ITEM 1. BUSINESS
Company Overview
We are a tech-enabled, omni-channel consumer finance company serving a full spectrum of non-prime, near-prime and prime consumers in portions of the U.S. and Canada. CURO was founded over 25 years ago to meet the growing needs of consumers looking for alternative access to credit. We continuously update our products and technology platform to offer a variety of convenient, accessible financial and loan services. We design our customer experience to allow consumers to apply for, update and manage their loans in the channels they prefer—in branch, and via mobile device or over the phone. Our high customer satisfaction scores speak to our ability to anticipate and exceed customers’ needs.
In the U.S., we operate under several principal brands, including "Covington Credit," "Heights Finance," "Quick Credit," "Southern Finance" and "First Heritage." In Canada, we operate under “Cash Money” and “LendDirect” direct lending brands and the "Flexiti" POS/BNPL brand. As of December 31, 2022, we operated our direct lending and online services in eight Canadian provinces and one Canadian territory. Our point-of-sale operations are available at over 8,400 retail locations and over 3,500 merchant partners across 10 provinces and two territories. Until the sale of our Legacy U.S. Direct Lending Business in July 2022, we also operated under brands that included "Speedy Cash," "Rapid Cash" and "Avio Credit." We also offered demand deposit accounts in the U.S. under the "Revolve Finance" brand, and credit card programs under the "First Phase" brand, until the fourth quarter of 2022. As of December 31, 2022, our store network consisted of 496 locations across 13 U.S. states.
Recent Business Developments
Flexiti Acquisition
On March 10, 2021, we acquired Flexiti, an emerging growth Canadian POS/BNPL provider, which provided us instant capability and scale opportunity in Canada's credit card and POS financing markets. Flexiti offers the customers of its retail partners a variety of promotional financing offers on big-ticket purchases such as furniture, appliances, jewelry and electronics.
Heights Finance Acquisition
On December 27, 2021, we acquired Heights Finance, a consumer finance company that provides Installment loans and offers customary opt-in insurance and other financial products in the U.S. The acquisition of Heights Finance accelerated our strategic transition toward longer term, higher balance and lower credit risk products, and provided us with access to a larger addressable market while mitigating regulatory risk.
Divestiture of Legacy U.S. Direct Lending Business
On July 8, 2022, we sold our Legacy U.S. Direct Lending Business, which operated under the "Speedy Cash", "Rapid Cash" and "Avio Credit" brands, to Community Choice Financial.
First Heritage Acquisition
On July 13, 2022, we purchased First Heritage, a consumer lender that provides near-prime installment loans and customary opt-in insurance and other financial products in the U.S. This acquisition furthered our strategic shift to broaden our presence in the near-prime consumer lending market in the U.S.
These transactions were foundational to our strategic transition into longer term, higher balance and lower rate credit products. Refer to Note 14, "Acquisitions and Divestiture" for additional details regarding the divestiture of our Legacy U.S. Direct Lending Business and the acquisitions of First Heritage, Heights Finance and Flexiti.
2022 Restructuring and Expense Saving Initiatives
In October 2022, we began restructuring actions to increase our operating efficiency by reducing our global workforce and closing 89 stores across the U.S. and Canada. These actions were aimed at reducing duplicative corporate functions and stores with overlapping customer populations as a result of our recent acquisitions. Refer to Note 21, "Restructuring and Store Closures" for additional details regarding these initiatives.
Regulatory Developments
Our Products and Services
Overview of Loan Product Revenue
The following charts depict the revenue contribution, including CSO fees, of our products and services:
Our direct lending operations include a broad range of direct-to-consumer finance products focusing on revolving LOC, installment loans, insurance and other ancillary products, serving our customers' diversified needs as they address credit and related financial needs. The acquisitions of Heights Finance and First Heritage enable us to expand the geographic reach of our Installment products in the U.S. Through our acquisition of Flexiti in March 2021, we diversified our products, now offering POS financing options for consumers in Canada. We also provide a number of ancillary financial products such as optional credit protection, demand deposit accounts, proprietary general-purpose credit cards, check cashing and money transfer services. Our products are licensed and governed by enabling federal and state legislation in the U.S. and federal and provincial regulations in Canada. For additional details regarding recent regulatory developments, see "Regulatory Environment and Compliance" below.
Installment Loans
Installment loan products range from unsecured, short-term loans in Canada whereby a customer receives cash in exchange for a post-dated personal check or a pre-authorized debit from the customer’s bank account, to fixed-term, fully amortizing loans with a fixed payment amount due each period during the term of the loan in both U.S. and Canada. Certain Installment loans are secured by a clear vehicle title or security interest in the vehicle. The customer receives the benefit of immediate cash and retains possession of the vehicle while the loan is outstanding. Payments are due bi-weekly or monthly to match the customer's pay cycle. Customers may prepay without penalty or fees. Loans offered by Heights Finance and First Heritage are considered Installment loans, and can be unsecured or secured. Installment loans comprised 53.5%, 54.9% and 63.6% of our consolidated revenue during the years ended December 31, 2022, 2021 and 2020, respectively.
Revolving LOC Loans
Revolving LOC loans are lines of credit without a specified maturity date. Customers in good standing may draw against their line of credit, repay with minimum, partial or full payment and redraw as needed. We earn interest on the outstanding loan balances. Customers may prepay without penalty or fees. Typically, customers do not initially draw the full amount of their credit limits. Canada Direct Lending Revolving LOC loans comprised 93.8%, 94.2% and 91.8% of our total Canada Direct Lending loans as of December 31, 2022, 2021 and 2020, respectively. As of December 31 2022, Revolving LOC loans also included the Flexiti POS financing products, which are included in our Canada POS Lending segment and allow us to offer BNPL products as well as Flexiti branded credit cards at merchant locations. Canada POS Lending Revolving LOC gross loans receivable increased $374.3 million, or 81.5% from December 31, 2021. For the years ended December 31, 2022, 2021 and 2020, revolving loans revenues were $345.8 million, $294.6 million and $249.5 million, respectively.
Insurance Premiums and Commissions
We offer consumers a number of insurance products, including Credit Life and Disability, Involuntary Unemployment, Personal Property Collateral and Collateral Protection Plans. These products are optional and not a condition of the loan. We do not sell insurance to non-borrowers. We own a captive insurance company in the U.S. that reinsures a portion of our insurance sales. We earn revenue from the sale of optional credit protection insurance, which we recognize ratably over the term of the loan. Credit protection insurance is available to consumers on certain Revolving LOC and Installment products. For the years ended December 31, 2022, 2021 and 2020, insurance revenues were $88.5 million, $49.4 million and $35.6 million, respectively.
Other
Other products we offer include general-purpose credit cards, ancillary financial products including check cashing, prepaid cards, demand deposit and money transfer services. We offer memberships for car club, home and auto related services. We have no direct risk of loss on these membership plans. Check cashing, demand deposit and money transfer product lines in the U.S.ended with the divestiture of the Legacy U.S. Direct Lending Business and are now only offered by Canada Direct Lending. Revenues from consumer products include credit card revenue, check cashing and miscellaneous fees such as administrative fees, annual membership fees, over limit fees and deferral fees.
For the years ended December 31, 2022, 2021 and 2020, other revenues were $32.0 million, $24.7 million and $23.7 million, respectively.
CSO Programs
Through our CSO programs, we acted as a CSO/CAB on behalf of customers in accordance with applicable state laws. We offered Installment loans with a maximum term of 180 days through CSO programs in stores and online in the state of Texas. As a CSO, we earned revenue by charging the customer a CSO fee for arranging an unrelated third party to make a loan to that customer.
CSO loans were made by a third-party lender, and thus we did not include them in our Consolidated Balance Sheets as loans receivable; instead, we included fees receivable in “Prepaid expenses and other” in our Consolidated Balance Sheets.
As a result of the sale of the Legacy U.S. Direct Lending Business in July 2022, we no longer guarantee loans originated by third-party lenders through CSO programs. Refer to Note 14, "Acquisitions and Divestiture" for additional information.
Geography
For the years ended December 31, 2022, 2021 and 2020, approximately 60.0%, 64.3% and 75.4%, respectively, of our consolidated revenues were generated from services provided within the U.S. and approximately 40.0%, 35.7 % and 24.6%, respectively, were generated from services provided within Canada. For the years ended December 31, 2022 and 2021, respectively, approximately 43.8% and 59.9%, of our long-lived assets were located within the U.S., and approximately 56.2% and 40.1%, were located within Canada. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information on our geographic segments.
Stores: As of December 31, 2022, we had a total of 645 stores, with 496 stores across 13 U.S. states and 149 stores across eight provinces in Canada. Our U.S. stores include 106 stores acquired with the acquisition of First Heritage in July 2022.
The largest concentrations of U.S. Direct Lending gross loan receivables, as of December 31, 2022, based on location of originating store, were in Tennessee, Texas, Mississippi and South Carolina. The largest concentrations of U.S. Direct Lending gross loan receivables, as of December 31, 2021, based on location of originating store, were in Tennessee, Texas and South Carolina. The largest concentrations of Canada Direct Lending gross loan receivables as of December 31, 2022 and December 31, 2021, based on location of originating store, were in Ontario, British Columbia and Alberta.
Retail: We offer POS Lending in Canada at over 8,400 retail locations and over 3,500 merchant partners across 10 provinces and two territories.
Strategy
We believe our diversification across brands, products and geography positions us well for long-term growth. Our acquisitions of Flexiti, Heights Finance and First Heritage established us as a full-spectrum lender able to meet our target customers' evolving credit demands.
•Focus on operating new business—We have undergone a complete strategic repositioning over the past several years, including the sale of our Legacy U.S. Direct Lending Business and a shift toward longer term, higher balance and lower interest rate credit products. Our near-term focus is to ensure a successful integration of our acquired businesses and execution of our business plan.
•Focus on customer experience—We will continue our focus on customer service and experience, by designing our stores and website interfaces to appeal to our customers’ needs and behaviors.
•Effectively manage our operating expenses—We have made significant investments in our business over the past several years, primarily through acquisitions, to drive our strategic initiatives. As we work to fully integrate these businesses, we will remain focused on operating efficiencies through the prudent management of our expenses, which has included cost savings measures starting in the fourth quarter of 2022.
•Demonstrated access to capital markets and diversified funding sources— We have raised over $4.9 billion of debt financing across 18 separate offerings and various credit facilities since 2010, including over $1.0 billion raised during 2022. This aggregate amount includes the existing $1.0 billion of 7.50% Senior Secured Notes, five asset based revolving facilities used to support growth across our U.S. Direct Lending, Canada Direct Lending and Canada POS Lending segments, and a U.S. bank revolving credit facility to supplement intra-period liquidity. For more information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Customers
Our U.S. Direct Lending and Canada Direct Lending customers require essential financial services and value timely, transparent, affordable and convenient alternatives to banks, credit card companies and other traditional financial services companies, which are generally not available to them. Our U.S. Direct Lending and Canada Direct Lending customers typically earn between $10,000 and $60,000 annually while the average annual earnings of Canada POS Lending customers are approximately C$100,000. Based on our experience, our target consumer utilizes the products provided by our industry for a variety of reasons, such as when they often:
•have unexpected expenses such as car repairs or other bills;
•have been rejected for or have limited access to traditional banking services;
•maintain insufficient account balances to make a bank account economically efficient;
•prefer and trust the simplicity, transparency and convenience of our products and customer experience;
•need access to financial services outside of normal banking hours;
•seek an opportunity to improve their credit history and profile; or
•reject complicated fee structures in some bank products (e.g., credit cards and overdrafts).
Our Canada POS Lending consumers are looking for flexible payment solutions at the time of purchase, primarily at retail locations. The Flexiti card offers deferred payment solutions, for up to 24 months at 0% interest during the promotional period, monthly installment payment solutions of up to 72 months also at 0% interest during the promotional period provided that scheduled payments are made, or a revolving credit experience similar to a typical credit card. The fully automated application process typically results in a credit decision within three minutes with Flexiti branded credit cards available to use at over 8,400 partner retail locations.
Marketing
Our U.S Direct Lending and Canada Direct Lending Businesses use a multi-channel approach to attract new customers and retain valued customer relationships. We engage with customers across targeted, direct response channels digitally, in stores and through our insourced contact centers. We reach out to our customers via email, text, direct mail and phone calls to enhance customer satisfaction and preference, which in turn results in customer recommendations to family and friends. Our most effective marketing techniques include paid and organic search, prescreen direct mail campaigns, email, local store marketing, “send a friend” promotions and asking customers to leave us an online review..
Information Systems
Our Canada Direct Lending business is powered by our proprietary loan management system, which is a platform that integrates activities related to customer acquisition, underwriting, scoring, servicing, collections, compliance and reporting. It is designed to support and monitor compliance with regulatory and other legal requirements. With this technology we can make real-time, data-driven changes to our acquisition and risk models, which yields significant benefits in terms of customer acquisition costs and credit performance.
Our proprietary, highly scalable scoring system employs various algorithms which are continuously reviewed and refreshed. They focus on several factors related to the loan applicant's disposable income, expense trends or cash flows, among other factors. The predictability of our scoring models is driven by the combination of application data, purchased third-party data and our robust historical customer data. These variables are then analyzed using a series of algorithms to produce a "Curo Score" that allows us to optimize lending decisions in a scalable manner.
Our U.S. Direct Lending business is powered by a combination of third party vendors as well as proprietary software. The vendor solution provides the underpinnings for managing loan origination, decisioning and servicing. The proprietary software is an overlay sitting on top that provides a streamlined user interface and capabilities to enhance the efficiency of the branch workforce.
Our Canada POS Lending Business is powered by Flexiti’s proprietary POS technology platform, which powers the entire lifecycle of customer and merchant transactions. Data related to loan originations, servicing activities, collection activities, payments and defaults are also captured. The platform enables data-driven decisions that optimize performance across all aspects of the POS business.
A credit risk rating model is applied in real-time to every customer’s application and drives our underwriting decision. Our credit risk models combined with our scalable omni-channel instant apply-and-buy POS financing solution yield significant benefits in terms of customer acquisition costs and credit performance.
Cybersecurity Management
We rely on information technology systems and networks in connection with many of our business activities. We periodically evaluate ourselves for appropriate business continuity and disaster recovery planning using test scenarios and simulations. Our networks and systems are tested multiple times throughout the year by third-party security firms through penetration and vulnerability testing and our networks and systems are monitored by intrusion detection services as well as state-of-the-art network behavior analysis hardware and software. We mitigate vulnerabilities in our systems through a robust patch management program that we review annually. We employ a skilled IT workforce to implement our cybersecurity programs and to perform all security and compliance-related responsibilities in a timely manner. For risks associated with cybersecurity, see “Item 1A – Risk Factors.”
Collections
We operate collections through centralized and/or branch locations in the U.S. and Canada to enable store employees to focus primarily on customer service and to improve effectiveness and compliance management. Our collections personnel contact customers after a missed payment, primarily via phone calls, letters, text, push notifications and emails, and help the customer understand available payment arrangements or alternatives to help resolve the deficiency. We use a variety of collection strategies, including payment plans, settlements and adjustments to due dates. Collections teams are trained to apply different strategies and tools for the various stages of delinquency and also employ varying methodologies by product type.
At Canada POS Lending, we utilize a combination of internal and external collection agencies to collect on past due and charged off accounts. Prior to an account charging off, accounts are addressed by either our internal collection call center or external agencies that we hire. After an account charges off, third party collection agencies call on our behalf to arrange repayment of debt. Attempts to collect are primarily made via phone calls, but email, text messages and letters may be used.
Competition
We believe that the primary factors upon which we compete are:
•range of services and products;
•flexibility of product offering;
•convenience;
•reliability;
•fees;
•omni-channel technology;
•ability to partner with retailers and add value as an advisor;
•experienced management; and
•speed.
Our customers value service that is quick and convenient, lenders that can provide the most appropriate structure, loan terms that are fair and payments that are affordable. We face competition in all of our markets from other financial services providers, banks, savings and loan institutions, short-term consumer lenders and other financial services entities. Our industry has a small number of large, national participants with a significant presence in markets across the country and a significant number of smaller localized operators. Our competitors in the alternative financial services industry include monoline operators (both public and private) specializing in short-term cash advances, multiline providers offering cash advance services in addition to check cashing and other services and subprime specialty finance and consumer finance companies, as well as businesses conducting operations online and by phone. In our Canada POS Lending segment, our competitors include POS/BNPL companies that operate both in store with retailers and online through e-commerce sites.
Seasonality
Our direct lending businesses in the U.S. and Canada typically experience the greatest demand during the third and fourth calendar quarters. In the U.S., this demand generally declines in the first calendar quarter as a result of federal income tax refunds and credits. Typically, our cost of revenue for loan products, which represents our provision for losses, is lowest as a percentage of revenue in the first quarter of each year due to our customers’ receipt of income tax refunds, and increases as a percentage of revenue for the remainder of the year. As a result, we experience seasonal fluctuations in our U.S. operating results and cash needs. Our direct lending business in Canada experiences less seasonality than our U.S. direct lending business.
Our Canada POS Lending sales are largely driven by the typical seasonality has some of the typical seasonality experienced in the Canadian retail markets, with 31% of 2022 sales falling in the last quarter of the year. The business also saw strong growth and momentum with an 89% increase in net sales compared to 2021.
Human Capital Resources
Employee Profile. As of December 31, 2022, we had approximately 4,000 full-time employees, approximately 2,600 of whom work in our branches. We moved our corporate headquarters from Wichita, Kansas to Chicago, Illinois in January 2023, which, coupled with our remote and hybrid first model, allows us to attract and retain talented technology and data science professionals. We also have offices in Toronto, Ontario; Greenville, South Carolina; Wichita, Kansas; and Ridgeland, Mississippi servicing our Canadian and U.S. segments. We are closing our Canadian corporate office in 2023 but will retain our Flexiti corporate office in Toronto. None of our employees are unionized or covered by a collective bargaining agreement and we consider our employee relations to be good.
Diversity and Inclusion and Social Responsibility. We strive to foster and cultivate a culture of diversity, equity and inclusion. To this end, we launched a Diversity and Inclusion Council in 2020 with Board and executive sponsorship to ensure we have the resources to appropriately address racial and social issues. We are committed to being a StigmaFree company by partnering with the National Alliance on Mental Illness. Led by our Diversity and Inclusion Council, we annually identify and contribute to non-profit organizations supporting vulnerable communities. We also launched the CURO Cares Employee Relief Fund, which is a grant program to help employees cope with unexpected hardships that place undue financial stress on them and their families.
Regulatory Environment and Compliance
The financial services industry is regulated at the federal, state and local levels in the U.S. and at the federal and provincial levels in Canada. Laws and regulations governing our loan products typically impose restrictions and requirements, such as those on:
•the terms of loans (such as interest rates, fees, durations, repayment terms, maximum loan amounts, renewals and extensions and repayment plans) and the number and frequency of loans;
•underwriting requirements;
•collection and servicing activity, including initiation of payments from consumer accounts;
•licensing, reporting and document retention;
•unfair, deceptive and abusive acts and practices and discrimination;
•disclosures, notices, advertising and marketing;
•loans to members of the military and their dependents;
•insurance products and traditional ancillary products; requirements governing electronic payments, transactions, signatures and disclosures;
•check cashing;
•privacy and use of personally identifiable information and consumer data, including credit reports;
•repossession practices in certain jurisdictions where we operate as a title lender.
For more information regarding the regulations applicable to our business and the risks to which they subject us, see “Item 1A—Risk Factors.”
The legal environment is constantly changing as new laws and regulations are introduced and adopted, and existing laws and regulations are repealed, amended or reinterpreted, any of which could have material adverse effect on our results of operations or financial condition. We work with regulatory authorities, both directly and through our active memberships in industry trade associations, to support our industry and to promote the development of laws and regulations that we believe are equitable to businesses and consumers alike, that facilitate competition and thus lower costs associated with financial products and services, and that enable consumers to access myriad responsible credit products that meet their needs.
U.S. Regulations
U.S. Federal Regulations
Dodd-Frank. Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") passed by Congress created the Consumer Financial Protection Bureau (“CFPB”) and provided the CFPB with broad rulemaking, supervisory and enforcement powers regarding consumer financial services. Title X of Dodd-Frank also contains “UDAAP” provisions, which declare unlawful “unfair,” “deceptive” or “abusive” acts and practices in connection with the delivery of consumer financial services and gives the CFPB the power to enforce UDAAP prohibitions and adopt UDAAP rules defining unlawful acts and practices. Additionally, Section 5 of the Federal Trade Commission Act prohibits “unfair” and “deceptive” acts and practices in connection with a trade or business and gives the Federal Trade Commission enforcement authority to prevent and redress violations of this prohibition.
Dodd-Frank also gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws (including Dodd-Frank’s UDAAP provisions and the CFPB’s own rules). Further, Dodd-Frank empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties). The CFPB also has supervisory powers over many providers of consumer financial products and services, including certain non-bank providers that the CFPB determines may pose a risk to consumers.
Our business is heavily regulated and subject to a number of key Federal laws and regulations, including the following:
•The Military Lending Act, which imposes a 36% cap on the “all-in” annual percentage rates charged on loans to active-duty members of the U.S. military, Reserves and National Guard and their dependents.
•The Truth in Lending Act and Regulation Z, which require creditors to deliver disclosures to borrowers prior to consummation of both closed-end and open-end loans.
•Equal Credit Opportunity Act and Regulation B, which prohibits discrimination based on protected bases. We must also deliver notices specifying the basis for credit denials, as well as certain other notices.
•The Fair Credit Reporting Act, which regulates the use of consumer reports and reporting of information to credit reporting agencies.
•The Electronic Signatures In Global And National Commerce Act, which governs the use of electronic signatures and disclosures.
•The Electronic Funds Transfer Act and Regulation E, which define requirements related to electronic payments.
•The Telephone Consumers Protection Act and CAN-SPAM (Controlling the Assault of Non-Solicited Pornography and Marketing Act) as well as rules from the Federal Communications Commission, which require limitations on telemarketing calls, auto-dialed calls, pre-recorded calls, text messages and unsolicited faxes.
•Prohibition of dealing with a list of individuals and companies identified by the Office of Foreign Assets Control.
Privacy Laws. The Gramm-Leach-Bliley Act and the FTC’s Safeguards Rule and its implementing regulations, require us to protect the confidentiality of our customers’ nonpublic personal information and to disclose to our customers our privacy policy and practices, including those regarding sharing customers’ nonpublic personal information with third parties. That disclosure must be made to customers at the time the customer relationship is established and at least annually thereafter. The FTC’s Safeguards Rule includes, among other things: (i) detailed requirements for an information security program; (ii) new requirements for accountability, including designation of a Qualified Individual (as defined in the Rule); and (iii) an expansion of the definition of a financial institution. Under the Safeguards Rule, safeguards must address access controls, data inventory and classification, encryption, secure development of application practices, authentication, information disposal procedures, change management, testing and incident response. Our Board of Directors has appointed a Qualified Individual and adopted a Safeguards Rule Policy.
Additionally, various states have enacted their own privacy and security laws which cover employees and business to business data.
U.S. State and Local Regulations
Currently, we make loans in approximately 13 states in the U.S. pursuant to enabling legislation that specifically allows direct loans of the type that we make. Our consumer loans must comply with extensive laws of the states where our branches are located.
Canada Regulations
Unsecured Installment Loans, Revolving LOC Loans and POS/BNPL Products
Unsecured Installment loans, Revolving LOC loans and POS/BNPL products are regulated at both the federal and provincial level in Canada. At the federal level, such lending products are subject to the criminal rate of interest provisions of the Criminal Code, which prohibit receiving (or entering into an agreement to receive) interest at an effective annual rate that exceeds 60% on the credit advanced under the loan agreement. These provisions have been in place since 1980. In August 2022, the federal government released “Consultation on Fighting Predatory Lending,” a consultation paper posing questions specific to the criminal rate of interest and its impact on Canadian consumers. The consultation closed in October 2022 with approximately 100 submissions from diverse industry organizations and individuals. The federal government is now considering the feedback it received and has not provided a timeline for a decision on whether it will change the criminal rate of interest.
We are also subject to provincial legislation that requires lenders to provide cost of credit disclosures and extend consumer protection rights to borrowers, such as prepayment rights, and prohibits the charging of certain default fees.
In addition. some provinces have enacted legislation that regulates high-cost credit grantors. These laws define a high-cost credit product and require licensing and additional consumer protection oversight.
Single-Pay
Canadian federal legislation exempts from the criminal rate of interest provisions of the Criminal Code cash advance loans of $1,500 or less if the term of the loan is 62 days or less (“payday loans”) and the lender is licensed under provincial legislation as a short-term cash advance lender and the province has been designated under the Criminal Code.
Check Cashing
In Canada, the federal government generally does not regulate check cashing businesses, other than federally regulated financial institutions (and other than the prohibition noted above regarding charging or receiving in excess of 60% annual interest rate on the credit advanced for the fee of a check cashing transaction), nor do most provincial governments impose regulations specific to the check cashing industry. There are some minor exceptions in various provinces.
Available Information
Information about us, including our Code of Business Conduct and Ethics, Corporate Governance Guidelines and charters of our committees, is available at our website at www.curo.com. Printed copies of the documents listed above are available upon request, without charge, by writing to us at 200 W. Hubbard, 8th Floor, Chicago, Illinois 60654, Attention: Investor Relations.
We also make available through our website at www.ir.curo.com, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports (along with certain other Company filings with the SEC) as soon as reasonably practicable after we electronically file those reports with or furnish them to the SEC. These materials are also accessible on the SEC's website at www.sec.gov.
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to many risks and uncertainties that could adversely affect our business, results of operations, financial condition or share price of our stock. While we believe the discussion below addresses the key risk factors affecting our business, there may be additional risks and uncertainties not currently known or that we currently deem to be immaterial that may become material in the future or that could adversely affect our business, results of operations, financial condition or share price. You should carefully consider these risk factors.
Risks Relating to Our Business
If our ALL is not adequate to absorb our actual losses, this could have a material adverse effect on our results of operations or financial condition.
Our customers may fail to repay their loans in full. We maintain an ALL for estimated probable losses on company-funded loans and loans in default. See Note 1, “Summary of Significant Accounting Policies and Nature of Operations” of the Notes to Consolidated Financial Statements for factors we consider when estimating the ALL. This reserve is an estimate. Actual losses are difficult to forecast, especially if losses stem from factors that we have not experienced historically, and unlike traditional banks, we are not subject to periodic review by bank regulatory agencies of our ALL. In addition, Flexiti offers loans to consumers with various terms, including no interest and/or no payment promotional offers. While many of Flexiti’s customers have prime credit scores, these promotional offers can make credit losses less predictable. As a result, our ALL may not be sufficient to cover incurred losses or comparable to that of traditional banks subject to regulatory oversight. If actual losses are greater than our reserve and allowance, this could have a material adverse effect on our results of operations or financial condition.
Because of the non-prime nature of many of our customers, we have experienced a high rate of NCOs as a percentage of revenues, and it is essential that we price loans appropriately. We rely on our proprietary credit and fraud scoring models to forecast loss rates. If we are unable to effectively forecast loss rates, it may negatively and materially impact our operating results.
Because of the non-prime credit rating score status of certain of our customers, we have much higher charge-off rates than traditional lenders. Accordingly, it is essential that we price our products appropriately to account for these credit risks. In deciding whether to extend credit and the terms of such credit, including price, we rely heavily on our proprietary credit and fraud scoring models, which are an empirically derived suite of statistical models built using third-party data, customer data and our historical credit experience. If we do not regularly enhance our scoring models to ensure optimal performance, our models may become less effective. If we were unable to rebuild our scoring models or if they did not perform as expected, our products could experience increasing defaults, higher customer acquisition costs, or both.
If our scoring models fail to adequately predict the creditworthiness of customers, or if they fail to assess prospective customers’ ability to repay loans, or other components of our credit decision process fail, higher than forecasted losses may result. Similarly, if our scoring models overprice our products, we could lose customers. Among other things, the cessation of government stimulus programs related to the COVID-19 pandemic, an inflationary or a recessionary environment or higher interest rates, can further add volatility to loan balances, repayments and profitability. Furthermore, if we are unable to access third-party data, or access to such data is limited or cost prohibitive, our ability to accurately evaluate potential customers will be compromised. As a result, we may be unable to effectively predict probable credit losses inherent in the resulting loan portfolio, and we may experience higher defaults or customer acquisition costs, which could have a material adverse effect on our business, prospects, results of operations or financial condition.
Additionally, if any of the models or tools used to underwrite loans contain errors in development or validation, such loans may result in higher delinquencies and losses. Moreover, if future performance of customer loans differs from past experience, delinquency rates and losses could increase, all of which could have a material adverse effect on our business, prospects, results of operations or financial condition. An inability to effectively forecast loss rates could also inhibit our ability to borrow from our debt facilities, which could further hinder our growth and have a material adverse effect on our business, prospects, results of operations or financial condition.
Changes in the demand for our products and specialty financial services or our failure to adapt to such changes could have a material adverse effect on our business, prospects, results of operations or financial condition.
The demand for a product or service may change due to many factors such as regulatory restrictions that reduce customer access to products, the availability of competing products, reduction in our marketing spend, macroeconomic changes (including inflation, recession or higher interest rates) or changes in customers’ financial conditions among others. If we do not adapt to a significant change in customers’ demand for, or access to, our products or services, our revenue could decrease significantly. Even if we make adaptations or introduce new products or services, customer demand could decrease if the adaptations make them less attractive, less available or more expensive, all of which could have a material adverse effect on our business, prospects, results of operations or financial condition.
We face strong direct and indirect competition.
The consumer finance industry is highly competitive, and the barriers to entry for new competitors are relatively low in the markets in which we operate. We compete for customers, locations, employees and other aspects of our business with many other local, regional and national institutions. Our profitability depends, in large part, on our ability to underwrite and originate loans. Some of
our competitors have greater financial, technical and marketing resources than we possess. Some competitors may also have a lower cost of funds and access to funding sources that may not be available to us. We cannot give assurances that the competitive pressures we face will not have a material adverse effect on our financial condition or results of operations.
We have grown significantly in recent years, and if we are unable to manage growth effectively, our results of operations or financial condition may be materially adversely affected.
We have experienced significant growth in recent years. We may not be able to manage this growth successfully, and the pace of our future growth may slow. In addition, if we do not continue to grow the business and generate sufficient levels of cash flow, our ability to service our debt obligations could be negatively and materially impacted. The profitability of our operations and any future growth depends upon many factors, including our ability to appropriately price our products, manage credit risk, manage our foreign currency exposure, respond to regulatory and legislative changes, obtain and maintain financing, hire, train and retain qualified employees, obtain and maintain required licenses and other factors, some of which are beyond our control, such as changes in regulation and legislation. As a result, our profitability and cash flows could suffer if we do not successfully implement our business strategy.
Our failure to expand our management systems and controls to support our recent growth or integrate acquisitions could seriously harm our operating results and business.
Our recent growth and executing our business strategy has placed significant demands on management and our administrative, operational, information technology, financial and personnel resources. Accordingly, our future operating results will depend on the ability of our officers and other key employees to continue to implement and improve our operational, information technology and financial control systems, and effectively expand, train and manage our employee base. Otherwise, we may not be able to manage our recent growth successfully.
We face risks associated with our growth strategies including those related to acquisitions.
We have expanded our products and markets in part through strategic acquisitions, including the acquisitions of Flexiti, Heights Finance and First Heritage, and we may continue to do so in the future, depending on our ability to identify and successfully pursue suitable acquisition candidates. Acquisitions involve numerous risks, including risks inherent in entering new markets in which we may not have prior experience; potential loss of significant customers or key personnel of the acquired business; not obtaining the expected benefits of the acquisition on a timely basis or at all; managing geographically-remote operations or different technology platforms; and potential diversion of management's attention from other aspects of our business operations. Acquisitions may also cause us to incur debt or result in dilutive issuances of equity securities, additional write-offs of goodwill and substantial amortization expenses associated with acquired intangible assets. We may not be able to obtain financing for future acquisitions on favorable terms, making any such acquisitions more expensive. Any such financing may have terms that restrict our operations. We may not be able to successfully integrate the operations of any acquired businesses into our operations and achieve the expected benefits of any acquisitions. The failure to successfully integrate newly acquired businesses or achieve the expected benefits of strategic acquisitions in the future, or consummate a potential acquisition after incurring material costs, could have an adverse effect on our business, results of operations and financial position.
The outcome of a CFPB investigation into certain of Heights Finance’s business practices is uncertain and may materially and adversely affect Heights Finance's business and, ultimately, the combined business.
In April 2020, Heights Finance received a civil investigative demand (“CID”) from the CFPB applicable to its small loan business. We have received and responded to additional CIDs and are fully cooperating with the investigation. In May and June of 2022, Heights Finance responded to the CFPB’s Notice and Opportunity to Respond and Advise, which was substantively aligned with the previously received CIDs. We continue to await a response from the CFPB.
We are currently unable to predict the ultimate timing or outcome of the CFPB investigation. While we have contractual rights to indemnification under the acquisition document for certain losses that arise with respect to the CFPB investigation, there can be no assurance that such indemnification will be sufficient to address all covered losses or that the CFPB’s ongoing investigation or future exercise of its enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of consumer financial protection laws that could lead to enforcement actions, proceedings or litigation, whether by the CFPB, other state or federal agencies, or other parties, and the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements or changes to Heights Finance’s business practices or operations that could materially and adversely affect its or the combined business’, financial condition, results of operations or reputation.
Our substantial indebtedness could materially impact our business, results of operations or financial condition.
We have significant debt. The amount of our indebtedness could have significant effects on our business, including:
•making it more difficult to satisfy our financial obligations;
•inhibiting our ability to obtain additional financing for operational and strategic purposes;
•requiring the use of a substantial portion of our cash flow from operations to pay interest on our debt, especially in a prolonged high interest rate environment, which reduces funds available for other operational and strategic purposes;
•putting us at a competitive disadvantage compared to our competitors that may have proportionately less debt;
•restricting our ability to pay dividends; and
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
For instance, our ability to offer our current products or services or the financial performance of these products and services could be negatively impacted by regulatory changes, which could inhibit our ability to comply with the terms of our debt.
If our cash flows and capital resources are insufficient to fund our debt obligations, or if we confront regulatory uncertainty or challenges in debt capital markets, we may not be able to refinance our indebtedness prior to maturity on favorable terms, or at all. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest or other debt capital expense. A refinancing could also require us to comply with more onerous covenants on our business operations. If we are unable to refinance our indebtedness prior to maturity we will be required to pursue alternative measures that could include restructuring our current indebtedness, selling all or a portion of our business or assets, seeking additional capital, reducing or delaying capital expenditures or taking other steps to address obligations under the terms of our indebtedness.
Our ability to meet our debt obligations, refinance current debt obligations or access capital markets in the future depends on our future performance, which will be affected by financial, business, economic, regulatory and other factors, many of which we cannot control or predict. Our business may not generate sufficient cash flow from operations, and we may not realize our anticipated growth in revenue and cash flow, either of which could result in being unable to repay indebtedness, or to fund other liquidity needs. If we do not have enough capital resources, we may need to refinance all or part of our debt, sell assets or borrow more funds, which we may not be able to do on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from pursuing any of these alternatives.
In preparing our financial statements, including implementing accounting principles, financial reporting requirements or tax rules or tax positions, we use our judgment, and that judgment encompasses many risks.
We prepare our financial statements in accordance with U.S. GAAP and its interpretations are subject to change. If new rules or interpretations of existing rules require us to change our accounting, financial reporting or tax positions, our results of operations or financial condition could be materially adversely affected, and we could be required to restate financial statements. Preparing financial statements requires management to make estimates and assumptions, including those impacting allowances for loan losses, goodwill and intangibles, acquisition related contingent consideration payments and accruals related to self-insurance. These affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as well as the reported amounts of revenue and expenses. In addition, management’s judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. As a result, our assumptions and provisions may not be sufficient to cover actual losses. If actual losses are greater than our assumptions and provisions, our results of operations or financial condition could be adversely affected.
Further, FASB issued new guidance requiring us to adopt the current expected credit loss (“CECL”) model to evaluate impairment of loans. The CECL approach, effective for us by January 1, 2023, requires evaluation of credit impairment based on an estimate of life of loan losses as opposed to credit impairment based on incurred losses. Our adoption of CECL as of January 1, 2023 will result in an estimated CECL allowance for credit losses of $257 million, causing an increase to the allowance for credit losses of approximately $135 million. Adjusting the CECL allowance for credit losses for changes in economic forecasts and conditions may result in the need for significant and unanticipated changes in our provision for credit losses in the future, which would materially affect our results of operations. If we misinterpret or make inaccurate assumptions under the new guidance, our results of operations or financial condition could also be adversely affected.
Changes in our financial condition or a potential disruption in the capital markets could reduce available capital.
If we do not have sufficient funds from our operations, excess cash or debt agreements, we will be required to rely on banking and credit markets to meet our financial commitments and short-term liquidity needs. We also expect to periodically access debt capital markets to finance the growth of our consumer loans receivable portfolio. Efficient access to such markets, which could be critical for us, may be restricted due to many factors, including deterioration of our earnings, cash flows or balance sheet quality, overall business or industry prospects, adverse regulatory changes, disruption to or deterioration in capital markets, a rising interest rate
environment or a negative bias toward our industry by consumers or market participants. Disruptions and volatility in capital markets may cause banks and other credit providers to restrict availability of new credit. We may also have more limited access to commercial bank lending than other businesses due to the negative bias toward our industry. If adequate funds are not available, or are not available at favorable terms, we may not have sufficient liquidity to fund our operations, make future investments, take advantage of strategic opportunities or respond to competitive challenges, all of which could negatively impact our ability to achieve our strategic plans. Additionally, if the capital and credit markets experience volatility, and the availability of funds is limited, third parties with whom we do business may incur increased costs or business disruption and this could have a material adverse effect on our business relationships with such third parties.
Adverse economic conditions, including those resulting from a recession or recessionary environment or weather-related events or other natural disasters, man-made events or health emergencies, could have an adverse impact on our business or the economy and could cause demand for our loan products to decline or make it more difficult for our customers to make payments on our loans and increase our default rates, which could adversely affect our results of operations or financial condition.
We operate stores across the U.S. and Canada and derive the majority of our revenue from consumer lending. Macroeconomic conditions, such as interest rates, whether the economy is in a recession or recessionary environment, levels of employment, personal income and consumer sentiment, may influence demand for our products. Additionally, weather-related events, power losses, telecommunication failures, terrorist attacks, acts of war, widespread health emergencies (such as COVID-19) and governmental responses thereto, and similar events, may significantly impact our customers’ ability to repay their loans and cause other negative impacts on our business. These conditions may result in us changing the way we operate our business, including tightening credit, waiving certain fees and granting concessions to customers.
Our underwriting standards require our customers to have a steady source of income. Therefore, if unemployment increases among our customer base, the number of loans we originate may decline and defaults could increase. If consumers become more pessimistic regarding the economic outlook and spend less and save more, demand for consumer loans may decline. Accordingly, poor economic conditions could have a material adverse effect on our results of operations or financial condition.
We may be limited in our ability to collect on our loan portfolio, and the security interests securing a significant portion of our loan portfolio are not perfected, which may increase our credit losses.
Legal and practical limitations may limit our ability to collect on our loan portfolio, resulting in increased credit losses, decreased revenues and decreased earnings. State and federal laws and regulations restrict our collection efforts and the amounts that we are able to recover from the repossession and sale of collateral in the event of a customer’s default typically do not fully cover the outstanding loan balance and costs of recovery. A significant portion of our secured loans have not been and will not be perfected, which means that we cannot be certain that such security interests will be given first priority over other creditors. The lack of perfected security interests is one of several factors that may make it more difficult for us to collect on our loan portfolio. Additionally, for those of our loans that are unsecured, borrowers may choose to repay obligations under other indebtedness before repaying loans to us because such borrowers may feel that they have no collateral at risk. In addition, given the relatively small size of our loans, the costs of collecting loans may be high relative to the amount of the loan. As a result, many collection practices that are legally available, such as litigation, may be financially impracticable. These factors may increase our credit losses, which would have a material adverse effect on our results of operations and financial condition.
Goodwill comprises a significant portion of our assets. We assess goodwill for impairment at least annually. If we recognize an impairment, it could have a material adverse effect on our results of operations or financial condition.
We assess goodwill for impairment on an annual basis at the reporting unit level. We assess goodwill between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Due to macroeconomic conditions and our current earnings outlook, we have determined that it is appropriate to impair the goodwill associated with our U.S. Direct Lending business and Canada POS Lending business, as described in Note 4, "Goodwill and Intangibles."
Our impairment reviews require extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions could produce significantly different results. A material impairment of goodwill could adversely affect our results of operations or financial condition. Due to the current economic environment and the uncertainties that future economic consequences will have on our reporting units, we cannot be sure that our estimates and assumptions made for purposes of our annual goodwill impairment test will be accurate predictions of the future. If our assumptions regarding forecasted revenues or margins for our reporting units are not achieved, we may be required to record additional goodwill impairment losses in the future. We cannot determine if any such future impairment will occur, and if it does occur, whether such charge would be material.
Our lending business is somewhat seasonal which causes our revenues to fluctuate and could have a material adverse effect on our ability to service our debt obligations.
Our U.S. business typically experiences reduced demand in the first quarter because of customers’ receipt of tax refund checks. Demand for our U.S. lending services is generally greatest during the third and fourth quarters. This seasonality requires us to manage our cash flows during the year. If a governmental authority pursued economic stimulus actions or issued additional tax refunds or tax credits at other times during the year, such actions could have a material adverse effect on our business, prospects, results of operations or financial condition during those periods. If our revenues fall substantially below expectations during certain periods, our annual results and our ability to service our debt obligations could be materially adversely affected.
Flexiti has substantial merchant partner concentration, with a limited number of merchant partners accounting for a substantial portion of its point-of-sale lending revenues.
Flexiti currently derives a significant portion of its point-of-sale lending originations through a limited number of merchant partners. For the year ended December 31, 2022 and 2021, Flexiti had two merchant partners that accounted for 35% and 18% of its total point-of-sales lending originations, respectively. There are inherent risks whenever a large percentage of revenues are concentrated with a limited number of merchant partners. It is not possible for us to predict the future level of demand for our services that will be generated by these merchant partners or new merchant partners, or the future demand for the products and services of these merchant partners or new merchant partners. If any of these merchant partners experience declining or delayed sales due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our products which could have an adverse effect on our margins and financial position and could negatively affect our revenues and results of operations and/or the trading price of our common stock.
Our credit agreements contain covenants which may restrict our flexibility to operate our business. If we do not comply with these covenants, our failure could have a material adverse effect on our results of operations or financial condition.
Our credit agreements contain performance and financial covenants (both at the parent and SPV level) that could adversely affect our business and our flexibility to respond to changing business and economic conditions or opportunities. Among other things, these covenants limit our ability to:
•incur or guarantee additional indebtedness;
•create or incur liens;
•sell assets, including our loan portfolio or the capital stock of our subsidiaries;
•pay dividends or make distributions on our capital stock or make certain other restricted payments;
•make certain investments, including in our subsidiaries; and
•consolidate, merge, sell or other dispose of substantially all of our assets.
In addition, credit facilities for our SPVs contain certain performance covenants on the receivables pledged to each respective facility. If we violate these covenants, our ability to draw under these facilities could be impacted and we may be required to redirect all excess cash to the lenders.
The credit agreements also impose certain obligations on us relating to our underwriting standards, recordkeeping and servicing of our loans and our loss reserves and charge-off policies, and they require us to comply with certain financial ratios, including leverage, equity and interest coverage ratios. If we were to breach any covenants or obligations under our credit agreements and such breaches were to result in an event of default, our lenders could cause all amounts outstanding to become due and payable, subject to applicable grace periods. An event of default in any one credit agreement could also trigger cross-defaults under other existing and future credit agreements and other debt instruments, which in turn could materially and adversely affect our financial condition and ability to continue operating our business as a going concern. Failure to comply with any covenants could have a material adverse effect on our liquidity, results of operation or financial condition if we are unable to access capital when we need it or if we are required to reduce our outstanding indebtedness.
Because we depend on third-party lenders to provide cash needed to fund our loans, an inability to affordably access third-party financing could have a material adverse effect on our business.
Our principal sources of liquidity to fund our customer loans are cash provided by operations and our SPV facilities. We may not be able to secure additional operating capital from third-party lenders or refinance our existing credit facilities on reasonable terms or at all. As the volume of loans that we make to customers increases, we may have to expand our borrowing capacity on our existing SPV facilities or add new sources of capital. If the underlying collateral does not perform as expected, our access to the SPV facilities could be reduced or eliminated. The availability of these financing sources depends on many factors, some of which we cannot control. In the event of a sudden shortage of funds in the banking system or capital markets, we may not be able to maintain necessary levels of funding without incurring high funding costs, suffering a reduction in the term of funding instruments or having to liquidate certain assets. If our cost of borrowing increases or we are unable to arrange new methods of financing on
favorable terms, we may have to curtail our origination of loans, which could have a material adverse effect on our results of operations or financial condition.
We are subject to interest rate risk resulting from general economic conditions and policies of various governmental and regulatory agencies.
Interest rate risk arises from the possibility that changes in interest rates will affect our results of operations and financial condition. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board and Bank of Canada. In response to elevated inflation, the agencies have rapidly increased interest rates since early 2022. The Federal Reserve Board and Bank of Canada have indicated that they may raise rates further if deemed necessary to combat continued inflation growth. Furthermore, market conditions or regulatory restrictions on interest rates we charge may prevent us from passing any increases in interest rates along to our customers. In addition, rising interest rates will increase our cost of capital by influencing the amount of interest we pay on our revolving credit facilities, or any other floating interest rate obligations that we may incur, which would increase our operating costs and decrease our operating margins.
Our use of derivatives exposes us to credit and market risk.
From time to time, we may elect to purchase derivative financial instruments such as interest rate caps, interest rate swaps, collars or similar instruments with the objective of reducing our borrowing cost volatility. By using derivative instruments, we are exposed to credit and market risk, including the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost, default risk and the risk of insolvency or other inability of the counterparty to a particular derivative financial instrument to perform its obligations.
We may be unable to protect our proprietary technology and analytics or keep up with that of our competitors.
The success of our business depends, in part, upon our ability to protect our proprietary technology, which we use for pricing and underwriting loans. We seek to protect our intellectual property with nondisclosure agreements with third parties and employees and through standard measures to protect trade secrets. We also implement cybersecurity policies and procedures to prevent unauthorized access to our systems and technology. However, we may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. We do not have agreements with all of our employees requiring them to assign to us proprietary rights to technology developed in the scope of employment. Additionally, while we have registered trademarks and pending applications for trademark registration(s), we do not own any patents or copyrights with respect to our intellectual property.
If a competitor learns our trade secrets (especially with regard to our marketing, pricing and risk management capabilities), if a third-party reverse engineers or otherwise uses our proprietary technology, or if an employee makes commercial use of the technology he or she develops for us, our business will be harmed. Pursuing a claim against a third-party or employee for infringement would be costly and our efforts may not be successful. If we are unable to protect our intellectual property, our competitors would have an advantage over us.
Our risk management efforts may not be effective.
We could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage, monitor and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk and other market-related risks, as well as well as regulatory and operational risks related to our business, assets and liabilities. Our risk management policies, procedures and techniques may not be sufficient to identify all of the risks we are exposed to, mitigate the risks we have identified or identify concentrations of risk or additional risks to which we may become subject in the future.
Our controls and procedures may fail or be circumvented.
Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. If we fail to identify and remediate control deficiencies, it is possible that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis. In addition, any failure or circumvention of our other controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
If a third party cannot provide us products, services or support, it could disrupt our operations or reduce our revenue.
Some of our lending activity depends on support we receive from third parties that provide services to facilitate lending, loan underwriting and payment processing. We also use third parties to support and maintain certain of our communication and information systems. If our relationship with any of these third parties end and we are unable to replace them or if they do not maintain quality and consistency in their services, we could lose customers which would substantially decrease our revenue and earnings.
Our core operations are dependent upon maintaining relationships with banks and other third-party electronic payment solutions providers. Any inability to manage cash movements through the banking system or the Automated Clearing House (“ACH”) system would materially impact our business.
We maintain relationships with commercial banks and third-party payment processors who provide a variety of treasury management services including depository accounts, transaction processing, merchant card processing, cash management and ACH processing. We rely on commercial banks to receive and clear deposits, provide cash for our store locations, perform wire transfers and ACH transactions and process debit card transactions. We rely on the ACH system to deposit loan proceeds into customer accounts and to electronically withdraw authorized payments from those accounts. The failure or inability of retail banks and/or payment providers to continue to provide services to us could adversely affect our operations.
Improper disclosure of customer personal data could result in liability and harm our reputation. Our costs could increase as we seek to minimize or respond to cybersecurity risks and security breaches.
We store and process large amounts of personally identifiable information, including sensitive customer and employee information. While we believe that we maintain adequate policies and procedures, including antivirus and malware software and access controls, and use appropriate safeguards to protect against attacks, our security controls over personal data and our employee training may not prevent improper disclosure of personally identifiable information. Such disclosure could harm our reputation and subject us to liability, resulting in increased costs or loss of revenue.
We are subject to cybersecurity risks and security breaches which could result in the unauthorized disclosure or appropriation of customer and employee data. We may not be able to implement effective preventive measures against these types of breaches, especially because the techniques change frequently or may not be recognized until launched. We may need to spend significant resources to protect against security breaches or to address problems caused by breaches. Actual or anticipated attacks and risks may increase our expenses, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. Our protective measures also could fail to prevent a cyber-attack and the resulting disclosure or appropriation of customer data. A significant data breach could harm our reputation, diminish customer confidence and subject us to significant legal claims, any of which may have a material adverse effect on us.
A successful penetration of our systems could cause serious negative consequences, including significant disruption of our operations, misappropriation of our or our customers' confidential information or damage to our computers or systems or those of our customers and counterparties, and could result in violations of privacy and other laws, financial loss to us or to our customers, customer dissatisfaction, significant litigation exposure and harm to our reputation, all of which could have a material adverse effect on us. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information. The technology we use to protect transaction data may be compromised due to advances in computer capabilities, new discoveries in cryptography or other developments. Data breaches can also occur because of non-technical issues.
Our servers are also vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, including “denial-of-service” type attacks. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach of our systems or unauthorized release of consumers’ personal information, could damage our reputation and expose us to litigation and liability.
We share confidential customer information and our own proprietary information with vendors, service providers and business partners who provide products, services or support to us. The information systems of these third parties are also vulnerable to any of the above cyber risks or security breaches, and we may not be able to ensure that these third parties have adequate security controls in place to protect the information that we share with them. If our proprietary or confidential customer information is intercepted, stolen, misused or mishandled while in possession of a third party, it could result in reputational harm to us, loss of customers and suppliers, additional regulatory scrutiny and it could expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and liquidity. Although we maintain insurance that is intended to cover certain losses from such events, there can be no assurance that such insurance will be adequate or available.
In addition, federal and some state regulators have implemented, or are considering implementing, rules and standards to address cybersecurity risks and many U.S. states have already enacted laws requiring companies to notify individuals of data security
breaches involving their personal data. These standards and mandatory disclosures are costly to implement and may lead to widespread negative publicity, which may cause customers to lose confidence in the effectiveness of our data security measures.
If the information provided by customers to us is inaccurate, we may misjudge a customer’s qualification to receive a loan, which may adversely affect our results of operations.
A large portion of our underwriting activities and our credit extension decisions are made online. We rely on certain third-party vendors in connection with verifying application data related to loans originated online. Any error or failure by a third-party vendor in verifying the information may cause us to originate loans to borrowers that do not meet our underwriting standards. From time to time in the past, these checks have failed and there is a risk that these checks could also fail in the future. We cannot be certain that every loan is made in accordance with our underwriting standards. Variances in underwriting standards could expose us to greater delinquencies and credit losses than we have historically experienced.
In addition, in deciding whether to extend credit or enter into other transactions with customers, we rely heavily on information provided by customers, counterparties and other third parties, including credit bureaus and data aggregators, and we further rely on representations of customers and counterparties as to the accuracy and completeness of that information. If a significant percentage of our customers were to intentionally or negligently misrepresent any of this information, or provide incomplete information, and our internal processes were to fail to detect such misrepresentations in a timely manner, we could end up approving a loan that, based on our underwriting criteria, we would not have otherwise made. As a result, our earnings and our financial condition could be negatively impacted.
Employee misconduct could harm us by subjecting us to monetary loss, legal liability, regulatory scrutiny and reputational harm.
Our reputation is crucial to maintaining and developing relationships with existing and potential customers and third parties with whom we do business. There is a risk that our employees could engage in misconduct that adversely affects our business. For example, if an employee were to engage—or be accused of engaging—in illegal or suspicious activities, including fraud or theft, we could be subject to regulatory sanctions and suffer significant harm to our reputation, financial condition, customer relationships and ability to attract future customers or employees. Employee misconduct could prompt regulators to allege or to determine, based upon such misconduct, that we have not established adequate supervisory systems and procedures to inform employees of applicable rules or to detect and deter violations of such rules. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent misconduct may not be effective in all cases. Misconduct by our employees, or even unsubstantiated allegations, could result in a material adverse effect on our reputation and our business.
Risks Relating to Our Industry
The CFPB authority over U.S. consumer lending could have a significant impact on our U.S. business.
The CFPB regulates U.S. consumer financial products and services. The CFPB has regulatory, supervisory and enforcement powers over providers of consumer financial products and services. It also has supervisory authority over certain non-bank providers, such as payday lenders and any non-bank provider that the CFPB determines may pose risk to consumers.
The CFPB has examined our lending products, services and practices, and we expect the CFPB will continue to examine us. CFPB examiners have the authority to require quarterly monitoring, inspect our books and records and probe our business practices, and its examination includes review of marketing activities; loan application and origination activities; payment processing activities and sustained use by consumers; collections, accounts in default and consumer reporting activities as well as third-party relationships. As a result of these examinations of us or other parties, we could be required to change our products, services or practices, or we could be subject to monetary penalties, which could materially adversely affect us. Beginning in the fourth quarter of 2021, we were required to submit certain information regarding our business to the CFPB on a quarterly basis. In November 2022, the CFPB notified us that it had paused its monitoring of us until further notice.
The CFPB also has broad authority to prohibit unfair, deceptive or abusive acts or practices and to investigate and take enforcement action against financial institutions. In addition to assessing financial penalties, the CFPB can require remediation of practices, restitution and rescission or reformation of contracts. Also, if a company has violated Title X of the Dodd-Frank Act or related CFPB regulations, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy violations. If the CFPB or state attorneys general or state regulators believe that we have violated any laws or regulations, they could exercise their enforcement powers which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
The CFPB's Final Payday Rule, if implemented in its current form, could negatively affect our U.S. consumer lending business.
Pursuant to its authority to adopt UDAAP rules, the CFPB issued the 2017 and 2020 Final CFPB Rule, which contained payment restrictions, among other things. The repayment provisions applicable to us include those for longer-term loans with (a) annual percentage rates exceeding 36% and (b) lender access to the consumer’s account, whether by ACH, card payment, check or otherwise. The payment provisions generally prohibit lenders from seeking payment, without explicit reauthorization, when two consecutive payments have failed due to insufficient funds and also require a series of prescribed notices for initial payments, “unusual” payments (by amount, payment date or payment modality) and the triggering of limitations and a consumer rights notice after two consecutive failed payment attempts.
The 2017 Final CFPB Rule was originally scheduled to go into effect by August 2019. However, the Community Financial Services Association and the Consumer Service Alliance of Texas (collectively, the “Trade Groups”), brought a lawsuit (the “Texas Lawsuit”) against the CFPB in a federal district court in Texas. The Texas Lawsuit challenged the 2017 Final CFPB Rule and resulted in a court-ordered stay of the Rule.
In August 2021, following the U.S. District Court’s ruling in favor of the CFPB, the Trade Groups filed a Notice of Appeal with the Fifth Circuit and simultaneously filed a motion to stay the effective compliance date, pending the decision on appeal. On October 14, 2021, the Fifth Circuit granted the compliance stay extension.
On October 19, 2022, the Fifth Circuit, handed down a decision invalidating the payment restrictions of the 2017 and later modified 2020 Final CFPB Rule on the basis that the CFPB’s funding mechanism is unconstitutional. Specifically, the Fifth Circuit ruled that the CFPB’s funding structure violates the Constitution because the CFPB does not receive its funding from annual congressional appropriations, but instead receives funding directly from the Federal Reserve based on a request from the CFPB’s director. Thus, while Congress properly authorized the CFPB to promulgate the 2017 and 2020 Final Rule, the CFPB itself did not have the ability to exercise that power via constitutionally appropriated funds. The Fifth Circuit ruled, following this logic, that the appropriate remedy for the resulting harm to the Trade Groups due to this improper use of unappropriated funds in conducting the rulemaking associated with the 2017 and 2020 Final CFPB Rule was to nullify the CFPB’s action. The CFPB has appealed this decision to the Supreme Court, which has agreed to hear oral arguments next term, starting October 2023.
If the payment provisions of the 2017 and 2020 Final CFPB Payday Rule become effective in the current form, we will need to make changes to our payment processes and customer notifications in our U.S. consumer lending business. If we are not able to make all of these changes successfully, the payment provisions of the 2017 and 2020 Final CFPB Payday Rule could have a significant adverse impact on our business, prospects, results of operations, financial condition and cash flows. Refer to Business—Regulatory Environment and Compliance—U.S. Regulations—U.S. Federal Regulations— CFPB Rules."
Our use of third-party vendors is subject to regulatory review.
The CFPB and other regulators have issued regulatory guidance focusing on the need for financial institutions to perform due diligence and ongoing monitoring of third-party vendor relationships, which increases the scope of management involvement and decreases the benefit that we receive from using third-party vendors. Moreover, if our regulators conclude that we have not met the standards for oversight of our third-party vendors, we could be subject to enforcement actions, civil monetary penalties, supervisory orders to cease and desist or other remedial actions, which could have a material adverse effect on our business, reputation, financial condition and results of operations. Further, federal and state regulators have scrutinized the practices of lead aggregators and providers. If regulators place restrictions on certain practices by lead aggregators or providers, our ability to use them as a source for applicants could be affected.
Our industry is highly regulated. Existing and new laws and regulations could have a material adverse effect on our results of operations or financial condition and failure to comply with these laws and regulations could subject us to various fines, civil penalties and other relief.
In the U.S. and Canada, our business is subject to a variety of statutes and regulations enacted at the federal, state, provincial and municipal levels. Accordingly, regulatory requirements, and the actions we must take to comply with regulations, vary considerably by jurisdiction. Managing this complex regulatory environment requires considerable compliance efforts. It is costly to operate in this environment, and it is possible that those costs will increase materially over time. This complexity also increases the risks that we will fail to comply with regulations which could have a material adverse effect on our results of operations or financial condition. These regulations affect our business in many ways, and include regulations relating to:
•the terms of loans (such as interest rates, fees, durations, repayment terms, maximum loan amounts, renewals and extensions and repayment plans) and the number and frequency of loans;
•underwriting requirements;
•collection and servicing activity, including initiation of payments from consumer accounts;
•licensing, reporting and document retention;
•unfair, deceptive and abusive acts and practices and discrimination;
•disclosures, notices, advertising and marketing;
•loans to members of the military and their dependents;
•insurance products and traditional ancillary products;
•requirements governing electronic payments, transactions, signatures and disclosures;
•check cashing;
•money transmission;
•currency and suspicious activity recording and reporting;
•privacy and use of personally identifiable information and consumer data, including credit reports;
•posting of fees and charges; and
•repossession practices in certain jurisdictions where we operate as a title lender.
These regulations affect the entire life cycle of our customer relationships and compliance with the regulations affects our loan volume, revenues, delinquencies and other aspects of our business, including our results of operations. We expect that regulation of our industry will continue and that laws and regulations currently proposed, or other future laws and regulations, will be enacted and will adversely affect our pricing, product mix, compliance costs or other business activities in a way that is detrimental to our results of operations or financial condition.
There are a range of penalties that governmental entities could impose if we fail to comply with the various laws and regulations that apply to us, including:
•ordering corrective actions, including changes to compliance systems, product terms and other business operations;
•imposing fines or other monetary penalties, which could be substantial;
•ordering restitution, damages or other amounts to customers, including multiples of the amounts charged;
•requiring disgorgement of revenues or profits from certain activities;
•imposing cease and desist orders, including orders requiring affirmative relief, targeting specific business activities;
•subjecting our operations to monitoring or additional regulatory examinations during a remediation period;
•revoking licenses required to operate in particular jurisdictions; and/or
•ordering the closure of one or more stores.
Accordingly, if we fail to comply with applicable laws and regulations, it could have a material adverse effect on our results of operations or financial condition.
Our direct lending insurance operations are subject to a number of risks and uncertainties.
Our direct lending customers can either purchase optional insurance products through an unaffiliated insurance company and finance the premiums with their loan from us. Our insurance operations are subject to a number of risks and uncertainties, including changes in laws and regulations, customer demand, claims experience and insurance carrier relationships, the manner in which we can offer such products, capital and reserve requirements, the frequency and type of regulatory monitoring and reporting, benefits or loss ratio requirements, insurance producer and agent licensing or appointment requirements and reinsurance operations. In addition, the credit insurance products that we offer are optional and solely related to the loans we originate. Because we finance substantially all of our customers' insurance premiums, any decrease in demand for credit insurance products would adversely impact our insurance income as well as our interest and fee income. Insurance claims and policyholder liabilities are also difficult to predict and may exceed the related reserves set aside for claims and associated expenses for claims adjudication.
We are also dependent on the continued willingness of unaffiliated third-party insurance companies to participate in the credit insurance market, and we cannot be certain that the credit insurance market will remain viable. Further, if our insurance providers are unable or unwilling to meet claims and premium reimbursement payment obligations or premium ceding obligations, we could be subject to increased net credit losses, regulatory scrutiny, litigation and other losses and expenses. If any of these events, risks,
or uncertainties were to occur, it could have a material adverse effect on our financial condition and results of operations and cash flows.
Our stock price, reputation and financial results could be adversely affected by media and public perception of our credit products.
Consumer advocacy groups and various media outlets continue to criticize alternative financial services providers. These critics often characterize such alternative financial services providers as predatory or abusive toward consumers. If these persons were to criticize the products that we offer, it could negatively impact our relationships with existing borrowers and our ability to attract new borrowers and generate dissatisfaction among our employees.
Litigation, including class actions, and administrative proceedings against us or our industry could have a material adverse effect on our results of operations, cash flows or financial condition.
We have been the subject of administrative proceedings and lawsuits, as well as class actions, in the past, and may be involved in future proceedings, lawsuits or other claims. See Item 1, "Business—Regulatory Environment and Compliance— U.S. Regulations—U.S. and State" and Note 7, “Commitments and Contingencies” for a description of material litigation. Other companies in our industry have also been subject to litigation, class action lawsuits and administrative proceedings regarding the offering of consumer loans and the resolution of those matters could adversely affect our business. We anticipate that lawsuits and enforcement proceedings involving our industry, and potentially involving us, will continue to be brought.
We may incur significant expenses associated with the defense or settlement of lawsuits. The adverse resolution of legal or regulatory proceedings could force us to refund fees and interest collected, refund the principal amount of advances, pay damages or monetary penalties or modify or terminate our operations in particular jurisdictions. The defense of such legal proceedings, even if successful, is expensive and requires significant time and attention from our management. Settlement of proceedings may also result in significant cash payouts, foregoing future revenues and modifications to our operations. Additionally, an adverse judgment or settlement could result in the termination, non-renewal, suspension or denial of a license required for us to do business in a particular jurisdiction (or multiple jurisdictions). A sufficiently serious violation of law in one jurisdiction or with respect to one product could have adverse licensing consequences in other jurisdictions and/or with respect to other products. Thus, legal and enforcement proceedings could have a material adverse effect on our business, future results of operations, financial condition or our ability to service our debt obligations.
Judicial decisions or new legislation could potentially render our arbitration agreements unenforceable.
We include arbitration provisions in certain customer loan agreements in the United States. Arbitration provisions require that disputes with customers be resolved through individual arbitration rather than in court. Thus, our arbitration provisions, if enforced, have the effect of shielding us from class action liability. The effectiveness of arbitration provisions depends on whether courts will enforce these provisions. A number of courts, including the California Supreme Court, have concluded that arbitration agreements with class action waivers are unenforceable, particularly where a small dollar amount is in controversy on an individual basis. If our arbitration provisions are found to be unenforceable, our costs to litigate and settle customer disputes could increase and we could face class action lawsuits, with a potential material adverse effect on our results of operations or financial condition.
Risk Factor Relating to our Investment in Katapult
Our operating results may be adversely affected by our investment in Katapult.
Our fully diluted ownership of Katapult as of December 31, 2022 was 19.5%, assuming full payout of earnout shares, and 18.2% excluding payout of earnout shares. We apply the equity method of accounting to certain shares of common stock and interests that qualify as in-substance common stock. We recognize our share of Katapult's income or losses on a one-quarter lag related to the equity method investment. We cannot provide assurance that our investment will (i) increase or maintain its value, or (ii) that we will not incur losses from the holding of such investments.
General Risk Factors
We may fail to meet our publicly announced guidance or other expectations about our business and future operating results which would cause our stock price to decline.
We may provide guidance about our business and future operating results. In developing this guidance, we make certain assumptions and judgments about our future performance, which are difficult to predict. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. The
assumptions used or judgments applied to our operations to project future operating and financial results may be inaccurate and could result in a material reduction in the price of our common stock, which we have experienced in the past. Our business results may also vary significantly from our guidance or our analyst’s consensus due to a number of factors which are outside of our control and which could adversely affect our operations and financial results. Furthermore, if we make downward revisions of previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock could decline.
The market price of our common stock may be volatile.
The stock market is highly volatile. As a result, the market price and trading volume for our stock may also be highly volatile, and investors may experience a decrease in the value of their shares, which may be unrelated to our operating performance or business prospects. Factors that could cause the market price of our common stock to fluctuate significantly include:
•our operating and financial performance and prospects and the performance of competitors;
•our quarterly or annual earnings or those of competitors;
•the size of the public float of our common stock;
•conditions that impact demand for our products and services;
•our ability to accurately forecast our financial results;
•changes in earnings estimates or recommendations by securities or research analysts who track our common stock;
•market and industry perception of our level of success in pursuing our business strategy;
•strategic actions by us or our competitors, such as acquisitions or restructurings;
•changes in laws and regulations;
•changes in accounting standards, policies, guidance, interpretations or principles;
•arrival or departure of members of senior management or other key personnel;
•the number of shares that are publicly traded;
•exclusion of our common stock from certain market indices, which could reduce the ability of certain investment funds to own our common stock and put short-term selling pressure on our common stock;
•sales of common stock by us, our investors or members of our management team;
•potential dilution to our common stock, including the award and vesting of equity awards to our employees under our 2017 Incentive Plan;
•unfavorable or misleading information published by securities or industry analysts;
•factors affecting the industry in which we operate, including competition, innovation, regulation and the economy; and
•changes in general market, economic and political conditions, including those resulting from natural disasters, health emergencies (such as COVID-19), telecommunications failures, cyber-attacks, civil unrest, acts of war, terrorist attacks or other catastrophic events.
Any of these factors may result in large and sudden changes in the trading volume and market price of our common stock and may prevent you from being able to sell your shares at or above the price you paid for them. Following periods of volatility, stockholders may file securities class action lawsuits. Securities class action lawsuits are costly to defend and divert management’s attention and, if adversely determined, could involve substantial damages that may not be covered by insurance.
Our business could suffer as the result of the loss of the services of our senior executives or if we cannot attract and retain talented employees.
We compete with other companies both within and outside of our industry for talented employees. If we cannot recruit, train, develop and retain sufficient numbers of talented employees, we could experience increased turnover, decreased customer satisfaction, operational challenges, low morale, inefficiency or internal control failures. Insufficient numbers of talented employees, particularly IT developers, could also limit our ability to grow and expand our businesses. Labor shortages could also result in higher wages that would increase our labor costs, which could reduce our profits. In addition, the efforts and abilities of our senior executives are important elements of maintaining our competitive position and driving future growth, and the loss of the services of one or more of our senior executives could result in challenges executing our business strategies or other adverse effects on our business. The reduced value of the equity awards we have awarded under our 2017 Incentive Plan could be a factor in causing an individual senior executive to leave the Company.
The original founders of the company ("Founders") own a significant percentage of our outstanding common stock and their interests may conflict with ours or yours in the future.
At March 3, 2023, the Founders owned approximately 41.8% of our outstanding common stock. Two of the Founders are members of our Board of Directors, and one also serves as Chairman of the Board. Accordingly, the Founders collectively can exert control over many aspects of our company, including the election of directors. The Founders interests may not in all cases be aligned with your interests.
Provisions in our charter documents could discourage a takeover that stockholders may consider favorable.
Certain provisions in our governing documents could make a merger, tender offer or proxy contest involving us difficult, even if such events would be beneficial to your interests. Among other things, these provisions:
•permit our Board of Directors to set the number of directors and fill vacancies and newly-created directorships;
•authorize “blank check” preferred stock that our Board of Directors could use to implement a stockholder rights plan;
•provide that our Board of Directors is authorized to amend or repeal any provision of our bylaws;
•restrict the forum for certain litigation against us to Delaware;
•establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings;
•require that actions to be taken by our stockholders be taken only at an annual or special meeting of our stockholders, and not by written consent; and
•establish certain limitations on convening special stockholder meetings.
These provisions may delay or prevent attempts by our stockholders to replace members of our management by making it more difficult for stockholders to replace members of our Board of Directors. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers or investors aiming to effect changes in management to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any proposal. However, such anti-takeover provisions could also depress the price of our common stock by acting to delay or prevent a change in control.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
The choice of forum provision in our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes with stockholders. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may discourage many types of lawsuits.