of high traffic areas, installed plexiglass dividers at store point-of-sale counters and prohibited all domestic and international non-essential travel for all employees, among other things. The Company continues to actively monitor its COVID-19 safety protocols and updates these protocols to respond to the current situation in its specific geographies.
The Company has consistently been able to meet customers’ demands for its products, while at the same time making the necessary investments to ensure that the Company prioritizes the health, safety and welfare of its employees. In addition, during the pandemic, the Company has prioritized the welfare of its employees by maintaining their paid employment status. To date, no employees in the U.S. or Mexico markets have been terminated, laid off or furloughed without pay as a direct result of the pandemic.
The Company’s pawn, LTO and retail finance businesses are subject to significant regulation through various laws, regulations, ordinances and regulatory pronouncements from federal, state and municipal governmental entities in the U.S. and Latin America, all of which are constantly evolving and subject to potentially significant changes. These statutes and regulations prescribe, among other things, the general terms of the Company’s pawn loan agreements, including maximum service fees and/or interest rates that may be charged and collected and mandatory consumer disclosures, as well as maximum interest rates/finance charges or leasing fees (as applicable), consumer disclosures, contractual terms and other matters directly related to the Company’s retail POS payments solutions platform activities. The Company is also required to obtain and maintain regulatory licenses and comply with regular or frequent regulatory reporting and registration requirements. In general, the regulatory regimes to which the Company are subject are increasingly focused on consumer finance companies serving credit-constrained customers and any of these agencies or authorities may propose and adopt new regulations, or interpret existing regulations, in a manner that could result in significant adverse changes in the regulatory landscape for businesses such as the Company’s. In addition, the current presidential administration has taken a more aggressive enforcement stance against consumer finance companies serving credit-constrained customers like the Company.
For a discussion of the risks related to the Company’s regulatory environment, see “Item 1A. Risk Factors—Regulatory, Legislative and Legal Risks.”
U.S. Federal Regulations
The U.S. government and its agencies have significant regulatory authority over the Company’s activities and its business is subject to a variety of federal laws, including but not limited to the following:
Federal Trade Commission (“FTC”) Act and Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) - The FTC and the Consumer Financial Protection Bureau (the “CFPB”), regulate advertising, marketing of and practices related to financial products and services. The FTC is charged with preventing, investigating and remediating unfair or deceptive acts or practices and false or misleading advertisements, and the CFPB is charged with preventing unfair, deceptive or abusive acts or practices. The CFPB has regulatory, supervisory and enforcement powers over certain providers of consumer financial products and services. The CFPB also has the authority to issue civil investigative demands and pursue administrative proceedings or litigation for actual or perceived violations of federal consumer laws (including the CFPB’s own rules). In these proceedings, the CFPB can seek consent orders, confidential memorandums of understandings, cease and desist orders (which can include orders for redisclosure, restitution or rescission of contracts, as well as affirmative or injunctive relief) and monetary penalties. The Company was recently named as a defendant in a lawsuit brought by the CFPB alleging violations of the Military Lending Act (“MLA”) as discussed elsewhere herein. For a discussion of the risks to the Company’s business related to CFPB regulation, see “Item 1A. Risk Factors—Regulatory, Legislative and Legal Risks and General Economic and Market Risks.”
On October 5, 2017, the CFPB released its small-dollar loan rule (the “SDL Rule”), which was subsequently revised on July 7, 2020. Traditional possessory, non-recourse pawn loans are not covered under the SDL Rule. The SDL Rule does, however, define consumer loan products, both short-term loans and installment loans offered by the Company before June 30, 2020, as loans covered under the rule. The SDL Rule also defines some of the RISA transactions that AFF purchases and some of the installment loans that AFF sub-services as loans covered under the rule.
Electronic Fund Transfer Act (“EFTA”) - The EFTA and its implementing Regulation, Regulation E, is a consumer protection law affecting electronic fund transfers, including one-time and recurring preauthorized transactions. Consumers with whom the Company conducts business may elect to repay through the use of electronic funds transfers, requiring the Company to obtain the appropriate authorization from the consumer to enter into such transactions. The EFTA imposes certain disclosure and practice restriction requirements upon the Company, and at the same time grants certain rights to consumers.
MLA - The MLA requires the provision of certain disclosures at certain times and restricts, among other things, the interest rate and other terms that can be offered to active military personnel and their dependents on most types of consumer credit. The MLA caps the interest rate that may be offered to a covered borrower to a 36% military annual percentage rate (“MAPR”), which includes certain fees such as application fees, participation fees and fees for add-on products. The MLA also requires certain disclosures and prohibits certain terms, such as mandatory arbitration, if a dispute arises concerning the consumer credit product. The MLA covers overdraft lines of credit, pawn loans and certain vehicle-secured and unsecured credit products and restricts the Company’s ability to offer its products to military personnel and their dependents to the extent any such products
have a MAPR greater than 36%. Failure to comply with the MLA may limit the Company’s ability to collect principal, interest, and fees from borrowers and may result in civil and criminal liability that could harm its business. Compliance with the MLA is complex, increases compliance risks and related costs and limits the potential customer base of the Company. The Company was recently named as a defendant in a lawsuit brought by the CFPB alleging violations of the MLA as discussed elsewhere herein.
Servicemembers Civil Relief Act (“SCRA”) - The federal SCRA and similar state laws apply to certain transactions between the Company and servicemembers called to active duty in the United States military as defined within the SCRA, and may include reservists and members of the National Guard. The SCRA limits the rate of interest a covered servicemember may be charged, including certain fees, as well as the actions that can be taken while the consumer is a covered servicemember, including limitations on the ability to maintain legal action and obtain default judgments.
Truth in Lending Act (“TILA”) - TILA and its implementing regulations known as Regulation Z require creditors to deliver disclosures to borrowers during the life cycle of a loan, including when publishing certain advertisements, at application, at account opening and at consummation. The requirements may vary based upon product type (e.g., open-end versus closed end credit products), as well as the timing and nature of certain events (e.g., post-consummation events). These disclosures include, among other things, the total amount of the finance charges and annualized percentage rate.
Anti-money laundering and economic sanctions - The Company is subject to certain provisions of the USA PATRIOT Act and the Bank Secrecy Act under which it must maintain an anti-money laundering compliance program covering certain of its business activities.
Fair Credit Reporting Act (“FCRA”) - The Company is subject to the FCRA and its implementing regulation known as Regulation V, as both a user of consumer reports and a furnisher of consumer credit information to credit reporting agencies. The FCRA regulates the use of consumer reports and reporting of information to credit reporting agencies. Specifically, the FCRA establishes requirements that apply to the use of “consumer reports” and similar data, including certain notifications to consumers, including when an adverse action, such as a loan declination, is based on information contained in a consumer report. The Company only obtains and uses consumer reports subject to the permissible purpose requirements under the FCRA, which also permits the Company to share its experiential information, information obtained from consumer reporting agencies and other customer information with affiliates. The Company complies with notice and opt out requirements for prescreen solicitations and for certain information sharing under the FCRA, and conducts reasonable investigations of disputes as applicable. The Company also has implemented an identity theft prevention program to fulfill the requirements of the Red Flags Regulations and Guidelines issued under the Fair and Accurate Credit Transactions Act (the “FACTA”).
Anti-corruption - The Company is subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other similar laws in other jurisdictions which generally prohibit companies and their agents or intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits.
Brady Handgun Violence Prevention Act (“Brady Act”) - Each U.S. pawn store location that handles pawned firearms or buys and sells firearms must comply with the Brady Act. The Brady Act requires that federally licensed firearms dealers conduct a background check in connection with releasing, selling or otherwise disposing of firearms. In addition, the Company must also comply with various state law provisions and the regulations of the U.S. Department of Justice-Bureau of Alcohol, Tobacco and Firearms that require each pawn lending location dealing in guns to obtain a Federal Firearm License (“FFL”) and maintain a permanent record of all receipts and dispositions of firearms.
Telephone Consumer Protection Act - The Company is also subject to the Telephone Consumer Protection Act and its implementing regulations (together, the “TCPA”) and the regulations of the Federal Communications Commission. The TCPA regulates the delivery of live and prerecorded telemarketing calls, non-marketing calls to cell phones through the use of an automated telephone dialing system, fax advertisements and text messages. For example, under the TCPA, it is unlawful to make many of these types of communications without the prior consent of the recipient. The TCPA also established a federal do-not-call registry with the Telemarketing Sales Rule. The Company maintains policies and procedures reasonably designed to comply with the TCPA.
U.S. State and Local Regulations
Pawn Business - The Company operates pawn stores in 25 U.S. states and the District of Columbia, all of which have licensing and/or fee regulations on pawnshop operations and employees, and are subject to regular state level regulatory audits. In general, state statutes and regulations establish licensing requirements for pawnbrokers and may regulate various aspects of pawn transactions, including the purchase and sale of merchandise, service charges, interest rates, the content and form of the pawn transaction agreement and the length of time a pawnbroker must hold a purchased item or forfeited pawn before it is made available for sale. Additionally, these statutes and regulations in various jurisdictions restrict or prohibit the Company from transferring and/or relocating its pawn licenses and restrict or prohibit the issuance of new licenses. Many of the Company’s pawn locations are also subject to local ordinances that require, among other things, local permits, licenses, record keeping requirements and procedures, reporting of daily transactions, and adherence to local law enforcement “do-not-buy-lists” by checking law enforcement created databases.
AFF Business - In addition to federal regulatory oversight, currently, nearly every state specifically regulates LTO transactions via state statutes and regulations. This includes states in which the POS payments platform operates through existing merchant partners. The scope of state LTO regulation, including permissible rental rates, fees and terms, varies from state to state. Some states require specific disclosures, mandate or prohibit certain terms and limit the total cost of ownership and fees that may be charged. Most state LTO laws require LTO companies to disclose to their customers the total number of payments, total amount and timing of all payments to acquire ownership of an item, any other charges that may be imposed and miscellaneous other items. The more restrictive state LTO laws limit the retail price for an item, limit the total cost of ownership that a customer may be required to pay to obtain ownership of an item, or regulate the "cost-of-rental" amount that lease-to-own companies may charge on lease-to-own transactions, generally defining "cost-of-rental" as lease fees paid in excess of the "retail" price of the goods. Where licensing or registration is required, the Company is subject to extensive state rules, licensing and examination. Failure to comply with these requirements may result in, among other things, refunds of excess charges, monetary penalties, revocation of required licenses, voiding of leases and other administrative enforcement actions.
Some states also specifically regulate via statutes and regulations the RISA transactions that AFF purchases from merchants. The scope of state RISA regulation varies from state to state. Most state RISA laws require certain consumer-facing disclosures. Some state RISA laws require AFF, as a purchaser of RISA transactions, to obtain a license or file a registration or notification with the applicable state regulator. Where licensing or registration is required, AFF is subject to extensive state rules, licensing and examination. Failure to comply with these requirements may result in, among other things, refunds of excess charges, monetary penalties, revocation of required licenses, voiding of RISA transactions and other administrative enforcement actions.
In addition, from time to time, state regulatory agencies and state attorneys general have directed investigations or regulatory initiatives toward the Company’s industry, or toward certain companies within the industry. For example, on January 6, 2022, AFF received a subpoena from the New Jersey Attorney General’s office requesting information related to AFF’s partnership with the Bank and the bank loans with New Jersey consumers that AFF sub-services. AFF is in the process of providing the requested documents.
The Company’s pawn business in Mexico is subject to various federal, state and local regulatory regimes affecting the pawn industry, as well as general business regulations in the areas of tax compliance, customs, consumer protections, anti-money laundering, public safety and employment matters, among others, by various federal, state and local governmental agencies.
Procuraduria Federal del Consumidor (“PROFECO”) - The Company’s pawn business in Mexico is regulated by PROFECO, Mexico’s primary federal consumer protection agency, which requires the Company to annually register its pawn stores, approve pawn contracts and disclose the interest rate and fees charged on pawn transactions.
PROFECO regulates the form and non-financial terms of pawn contracts and defines certain operating standards and procedures for pawnshops, including retail operations, consumer disclosures and establishes reporting requirements and requires all pawn businesses and their owners to register annually with and be approved by PROFECO in order to legally operate. In addition, all operators must comply with additional customer notice and disclosure provisions, bonding and insurance requirements to insure against loss or insolvency, reporting of certain types of suspicious transactions, and reporting to state law enforcement officials of certain transactions (or series of transactions) or suspicious transactions on a monthly basis to states’ attorneys general offices. There are significant fines and sanctions, including license revocation and operating suspensions, for failure to register and/or comply with PROFECO’s rules and regulations.
Anti-Money Laundering - Mexico’s anti-money laundering regulations, The Federal Law for the Prevention and Identification of Transactions with Funds From Illegal Sources, requires monthly reporting of certain transactions (or series of transactions) exceeding certain monetary limits, imposes strict maintenance of customer identification records and controls, and requires reporting of all foreign (non-Mexican) customer transactions.
Privacy Laws - Mexico’s Federal Personal Information Protection Act requires companies to protect their customers’ personal information, among other things.
Mexico State and Local Regulations
Certain state and local governmental entities in Mexico also regulate pawn and retail businesses through state laws and local zoning and permitting ordinances. For example, in certain states where the Company has significant or concentrated operations, states have enacted legislation or implemented regulations which require items such as special state operating permits for pawn stores, certification of pawn employees trained in valuation of merchandise, strict customer identification controls, collateral ownership certifications and/or detailed and specified transactional reporting of customers and operations. Certain other states have proposed similar legislation but have not yet enacted such legislation. Furthermore, certain municipalities in Mexico have attempted to further regulate or limit the operation of new and existing pawn stores through additional local business licensing, such as operating licenses, signage permits and safety permits, in addition to reporting requirements and the enactment of transaction taxes on certain pawn transactions. State and local agencies, including local and state police officials, often have unlimited and discretionary authority to suspend store operations pending an investigation of suspicious pawn transactions or resolution of actual or alleged regulatory, licensing and permitting issues.
Other Latin American Federal and Local Regulations
Similar to Mexico, certain federal, department and local governmental entities in Guatemala, Colombia and El Salvador also regulate the pawn industry and retail and commercial businesses. Certain federal laws and local zoning and permitting ordinances require basic commercial business licenses and signage permits. Operating in these countries also subjects the Company to other types of regulations including, but not limited to, regulations related to commercialization of merchandise, financial reporting, privacy and data protection, tax compliance, customs, labor and employment practices, real estate transactions, anti-money laundering, commercial and electronic banking restrictions, credit card transactions, marketing, advertising and other general business activities. Like Mexico, department agencies, including local and state police officials, have unlimited and discretionary authority in their application of their rules and requirements.
The Company’s primary websites are www.firstcash.com and www.americanfirstfinance.com. The Company makes available, free of charge, at its corporate website, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission (“SEC”). The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
Item 1A. Risk Factors
Important risk factors that could materially affect the Company’s business, financial condition or results of operations in future periods are described below. These factors are not intended to be an all-encompassing list of risks and uncertainties and are not the only risks and uncertainties facing the Company. Additional risks not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition or results of operations in future periods.
Risk Factor Summary
Risks Related to the Company’s Strategy, Business and Operations
•The Company faces significant competition from banks, credit unions, internet-based lenders, point-of-sale consumer finance companies, other short-term consumer lenders, governmental entities and other organizations offering similar financial services and retail products to those offered by the Company.
•A decrease in demand for the Company’s products and services and the failure of the Company to adapt to such decreases could adversely affect the Company’s results of operations.
•The Company’s future success is largely dependent upon the ability of its management team to successfully execute its business strategy and drive organic growth.
•The inability to successfully identify attractive acquisition targets, realize administrative and operational synergies and integrate completed acquisitions could adversely affect results.
•The Company depends on its senior management and hiring, training and retaining an adequate number of qualified employees to run its businesses.
•Security breaches, cyber attacks or fraudulent activity could result in damage to the Company’s operations or lead to reputational damage and expose the Company to significant liabilities.
•The Company’s businesses are typically subject to seasonality, which causes the Company’s revenues and operating cash flows to fluctuate.
•The Company’s financial position and results of operations may fluctuate significantly due to fluctuations in currency exchange rates in Latin American markets.
•Changes impacting international trade and corporate tax and other related regulatory provisions may have an adverse effect on the Company’s financial condition and results of operations.
Risks Related to the Company’s Regulatory, Legislative and Legal Environment
•The Company is the subject of a lawsuit initiated by the CFPB alleging violations of the MLA and the Company’s predecessor company’s consent order with the CFPB.
•The Company’s products and services are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations in both the U.S. and Latin America and consumer finance companies that serve credit-constrained consumers, like the Company, face increasing regulatory scrutiny under the current presidential administration and regulatory environment.
•The adoption of new laws or regulations or adverse changes in, or the interpretation or enforcement of, existing laws or regulations affecting the Company’s products and services could adversely affect its financial condition and operating results.
•If AFF’s originating bank partner model is successfully challenged or deemed impermissible, it could be found to be in violation of licensing, interest rate limit, lending or brokering laws and face penalties, fines, litigation or regulatory enforcement.
•Media reports, statements made by regulators and elected officials and public perception in general of pawnshops, LTO and retail finance products for credit-constrained consumers as being predatory or abusive could materially adversely affect the Company’s businesses.
•Current and future litigation or regulatory proceedings, both in the U.S. and Latin America, could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition.
•The sale and pawning of firearms, ammunition and certain related accessories is subject to current and potential regulation.
Risks Related to the AFF Acquisition and Business
•The Company may fail to realize all of the anticipated benefits of the AFF Acquisition, or those benefits may take longer to realize than expected. The Company may also encounter significant difficulties in integrating the AFF business.
•The AFF business is dependent on merchant partners for its transaction volume and its growth is primarily driven by its ability to attract additional merchants and retain and grow its relationships with its existing merchant partners.
•The AFF business derives a significant portion of its revenue from several top merchant partners. The loss of business or platform support from one or more of these top merchant partners could have a material adverse effect on the AFF business.
•The AFF business relies extensively on its proprietary decisioning platform and if such platform is not effective, it could have a material impact on the AFF business and its financial condition and results of operations.
•If the AFF business is unable to collect on its leases, RISAs and bank loans, the performance of its lease and loan portfolio would be adversely affected.
Risks Related to Tax and Financial Matters
•The Company’s existing and future levels of indebtedness and any potential earnout payments payable in connection with the AFF Acquisition could adversely affect its financial health, its ability to obtain financing in the future, its ability to react to changes in its business and its ability to fulfill its obligations under such indebtedness.
•Declines in commodity market prices of gold, other precious metals and diamonds could negatively affect the Company’s profits.
•Unexpected changes in both domestic and foreign tax laws and policies could negatively impact the Company’s operating results.
Risks Related to Economic and Market Environment
•The COVID-19 pandemic has adversely impacted, and may materially and adversely impact in future periods, the Company’s business and results of operations.
•A sustained deterioration of economic conditions or an economic crisis and government actions taken to limit the impact of such an economic crisis could reduce demand or profitability for the Company’s products and services which would result in reduced earnings.
•The price of the Company’s common stock has fluctuated substantially over the past several months and may continue to fluctuate substantially in the future.
Strategic and Business Risks
Increased competition from other pawnshops, point-of-sale consumer finance companies, other short-term consumer lenders, governmental entities and other organizations offering similar financial services and retail products offered by the Company could adversely affect the Company’s results of operations.
The Company’s principal competitors are other pawnshops, branch-based consumer loan or finance companies, internet-based lenders, LTO stores, point-of-sale, LTO and consumer finance providers, banks, credit unions and various other types of consumer finance companies that serve the Company’s primarily credit-constrained customer base. In addition, banks and consumer finance companies are developing retail POS payment products and services designed to compete for the credit-constrained customer, many of which have greater financial resources and brand recognition than the Company. Significant increases in the number and size of competitors for the Company’s business could result in a decrease in the number of the Company’s pawn transactions or in AFF’s transaction volumes, resulting in lower levels of revenue and earnings.
Furthermore, the Company’s retail pawn operations have many competitors, such as retailers of new and pre-owned merchandise, other pawnshops, thrift shops, online retailers of new and pre-owned merchandise, online classified advertising sites, social media platforms and online auction sites. Many consumers view these competitors as a safer, more price competitive or convenient option for acquiring similar products to what the Company sells. AFF also competes with many of these retailers for consumers desiring to purchase lower cost merchandise for cash or on credit.
In Mexico, the Company’s pawn stores also compete directly with government sponsored or affiliated non-profit foundations operating pawn stores. The Mexican government could take regulatory or administrative actions that would harm the Company’s ability to compete profitably in the Mexico market.
Increased competition or aggressive marketing and pricing practices by these competitors could result in decreased revenue, margins and inventory turnover rates in the Company’s retail operations.
A decrease in demand for the Company’s products and services and the failure of the Company to adapt to such decreases could adversely affect the Company’s results of operations.
Although the Company actively manages its product and service offerings to ensure that such offerings meet the needs and preferences of its customer base and merchant partners, in the case of the AFF business, the demand for a particular product or service may decrease due to a variety of factors, including many that the Company may not be able to control, anticipate or respond to in a timely manner, such as the availability and pricing of competing products or technology, changes in customers’ financial conditions as a result of changes in unemployment levels, declines in consumer spending habits related to general economic conditions, inflation, public health and safety issues, fuel prices, interest rates, government sponsored economic stimulus programs, social welfare or benefit programs, real or perceived loss of consumer confidence or regulatory restrictions that increase or reduce customer access to particular products. The AFF business also competes in an industry that is subject to significant technological change and disruption and AFF’s ability to meet the needs of both merchants and consumers is dependent on its ability to adequately adapt and respond to these changes.
The Company’s retail sales depend in large part on sufficient inventory levels driven primarily by forfeited collateral on pawn loans. If demand for pawn loans decreases, inventory levels typically decline, which can have a material adverse impact on retail sales.
Should the Company fail to adapt to a significant change in its customers’ demand for, or regular access to, its products, the Company’s revenue could decrease significantly. Even if the Company makes adaptations, its customers or merchants may resist or may reject products or services whose adaptations make them less attractive or less available. In any event, the effect of any product or service change on the results of the Company’s business may not be fully ascertainable until the change has been in effect for some time.
The Company’s organic growth is subject to external factors and other circumstances over which it has limited control or that are beyond its control. These factors and circumstances could adversely affect the Company’s ability to grow.
The success of the Company’s organic expansion strategy is subject to numerous external factors, including regulatory restrictions, general economic conditions and acceptance of the Company’s products. With respect to the Company’s pawn business, organic growth is largely driven by the ability to increase the productivity of its existing stores and successfully open new stores, which new store openings are impacted by the availability of sites with favorable customer demographics, limited competition from other pawn stores, community acceptance, suitable lease terms, its ability to attract, train and retain qualified associates and management personnel, the ability to obtain required government permits and licenses and the ability to complete construction and obtain utilities in a timely manner. With respect to the AFF business, organic growth is largely driven by the ability of AFF to expand its network of merchant partners, increase utilization of its products at its merchant partners and improve its technology to support increased growth, meet the needs of its merchants and consumers and make effective approval decisions with respect to its products. Some of these factors are beyond the Company’s control. The failure to execute the Company’s organic expansion strategy would adversely affect the Company’s ability to expand its business and could materially adversely affect its business, prospects, results of operations and financial condition.
The inability to successfully identify attractive acquisition targets, realize administrative and operational synergies and integrate completed acquisitions could adversely affect results.
The Company has historically grown, in large part, through strategic acquisitions, and the Company’s strategy is to continue to pursue attractive acquisition opportunities if and when they become available. The success of an acquisition is subject to numerous internal and external factors, such as competition rules, the ability to consolidate information technology and accounting functions, the management of additional sales, administrative, operations and management personnel, overall management of a larger organization, competitive market forces, and general economic and regulatory factors. It is possible that the integration process could result in unrealized administrative and operational synergies, the loss of key employees, the disruption of ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect the Company’s ability to maintain relationships with customers, employees, or other third-parties or the Company’s ability to achieve the anticipated benefits of such acquisitions and could harm its financial performance. Furthermore, future acquisitions may be in jurisdictions in which the Company does not currently operate or in lines of business that are new to the Company, which could make the successful consummation and integration of any such acquisitions more difficult. Attractive acquisition targets may also become increasingly scarce in future periods or in jurisdictions the Company would like to expand its operations in. Failure to successfully integrate an acquisition
could have an adverse effect on the Company’s business, results of operations and financial condition, and failure to successfully identify attractive acquisition targets and complete such acquisitions on favorable terms could have an adverse effect on the Company’s growth. Additionally, any acquisition has the risk that the Company may not realize a return on the acquisition or the Company’s investment.
The Company’s future success is largely dependent upon the ability of its management team to successfully execute its business strategy.
The Company’s future success, including its ability to achieve its growth and profitability goals, is dependent on the ability of its management team to execute on its long-term business strategy, which requires them to, among other things: (1) pursue organic growth by opening new pawn stores and expanding AFF’s network of merchant partners, (2) identify attractive acquisition opportunities, close on such acquisitions on favorable terms and successfully integrate acquired businesses, (3) encourage and improve customer traffic at its pawn stores and the utilization of AFF’s products with its existing merchant partners, (4) improve the customer experience at its pawn stores and for AFF’s merchant partners and customers, (5) enhance productivity of its pawn stores, including through investments in technology, (6) control expenses in line with their current projections, (7) keep pace with technological change and improve the Company’s proprietary pawn point-of-sale and loan management system and AFF’s proprietary lease and loan management system and decisioning platform, and (8) effectively maintain its compliance programs and respond to regulatory developments and changes that impact its business. Failure of management to execute its business strategy could negatively impact the Company’s business, growth prospects, financial condition or results of operations. Further, if the Company’s growth is not effectively managed, the Company’s business, financial condition, results of operations and future prospects could be negatively affected, and the Company may not be able to continue to implement its business strategy and successfully conduct its operations.
The Company depends on its senior management and may not be able to retain those employees or recruit additional qualified personnel.
The Company depends on its senior management to execute its business strategy and oversee its operations. The Company’s senior management team has significant pawn industry experience in both Latin America and the United States as well as public company experience, which the Company believes is unique in the pawn industry. Furthermore, the addition of AFF’s senior management team following the AFF Acquisition, provides the Company with significant experience with retail POS payment solutions for credit-constrained customers. The loss of services of any of the members of the Company’s senior management could adversely affect the Company’s business until a suitable replacement can be found, if at all. There may be a limited number of persons with the requisite skills to serve in these positions, and the Company cannot ensure that it would be able to identify or employ such qualified personnel on acceptable terms. Furthermore, a significant increase in the costs to retain any members of the Company’s senior management could adversely affect the Company’s business and operations.
The Company depends on hiring, training and retaining an adequate number of qualified employees to run its businesses.
The Company’s pawn business relies heavily on retail employees who work on an hourly basis and AFF relies heavily on sales, information technology, data science and customer service employees. The Company must attract, train, and retain a large number of employees, while at the same time controlling labor costs. In particular, the Company’s in-store positions have historically had high turnover rates, which can lead to increased training, retention and other costs and impair the overall customer service and efficiencies at the Company’s pawn stores. There has also been an increase in labor shortages and competition for employees, especially with respect to the Company’s hourly in-store employees, including from retailers and the restaurant industries. The Company also faces meaningful competition for AFF’s salesforce, information technology, call center and data science teams. The lack of availability of adequate employees or the Company’s inability to attract and retain qualified employees, or an increase in wages and benefits to current employees could adversely affect its business, results of operations, cash flows and financial condition.
Furthermore, federal, state or local legislated increases in the minimum wage, as well as increases in additional labor cost components such as employee benefit costs, workers’ compensation insurance rates, compliance costs, fines and, in Mexico, costs associated with labor agreements, unions and profit sharing requirements, would increase the Company’s labor costs, which could have a material adverse effect on its business, prospects, results of operations and financial condition.
The Company’s business depends on the uninterrupted operation of the Company’s facilities, systems and business functions, including its information technology and other business systems, and reliance on other companies to provide key components of its business systems.
The Company’s business depends highly upon its ability to perform, in an efficient and uninterrupted fashion, necessary business functions such as operating, managing and securing its retail locations, technical support centers, security monitoring, treasury and accounting functions and other administrative support functions. Additionally, the Company’s storefront operations depend on the efficiency and reliability of the Company’s proprietary pawn point-of-sale and loan management system and AFF depends on its systems to process its transaction volume and effectively decision and service its customers. Furthermore, third-parties provide a number of key components necessary to the Company’s business functions and systems. Any problems caused by these third-parties could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business. A shut-down of or inability to access these systems due to a power outage, a cyber-security breach or attack, a breakdown or failure of one or more of its information technology, telecommunications or other systems, or sustained or repeated disruptions of such systems could significantly impair its ability to perform such functions on a timely basis and could result in a deterioration of the Company’s ability to perform its day-to-day operations, provide customer service or perform other necessary business functions.
Security breaches, cyber attacks or fraudulent activity could result in damage to the Company’s operations or lead to reputational damage and expose the Company to significant liabilities.
An important component of the Company’s business involves collection, storage, use, disclosure, processing, transfer and other handling of a wide variety of sensitive, regulated and/or confidential information, including personally identifiable information, for various purposes in its business. The Company has historically maintained minimal personal information with respect to its pawn transactions (primarily name, address and date of birth). However, AFF obtains additional personal information, including social security numbers, dates of birth, bank account and payment card information and data from consumer reporting agencies (including credit report information), increasing the potential risk of unauthorized access to such confidential information. The Company is under constant threat of loss due to the velocity and sophistication of security breaches and cyber attacks. These security incidents and cyber attacks may be in the form of computer hacking, acts of vandalism or theft, malware, computer viruses or other malicious codes, phishing, employee error or malfeasance, catastrophes or unforeseen events or other cyber-attacks. A security breach of the Company’s computer systems, or those of the Company’s third-party service providers, including as a result of cyber attacks, could cause loss of Company assets, interrupt or damage its operations or harm its reputation. In addition, the Company could be subject to liability if confidential customer or employee information is misappropriated from its computer systems. Any compromise of security, including security breaches perpetrated on persons with whom the Company has commercial relationships, that results in the unauthorized access to or use of personal information or the unauthorized access to or use of confidential employee, customer, supplier or Company information, could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to the Company’s reputation, and a loss of confidence of the Company’s customers, vendors and others, which could harm its business and operations. Any compromise of security could deter people from entering into transactions that involve transmitting confidential information to the Company’s systems and could harm relationships with the Company’s suppliers, which could have a material adverse effect on the Company’s business. Actual or anticipated cyber attacks may cause the Company to incur substantial costs, including costs to prevent future attacks and investigate actual attacks, deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. Despite the Company’s implementation of significant security measures, including the use of encryption and authentication technology to provide security and authentication to effective secure transmission of confidential information, these systems may still be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third-parties or similar disruptive problems. The Company may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber attacks. Moreover, the Company may be unable to anticipate cyber attacks, react in a timely manner, or implement adequate preventative or remedial measures. Although the Company monitors its systems in order to detect security breaches or instances of unauthorized access to confidential information, there is no guarantee that its monitoring efforts will be effective. While the Company has not experienced any material losses relating to cyber attacks or other information security breaches to date, the Company and AFF have been the subject of attempted hacking and cyber attacks and there can be no assurance that the Company will not suffer significant losses or reputational harm in the future.
Additionally, the regulatory environment related to information security and data collection, retention, use and privacy is increasingly rigorous, with new and constantly changing requirements applicable to the Company’s business, and compliance with those requirements could result in additional costs, such as increased investment in technology or investigative expenses, the costs of compliance with privacy laws, and fines, penalties and costs incurred to prevent or remediate information security or cyber breaches. Furthermore, federal and state regulators and many federal and state laws and regulations require notice of any data security breaches that involve personal information. These mandatory disclosures regarding a security breach are
costly to implement and often lead to widespread negative publicity, which may cause consumers to lose confidence in the effectiveness of the Company’s data security measures. Any security breach suffered by the Company or its vendors, any unauthorized, accidental, or unlawful access or loss of data, or the perception that any such event has occurred, could result in a disruption to the Company’s operations, litigation, an obligation to notify regulators and affected individuals, the triggering of indemnification and other contractual obligations, regulatory investigations, government fines and penalties, reputational damage, and loss of customers and ecosystem partners, and its business could be materially and adversely affected.
Lastly, the Company’s cyber and other insurance policies carry retention and coverage limits which may not be adequate to reimburse for losses caused by security breaches, and the Company may not be able to collect fully, if at all, under these insurance policies.
Because the Company maintains a significant supply of cash, loan collateral and inventories in its pawn stores and certain processing centers, the Company may be subject to employee and third-party robberies, riots, looting, burglaries and thefts. The Company also may be subject to liability as a result of crimes at its pawn stores.
The Company’s business requires it to maintain a significant supply of cash, loan collateral and inventories, including gold and other precious metals, in most of its pawn stores and certain corporate locations. As a result, the Company is subject to the risk of employee and third-party robberies, riots, looting, burglaries and thefts. Although the Company has implemented various programs in an effort to reduce these risks and utilizes various security measures at its facilities, there can be no assurance that robberies, riots, looting, burglaries and thefts will not occur. Robberies, riots, looting, burglaries and thefts could lead to losses and shortages and could adversely affect the Company’s business, prospects, results of operations and financial condition. The Company maintains a program of insurance coverage for various types of property, casualty and other risks. However, the insurance program generally has large deductibles and may not be adequate to cover all such losses. The Company could also experience liability or adverse publicity arising from such crimes. Any such event may have a material and adverse effect on the Company’s business, prospects, results of operations and financial condition.
If the Company is unable to protect its intellectual property rights, its ability to compete could be negatively impacted.
The success of the Company’s business depends to a certain extent upon the value associated with its intellectual property rights, including its proprietary, internally developed point-of-sale and loan management system that is in use in its pawn stores and its proprietary decisioning technology that is used by the AFF business. The Company relies on a combination of trademarks, trade dress, trade secrets, proprietary software, website domain names and other rights, including confidentiality procedures and contractual provisions to protect its proprietary technology, processes and other intellectual property. While the Company intends to vigorously protect its trademarks and proprietary systems against infringement, it may not be successful. In addition, the laws of certain foreign countries may not protect intellectual property rights to the same extent as the laws of the U.S. The costs required to protect the Company’s intellectual property rights and trademarks could be substantial.
The Company’s businesses are typically subject to seasonality, which causes the Company’s revenues and operating cash flows to fluctuate and may adversely affect the Company’s ability to borrow on its unsecured credit facilities, service its debt obligations and fund its operations.
The Company’s U.S. pawn business typically experiences reduced demand in the first and second quarters as a result of its customers’ receipt of federal tax refund checks typically in February of each year while demand typically increases during the third and fourth quarters. The AFF business experiences significantly higher originations in the fourth quarter associated with holiday shopping, which also generally positively impacts retail sales in the Company’s pawn stores in the fourth quarter, and reduced demand in the first and second quarters as retail expenditures are generally lower in these quarters. Typically, the Company’s pawn business experiences seasonal growth of service fees in the third and fourth quarter of each year due to loan balance growth. Service fees generally decline in the first and second quarter of each year due to the typical repayment of pawn loans associated with statutory bonuses received by customers in the fourth quarter in Mexico and with tax refund proceeds typically received by customers in the first quarter in the U.S.
This seasonality requires the Company to manage its cash flows over the course of the year. If a governmental authority were to pursue economic stimulus actions or issue additional tax refunds, tax credits or other statutory payments at other times during the year, such actions could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition during these periods. If the Company’s revenues were to fall substantially below what it would normally expect during certain periods, the Company’s annual financial results, its ability to borrow on its unsecured credit facilities, and its ability to service its debt obligations or fund its operations, including originations for the AFF business, could be adversely affected.
The failure or inability of third-parties who provide products, services or support to the Company to maintain their products, services or support could disrupt Company operations or result in a loss of revenue.
The Company’s operations and cash management are dependent upon the Company’s ability to maintain retail banking services, treasury management services and borrowing relationships with commercial banks. Actions by federal regulators in the U.S. and other Latin American countries where the Company operates have caused many commercial banks, including certain banks used by the Company, to cease offering such services to the Company and other businesses in the pawn, LTO and consumer finance industries. The Company also relies significantly on outside vendors to provide services related to financial transaction processing (including credit and debit card processors), utilities, store security, armored transport, precious metal smelting, data and voice networks and other information technology products and services. The failure or inability of any of these third-party financial institutions or vendors to provide such services could limit the Company’s ability to grow its business and could increase the Company’s costs of doing business, which could adversely affect the Company’s operations if the Company is unable to timely replace them with comparable service providers at a comparable cost.
Regulators and payment processors are scrutinizing certain consumer finance companies’ access to the Automated Clearing House (“ACH”) system to disburse and collect proceeds and repayments for consumer finance products, and any interruption or limitation on the Company’s ability to access this critical system would materially adversely affect its business.
It has been reported that actions, referred to as Operation Choke Point, by the U.S. Department of Justice (the “Justice Department”) the Federal Deposit Insurance Corporation (the “FDIC”) and certain state regulators appear to be intended to discourage banks and ACH payment processors from providing access to the ACH system for certain lenders that they believe are operating illegally, cutting off their access to the ACH system to either debit or credit customer accounts (or both).
In the past, this heightened regulatory scrutiny by the Justice Department, the FDIC and other regulators has caused some banks and ACH payment processors to cease doing business with consumer finance companies who are operating legally, without regard to whether those companies are complying with applicable laws, simply to avoid the risk of heightened scrutiny or even litigation. These actions have reduced the number of banks and payment processors who provide ACH payment processing services and could conceivably make it increasingly difficult to find banking partners and payment processors in the future and/or lead to significantly increased costs for these services. Furthermore, the Company also relies on credit card companies and payment processors for a significant portion of its retail sales as well as payments on its pawn loans, LTO, RISA and bank loan products. These companies may decide to cease doing business with the Company due to regulatory or reputational concerns. If the Company is unable to maintain access to needed services on favorable terms, the Company would have to materially alter, or possibly discontinue, some or all of its business if alternative processors are not available.
Regulatory, Legislative and Legal Risks
The Company is the subject of a lawsuit initiated by the CFPB alleging violations of the MLA and the Company’s predecessor company’s 2013 CFPB consent order and a purported securities class action.
On November 12, 2021, the CFPB initiated a civil action in the United States District Court for the Northern District of Texas against FirstCash, Inc. and Cash America West, Inc., two of the Company’s subsidiaries, alleging violations of the MLA. The CFPB also alleges that FirstCash, Inc. violated a 2013 CFPB order against its predecessor company that, among other things, required the predecessor company to cease and desist from further MLA violations. The CFPB is seeking an injunction, redress for affected borrowers and a civil money penalty. While the Company intends to vigorously defend itself against the allegations in the case, it cannot predict or determine the timing or final outcome of this matter, or the effect that any adverse determinations from the lawsuit may have on the Company. An unfavorable determination in the lawsuit could result in the payment of substantial monetary damages, which could have a material effect on the Company’s business, results of operations or financial condition. The Company may also be required to modify its business practices in the event of an unfavorable determination in the lawsuit, which could impact demand for its products and customer satisfaction. Further, the legal costs associated with the lawsuit, which may not be covered by insurance, and the amount of time required to be spent by management and the Board of Directors on this matter, even if the Company is ultimately successful, could have a material effect on its business, financial condition and results of operations. Furthermore, due to the impact of the announcement of the CFPB’s action on the Company’s stock price, the Company has become subject to a purported securities class action related to the CFPB’s lawsuit and may become subject to further related litigation. An unfavorable result in these matters could also have a material impact on the Company’s financial condition and results of operations.
The Company’s products and services are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations in both the U.S. and Latin America. If changes in regulations affecting the Company’s pawn business or the AFF business create increased restrictions, or have the effect of prohibiting pawn loans or POS payment products in the jurisdictions where the Company currently operates, such regulations could materially impair or reduce the Company’s business and limit its expansion into new markets.
The Company’s products and services are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations in both the U.S. and Latin America. Federal and state regulatory authorities are increasingly focused on consumer finance and retail POS payment products for credit-constrained consumers such as those offered by the Company. The Company faces the risk that restrictions or limitations on pawn loans and retail POS payment products resulting from the enactment, change, interpretation or enforcement of laws and regulations in the U.S. or Latin America could have a negative effect on the Company’s business activities. In addition, certain consumer advocacy groups, federal, state and local legislators and governmental agencies have also asserted that rules, laws and regulations should be tightened so as to severely limit, if not eliminate, the availability of pawn transactions, POS payment products and buy/sell agreements to consumers. Moreover, the Company expects the current presidential administration to devote substantial attention to consumer protection matters, including more aggressive enforcement actions, and, as a result, businesses transacting with credit-constrained consumers could be held to higher standards of monitoring, disclosure and reporting, regardless of whether new laws or regulations governing the Company’s industry are adopted. It is difficult to assess the likelihood of the enactment of any unfavorable federal or state legislation or local ordinances, and there can be no assurance that additional legislative, administrative or regulatory initiatives will not be enacted that would severely restrict, prohibit, or eliminate the Company’s ability to offer certain products and services.
In particular, with respect to the Company’s pawn business, restrictions and regulations such as licensing requirements for pawn stores and their employees, customer identification requirements, suspicious activity reporting, disclosure requirements and limits on interest rates, loan service fees, or other fees have been and continue to be proposed. Adoption of such federal, state or local regulation or legislation in the U.S. and Latin America could restrict, or even eliminate, the availability of pawn transactions and buy/sell agreements at some or all of the Company’s locations, which would adversely affect the Company’s operations and financial condition.
In addition, certain aspects of the AFF business, such as the content of its advertising and other disclosures to customers about transactions, its collection practices, the manner in which AFF contacts its customers, the decisioning process regarding whether to enter into a transaction with a potential customer, its credit reporting practices and the manner in which it processes and stores certain customer, employee and other information are subject to federal and state laws and regulatory oversight. These applicable state and federal privacy laws will require AFF to design, implement and maintain different types of privacy- and access-related compliance controls and programs simultaneously in multiple states, thereby further increasing the complexity and cost of compliance.
Moreover, certain states limit the total amount or rate of finance charge that AFF may charge a customer in order for the customer to achieve ownership of the leased merchandise at the end of the lease term. Additional states may elect to implement similar limits or states with existing limits may elect to further lower the total cost that AFF may charge a customer to achieve ownership of the leased merchandise at the end of the lease term, which could have an adverse effect on the Company’s results of operation and financial condition.
The complexity of the political and regulatory environment in which the Company operates and the related cost of compliance are both increasing due to the changing political landscape, additional legal and regulatory requirements, the Company’s ongoing expansion into new markets and the fact that foreign laws occasionally are vague or conflict with domestic laws. In addition to potential damage to the Company’s reputation and brand, failure to comply with applicable federal, state and local laws and regulations such as those outlined elsewhere in these risk factors may result in the Company being subject to claims, lawsuits, fines and adverse publicity that could have a material adverse effect on its business, results of operations and financial condition.
The FTC and the CFPB have regulatory, supervisory and enforcement powers over providers of consumer financial products and services in the U.S., and each could exercise its enforcement powers in ways that could have a material adverse effect on the Company’s business and financial results.
The FTC is charged with preventing unfair or deceptive acts or practices and false or misleading advertisements, and the CFPB is charged with preventing unfair, deceptive or abusive acts or practices. To this end, the FTC and CFPB have been exercising their supervisory and investigative powers over certain non-bank providers of consumer financial products and services. In particular, both the FTC and CFPB have the authority to issue civil investigative demands and pursue administrative proceedings or litigation for actual or perceived violations of some federal consumer laws. In these proceedings, the FTC can seek consent orders, confidential memorandums of understandings, cease and desist orders (which can include orders for redisclosure, restitution or rescission of contracts, as well as affirmative or injunctive relief) and monetary penalties. The CFPB’s examination authority permits its examiners to inspect the books and records of providers of short-term, small dollar loans and ask questions about their business practices. As a result of these examinations of non-bank providers of consumer credit, the Company could be subject to specific enforcement action, including monetary penalties, which could adversely affect the Company.
Also, where a company is alleged to have violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the Dodd-Frank Act, the Dodd-Frank Act empowers state attorneys general and certain state regulators to bring civil actions to remedy alleged violations of law. If the CFPB or one or more state attorneys general or state regulators believe that the Company has violated any of the applicable laws or regulations or any consent orders or confidential memorandums of understanding against or with the Company, they could exercise their enforcement powers in ways that could have a material adverse effect on the Company’s business and financial results. Furthermore, under the current presidential administration, the CFPB has been more aggressive in their exercise of the enforcement powers making it more likely, as evidenced by the CFPB’s action against the Company related to alleged violations of the MLA, that future enforcement actions will be brought against consumer finance companies providing services and products to credit-constrained customers.
See “Item 1. Business—Government Regulation” for a further discussion of the regulatory authority of the CFPB.
The FDIC has issued examination guidance affecting AFF’s unaffiliated third-party lender and these or subsequent new rules and regulations could have a significant impact on AFF’s products originated by the Bank.
The installment loans are originated by the Bank using technology and marketing services provided by AFF. The Bank is supervised and examined by both the state of Utah, which charters the Bank, and the FDIC. If the FDIC or the Utah Department of Financial Institutions considers any aspect of the products originated by the Bank to be inconsistent with its guidance, the Bank may be required to alter or discontinue the product.
On July 29, 2016, the board of directors of the FDIC released examination guidance relating to third-party lending, which, if finalized, would apply to all FDIC-supervised institutions that engage in third-party lending programs, including certain bank products. The proposed guidance elaborates on previously-issued agency guidance on managing third-party risks and specifically addresses third-party lending arrangements where an FDIC-supervised institution relies on a third party to perform a significant aspect of the lending process. The types of relationships that would be covered by the guidance include (but are not limited to) relationships for originating loans on behalf of, through or jointly with third-parties, or using platforms developed by third parties. If adopted as proposed, the guidance would result in increased supervisory attention of institutions that engage in significant lending activities through third-parties, including at least one examination every 12 months, as well as supervisory expectations for a third-party lending risk management program and third-party lending policies that contain certain minimum requirements, such as self-imposed limits as a percentage of total capital for each third-party lending relationship and for the overall loan program, relative to origination volumes, credit exposures (including pipeline risk), growth, loan types, and acceptable credit quality. While the guidance has never formally been adopted, it is the Company’s understanding that the FDIC has relied upon it in its examination of third-party lending arrangements.
If AFF’s originating bank partner model is successfully challenged or deemed impermissible, it could be found to be in violation of licensing, interest rate limit, lending or brokering laws and face penalties, fines, litigation or regulatory enforcement.
Loans originated through the Bank’s program would have accounted for 5% of the Company’s total revenues during 2021 on a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021. AFF relies on its originating bank partner model to comply with various federal, state and other laws. If the legal structure underlying AFF’s relationship with the Bank was successfully challenged, it may be found to be in violation of state licensing requirements and state laws regulating interest rates. For example, AFF is currently responding to a subpoena from the New Jersey Attorney General related to its partner bank’s loan product, and in the state of New Mexico there is pending legislation which would effectively prohibit AFF’s use of the bank partner model in that state. Such bank loan products in New Jersey and New Mexico would have accounted for less than 1% of the Company’s total revenues during 2021 on a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021. In the event of such a challenge or if its arrangements with the Bank were to end for any reason, AFF would need to find and rely on an alternative bank relationship, rely on existing state licenses, obtain new state licenses, pursue a federal bank charter, offer consumer loans and/or be subject to the interest rate limitations of certain states.
AFF could be subject to litigation, whether private or governmental, or administrative action regarding the above claims. The potential consequences of an adverse determination could include the inability to collect loans at the interest rates contracted for, licensing violations, the loans being found to be unenforceable or void, or the reduction of interest or principal, or other penalties or damages. Third-party purchasers of loans facilitated through AFF’s platform also may be subject to scrutiny or similar litigation, whether based upon the inability to rely upon the “valid when made” doctrine or because a party other than the Bank is deemed the true lender.
The adoption of new laws or regulations or adverse changes in, or the interpretation or enforcement of, existing laws or regulations affecting the Company’s products and services could adversely affect its financial condition and operating results.
Governments, including agencies at the national, state and local levels, may seek to enforce or impose new laws, regulatory restrictions, licensing requirements or taxes that affect the Company’s products or services it offers, the terms on which it may offer them, and the disclosure, compliance and reporting obligations it must fulfill in connection with its business. They may also interpret or enforce existing requirements in new ways that could restrict the Company’s ability to continue its current methods of operation or to expand operations, impose significant additional compliance costs, and could have a material adverse effect on the Company’s financial condition and results of operations. In some cases, these measures could even directly prohibit some or all of the Company’s current business activities in certain jurisdictions, or render them unprofitable and/or impractical to continue.
Media reports, statements made by regulators and elected officials and public perception in general of pawnshops, LTO and retail finance products for credit-constrained consumers as being predatory or abusive could materially adversely affect the Company’s businesses. In recent years, consumer advocacy groups and some media reports, in both the U.S. and Latin America, have advocated governmental action to prohibit or place severe restrictions on the Company’s products and services.
Reports and statements made by consumer advocacy groups, members of the media, regulators and elected officials often focus on the annual or monthly cost to a consumer of pawn, LTO and certain retail finance transactions, which are higher than the interest typically charged by banks to consumers with better credit histories. These reports and statements typically characterize these products as predatory or abusive and often focus on alleged instances of pawn operators purchasing or accepting stolen property as pawn collateral. If the negative characterization of the Company’s businesses becomes increasingly accepted by consumers, demand for its products could significantly decrease, which could materially affect the Company’s results of operations and financial condition. Additionally, if the negative characterization of these types of transactions becomes increasingly accepted by legislators and regulators, the Company could become subject to more restrictive laws and regulations that could have a material adverse effect on the Company’s financial condition and results of operations. Furthermore, any negative public perception of pawnshops generally would also likely have a material negative impact on the Company’s retail operations, including reducing the number of consumers willing to shop at the Company’s stores.
Judicial or administrative decisions, CFPB rule-making, amendments to the Federal Arbitration Act (the “FAA”) or new legislation could render the arbitration agreements the Company uses illegal or unenforceable.
The Company includes dispute arbitration provisions for its employees and in its pawn, LTO and retail finance agreements. These provisions are designed to allow the Company to resolve any employee or customer disputes through individual arbitration rather than in court. The Company’s arbitration provisions explicitly provide that all arbitrations will be conducted on an individual and not on a class or collective basis. Thus, the Company’s arbitration agreements, if enforced, have the effect of mitigating class and collective action liability.
However, a number of state and federal circuit courts and the National Labor Relations Board have concluded that arbitration agreements with consumer class action waivers are “unconscionable” and hence unenforceable, particularly where a small dollar amount is in controversy on an individual basis.
Therefore, it is possible that the Company’s consumer arbitration agreements will be rendered unenforceable. Additionally, Congress has considered legislation that would generally limit or prohibit mandatory dispute arbitration in certain consumer contracts, and it has adopted such prohibitions with respect to certain mortgage loans and certain consumer loans to active-duty members of the military and their dependents.
Any judicial or administrative decision, federal legislation or agency rule that would impair the Company’s ability to enter into and enforce consumer arbitration agreements with class action waivers, could significantly increase the Company’s exposure to class action litigation as well as litigation in plaintiff friendly jurisdictions. Such litigation could have a material adverse effect on the Company’s business, results of operations and financial condition.
Current and future litigation or regulatory proceedings, both in the U.S. and Latin America, could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition.
The Company or its subsidiaries has been, is, or may become involved in lawsuits, regulatory or administrative proceedings, examinations, investigations, consent orders, memorandums of understanding, audits, other actions arising in the ordinary course of business, including those related to consumer financial protection, federal or state wage and hour laws, product liability, unclaimed property, employment, personal injury and other matters that could cause it to incur substantial expenditures and generate adverse publicity. In particular, the Company may be involved in lawsuits or regulatory actions related to consumer finance and protection, employment, marketing, unclaimed property, competition matters, and other matters, including class action lawsuits brought against it for alleged violations of the Fair Labor Standards Act, state wage and hour laws, state or federal advertising laws, consumer protection, lending and other laws. The consequences of defending proceedings or an adverse ruling in any current or future litigation, judicial or administrative proceeding, including consent orders or memorandums of understanding, could cause the Company to incur substantial legal fees, to have to refund fees and/or interest collected, refund the principal amount of advances, pay treble or other multiple damages, pay monetary penalties, fines, and/or modify or terminate the Company’s operations in particular states or countries. Defense or filing of any lawsuit or administrative proceeding, even if successful, could require substantial time, resources, and attention of the Company’s management and could require the expenditure of significant amounts for legal fees and other related costs. Settlement of lawsuits or administrative proceedings may also result in significant payments and modifications to the Company’s operations. Due to the inherent uncertainties of litigation, administrative proceedings and other claims, the Company cannot accurately predict the ultimate outcome of any such matters.
Adverse court and administrative interpretations or enforcement of the various laws and regulations under which the Company operates could require the Company to alter the products that it offers or cease doing business in the jurisdiction where the court, state or federal agency interpretation and enforcement is applicable. The Company is also subject to regulatory proceedings, and the Company could suffer losses from interpretations and enforcement of state or federal laws in those regulatory proceedings, even if it is not a party to those proceedings. Any of these events could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition and could impair the Company’s ability to continue current operations.
The sale and pawning of firearms, ammunition and certain related accessories is subject to current and potential regulation, which could have a material adverse effect on the Company’s reputation, business, prospects, results of operations and financial condition.
Because the Company accepts firearms as pawn collateral and buys and sells firearms, ammunition and certain related accessories in many U.S. locations, the Company is required to comply with federal, state and local laws and regulations pertaining to the pawning, purchase, storage, transfer and sale of such products, and the Company is subject to reputational harm if a customer purchases or pawns a firearm that is later used in a deadly shooting.
Over the past several years, the purchase, sale and ownership of firearms, ammunition and certain related accessories has been the subject of increased media scrutiny and federal, state and local regulation. If enacted, new laws and regulations could limit the types of licenses, firearms, ammunition and certain related accessories that the Company is permitted to purchase and sell and could impose new restrictions and requirements on the manner in which the Company pawns, offers, purchases and sells these products, which could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition.
Furthermore, the Company may incur losses and reputational damage due to lawsuits relating to its performance of background checks on firearms purchases as mandated by state and federal law, the selling of firearms or the improper use of firearms sold by the Company, including lawsuits by individuals, municipalities, state or federal agencies or other organizations attempting to recover damages or costs from firearms retailers relating to the sale or misuse of firearms. Furthermore, if any firearms sold by the Company are used in the commitment of any crimes or mass shootings, it could result in significant adverse media attention against the Company and have a material adverse impact on the reputation of the Company. Commencement of such lawsuits or any adverse media attention against the Company could have a material adverse effect on its business, reputation, prospects, results of operations and financial condition.
The Company is subject to the FCPA, anti-money laundering laws and other anti-corruption laws, and the Company’s failure to comply with these laws could result in penalties that could have a material adverse effect on its business, results of operations and financial condition.
The Company is subject to the FCPA, which generally prohibits companies and their agents or intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. The Company is also subject to anti-money laundering laws in both the United States and Latin America and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the Patriot Act. Furthermore, AFF is required under its agreements with its originating bank partner to maintain an enterprise-wide program designed to enable it to comply with all applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the Patriot Act. Although the Company has policies and procedures designed to ensure that it, its employees, agents, and intermediaries comply with the FCPA, anti-money laundering laws and other similar laws and regulations, there can be no assurance that such policies or procedures will work effectively all of the time or protect the Company against liability for actions taken by its employees, agents, and intermediaries with respect to its business or any businesses that it may acquire. In the event the Company believes, or has reason to believe, its employees, agents, or intermediaries have or may have violated applicable anti-corruption laws in the jurisdiction in which it operates, including the FCPA, the Company may be required to investigate or have a third-party investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. The Company’s continued operation and expansion outside the U.S., especially in Latin America, could increase the risk, perceived or otherwise, of such violations in the future.
If the Company is found to have violated the FCPA, anti-money laundering laws or other similar laws, the Company may be subject to criminal and civil penalties and other remedial measures, which could have an adverse effect on its business, results of operations, financial condition, and relationship with regulators and the Bank. Investigation of any potential or perceived violations of the FCPA, anti-money laundering laws or other similar laws by U.S. or foreign authorities could harm the Company’s reputation and could have a material adverse effect on its business, results of operations and financial condition.
Failure to maintain certain criteria required by state and local regulatory bodies could result in fines or the loss of the Company’s licenses to conduct business.
Most states and many local jurisdictions both in the U.S. and in Latin America in which the Company operates require registration and licenses of stores and employees to conduct the Company’s business. These states or their respective regulatory bodies have established criteria the Company must meet in order to obtain, maintain, and renew those licenses. In addition, the AFF business is also subject to certain states’ laws which regulate and require licensing, registration, notice filing or other approval by parties that engage in certain activity regarding consumer finance transactions, including facilitating and assisting
such transactions in certain circumstances. Furthermore, certain states and localities have also adopted laws requiring licensing, registration, notice filing, or other approval for consumer debt collection or servicing, and/or purchasing or selling consumer loans. From time to time, the Company is subject to audits in various states to ensure it is meeting the applicable requirements to maintain the applicable licenses and registrations.
Failure to meet the Company’s legal compliance requirements could result in substantial fines and penalties, store closures, the temporary or permanent suspension of operations, the revocation of existing licenses and/or the denial of new and renewal licensing requests. The Company cannot guarantee future license applications or renewals will be granted. If the Company were to lose any of its licenses to conduct its business, it could result in the temporary or permanent closure of stores and/or cessation of AFF’s consumer lending activities, any of which could adversely affect the Company’s business, results of operations and cash flows.
Foreign Operations Risks
The Company’s financial position and results of operations may fluctuate significantly due to fluctuations in currency exchange rates in Latin American markets.
The Company derives significant revenue, earnings and cash flow from operations in Latin America, where business operations are transacted in Mexican pesos, Guatemalan quetzales and Colombian pesos. The Company’s exposure to currency exchange rate fluctuations results primarily from the translation exposure associated with the preparation of the Company’s consolidated financial statements, as well as from transaction exposure associated with transactions and assets and liabilities denominated in currencies other than the respective subsidiaries’ functional currencies. While the Company’s consolidated financial statements are reported in U.S. dollars, the financial statements of the Company’s Latin American subsidiaries are prepared using their respective functional currency and translated into U.S. dollars by applying appropriate exchange rates. As a result, fluctuations in the exchange rate of the U.S. dollar relative to the Latin American currencies could cause significant fluctuations in the value of the Company’s assets, liabilities, stockholders’ equity and operating results. In addition, while expenses with respect to foreign operations are generally denominated in the same currency as corresponding sales, the Company has transaction exposure to the extent expenditures are incurred in currencies other than the respective subsidiaries’ functional currencies. The costs of doing business in foreign jurisdictions also may increase as a result of adverse currency rate fluctuations. In addition, changes in currency rates could negatively affect customer demand, especially in Latin America and in U.S. stores located near the Mexican border. For a detailed discussion of the impact of fluctuations in currency exchange rates, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Risks and uncertainties related to the Company’s foreign operations could negatively impact the Company’s operating results.
As of December 31, 2021, the Company had 1,744 store locations in Latin America, including 1,656 in Mexico, 60 in Guatemala, 15 in Colombia and 13 in El Salvador, and the Company plans to open additional stores in Latin America in the future. In addition, AFF owns a customer service call center operating in Jamaica and utilizes third-party call center services located in the Dominican Republic and Mexico. Doing business in each of these countries involves increased risks related to geo-political events, political instability, corruption, economic volatility, property crime, drug cartel and gang-related violence, social and ethnic unrest including riots and looting, enforcement of property rights, governmental regulations, tax policies, banking policies or restrictions, foreign investment policies, public safety, health and security, anti-money laundering regulations, interest rate regulation and import/export regulations among others. As in many developing markets, there are also uncertainties as to how both local law and U.S. federal law is applied, including areas involving commercial transactions and foreign investment. As a result, actions or events could occur in these foreign countries that are beyond the Company’s control, which could restrict or eliminate the Company’s ability to operate some or all of its locations in these countries or significantly reduce customer traffic, product demand and the expected profitability of such operations.
Changes impacting international trade and corporate tax and other related regulatory provisions may have an adverse effect on the Company’s financial condition and results of operations.
Many of the foreign countries in which the Company operates impose costs on non-domestic companies through the use of local regulations, tariffs, labor controls and other federal or state requirements or legislation. As the Company derives significant revenue, earnings and cash flow from operations in Latin America, primarily in Mexico, there are some inherent risks regarding the overall stability of the trading relationship between Mexico and the U.S. and the burdens imposed thereon by any changes to (or the adoption of new) regulations, tariffs or other federal or state legislation. Specifically, the Company has significant exposure to fluctuations and devaluations of the Mexican peso and the health of the Mexican economy, which, in each case, may be negatively impacted by changes in U.S. trade treaties, including the United States-Mexico-Canada
Agreement and corporate tax policy. In some cases, there have been negative reactions to the enacted and/or proposed policies as expressed in the media and by politicians in Mexico, which could potentially negatively impact U.S. companies operating in Mexico. In particular, there is continued uncertainty around Mexico’s current federal administration and how the policies as applied by its administration, including conducting aggressive corporate tax and other regulatory audits, adverse government discretion, and support of increased employee minimum wages, profit sharing and benefit programs, may impact U.S. companies doing business in Mexico generally and pawn and consumer finance companies in particular. While the Company engages in limited cross-border transactions other than those involving scrap jewelry sales, any such changes in regulations, trade treaties, corporate tax policy, import taxes or adverse court or administrative interpretations of the foregoing could adversely and significantly affect the Mexican economy and ultimately the Mexican peso, which could adversely and significantly affect the Company’s financial position and results of the Company’s Latin America pawn operations.
Risks Related to the AFF Acquisition
The Company may fail to realize all of the anticipated benefits of the AFF Acquisition or those benefits may take longer to realize than expected. The Company may also encounter significant difficulties in integrating the AFF business.
The Company’s ability to realize the anticipated benefits of the AFF Acquisition depends, to a large extent, on its ability to integrate the AFF business, which is a complex, costly and time-consuming process, and for the AFF business to achieve its projected growth rates. AFF also represents a new line of business for the Company, which increases the complexity and challenges of the integration process as compared to the Company’s pawn acquisitions. As a result of the AFF Acquisition, the Company must devote significant management attention and resources to integrate the business practices and operations of the Company and AFF. The integration process may disrupt the Company’s business and, if implemented ineffectively, could restrict the realization of the full expected benefits. The failure to meet the challenges involved in the integration process and to realize the anticipated benefits of the AFF Acquisition could cause an interruption of, or a loss of momentum in, the Company’s operations and could adversely affect its business, financial condition and results of operations.
In addition, the integration of the AFF business may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customers and other business relationships, and diversion of management’s attention. Additional integration challenges include:
•difficulties in integrating and managing a new line of business with different products, including those with credit risk, retail merchant partners and additional regulatory risks;
•diversion of management’s attention to integration matters;
•difficulties in achieving anticipated synergies, business opportunities and growth prospects from the AFF Acquisition;
•difficulties in the integration of operations and systems;
•difficulties in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures;
•difficulties in managing the expanded operations of a significantly larger and more complex company;
•challenges in keeping existing merchant partners and obtaining new merchant partners;
•challenges in retaining and assimilating key personnel;
•the impact of potential liabilities the Company may be inheriting from AFF;
•difficulty addressing possible differences in corporate culture and management philosophies; and
•a potential deterioration of the Company’s credit ratings.
Many of these factors are outside of the Company’s control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could adversely affect the Company’s business, financial condition and results of operations and result in the Company becoming subject to litigation. In addition, even if the AFF business is integrated successfully, the full anticipated benefits of the AFF Acquisition may not be realized, including the synergies, cost savings or sales or growth opportunities that are anticipated. These benefits may not be achieved within the anticipated time frame, or at all. Further, additional unanticipated costs may be incurred in the integration process. All of these factors could cause reductions in the Company’s earnings per share, decrease or delay the expected accretive effect of the AFF Acquisition and negatively impact the price of shares of its common stock. As a result, it cannot be assured that the AFF Acquisition will result in the realization of the full anticipated benefits.
The AFF Acquisition may not be accretive and may cause dilution of the Company’s adjusted earnings per share, which may negatively affect the market price of the Company’s common stock.
The Company anticipates that the AFF Acquisition will be accretive to stockholders on an adjusted earnings per share basis. This expectation is based on currently available net revenue and operating expense estimates, which may materially change. The Company could also encounter additional transaction and integration-related costs or other factors such as the failure to realize all of the benefits anticipated in the AFF Acquisition. All of these factors could cause dilution of the Company’s adjusted earnings per share or decrease or delay the expected accretive effect of the AFF Acquisition and cause a decrease in the market value of the Company’s common stock.
Failure to retain key employees could diminish the anticipated benefits of the AFF Acquisition.
The success of the AFF Acquisition will depend in large part upon the ability of the Company to retain personnel critical to the AFF business. Employees may experience uncertainty about their future roles or apprehension about joining a larger and public company. The corporate cultures may also differ, and some Company or AFF employees may choose not to remain with the Company. If the Company is unable to retain Company or AFF personnel that are critical to the Company’s operations, the Company could experience disrupted operations, loss of customers, key information, expertise and know how, or unanticipated hiring and training costs, especially given that the Company’s existing management team has limited experience operating a line of business similar to the AFF business. In addition, the loss of key personnel could diminish the anticipated benefits of the AFF Acquisition that are actually achieved by the Company.
The Company may be required to make earnout payments to the AFF sellers if certain conditions are met, including if the AFF business achieves earnout thresholds and if the Company’s stock price does not reach certain levels and, as a result, the Company’s financial position may be adversely impacted if it is required to make such payments.
In connection with the AFF Acquisition, the Company may be required to make earnout payments in the form of cash and/or shares of the Company’s common stock to the sellers of the AFF business as described below:
•The sellers of the AFF business are entitled to receive up to an additional $300.0 million of consideration pursuant to an earnout if the AFF business achieves certain adjusted EBITDA targets following the closing of the AFF Acquisition (the “Earnout Consideration”). In particular, the earnout provides the seller parties the right to receive up to $250.0 million of additional consideration if the AFF business achieves certain adjusted EBITDA targets for the period consisting of the fourth quarter of 2021 through the end of 2022 and up to $50.0 million if the AFF business achieves certain adjusted EBITDA targets for the first half of 2023. The Earnout Consideration is payable in cash or, at the Company’s discretion and subject to obtaining any required stockholder approvals under the NASDAQ rules for such issuance, in shares of the Company’s common stock.
•The sellers of the AFF business are entitled to received up to $75.0 million of additional consideration in the event that the highest average stock price of the shares of the Company’s common stock being issued to the seller parties pursuant to that certain Business Combination Agreement, by and among the Company, AFF and the other parties thereto, dated October 27, 2021 (the “Acquisition Agreement”), for any 10-day period from the date of that certain Amendment to the Acquisition Agreement, dated as of December 6, 2021 (the “Amendment”), through February 28, 2023 (the “Highest Average Stock Price”) is less than $86.25 (the “Reference Price”). In the event that the Highest Average Stock Price is less than the Reference Price, then the AFF sellers shall be entitled to an amount equal to such difference multiplied by the number of shares issued to the AFF sellers as stock consideration (approximately 8.05 million shares), with such amount capped at $75.0 million.
•In addition, the Amendment provided for a fixed $25.0 million working capital payment payable at the end of 2022.
If any of these earnout thresholds or stock price conditions are met, the Company may not have sufficient cash reserves to pay the cash amount due to the AFF sellers. If the Company is able to pay these cash amounts, the payment may impede its ability to fund other aspects of its business, which would adversely affect its operating results and the price of its common stock and senior unsecured notes.
Additional Risks Related to the AFF Business
If AFF is unable to attract additional merchants and retain and grow its relationships with its existing merchant partners, its business, results of operations, financial condition and future prospects would be materially and adversely affected.
AFF’s continued success is dependent on its ability to maintain and expand its merchant partner base and the volume of transactions from these merchants in order to grow revenue on its platform. Its ability to retain and grow its relationships with its merchant partners depends on the willingness of merchants to partner with AFF. The attractiveness of AFF’s platform to merchants depends upon, among other things, the size of its consumer base, its brand and reputation, the amount of merchant premium, discounts or profit share paid or received by AFF, its ability to sustain its value proposition to merchants for customer acquisition by demonstrating higher conversion at checkout, the attractiveness to merchants of AFF’s technology and data-driven platform, services and products offered by competitors, and its ability to perform under, and maintain, its merchant agreements. It’s also important that AFF partner with merchants with growing sales across a diverse mix of retail channels to mitigate risk associated with changing consumer spending behavior, economic conditions and other factors that may affect a particular type of merchant or industry. Additionally, AFF’s agreements with its merchant partners are generally terminable for convenience.
If AFF is not able to retain its existing merchant partners, attract additional merchants and expand revenue and volume of transactions from existing merchants, it will not be able to continue to grow its business and its business, results of operations, financial condition and future prospects would be materially and adversely affected.
AFF derives a significant portion of its revenue from several top merchant partners. The loss of business from one or more of these top merchant partners could have a material adverse effect on the AFF business.
Historically, AFF has relied on a limited number of merchant partners for a significant portion of its total revenues and transaction volume. On a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021, AFF’s top five merchant partners accounted for an aggregate of 16% of combined pro forma 2021 revenues and future revenues and transaction volume of AFF may be similarly concentrated. The loss of any of these top merchant partners or groups of merchant partners for any reason, or a change of relationship with any of AFF’s key merchant partners could adversely affect the results of operations of the AFF business.
Additionally, mergers or consolidations among AFF’s top merchant partners could reduce the number of merchant partners and could adversely affect AFF’s revenues. In particular, if AFF’s merchant partners are acquired by entities that are not also AFF’s merchant partners, that do not use its solutions or that have more favorable contract terms with a competitor and choose to discontinue, reduce or change the terms of their use of AFF’s solutions, the AFF business and its operating results could be materially and adversely affected.
AFF’s transaction volume is dependent on the support of its platform by its merchant partners.
AFF depends on its merchants to drive transaction volume by supporting its platform over alternative payment options for credit-constrained customers and prominently presenting AFF’s platform as an attractive payment option for these customers. The degree to which these merchants successfully integrate the AFF platform into their website or in their store, such as by prominently featuring its platform on their websites or in their stores, has a material impact on AFF’s transaction volume. The failure by AFF’s merchants to effectively present, integrate, and support its platform would have a material and adverse effect on AFF’s originations and, as a result, on its business, results of operations, financial condition and future prospects.
Furthermore, AFF relies on these merchants to comply with all applicable laws and regulations associated with the LTO, RISA and bank loan products offered by AFF. As part of this process, merchants are generally contractually required to comply with AFF’s policies, procedures, marketing materials, and training materials. In the event that a merchant or merchant employee fails to adequately and correctly describe the terms and conditions of the lease, RISA or bank loan product, the merchant and/or AFF may be subject to consumer complaints and/or lawsuits.
AFF’s bank loan product is offered pursuant to its agreement with the Bank and such agreement is non-exclusive, short-term in duration and subject to termination by the Bank partner upon the occurrence of certain events. If that agreement is terminated and AFF is unable to either replace the commitments of the Bank or substitute its other products for the bank loan product, its business, results of operations, financial condition, and future prospects may be materially affected.
AFF serves as a marketer, service provider and sub-servicer of loans originated by a Utah chartered state bank. Under this arrangement, AFF purchases a portion of the cash flows originated by the Bank and sub-services the loans thereafter. AFF does not originate or ultimately control the pricing or functionality of the loans. The Bank makes all key decisions regarding the marketing, underwriting, product features and pricing. AFF generates revenues through the loans and through marketing and sub-servicing fees paid by the Bank. If the Bank were to change its pricing, underwriting or marketing of the loans in a way that decreases revenues or increases losses, then the profitability of each loan could be reduced. Loans originated through the Bank’s program represent a material amount of AFF’s total origination volume. AFF’s bank loan product relies on the Bank originating the loans that are facilitated through AFF’s platform and complying with various federal, state and other laws. The loan program agreement has an initial term that expires during the third quarter of 2023, which automatically renews once for an additional three year term unless either party provides notice of non-renewal prior to the end of any such term. In addition, upon the occurrence of certain early termination events, either AFF or the Bank may terminate the loan program agreement immediately upon written notice to the other party. The Bank could decide not to work with AFF for any reason, could make working with AFF cost-prohibitive or could decide to enter into an exclusive or more favorable relationship with one or more of AFF’s competitors. If the Bank were to suspend, limit or cease its operations, or if AFF’s relationship with the Bank were to otherwise terminate for any reason (including, but not limited to, its failure to comply with regulatory actions), AFF would need to implement a substantially similar arrangement with another bank, obtain additional state licenses or curtail its offering of a direct to consumer loan product through its platform. If AFF needs to enter into alternative arrangements with a different bank to replace its existing arrangements, it may not be able to negotiate a comparable alternative arrangement in a timely manner or at all. If AFF is unable to enter into an alternative arrangement with different banks to fully replace or supplement its relationship with the Bank, AFF would potentially need to cease offering its bank loan product or other direct to consumer installment loans. In the event that AFF’s relationship with the Bank were terminated and it is unable to substitute another one of its products at the merchants that utilize such bank loan products, its business, results of operations, financial condition and future prospects may be materially affected.
AFF’s transaction volume is dependent on sales at its merchant partners and any decline in such sales or interruptions, inventory shortages and other factors affecting the supply chains of AFF’s merchant partners could have a material and adverse effect on AFF’s results of operations, financial condition and future prospects.
AFF depends on sales at its merchant partners to drive its transaction volume. If AFF’s merchant partners experience a general decline in sales it could negatively impact AFF’s transaction volume. Any extended supply chain interruptions, inventory shortages or other operational disruptions affecting any of its merchant partners could have a material adverse impact on AFF’s transaction volume and results of operations. AFF depends on its merchant partners’ abilities to deliver products to customers at the right time and in the right quantities. Accordingly, it is important for these merchant partners to maintain optimal levels of inventory and respond rapidly to shifting demands. The disruption to, or inefficiency in, supply chain networks may have an adverse impact on AFF’s operations in the near term, but if such interruptions were to continue, could potentially have a more material adverse impact on its results of operations, financial condition and future prospects.
AFF’s business relies extensively on its proprietary decisioning platform and if such platform is not effective it could have a material impact on AFF’s business, financial condition and results of operations.
AFF’s business is largely predicated on the effectiveness of its proprietary decisioning platform and model and AFF relies extensively on this platform for LTO, RISA and bank loan decisioning. AFF’s platform relies heavily on AFF’s modeling and analytics as well as information provided by applicants and third-party data providers and credit reporting agencies. To the extent that applicants provide inaccurate or unverifiable information or data from third-party providers is incomplete or inaccurate, then AFF’s platform will not be able to perform effectively, which could result in wrong or sub-optimal decisions with respect to applicants. AFF’s data providers could also stop providing data, provide untimely, incorrect or incomplete data, or increase the costs for their data for a variety of reasons, including security or regulatory concerns or for competitive reasons. If AFF were to lose access to this external data or if such access is restricted or becomes more expensive, it could have a material effect on AFF’s business. Furthermore, the models underlying AFF’s decisioning platform may prove in practice to be less predictive than AFF expects for a variety of reasons, including as a result of errors in constructing, interpreting or using the models or the use of inaccurate assumptions (including failures to update assumptions appropriately or in a timely manner). The potential errors or inaccuracies in AFF’s decisioning platform and models may be material and effect a significant number of transactions, which could have a material and adverse effect on AFF’s business.
If AFF is unable to collect on its leases, RISAs and bank loans, the performance of its lease and loan portfolio would be adversely affected.
AFF’s ability to collect scheduled payments under its leases, RISAs and bank loans is dependent on its customers’ continuing financial stability, and consequently, collections can be adversely affected by a number of factors, including general economic conditions, inflationary impacts and individual factors such as job loss, divorce, death, illness, personal bankruptcy and customer fraud. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and debtor relief laws, may limit the amount that can be recovered on AFF’s leases, RISAs and bank loans. Federal, state or other restrictions could impair the ability of AFF or the third-party collection services utilized by AFF to collect amounts owed and due on the leases and loans facilitated through its platform. Furthermore, AFF relies on its proprietary decisioning platform to decision its LTO, RISA and bank loan products and customizes this technology to individual merchants and merchandise categories. There is no guarantee that this technology or platform will be effective in making decisions that minimize credit losses. Furthermore, the platform relies on an experienced data science team. In the event the platform is not effective or cannot be supported at the required levels, AFF could experience increased credit losses.
If AFF is unable to fully collect on its leases, RISAs and bank loans, the performance of its lease and loan portfolio will be adversely affected, which could result in additional provisions for lease and loan losses and loss of revenue, cash flow and profitability.
Accounting, Tax and Financial Risks
The Company’s existing and future levels of indebtedness and any potential earnout payments payable in connection with the AFF Acquisition could adversely affect its financial health, its ability to obtain financing in the future, its ability to react to changes in its business and its ability to fulfill its obligations under such indebtedness.
As of December 31, 2021, including the Company's senior unsecured notes and the Company’s unsecured credit facilities, the Company had outstanding principal indebtedness of $1,309.0 million and availability of $267.0 million under its unsecured credit facilities, subject to certain financial covenants. The Company's level of indebtedness and amounts owed pursuant to potential earnout payments resulting from the AFF Acquisition could:
•make it more difficult for it to satisfy its obligations with respect to the Company’s senior unsecured notes and its other indebtedness, resulting in possible defaults on and acceleration of such indebtedness;
•require it to dedicate a substantial portion of its cash flow from operations to the payment of principal and interest on its indebtedness, thereby reducing the availability of such cash flows to fund originations in the AFF business, working capital, acquisitions, new store openings, capital expenditures and other general corporate purposes;
•limit its ability to obtain additional financing for working capital, financing originations from the AFF business, acquisitions, new store openings, capital expenditures, debt service requirements and other general corporate purposes;
•limit its ability to refinance indebtedness or cause the associated costs of such refinancing to increase;
•restrict the ability of its subsidiaries to pay dividends or otherwise transfer assets to the Company, which could limit its ability to, among other things, make required payments on its debt;
•increase the Company’s vulnerability to general adverse economic and industry conditions, including interest rate fluctuations (because a portion of its borrowings are at variable rates of interest); and
•place the Company at a competitive disadvantage compared to other companies with proportionately less debt or comparable debt at more favorable interest rates who, as a result, may be better positioned to withstand economic downturns.
Any of the foregoing impacts of the Company’s level of indebtedness could have a material adverse effect on its business, financial condition and results of operations.
Furthermore, the Company has, in the past, accessed the debt capital markets to refinance existing debt obligations and to obtain capital to finance growth. However, the Company’s future access to the debt capital markets could become restricted due to a variety of factors, including a deterioration of the Company’s performance or financial condition, overall industry prospects or changes in debt capital markets or the economy generally. Inability to access the credit markets on acceptable terms, if at all, could have a material adverse effect on the Company’s financial condition and ability to fund future growth.
Additionally, the Company’s debt instruments include certain affirmative and negative covenants that require the Company to comply with certain financial covenants and impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the
nature of the Company’s business. A failure to comply with the covenants contained in the Company’s debt instruments could result in an event of default or an acceleration of debt under its debt instruments. In addition, the Company’s debt instruments contain cross-default provisions that could result in its debt being declared immediately due and payable under a number of debt instruments, even if the Company defaults on only one debt instrument. In such event, it is possible that the Company would not be able to satisfy its obligations under all of such accelerated indebtedness simultaneously.
Determining the AFF business’ allowance for lease and loan losses requires many assumptions and complex analyses. If the estimates prove incorrect, the AFF business may incur net charge-offs in excess of its reserves, or may be required to increase its provision for lease and loan losses, either of which would adversely affect the Company’s results of operations.
The Company’s ability to measure and report its financial position and results of operations is influenced by the need to estimate the impact or outcome of future events on the basis of information available at the time of the issuance of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from the judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. Management has processes in place to monitor these judgments and assumptions, but these processes may not ensure that the judgments and assumptions are correct.
The Company maintains an allowance for lease and loan losses at a level sufficient to cover estimated lifetime losses expected to be incurred in the lease and loan portfolio. This estimate is highly dependent upon the reasonableness of its assumptions and the predictability of the relationships that drive the results of its valuation methodologies. The Company performs a quantitative analysis to compute historical losses to estimate the allowance for lease and loan losses. Lease and loan loss experience, first payment default histories, contractual delinquency of lease and loan receivables and management’s judgement are factors used in assessing the overall adequacy of the allowance and the resulting provision for lease and loan losses. Changes in estimates and assumptions can significantly affect the allowance and provision for lease and loan losses. It is possible that the Company will experience lease and loan losses that are different from its current estimates. If the Company’s estimates and assumptions prove incorrect and its allowance for lease and loan losses are insufficient, it may incur net charge-offs in excess of its reserves, or it could be required to increase its provision for lease and loan losses, either of which would adversely affect its results of operations.
The Company is subject to goodwill impairment risk.
At December 31, 2021, the Company had $1,536.2 million of goodwill on its consolidated balance sheet, all of which represents assets capitalized in connection with the Company’s acquisitions and business combinations. Accounting for goodwill requires significant management estimates and judgment. Management performs periodic reviews of the carrying value of goodwill to determine whether events and circumstances indicate that an impairment in value may have occurred. A variety of factors could cause the carrying value of goodwill to become impaired. A write-down of the carrying value of goodwill could result in a non-cash charge, which could have an adverse effect on the Company’s results of operations.
Declines in commodity market prices of gold, other precious metals and diamonds could negatively affect the Company’s profits.
The Company’s profitability could be adversely impacted by commodity market fluctuations. As of December 31, 2021, approximately 57% of the Company’s pawn loans were collateralized with jewelry, which is primarily gold, and 49% of its inventories consisted of jewelry, which is also primarily gold. The Company sells significant quantities of gold, other precious metals and diamonds acquired through collateral forfeitures or direct purchases from customers. A significant and sustained decline in gold and/or other precious metal and diamond prices could result in decreased merchandise sales and related margins, decreased inventory valuations and sub-standard collateralization of outstanding pawn loans. In addition, a significant decline in market prices could result in a lower balance of pawn loans outstanding for the Company, as customers would receive lower loan amounts for individual pieces of jewelry or other gold items. For a detailed discussion of the impact of a decline in market prices on wholesale scrap jewelry sales, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Unexpected changes in both domestic and foreign tax laws and policies could negatively impact the Company’s operating results.
The Company’s financial results may be negatively impacted by changes in domestic or foreign tax laws, administrative interpretations of such laws and enforcement of policies, including, but not limited to, an increase in statutory tax rates, changes in allowable expense deductions, or the imposition of new withholding requirements on repatriation of foreign earnings.
The application of indirect taxes, such as sales tax, is a complex and evolving issue, particularly with respect to the LTO industry generally and AFF’s virtual and e-commerce LTO businesses more specifically. Failure to comply with such tax provisions or a successful assertion by a jurisdiction requiring AFF to collect taxes in a location or for transactions where AFF presently does not, could result in substantial tax liabilities, including for past sales and leases, as well as penalties and interest. In addition, if the tax authorities in jurisdictions where AFF is already subject to sales tax or other indirect tax obligations were to successfully challenge AFF’s positions, AFF’s tax liability could increase substantially.
General Economic and Market Risks
The COVID-19 pandemic has adversely impacted, and will likely continue to adversely impact, the Company’s business and results of operations.
The COVID-19 pandemic has and may continue to adversely affect consumer traffic and demand for pawn loans and AFF’s retail finance products and has, and may continue to have, a material adverse effect on the Company’s results of operations. The extent to which COVID-19 continues to impact the Company’s operations, results of operations, liquidity and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak (including the possibility of further surges or variants of concern of the virus), the efficacy of the vaccination programs in the jurisdictions in which the Company operates, supply chain disruptions, rising inflation and labor costs, its ability to maintain sufficient qualified personnel due to labor shortages, employee illness, quarantine, willingness to return to work, vaccine and/or testing mandates, face-coverings and other safety requirements, or travel and other restrictions, and the actions taken by governments, businesses and individuals to contain the impact of COVID-19, as well as further actions taken to limit the resulting economic impact. These factors may adversely impact consumer, business, and government spending as well as customer demand for pawn loans and the Company’s retail finance products on an ongoing basis, each of which could adversely impact its business and operations.
While the Company saw positive results in the second half of 2021 despite the challenges raised by the COVID-19 environment, there remains uncertainty regarding how COVID-19 and general economic conditions will impact the Company’s business and operations in future periods. Nevertheless, COVID-19 continues to present a material uncertainty which could adversely affect the Company’s results of operations, financial condition and cash flows in the future.
A sustained deterioration of economic conditions or an economic crisis and government actions taken to limit the impact of such an economic crisis could reduce demand or profitability for the Company’s products and services which would result in reduced earnings.
The Company’s business and financial results may be adversely impacted by sustained unfavorable economic conditions or unfavorable economic conditions associated with a global or regional economic crisis which, in either case, include unemployment, declining personal income and consumer sentiment, inflation, adverse changes in interest or tax rates, effects of government initiatives to manage economic conditions and increased volatility of commodity markets and foreign currency exchange rates. Specifically, a sustained or rapid deterioration in the economy, along with the potential enactment of government stimulus programs to attempt to limit such economic deterioration, could adversely impact the performance of the Company’s pawn loan and AFF’s lease and loan portfolio and consumer or market demand for discretionary consumer goods and services weakening demand for AFF’s products and also demand for pre-owned merchandise or gold sold in the Company’s pawnshops. A sustained deterioration in the economy could also reduce the demand and resale value of pre-owned merchandise and reduce the amount that the Company could effectively lend on an item of collateral. Such reductions could adversely affect pawn loan balances, pawn redemption rates, inventory balances, inventory mixes, sales volumes and gross profit margins.
Furthermore, economic conditions and demand may also fluctuate by geographic region. The current geographic concentration of the Company’s pawn stores and AFF’s merchant partners creates exposure to local economies and politics, and regional downturns. As a result, the Company’s business is currently more susceptible to regional conditions than the operations of more geographically diversified specialty finance companies, and the Company is vulnerable to economic downturns or changing political landscapes in those regions. Any unforeseen events or circumstances that negatively affect these areas could materially adversely affect the Company’s revenues and profitability.
The price of the Company’s common stock has fluctuated substantially over the past several months and may continue to fluctuate substantially in the future.
The Company’s stock price has been, and may continue to be, subject to significant fluctuations, and has decreased significantly in recent months from historical trading levels as a result of a variety of factors, including the announcement of the acquisition of AFF, the CFPB’s action against the Company and other factors, some of which are beyond the Company’s control. The Company may fail to meet the expectations of its stockholders or securities analysts at some point in the future, and its stock price could decline further as a result. This volatility may prevent investors from being able to sell their common stock at or above the price they paid for their common stock.
In addition, the stock markets in general have experienced volatility recently that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of the Company’s common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Due to the impact of the announcement of the CFPB’s action on the Company’s stock price, the Company has become subject to a purported securities class action related to the CFPB’s lawsuit and may become subject to further litigation. An unfavorable result in these matters could have a material impact on the Company’s financial condition and results of operations.
Inclement weather, natural disasters or health epidemics can adversely impact the Company’s operating results.
The occurrence of weather events and natural disasters such as rain, cold weather, snow, wind, storms, hurricanes, earthquakes, volcanic eruptions, or health epidemics in the Company’s markets could adversely affect consumer traffic, retail sales, pawn loan and pawn redemption activities and LTO, RISA and installment loan originations and have a material adverse effect on the Company’s results of operations. In addition, the Company may incur property, casualty or other losses not covered by insurance. Losses not covered by insurance could be substantial and may increase the Company’s expenses, which could harm the Company’s results of operations and financial condition.
Adverse real estate market fluctuations and/or the inability to renew and extend store operating leases could affect the Company’s profits.
The Company leases most of its pawn store locations. Many of the store leases, especially in Latin America, include annual rent escalations tied to the local consumer price index. A significant rise in real estate prices or real property taxes could also result in an increase in store lease costs as the Company opens new locations and renews leases for existing locations, thereby negatively impacting the Company’s results of operations. The Company also owns certain developed and undeveloped real estate, which could be impacted by adverse market fluctuations. In addition, the inability of the Company to renew, extend or replace expiring store leases could have an adverse effect on the Company’s results of operations.
A discussion of certain other market risks is covered in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Item 1B. Unresolved Staff Comments
Item 2. Properties
While the Company generally leases its pawnshop locations, the Company also purchases real estate for its pawnshop locations as opportunities arise at prices that the Company believes are attractive, whether through store acquisitions or through purchases from its landlords at existing stores. As of December 31, 2021, the Company owned the real estate and buildings for 254 of its pawn stores, its Company’s corporate headquarters building in Fort Worth, Texas and an office building in Dallas, Texas.
As of December 31, 2021, the Company leased 2,590 pawn store locations that were open or were in the process of opening. Leased facilities are generally leased for a term of three to five years with one or more options to renew. A majority of the store leases can be terminated early upon an adverse change in law which negatively affects the store’s profitability. The Company’s leases expire on dates ranging between 2022 and 2045. All store leases provide for specified periodic rental payments ranging from approximately $1,000 to $25,000 per month as of December 31, 2021. For more information about the Company’s pawn store locations, see “Item 1. Business—Pawn Store Locations.”
The following table details material corporate locations leased by the Company (dollars in thousands):
|Description||Location||Square Footage||Lease Expiration Date||Monthly Rental Payment|
|Administrative offices||Dallas, Texas||37,000||September 30, 2022||$||45 |
|Administrative offices||Monterrey, Mexico||15,000||December 31, 2024||18 |
|Administrative offices||Mexico City, Mexico||8,000||March 31, 2024||18 |
Most leases require the Company to maintain the property and pay the cost of insurance and property taxes. The Company believes termination of any particular lease would not have a material adverse effect on the Company’s operations. The Company believes the facilities currently owned and leased by it as pawn stores are suitable for such purpose and considers its equipment, furniture and fixtures to be in good condition.
Item 3. Legal Proceedings
The description of the shareholder securities class action lawsuit, CFPB lawsuit and other lawsuits contained in Note 13 - Commitments and Contingencies of Notes to Consolidated Financial Statements contained in Part IV, Item 15 of this report is incorporated to this Part I, Item 3 by reference.
The Company is also a defendant in certain routine litigation matters and regulatory actions encountered in the ordinary course of its business. Certain of these matters are covered to an extent by insurance. In the opinion of management, the resolution of these matters is not expected to have a material adverse effect on the Company’s financial position, results of operations or liquidity.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
General Market Information
The Company’s common stock is quoted on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “FCFS.”
On February 14, 2022, there were approximately 231 stockholders of record of the Company’s common stock.
In February 2022, the Company’s Board of Directors declared a $0.30 per share first quarter cash dividend on common shares outstanding, or an aggregate of $14.5 million based on the December 31, 2021 share count, to be paid on February 28, 2022 to stockholders of record as of February 21, 2022. While the Company currently expects to continue the payment of quarterly cash dividends, the amount, declaration and payment of cash dividends in the future (quarterly or otherwise) will be made by the Board of Directors, from time to time, subject to the Company’s financial condition, results of operations, business requirements, compliance with legal requirements, expected liquidity, debt covenant restrictions and other relevant factors including the impact of COVID-19.
Issuer Purchases of Equity Securities
During 2021, the Company repurchased a total of 688,000 shares of common stock at an aggregate cost of $49.6 million and an average cost per share of $72.10, and during 2020, repurchased 1,427,000 shares of common stock at an aggregate cost of $107.0 million and an average cost per share of $74.96. The Company intends to continue repurchases under its active share repurchase program, including through open market transactions under trading plans in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act of 1934, as amended, subject to a variety of factors, including, but not limited to, the level of cash balances, credit availability, debt covenant restrictions, general business conditions, regulatory requirements, the market price of the Company’s stock, dividend policy, the availability of alternative investment opportunities, including acquisitions, and the impact of COVID-19.
The following table provides the information with respect to purchases made by the Company of shares of its common stock during each month a share repurchase program was in effect during the three months ended December 31, 2021 (dollars in thousands, except per share amounts):
|Total Number Of|
As Part Of Publicly
|Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans|
|October 1 through October 31, 2021 ||— ||$||— ||— ||$||72,217 |
|November 1 through November 30, 2021 ||— ||— ||— ||72,217 |
|December 1 through December 31, 2021 ||— ||— ||— ||72,217 |
|Total||— ||— ||— |
The following table provides purchases made by the Company of shares of its common stock under each share repurchase program in effect during 2021 (dollars in thousands):
|Plan Authorization Date||Plan Completion Date||Dollar Amount Authorized||Shares Purchased in 2021||Dollar Amount Purchased in 2021||Remaining Dollar Amount Authorized For Future Purchases|
|January 28, 2020||May 4, 2021||$||100,000 ||318,000 ||$||21,827 ||$||— |
|January 27, 2021||Currently active||100,000 ||370,000 ||27,783 ||72,217 |
|Total||688,000 ||$||49,610 ||$||72,217 |
The graph set forth below compares the cumulative total stockholder return on the common stock of the Company for the period from December 31, 2016 through December 31, 2021, with the cumulative total return on the Standard & Poor’s (“S&P”) MidCap 400 Index and the Russell 2000 Index, representing broad-based equity market indexes, and the S&P MidCap 400 Financials Index and the S&P MidCap 400 Consumer Discretionary Index, representing industry-based indexes, over the same period (assuming the investment of $100 on December 31, 2016 and assuming the reinvestment of all dividends on the date paid). The Company has previously included a peer group index, however believes the comparison to the above mentioned industry-based indexes is a more applicable comparison. As a result, the performance graph below does not include a peer group index. Note that historic performance is not necessarily indicative of future performance.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
On December 17, 2021, the Company completed the acquisition of AFF, which is a leading technology-driven retail POS payments platform primarily focused on providing LTO products. See Note 3 of Notes to Consolidated Financial Statements for additional information about the AFF Acquisition.
With the AFF Acquisition, the Company now operates two business lines: pawn operations and retail POS payment solutions. Its business lines are organized into three reportable segments. The U.S. pawn segment consists of all pawn operations in the U.S. and the Latin America pawn segment consists of all pawn operations in Mexico, Guatemala, Colombia and El Salvador. The retail POS payment solutions segment consists of the operations of AFF in the U.S. and Puerto Rico. Financial information regarding the Company’s revenue and long-lived assets by geographic areas is provided in Note 17 of Notes to Consolidated Financial Statements.
The Company’s primary business line continues to be the operation of retail pawn stores, also known as “pawnshops,” which focus on serving cash and credit-constrained consumers. Pawn stores help customers meet small short-term cash needs by providing non-recourse pawn loans and buying merchandise directly from customers. Personal property, such as jewelry, electronics, tools, appliances, sporting goods and musical instruments, is pledged and held as collateral for the pawn loans over the typical 30-day term of the loan. Pawn stores also generate retail sales primarily from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers.
The Company’s retail POS payment solutions business line consists solely of the operations of AFF, which focuses on providing LTO and retail financing payment options across a large network of traditional and e-commerce retail merchant partners in all 50 states in the U.S., the District of Columbia and Puerto Rico. AFF’s retail partnerships provide consumer goods and services to their shoppers and use AFF’s LTO and retail finance solutions to facilitate payments on such transactions. As one of the largest omni-channel providers of “no credit required” payment options, AFF’s technology set provides its merchant partners with seamless leasing and financing experiences in-store, online, in-cart and on mobile devices.
Business operations in Mexico, Guatemala and Colombia are transacted in Mexican pesos, Guatemalan quetzales and Colombian pesos. The Company also has operations in El Salvador where the reporting and functional currency is the U.S. dollar. The following table provides exchange rates for the Mexican peso, Guatemalan quetzal and Colombian peso for the current and prior-year periods:
|Mexican peso / U.S. dollar exchange rate:|
|Twelve months ended||20.3||6 ||%||21.5||(11)||%||19.3|
Guatemalan quetzal / U.S. dollar exchange rate:
|Twelve months ended||7.7||— ||%||7.7||— ||%||7.7|
|Colombian peso / U.S. dollar exchange rate:|
|Twelve months ended||3,742||(1)||%||3,693||(13)||%||3,280|
The Company’s management reviews and analyzes operating results in Latin America on a constant currency basis because the Company believes this better represents the Company’s underlying business trends. Constant currency results are non-GAAP financial measures, which exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates. The wholesale scrap jewelry sales in Latin America are priced and settled in U.S. dollars, and are not affected by foreign currency translation, as are a small percentage of the operating and administrative expenses in Latin America, which are billed and paid in U.S. dollars. Amounts presented on a constant currency basis are denoted as such. See “Non-GAAP Financial Information” for additional discussion of constant currency operating results.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, related revenue and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. Such estimates, assumptions and judgments are subject to a number of risks and uncertainties, which may cause actual results to differ materially from the Company’s estimates.
The critical accounting policies and estimates that could have a significant impact on the Company’s results of operations are described in Note 2 of Notes to Consolidated Financial Statements. The Company believes the following critical accounting policies describe the more significant judgments and estimates used in the preparation of its consolidated financial statements.
Pawn loans and revenue recognition - Pawn loans are secured by the customer’s pledge of tangible personal property, which the Company holds during the term of the loan. If a pawn loan defaults, the Company relies on the sale of the pawned property to recover the principal amount of an unpaid pawn loan, plus a yield on the investment, as the Company’s pawn loans are non-recourse against the customer. The Company accrues pawn loan fee revenue on a constant-yield basis over the life of the pawn loan for all pawns for which the Company deems collection to be probable based on historical pawn redemption statistics, which is included in accounts receivable, net in the accompanying consolidated balance sheets. If the pawn loan is not repaid prior to the expiration of the pawn loan term, including any extension or grace period, if applicable, the principal amount loaned becomes the inventory carrying value of the forfeited collateral, which is typically recovered through sales of the forfeited items at prices well above the carrying value. The Company has determined no allowance related to credit losses on pawn loans is required as the fair value of the pledged collateral is significantly in excess of the pawn loan amount.
Pawn inventories and revenue recognition - Pawn inventories represent merchandise acquired from forfeited pawn loans and merchandise purchased directly from the general public. The Company also retails limited quantities of new or refurbished merchandise obtained directly from wholesalers and manufacturers. Pawn inventories from forfeited pawn loans are recorded at the amount of the pawn principal on the unredeemed goods, exclusive of accrued interest. Pawn inventories purchased directly from customers, wholesalers and manufacturers are recorded at cost. The cost of pawn inventories is determined on the specific identification method. Pawn inventories are stated at the lower of cost or net realizable value and, accordingly, valuation allowances are established if pawn inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. Management has evaluated pawn inventories and determined that a valuation allowance is not necessary.
The Company’s merchandise sales are primarily retail sales to the general public in its pawn stores. The Company records sales revenue at the time of the sale. The Company presents merchandise sales net of any sales or value-added taxes collected. Some jewelry inventory is melted and processed at third-party facilities and the precious metal and diamond content is sold at either prevailing market commodity prices or a previously agreed upon price with a commodity buyer. The Company records revenue from these wholesale scrap jewelry transactions when a price has been agreed upon and the Company ships the commodity to the buyer.
Leased merchandise and revenue recognition - The Company provides merchandise, consisting primarily of furniture and mattresses, appliances, jewelry, electronics and automotive products, to customers of its merchant partners for lease under certain terms agreed to by the customer. The customer has the right to acquire the title either through an early buyout option or through payment of all required lease payments. The Company maintains ownership of the leased merchandise until all payment obligations are satisfied under the lease agreement. The customer has the right to cancel the lease at any time by returning the merchandise and making all scheduled payments due through the minimum lease holding period, which is typically 60 days. Leased merchandise contracts can typically be renewed for between six to 24 months. Leased merchandise is stated at depreciated cost. The Company depreciates leased merchandise over the life of the lease, and assumes no salvage value. Depreciation is accelerated upon an early buyout. All of the Company’s leased merchandise represents on-lease merchandise and all leases are operating leases.
Lease income is recognized over the lease term and is recorded net of any sales taxes collected. Charges for late fees and insufficient fund fees are recognized as income when collected. Initial direct costs related to the Companyʼs lease agreements are added to the basis of the leased property and recognized over the lease term in proportion to the recognition of lease income. The Company typically charges the customer a non-refundable processing fee at lease inception and may also receive a discount from or pay a premium to certain merchant partners for leases originated at their locations, which are deferred and amortized using the straight-line method as adjustments to lease income over the contractual life of the related leased merchandise. Unamortized fees, discounts and premiums are recognized in full upon early buyout or charge-off.
The Company accrues for lease income earned but not yet collected as accrued rent receivable, which is included in accounts receivable, net in the accompanying consolidated balance sheets. Alternatively, lease payments received in excess of the amount earned are recognized as deferred revenue, which is included in customer deposits and prepayments in the accompanying consolidated balance sheets. Customer payments are first applied to applicable sales tax and scheduled lease payments, then applied to any uncollected fees, such as late fees and insufficient fund fees. The Company collects sales taxes on behalf of the customer and remits all applicable sales taxes collected to the respective jurisdiction.
Provision for lease losses - The Company records a provision for lease losses on an allowance method, which estimates the leased merchandise losses incurred but not yet identified by management as of the end of the accounting period. The allowance for lease losses is based primarily upon historical loss experience with consideration given to recent and forecasted business trends including, but not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices.
The Company charges off leased merchandise when a lease is 90 days or more contractually past due. If an account is deemed to be uncollectible prior to this date, the Company will charge off the leased merchandise at the point in time it is deemed uncollectible.
Finance receivables and revenue recognition - The Company purchases and services retail finance receivables, the term of which typically range from six to 24 months, directly from its merchant partners or from its bank partner. The Company has a partnership with a Utah state-chartered bank that requires the Company to purchase the rights to the cash flows associated with finance receivables marketed to retail consumers on the bank’s behalf. The bank establishes the underwriting criteria for the finance receivables originated by the bank.
Interest income is recognized using the interest method over the life of the finance receivable for all loans for which the Company deems collection to be probable based on historical loan redemption statistics and stops accruing interest upon charge-off. Charges for late fees and insufficient fund fees are recognized as income when collected. The Company receives an origination fee on newly purchased bank loans and may receive a discount from or pay a premium to certain merchant partners for finance receivables purchased from them, which are deferred and amortized using the interest method as adjustments to yield over the contractual life of the related finance receivable. Unamortized origination fees, discounts and premiums are recognized in full upon early payoff or charge-off.
The Company offers customers an early payoff discount on most of its finance receivables whereby the customer has between 90 and 105 days to pay the full principal balance without incurring any interest charge. If the borrower does not pay the full principal balance prior to the expiration of the early payoff discount period, interest charges are applied retroactively to the inception date of the loan. The Company accrues interest income during the early payoff discount period but records a reserve for loans expected to pay the full principal balance prior to the expiration of the early payoff discount period based on historical payment patterns.
Provision for loan losses - Expected lifetime losses on finance receivables are recognized upon loan purchase, which requires the Company to make its best estimate of probable lifetime losses at the time of purchase. The Company segments its finance receivable portfolio into pools of receivables with similar risk characteristics which include loan product and monthly origination vintage and evaluates each pool for impairment.
The Company calculates the allowance for loan losses based on historical loss information and incorporates observable and forecasted economic conditions over a reasonable and supportable forecast period covering the full contractual life of finance receivables. Incorporating observable and forecasted economic conditions could have a material impact on the measurement of the allowance to the extent that forecasted economic conditions change significantly. The Company may also consider other qualitative factors to address recent and forecasted business trends in estimating the allowance, as necessary, including, but not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices. The allowance for loan losses is maintained at a level considered appropriate to cover expected lifetime losses on the finance receivable portfolio, and the appropriateness of the allowance is evaluated at each period end.
The Company charges off finance receivables when a receivable is 90 days or more contractually past due. If an account is deemed to be uncollectible prior to this date, the Company will charge off the finance receivable at the point in time it is deemed uncollectible.
Business combinations - Business combination accounting requires the Company to determine the fair value of all assets acquired, including identifiable intangible assets, liabilities assumed and contingent consideration issued in a business combination. The total consideration of the acquisition is allocated to the assets and liabilities in amounts equal to the estimated fair value of each asset and liability as of the acquisition date, and any remaining acquisition consideration is classified as goodwill. This allocation process requires extensive use of estimates and assumptions. When appropriate, the Company utilizes independent valuation experts to advise and assist in determining the fair value of the assets acquired and liabilities assumed in connection with a business acquisition, in determining appropriate amortization methods and periods for identified intangible assets and in determining the fair value of contingent consideration, which is reviewed at each subsequent reporting period with changes in the fair value of the contingent consideration recognized in the consolidated statement of income. See Note 3 and Note 6 of Notes to Consolidated Financial Statements.
Goodwill and other indefinite-lived intangible assets - Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination. The Company performs its goodwill impairment assessment annually as of December 31, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s reporting units, which are tested for impairment, are U.S. pawn, Latin America pawn and retail POS payment solutions. The Company assesses goodwill for impairment at a reporting unit level by first assessing a range of qualitative factors, including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company’s products and services, regulatory and political developments, entity specific factors, such as strategy and changes in key personnel, and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company proceeds to the impairment testing methodology. See Note 14 of Notes to Consolidated Financial Statements.
The Company’s other material indefinite-lived intangible assets consist of certain trade names and pawn licenses. The Company performs its indefinite-lived intangible asset impairment assessment annually as of December 31, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of an indefinite-lived intangible asset below its carrying amount. See Note 14 of Notes to Consolidated Financial Statements.
Results of Operations
2021 Consolidated Operating Results Highlights
The following table sets forth revenue, net income, diluted earnings per share, adjusted net income, adjusted diluted earnings per share, EBITDA and adjusted EBITDA for the year ended December 31, 2021 as compared to the year ended December 31, 2020 (in thousands, except per share amounts):
|Year Ended December 31,|
|As Reported (GAAP)||Adjusted (Non-GAAP)|
|Revenue||$||1,698,965 ||$||1,631,284 ||$||1,698,965 ||$||1,631,284 |
|Net income||$||124,909 ||$||106,579 ||$||161,479 ||$||125,153 |
|Diluted earnings per share||$||3.04 ||$||2.56 ||$||3.94 ||$||3.01 |
|EBITDA (non-GAAP measure)||$||244,098 ||$||213,608 ||$||289,631 ||$||236,974 |
|Weighted-average diluted shares||41,024 ||41,600 ||41,024 ||41,600 |
See “Non-GAAP Financial Information—Adjusted Net Income and Adjusted Diluted Earnings Per Share and —Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA” below.
The following charts present net income, adjusted net income, diluted earnings per share, adjusted diluted earnings per share, EBITDA, adjusted EBITDA and earning assets, which consist of pawn loans, finance receivables, inventories and leased merchandise, as of and for the years ended December 31, 2021, 2020 and 2019 (in millions, except per share amounts):
* Non-GAAP financial measures. See “Non-GAAP Financial Information” for additional discussion of non-GAAP financial measures.
Operating Results for the Twelve Months Ended December 31, 2021 Compared to the Twelve Months Ended December 31, 2020
The COVID-19 pandemic continues to impact numerous aspects of the Company’s business and the continuing long-term impact to its business remains unknown. The extent to which COVID-19 continues to impact the Company’s operations, results of operations, liquidity and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the unknown duration and severity of the COVID-19 pandemic, which may be impacted by variants of concern and the efficacy and adoption rate of the COVID-19 vaccines in the jurisdictions in which the Company operates. In addition, changes in economic conditions and consumer spending, rising inflation, and the actions taken to limit the economic impact of COVID-19, such as government stimulus and other transfer programs, have and may continue to have a material adverse impact on demand for pawn loans in future periods. Moreover, safety protocols, staffing constraints and supply chain delays continue to impact operations and traffic counts for many retailers, which include the Company’s pawn stores and many of AFF’s retail merchant partners.
The following tables and related discussion set forth key operating and financial data for the Company’s operations by reporting segment as of and for the years ended December 31, 2021 and 2020. For similar operating and financial data and discussion of the Company’s 2020 results compared to its 2019 results, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 1, 2021.
Stores included in the same-store calculations presented in the U.S. pawn segment and Latin America pawn segment sections below are those stores that were opened or acquired prior to the beginning of the prior-year comparative period and remained open through the end of the reporting period. Also included are stores that were relocated during the applicable period within a specified distance serving the same market where there is not a significant change in store size and where there is not a significant overlap or gap in timing between the opening of the new store and the closing of the existing store.
U.S. Pawn Segment
The following table details earning assets, which consist of pawn loans and inventories, as well as other earning asset metrics of the U.S. pawn segment as of December 31, 2021 as compared to December 31, 2020 (dollars in thousands, except as otherwise noted):
|As of December 31,|
|U.S. Pawn Segment|| || || |
|Pawn loans||$||256,311 ||$||220,391 ||16 ||%|
|Inventories||197,486 ||136,109 ||45 ||%|
|$||453,797 ||$||356,500 ||27 ||%|
|Average outstanding pawn loan amount (in ones)||$||222 ||$||198 ||12 ||%|
|Composition of pawn collateral:|
|General merchandise||34 ||%||33 ||%|
|Jewelry||66 ||%||67 ||%|
| ||100 ||%||100 ||%|
|Composition of inventories:|
|General merchandise||45 ||%||46 ||%|
|Jewelry||55 ||%||54 ||%|
|100 ||%||100 ||%|
|Percentage of inventory aged greater than one year||1 ||%||2 ||%|
|Inventory turnover (trailing twelve months cost of merchandise sales divided by average inventories)||2.8 times||3.2 times|
The following table presents segment pre-tax operating income and other operating metrics of the U.S. pawn segment for the year ended December 31, 2021 as compared to the year ended December 31, 2020 (dollars in thousands). Operating expenses include salary and benefit expense of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.
|December 31,||Increase /|
|U.S. Pawn Segment|
|Retail merchandise sales||$||742,374 ||$||720,281 ||3 ||%|
|Pawn loan fees||305,350 ||310,437 ||(2)||%|
|Wholesale scrap jewelry sales||27,163 ||45,405 ||(40)||%|
Interest and fees on finance receivables (1)
|— ||2,016 ||(100)||%|
|Total revenue||1,074,887 ||1,078,139 ||— ||%|
|Cost of revenue:|| || |
|Cost of retail merchandise sold||416,039 ||415,938 ||— ||%|
|Cost of wholesale scrap jewelry sold||22,886 ||39,584 ||(42)||%|
Provision for loan losses (1)
|— ||(488)||100 ||%|
|Total cost of revenue||438,925 ||455,034 ||(4)||%|
|Net revenue||635,962 ||623,105 ||2 ||%|
|Segment expenses:|| || |
|Operating expenses||380,895 ||396,627 ||(4)||%|
|Depreciation and amortization||22,234 ||21,743 ||2 ||%|
|Total segment expenses||403,129 ||418,370 ||(4)||%|
|Segment pre-tax operating income||$||232,833 ||$||204,735 ||14 ||%|
|Retail merchandise sales margin||44 ||%||42 ||%|
|Net revenue margin||59 ||%||58 ||%|
|Segment pre-tax operating margin||22 ||%||19 ||%|
(1)Effective June 30, 2020, the Company’s U.S. pawn segment ceased offering an unsecured consumer loan product.
Retail Merchandise Sales Operations
U.S. retail merchandise sales increased 3% to $742.4 million during 2021 compared to $720.3 million for 2020. Same-store retail sales were flat during 2021 compared to 2020. The gross profit margin on retail merchandise sales in the U.S. was 44% during 2021 compared to a margin of 42% during 2020. The increase in margin was primarily a result of continued retail demand for value-priced pre-owned merchandise, increased buying of merchandise directly from customers and lower levels of aged inventory, which limited the need for normal discounting.
U.S. inventories increased 45% from $136.1 million at December 31, 2020 to $197.5 million at December 31, 2021. The increase was primarily due to the lower than normal inventory balances at December 31, 2020 due to the impacts of the COVID-19 pandemic. Inventories aged greater than one year in the U.S. were 1% at December 31, 2021 compared to 2% at December 31, 2020.
Pawn Lending Operations
U.S. pawn loan receivables as of December 31, 2021 increased 16% in total and 13% on a same-store basis compared to December 31, 2020. The increase in total and same-store pawn receivables was primarily due to the continued recovery in pawn lending demand during 2021 to pre-pandemic levels as the economy reopened and government stimulus programs were curtailed.
U.S. pawn loan fees decreased 2% to $305.4 million during 2021 compared to $310.4 million for 2020. Same-store pawn fees decreased 4% during 2021 compared to 2020. The decline in total and same-store pawn loan fees was primarily due to the significantly lower than normal beginning pawn loan levels, partially offset by the continued recovery in pawn loan demand towards pre-pandemic levels during 2021.
Segment Expenses and Segment Pre-Tax Operating Income
U.S. store operating expenses decreased 4% to $380.9 million during 2021 compared to $396.6 million during 2020 and same-store operating expenses decreased 6% compared with the prior-year period. The decrease in total and same-store operating expenses was primarily due to reduced staffing levels and other cost saving initiatives in response to COVID-19, partially offset by increased store-level incentive compensation driven by increased revenues towards the latter part of 2021.
The U.S. segment pre-tax operating income for 2021 was $232.8 million, which generated a pre-tax segment operating margin of 22% compared to $204.7 million and 19% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected an increase in gross profit from retail sales and a decrease in operating expenses, partially offset by a slight decrease in pawn loan fees, gross profit from scrap sales and net revenue from consumer loan and credit services products as a result of discontinuing consumer lending operations in U.S. pawn stores in 2020.
Latin America Pawn Segment
The Company’s management reviews and analyzes operating results in Latin America on a constant currency basis because the Company believes this better represents the Company’s underlying business trends. Constant currency results are non-GAAP financial measures, which exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates. The wholesale scrap jewelry sales in Latin America are priced and settled in U.S. dollars and are not affected by foreign currency translation, as are a small percentage of the operating and administrative expenses in Latin America, that are billed and paid in U.S. dollars.
Latin American results of operations for 2021 compared to 2020 were impacted by a 6% favorable change in the average value of the Mexican peso compared to the U.S. dollar. The translated value of Latin American earning assets as of December 31, 2021 compared to December 31, 2020 was also impacted by a 4% unfavorable change in the end-of-period value of the Mexican peso compared to the U.S. dollar.
The following table details earning assets, which consist of pawn loans and inventories as well as other earning asset metrics of the Latin America pawn segment as of December 31, 2021 as compared to December 31, 2020 (dollars in thousands, except as otherwise noted):
|Constant Currency Basis|
|As of December 31,||Increase /||2021||Increase|
|Latin America Pawn Segment|| || || || |
|Pawn loans||$||91,662 ||$||87,840 ||4 ||%||$||94,420 ||7 ||%|
|Inventories||65,825 ||54,243 ||21 ||%||67,821 ||25 ||%|
|$||157,487 ||$||142,083 ||11 ||%||$||162,241 ||14 ||%|
|Average outstanding pawn loan amount (in ones)||$||77 ||$||78 ||(1)||%||$||79 ||1 ||%|
|Composition of pawn collateral:|
|General merchandise||67 ||%||64 ||%|
|Jewelry||33 ||%||36 ||%|
|100 ||%||100 ||%|
|Composition of inventories:|
|General merchandise||68 ||%||56 ||%|
|Jewelry||32 ||%||44 ||%|
|100 ||%||100 ||%|
|Percentage of inventory aged greater than one year||1 ||%||2 ||%|
|Inventory turnover (trailing twelve months cost of merchandise sales divided by average inventories)||4.2 times||4.3 times|
The following table presents segment pre-tax operating income and other operating metrics of the Latin America pawn segment for the year ended December 31, 2021 as compared to the year ended December 31, 2020 (dollars in thousands). Operating expenses include salary and benefit expense of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.
|Constant Currency Basis|
|Year Ended||December 31,||Increase /|
|December 31,||Increase /||2021||(Decrease)|
|Latin America Pawn Segment|
|Retail merchandise sales||$||391,875 ||$||355,237 ||10 ||%||$||371,033 ||4 ||%|
|Pawn loan fees||170,432 ||147,080 ||16 ||%||161,336 ||10 ||%|
|Wholesale scrap jewelry sales||30,027 ||50,828 ||(41)||%||30,027 ||(41)||%|
|Total revenue||592,334 ||553,145 ||7 ||%||562,396 ||2 ||%|
|Cost of revenue:|| || || |
|Cost of retail merchandise sold||247,425 ||225,149 ||10 ||%||234,308 ||4 ||%|
|Cost of wholesale scrap jewelry sold||26,243 ||39,962 ||(34)||%||24,837 ||(38)||%|
|Total cost of revenue||273,668 ||265,111 ||3 ||%||259,145 ||(2)||%|