What changed in this filing

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Item 1A. Risk Factors

2023-02-10 compared with 2022-02-11 · 52 added, 54 removed, 213 unchanged (33% of the section changed)

Industry, Operational and Macroeconomic Risks

The outbreak of COVID-19 has adversely impacted our business, and the continuance of this pandemic, or any future outbreak of any contagious diseases or other public health emergency, could materially and adversely affect our business, financial condition, liquidity and results of operations.

The COVID-19 pandemic has caused a deterioration in the U.S.

economy and our industry and resulted in a period of substantial economic and financial turmoil.

The ultimate impact of this event on our business and the duration and future severity of the economic downturn caused by the pandemic are uncertain;

however, the pandemic has adversely affected, and it is likely that the pandemic will continue to adversely affect, our business, team members, current and potential consumers, automobile dealers, and vendors, as well as our financial condition, liquidity, and results of operations.

In an attempt to contain COVID-19, certain state governments implemented social distancing guidelines, travel bans and restrictions, quarantines, stay-at-home orders and shutdowns of non-essential businesses.

These actions caused economic hardship in the areas in which they were implemented.

While the prevalence, severity and impact of such restrictions have lessened, uncertainty remains as to when economic conditions will return to normalcy.

Many automobile dealers were required to temporarily close or restrict their operations.

Additionally, there have been supply chain disruptions in the automotive industry, which have resulted in low dealer inventories and elevated used vehicle prices.

As a result, we have experienced a significant decline in Consumer Loan assignments.

We have worked with our consumers to provide relief where possible, including the temporary suspension of involuntary vehicle repossessions, late fees and suit starts.

The COVID-19 pandemic has also caused us to modify our business practices in an effort to increase team member safety, including allowing team members to work remotely, reconfiguring workstations to increase physical distance between team members, where permitted, limiting travel, and canceling physical participation in meetings and events, and we may take further actions as required by government authorities or that we determine are in the best interests of our team members.

Our business operations may be disrupted further if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, or other restrictions in connection with the COVID-19 pandemic.

There is no certainty that such measures will be sufficient to mitigate the risks posed by the disease, and our ability to perform certain functions could be negatively impacted.

While the duration and potential future impact of the COVID-19 pandemic on the U.S.

economy, and the automotive industry and our industry in particular, are difficult to assess or predict, the pandemic has resulted in disruption of financial markets, which may reduce our ability to access capital or our consumers’ ability to repay past or future Consumer Loans, and could negatively affect our liquidity and results of operations.

In addition, a recession or further financial market correction resulting from the COVID-19 pandemic could adversely affect demand for used vehicles.

A continued disruption in our workforce, decrease in collections from our consumers or decline in Consumer Loan assignments could cause a material adverse effect on our financial position, liquidity, and results of operations.

The COVID-19 pandemic continues to evolve, and we continue to monitor the situation closely.

The ultimate impact of this pandemic or a similar health epidemic is highly uncertain and subject to change.

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including, but not limited to, the duration of the pandemic, its severity, the actions to contain the disease or mitigate its impact, related restrictions on travel, additional federal stimulus measures and enhanced unemployment benefits, if any, and the duration, timing and severity of the impact on consumer behavior, including any recession resulting from the pandemic, all of which are uncertain and cannot be predicted.

An extended period of economic and supply chain disruptions as a result of the COVID-19 pandemic could have a material negative impact on our business, financial position, liquidity, and results of operations, though the full extent and duration is uncertain.

The COVID-19 pandemic may also intensify the risks described in the other risk factors disclosed in this Form 10-K.

The COVID-19 pandemic, or any future outbreak of any contagious diseases or other public health emergency, could continue to, and may materially, adversely affect our business, financial condition, liquidity and results of operations.

Our inability to accurately forecast and estimate the amount and timing of future collections could have a material adverse effect on results of operations.

Substantially all of the Consumer Loans assigned to us are made to individuals with impaired or limited credit histories.

The vast majority of the Consumer Loans assigned to us are made to individuals with impaired or limited credit histories.

Consumer Loans made to these individuals generally entail a higher risk of delinquency, default, and repossession, and higher losses than loans made to consumers with better credit.

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Additionally, if we are unsuccessful in maintaining and expanding our relationships with Dealers, we may be unable to accept Consumer Loans in the volume and on the terms that we anticipate.

An outbreak of contagious disease, such as the COVID-19 pandemic, or other public health emergency could materially and adversely affect our business, financial condition, liquidity, and results of operations.

The COVID-19 pandemic caused a deterioration in the U.S.

economy and our industry, resulted in a period of substantial economic and financial market turmoil and adversely affected our business.

In the early stages of the pandemic, certain state governments implemented social distancing guidelines, travel bans and restrictions, quarantines, stay-at-home orders, and shutdowns of non-essential businesses.

These actions caused economic hardship in the areas in which they were implemented.

Though such restrictions have lessened, uncertainty remains as to when economic conditions will fully return to normal.

Additionally, the automotive industry experienced many supply chain disruptions, which resulted in low dealer inventories and elevated used vehicle prices.

As a result, we experienced a significant decline in Consumer Loan assignments.

While unit volume for the year ended December 31, 2022 increased from the prior year, it remained below pre-pandemic levels.

The ultimate impact of the COVID-19 pandemic, and the potential impact of future contagious-disease outbreaks or other public health emergencies, are highly uncertain.

Disruptions in our workforce, decreases in collections from our consumers, declines in Consumer Loan assignments, or extended periods of economic or supply chain disruptions resulting from the COVID-19 pandemic or from future contagious-disease outbreaks or other public health emergencies could cause a material adverse effect on our financial position, liquidity, and results of operations.

Financial market disruptions, as occurred during the early stages of the COVID-19 outbreak, that occur as a result of contagious-disease outbreaks or other public health emergencies could reduce our ability to access capital or our consumers’ ability to repay past or future Consumer Loans and could negatively affect our liquidity and results of operations.

The COVID-19 pandemic could continue to, and may materially—and any future contagious-disease outbreak or other public health emergency could materially—adversely affect our business, financial condition, liquidity, and results of operations and also intensify the risks described in the other risk factors disclosed in this Form 10-K.

Reliance on third parties to administer our ancillary product offerings could adversely affect our business and financial results.

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We depend on these TPPs to evaluate and pay claims in an accurate and timely manner.

We also have a relationship with a TPP to administer GPS-SID.

If our relationships with these TPPs were modified, disrupted, or terminated, we would need to obtain these services from an alternative administrator or provide them using our internal resources.

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We are dependent on our senior management and the loss of any of these individuals or an inability to hire additional team members could adversely affect our ability to operate profitably.

Our senior management average over 16 years of experience with us.

Our senior management average 15 years of experience with us.

Our success is dependent upon the management and the leadership skills of this team.

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If any of these or other risks related to outsourcing were realized, our financial position, liquidity, and results of operations could be adversely affected.

Our ability to hire and retain foreign information technology personnel could be hindered by immigration restrictions.

A significant portion of our information technology team is composed of foreign nationals whose ability to work for us depends on obtaining the necessary H-1B visas.

Our ability to hire and retain foreign engineering personnel could be hindered by immigration restrictions.

A portion of our engineering team is composed of foreign nationals whose ability to work for us depends on maintaining the necessary H-1B visas.

The H-1B visa category allows U.S.

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Changes in the laws or regulations affecting the availability, allocation, and/or cost of H-1B visas, eligibility for the H-1B visa category, or otherwise affecting the admission or retention of skilled foreign nationals by U.S.

employers, or any increase in demand for H-1B visas relative to the limited supply of those visas, may adversely affect our ability to hire or retain foreign information technology personnel and may, as a result, increase our operating costs and impair our business operations.

employers, or any increase in demand for H-1B visas relative to the limited supply of those visas, may adversely affect our ability to hire or retain foreign engineering personnel and may, as a result, increase our operating costs and impair our business operations.

We may be unable to execute our business strategy due to current economic conditions.

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Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed automobiles may be sold or delay the timing of these sales.

Additionally, higher gasoline prices, increased focus on climate-related initiatives and regulation, declining stock market values, unstable real estate values, resets of adjustable rate mortgages to higher interest rates, increasing unemployment levels, general availability of consumer credit or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values of automobiles.

Additionally, inflation, higher gasoline prices, increased focus on climate-related initiatives and regulation, declining stock market values, unstable real estate values, resets of adjustable rate mortgages to higher interest rates, increasing unemployment levels, general availability of consumer credit, or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values of automobiles.

Because our business is focused on consumers who do not qualify for conventional automobile financing, the actual rates of delinquencies, defaults, repossessions, and losses on our Consumer Loans could be higher than those experienced in the general automobile finance industry, and could be more dramatically affected by a general economic downturn.

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Decreased consumer demand for automobiles could negatively impact demand for our financing programs as well as weaken collateral values of automobiles, which could materially adversely affect our financial position, liquidity, and results of operations.

Natural disasters, climate change, acts of war, terrorist attacks and threats or the escalation of military activity in response to these attacks or otherwise may negatively affect our business, financial condition and results of operations.

Natural disasters, climate change, acts of war, terrorist attacks and the escalation of military activity in response to these attacks or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, market disruptions and job losses.

These events may have an adverse effect on the economy in general.

Moreover, the potential for future terrorist attacks and the national and international responses to these threats could affect the business in ways that cannot be predicted.

The effect of any of these events or threats could have a material adverse effect on our business, financial condition and results of operations.

Natural disasters, climate change, military conflicts, acts of war, terrorist attacks and threats, or the escalation of military activity in response to terrorist attacks or otherwise may negatively affect our business, financial condition, and results of operations.

Natural disasters, climate change, military conflicts such as the war in Ukraine, acts of war, terrorist attacks, and the escalation of military activity in response to terrorist attacks or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, economic and financial market disruptions, loss of lives, damage to infrastructure, and job losses.

These types of events or developments and their consequences may have an adverse effect on the economy in general, including diminished liquidity and credit availability, reduced consumer confidence, disruptions to energy and food supplies, decreased economic growth, higher unemployment rates, increased inflation, and political and social upheaval.

The consequences of these types of events or developments could reduce used-car sales and demand for our product, impair the performance of our Loan portfolio, limit our access to capital, and intensify other risk factors disclosed in this Form 10-K, including cybersecurity-related risks.

Moreover, the potential for future military conflicts and terrorist attacks, natural disasters, and escalating effects of climate change, and the national and international responses to these threats, could affect our business in ways that cannot be predicted.

The effect of any of these events, developments, or threats could have a material adverse effect on our business, financial condition, and results of operations.

Governmental or market responses to climate change and related environmental issues could have a material adverse effect on our business.

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How governments act to mitigate climate and related environmental risks, as well as associated changes in the behavior and preferences of businesses and consumers, could have an adverse effect on our business and results of operations.

We could, for example, experience decreased consumer demand for gasoline-powered automobiles and declining values of gasoline-powered automobiles securing outstanding Consumer Loans, which would weaken collateral coverage and increase the amount of loss in the event of default.

A decline in demand for gasoline-powered automobiles, such as could occur due to regulatory restrictions or a shift in consumer preference toward electric vehicles, could decrease the value of gasoline-powered vehicles securing outstanding Consumer Loans, which would weaken collateral coverage and increase the amount of loss in the event of default.

Further, we may be compelled to change our business practices or our operational processes, and we could have less access to capital or face a higher cost of capital, because of climate- or environmental-driven changes in applicable law or due to related political, social, or market pressure.

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A small number of our shareholders have the ability to significantly influence matters requiring shareholder approval and such shareholders have interests which may conflict with the interests of our other security holders.

As of December 31, 2021, based on filings made with the SEC and other information made available to us, Prescott General Partners, LLC and its affiliates beneficially owned 18.3% of our common stock, Jill Foss Watson beneficially owned 15.4% of our common stock and Allan V.

Apple beneficially owned 12.6% of our common stock.

As of December 31, 2022, based on filings made with the SEC and other information made available to us, Allan V.

Apple beneficially owned 24.6% of our common stock, Prescott General Partners, LLC and its affiliates beneficially owned 18.3% of our common stock, Jill Foss Watson beneficially owned 16.2% of our common stock, and John P.

Neary beneficially owned 11.4% of our common stock (representing, collectively, beneficial ownership of 46.8% of our common stock, after taking into account those shares reported as beneficially owned by more than one of these shareholders).

As a result, these shareholders are able to significantly influence matters presented to shareholders, including the election and removal of directors, the approval of significant corporate transactions, such as any reclassification, reorganization, merger, consolidation, or sale of all or substantially all of our assets, and the control of our management and affairs, including executive compensation arrangements.

Their interests may conflict with the interests of our other security holders.

The beneficial ownership reported by Mr.

Apple and Mr.

Neary includes, in each case, beneficial ownership in their capacity as trustees of shares held in a trust established by our late founder, Donald Foss, for the benefit of members of Mr.

Foss’s family and representing 11.4% of our common stock as of December 31, 2022.

The shares in the trust are subject to the terms of a shareholder agreement, entered into by Mr.

Foss on January 3, 2017.

Under the terms of that agreement that became applicable to the trustees of the trust upon Mr.

Foss’s death on August 14, 2022, until the final adjournment of the tenth annual meeting of shareholders held by the Company after the date of the shareholder agreement, the shares in the trust are to be voted in accordance with the recommendation of the Company’s Board of Directors with respect to election and removal of directors, certain routine matters and any other proposal to be submitted to the Company’s shareholders with respect to any extraordinary transaction providing for the acquisition of all of the Company’s outstanding common stock.

Capital and Liquidity Risks

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Some of our debt agreements also impose requirements that we maintain specified financial measures not in excess of, or not below, specified levels.

(ii) as of the end of each fiscal quarter calculated for the two fiscal quarters then ending, consolidated net income, as defined in the agreements, of not less than a specified minimum;

and (iii) as of the end of each fiscal quarter, a ratio of consolidated income available for fixed charges for the period of four consecutive fiscal quarters most recently ended to consolidated fixed charges, as defined in the agreements, for that period of not less than a specified minimum.

In particular, our revolving credit facility requires, among other things, that we maintain (i) as of the end of each fiscal quarter, a ratio of consolidated funded debt less unrestricted cash and cash equivalents to consolidated tangible net worth at or below a specified maximum and (ii) as of the end of each fiscal quarter, a ratio of consolidated income available for fixed charges for the period of four consecutive fiscal quarters most recently ended to consolidated fixed charges, as defined in the agreements, for that period of not less than a specified minimum.

These covenants limit the manner in which we can conduct our business and could prevent us from engaging in favorable business activities or financing future operations and capital needs and impair our ability to successfully execute our strategy and operate our business.

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• a substantial portion of our cash flows from operations will be dedicated to paying principal and interest on our debt, reducing funds available for other purposes;

• we may be vulnerable to interest rate increases, as some of our borrowings, including those under our revolving credit facility, bear interest at variable rates;

• we may be vulnerable to interest rate increases, as some of our borrowings, including those under our revolving credit facility and Warehouse facilities, bear interest at variable rates;

• we could be more vulnerable to adverse developments in our industry or in general economic conditions;

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The FCA-regulated and authorized administrator of LIBOR indicated in 2020 that U.S.-dollar LIBOR for certain maturities would continue to be available until the end of June 2023.

It is unclear whether new methods of calculating LIBOR will be established or if alternative rates or benchmarks will be adopted.

Our revolving secured line of credit, certain of our Warehouse facilities, one of our Term ABS financings and our interest rate cap agreements utilize LIBOR as a benchmark for calculating the applicable interest rates.

We have entered into amendments for certain of those LIBOR-based facilities to provide for transitioning to a LIBOR alternative.

Changes in the method of calculating LIBOR, the elimination of LIBOR or the replacement of LIBOR with an alternative rate or benchmark, such as the Secured Overnight Financing Rate, may require us to renegotiate or amend those facilities that do not already provide for transitioning to a LIBOR alternative and, even if applied in a manner consistent with any transition provisions, may adversely affect the interest rates available to us and result in higher borrowing costs.

Such higher borrowing costs or any other similar increases in the cost of capital to us resulting from the phaseout or replacement of LIBOR could materially adversely affect our financial position, liquidity and results of operations.

During 2022, we entered into amendments for most of our LIBOR-based facilities to transition to alternative benchmark rates.

One of our Warehouse facilities and the corresponding interest rate cap agreement continue to utilize LIBOR as a benchmark for calculating the applicable interest rates.

We plan to transition the remaining LIBOR-based facility and its related interest rate cap to an alternative benchmark.

Any market volatility or disruption or changes in effective interest rates resulting from the discontinuance or replacement of LIBOR, or any failure to transition our remaining LIBOR-based facility and its related interest rate cap to an alternative benchmark, could adversely affect our access to the debt, securitization or derivative markets and increase our costs of funding and hedging.

Such market volatility or disruption or higher costs of funding and hedging or any other similar increases in our cost of capital resulting from the phaseout or replacement of LIBOR could materially adversely affect our financial position, liquidity, and results of operations.

Alternatives to LIBOR that have been incorporated into our borrowings to date, such as the Bloomberg Short-Term Bank Yield Index Rate (“BSBY”) and the Secured Overnight Financing Rate (“SOFR”), are relatively new reference rates with limited histories.

The future performance of these alternatives to LIBOR cannot reliably be predicted based on their limited historical performance.

Additionally, any other successor rates to LIBOR or successors to these initial alternatives to LIBOR may have different characteristics from those of LIBOR and these initial alternatives.

As a result, the manner in which and degree to which the interest rates on our variable-interest-rate debt fluctuate relative to market interest rates may be more difficult to predict than prior to the phaseout of LIBOR.

Reduction in our credit rating could increase the cost of our funding from, and restrict our access to, the capital markets and adversely affect our liquidity, financial condition, and results of operations.

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There can be no assurance that future disruptions in the financial sector will not occur that could have similar adverse effects on our business.

Information Technology and Cybersecurity Risks

Technology and Cybersecurity Risks

Our dependence on technology could have a material adverse effect on our business.

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Our Consumer Loan servicing platform is also technology based.

We rely on these systems to record and process significant amounts of data quickly and accurately and believe that these systems provide us with a competitive advantage.

All of these systems are dependent upon computer and telecommunications equipment, software systems and Internet access.

The temporary or permanent loss of any components of these systems through hardware failures, software errors, operating malfunctions, the vulnerability of the Internet or otherwise could interrupt our business operations, harm our business and adversely affect our competitive advantage.

In addition, our competitors could create or acquire systems similar to ours, which would adversely affect our competitive advantage.

We rely on these systems to record and process significant amounts of data quickly and accurately.

Our systems are dependent upon computer and telecommunications equipment, software systems, and internet access.

The temporary or permanent loss of any components of these systems through hardware failures, software errors, operating malfunctions, the vulnerability of the internet, or otherwise could interrupt our business operations and harm our business.

Our systems, and the equipment, software, and internet access on which they depend, may be subject to cyber attacks, security breaches, and other cybersecurity incidents.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors