What changed in this filing

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Item 1A. Risk Factors

2021-11-17 compared with 2020-12-14 · 47 added, 67 removed, 154 unchanged (43% of the section changed)

ITEM 1A — RISK FACTORS

There are many risks and uncertainties that may affect our operations, performance, development and results.

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Company Specific Risks

As a result of the current COVID-19 pandemic, we incurred operating losses in the fourth quarter of fiscal 2020 and expect those operating losses to continue into fiscal 2021.

The outbreak of COVID-19 began affecting our operations in March 2020.

Governmental fiscal stimulus response, stay-at-home orders and business restrictions, health agency guidance regarding social distancing and public perceptions of the risks associated with the COVID-19 pandemic have resulted in a reduction in the demand for pawn loans with a resulting significant decline in pawn loan balances.

See “Part II, Item 7 — Management’s Discussion and Analysis of Results of Operations and Financial Condition — Impact of COVID-19.” The decline in pawn loan balances negatively impacted our financial performance during the third and fourth quarters of fiscal 2020.

We expect the impact of the pandemic, and the recovery therefrom, will continue to adversely affect our net revenues and earnings in fiscal 2021.

A prolonged pandemic and recovery may impact our financial condition, results of operations and liquidity in future periods.

The extent of the impact is dependent upon a number of factors, including the longevity and severity of the pandemic, the pace of business reopenings and rebound, the impact of government responses and the degree to which customer behaviors return to historical norms.

Failure to sustain focus on internal controls could adversely affect our business, results of operations and financial condition.

As described in "Part II, Item 9A — Controls and Procedures," we identified and evaluated certain deficiencies in our IT general controls in the second quarter of fiscal 2019, and concluded those deficiencies, collectively, represented a material weakness in our internal control over financial reporting.

During the fourth quarter of fiscal 2020, we completed our efforts to remediate the underlying deficiencies, and have concluded that our disclosure controls and procedures and our internal control over financial reporting are effective as of September 30, 2020.

If we do not sustain our focus on internal controls, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results,

which could materially and adversely affect our business, results of operations and financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the deficiencies, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a decline in investor confidence and the market value of our publicly traded Class A Non-Voting Common Stock (“Class A Common Stock”).

Changes in, or failure to comply with, laws and regulations affecting our products and services could have a material adverse effect on our operations and financial performance.

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As of September 30, 2021, more than 60% of our U.S.

pawn stores were located in Texas (43%) and Florida (19%), and those stores account for a significant portion of our revenues and profitability.

pawn stores were locat ed in Texas (44%) and Florida (18%), a nd those stores account for a significant portion of our revenues and profitability.

The legislative, regulatory and general business environment in Texas and Florida has been relatively favorable for our pawn business activities, but a negative legislative or regulatory change in either of those states could have a material adverse effect on our overall operations and financial performance.

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Gold jewelry comprises a large portion of the collateral security for our pawn loans and our inventory.

Pawn service charges, sales proceeds and our ability to liquidate excess jewelry inventory at an acceptable margin are dependent upon gold values and the volume of gold transactions.

PSC, sales proceeds and our ability to liquidate excess jewelry inventory at an acceptable margin are dependent upon gold values and the volume of gold transactions.

A decline in the availability of gold or our customers’ willingness or ability to sell us gold or use gold as collateral for pawn loans could impact our business.

The impact on our financial position and results of operations of decreases in gold values or volumes or a change in customer behavior cannot be reasonably estimated because the market and customer response to changes in gold values is not known;

however, a significant decline in gold values or gold volumes could result in decreases in sales, sales margins, pawn loan balances and pawn service charges.

Fluctuations in our sales, pawn loan balances, sales margins and pawn redemption rates could have a material adverse impact on our operating results.

however, a significant decline in gold values or gold volumes could result in decreases in sales, sales margins, PLO and PSC.

Fluctuations in our sales, PLO, sales margins and pawn redemption rates could have a material adverse impact on our operating results.

We regularly experience fluctuations in a variety of operating metrics.

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Failure to achieve our expansion goals could adversely affect our prospects, future results of operations and future cash flows.

Our development of a digital platform, and the commercialization of that platform, may not be successful.

We have invested in the design and development of a digital platform to enhance our relationships with customers and provide them access to a broader range of financial products and services.

There can be no assurance that our efforts to develop and launch such a digital platform will be successful or that the platform will be accepted by existing customers or attract new customers.

Consequently, we may not realize the expected return on our investment.

We continue to have limited indemnity obligations to AlphaCredit for pre-closing taxes.

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In August 2019, AlphaCredit notified us of a potential indemnity claim for certain pre-closing taxes, but the nature, extent and validity of such claim has yet to be determined.

The last two payments from AlphaCredit totaling $8.0 million have been placed into escrow pending resolution of the potential indemnity claim.

The final payments from AlphaCredit totaling $8.0 million have been placed into escrow pending resolution of the potential indemnity claim.

One person beneficially owns all of our voting stock and generally controls the outcome of all matters requiring a vote of stockholders, which may influence the value of our publicly traded non-voting stock.

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The lack of voting rights may adversely affect the market value of our publicly traded Class A Common Stock.

In September 2019, Mr.

Cohen joined the Board of Directors and was appointed Executive Chairman.

Cohen is a member of our Board of Directors and serves as Executive Chairman.

As a member of the Board, Mr.

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We have a significant firearms business in the U.S., which exposes us to increased risks of regulatory fines and penalties, lawsuits and related liabilities.

As discussed under “Part I, Item 1 — Business — Regulation — U.S.

Regulations — Pawn Regulations,” some of our stores in the U.S.

Some of our stores in the U.S.

conduct pawn and retail transactions involving firearms, which may be associated with an increased risk of injury and related lawsuits.

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Further, we could be subject to liability to customers or other third parties as a result of such activities.

While we maintain asset protection and monitoring programs to mitigate these risks, as well as insurance programs to

protect against catastrophic loss or exposure, there can be no assurance that these crimes will not occur or that such losses will not have an adverse effect on our business or results of operations.

While we maintain asset protection and monitoring programs to mitigate these risks, as well as insurance programs to protect against catastrophic loss or exposure, there can be no assurance that these crimes will not occur or that such losses will not have an adverse effect on our business or results of operations.

Changes in competition from various sources could have a material adverse impact on our ability to achieve our plans.

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We may be required in future periods to impair our investment and recognize related investment losses, as we have done in the past, and we may not realize a positive return on the investment.

We currently own 34.75% of the outstanding ordinary shares of Cash Converters International, which is a publicly traded company based in Australia.

At November 1, 2021, we ow ned 37.72% of the outstanding ordinary shares of Cash Converters , which is a publicly traded company based in Australia.

We made the initial investment in November 2009 and have made incremental investments periodically since then.

The success of this strategic investment is dependent on a variety of factors, including Cash Converters International’s business performance and the market’s assessment of that performance.

We have recorded a number of impairments to the carrying value of our investment in Cash Converters International in the past.

After an analysis of Cash Converters International’s stock price performance and other factors, we determined that the fair value of our investment in Cash Converters International at September 30, 2020 was greater than its carrying value.

Accordingly, we did not record an impairment at that date.

See Note 5 of Notes to Consolidated Financial Statements included in “Part II, Item 8 - Financial Statements and Supplemental Data.” If the fair value of our investment declines and we determine that such decline is other-than-temporary, we may be required to further impair our investment and recognize the related investment loss, which would adversely affect our results of operations and financial position in the period of impairment.

Furthermore, there can be no assurance that we will be able to dispose of some or all of our investment in Cash Converters International on favorable terms, should we decide to do so in the future.

Our ability to recover our investment in RDC is heavily dependent on RDC's success and performance, including its ability to obtain further debt or equity financing.

We have an investment in Rich Data Corporation (“RDC”), a previously consolidated variable interest entity.

See Note 6 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” Our ability to recover our investment in RDC is heavily dependent on RDC's success and performance, potentially including its ability to obtain further debt or equity financing.

To the extent that RDC is not successful, we may be required in future periods to impair our investment and recognize related investment losses.

The success of this strategic investment is dependent on a variety of factors, including Cash Converters ’s business performance and the market’s assessment of that performance.

We have recorded a number of impairments to the carrying value of our investment in Cash Converters in

After an analysis of Cash Converters ’s stock price performance and other factors, we determined the fair value of our investment in Cash Converters at September 30, 2021 wa s greater than its carrying value.

Strategic Investments of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” If the fair value of our investment declines and we determine that such decline is other-than-temporary, we may be required to further impair our investment and recognize the related investment loss, which would adversely affect our results of operations and financial position in the period of impairment.

Furthermore, there can be no assurance that we will be able to dispose of some or all of our investment in Cash Converters on favorable terms, should we decide to do so in the future.

Our ability to recover our investments in Rich Data Corporation and Simple Management Group, Inc.

is heavily dependent on the success and performance of those companies, including their respective ability to obtain further debt or equity financing.

We have an investment in Rich Data Corporation (“ RDC ”) and an indirect investment in Simple Management Group, Inc.

Strategic Investments and Note 16:

Subsequent Events of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” Our ability to recover our investment in either of these companies is heavily dependent on their success and performance, potentially including their ability to obtain further debt or equity financing.

To the extent that either of such companies is not successful, we may be required in future periods to impair our investment and recognize related investment losses.

We may incur property, casualty or other losses, including losses related to natural disasters such as hurricanes, earthquakes and volcanoes.

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As noted above, not all physical damage that we incur as a result of any such natural disaster will be covered by insurance due to policy deductibles and risk retentions.

In addition, natural disasters could have a significant negative impact on our business beyond physical damage to property, including a reduction of our loan portfolio, inventory, pawn service charges and merchandise sales.

In addition, natural disasters could have a significant negative impact on our business beyond physical damage to property, including a reduction of our PLO, inventory, pawn service charges and merchandise sales.

Only limited portions, if any, of those negative impacts will be covered by applicable business interruption insurance policies.

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We assess goodwill for impairment at least annually, which could result in a material, non-cash write-down and could have a material adverse effect on our results of operations and financial conditions.

The carrying value of our goodwill was $257.6 million, or approximately 22% of our total assets, as of September 30, 2020.

In accordance with Financial Accounting Standards Board Accounting Standards Codification 350-20-35 , we test goodwill and intangible assets with an indefinite useful life for potential impairment annually, or more frequently 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.

The carrying value of our goo dwill was $285.8 million, or approximately 23% o f our total assets, as of September 30, 2021.

We test goodwill and intangible assets with an indefinite life for potential impairment annually, or more frequently 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.

These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in the estimated future discounted cash flows of our reporting units.

Our annual goodwill impairment test is performed in the fourth quarter utilizing the income approach.

This approach uses future cash flows and estimated terminal values for each reporting unit (discounted using a market participant perspective) to determine the fair value of each reporting unit, which is then compared to the carrying value of the reporting unit to determine if an impairment exists.

The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates discounted by an estimated weighted-average cost of capital derived from other publicly traded companies that are similar but not identical from an operational and economic standpoint.

During the second quarter of fiscal 2020, there was an indicator of impairment due to a decline in our market capitalization.

We performed a quantitative analysis as of March 31, 2020 utilizing the income approach.

As a result of our quantitative analysis, we determined the fair value of each of our reporting units was below its carrying value because of the impact of COVID-19, including a significant decline in pawn loan balances due to changes in typical customer behavior and mandated store closures in our GPMX countries.

These factors impacted the forecast of future net revenues and earnings and resulted in lower present value of future cash flows.

This led to a goodwill impairment charge of $41.3 million in the second quarter of fiscal 2020.

These impairments were recorded under "Impairment of goodwill, intangible and other assets" in the Consolidated Statements of Operations

See Note 1 and Note 8 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data” for a discussion of our annual impairment tests performed for goodwill and indefinite-lived intangible assets during fiscal 2020.

We remain confident in our businesses, as all business units were performing well prior to the impact of COVID-19.

When performing our annual test of goodwill for impairment in the fourth quarter, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the estimated fair value of a reporting unit is less than its carrying amount.

If we elect to perform a qualitative assessment and determine an impairment is more-likely-than-not, we are then required to perform a quantitative impairment test;

otherwise, no further analysis is required.

We also may elect not to perform a qualitative assessment and, instead, proceed directly to a quantitative impairment test.

When performing a quantitative impairment test, we apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

When we perform a quantitative goodwill impairment test, we estimate the fair value of the reporting unit using an income approach based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital (“WACC”) determined separately for each reporting unit.

The determination of fair value involves the use of estimates and assumptions, including revenue growth rates, operating margins and terminal growth rates discounted by an estimated WACC derived from other publicly traded companies that are similar but not identical to us from an operational and economic standpoint.

We use discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and in our internally developed forecasts.

Organization and Summary of Significant Accounting Policies and Note 8:

Goodwill and Intangible Assets of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for a discussion of our annual impairment tests performed for goodwill and indefinite-lived intangible assets.

The conversion feature of our convertible notes, if triggered, may adversely affect our financial condition and operating results.

We have outstanding a total of $316.3 million of convertible notes.

See Note 9 of Note to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.” If the conversion feature of any of those convertible notes is triggered, holders will be entitled to convert the notes at their option at any time during specified periods.

We have outstanding a total of $316.3 mill ion of convertible notes.

Debt of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.” If the conversion feature of any of those convertible notes is triggered, holders will be entitled to convert the notes at their option at any time during specified periods.

If one or more holders elect to convert their notes, we may be required, or may choose, to settle the obligation through the payment of cash, which could adversely affect our liquidity.

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Any sales in the public market of such shares could adversely affect prevailing market prices of our Class A Common Stock.

In addition, the existence of the convertible notes may encourage short selling by market participants because the conversion of such notes could be used to satisfy short positions, or

anticipated conversion of the notes into shares of our Class A Common Stock could depress the price of our Class A Common Stock.

In addition, the existence of the convertible notes may encourage short selling by market participants because the conversion of such notes could be used to satisfy short positions, or anticipated conversion of the notes into shares of our Class A Common Stock could depress the price of our Class A Common Stock.

We have a limited number of unreserved shares available for future issuance, which may limit our ability to conduct future financings and other transactions and our ability to offer equity awards to management.

Our certificate of incorporation currently authorizes us to issue up to 100 million shares of Class A Common Stock.

Taking into consideration the shares that are issued and outstanding, as well as the shares that have been reserved for issuance pursuant to convertible notes, warrants and outstanding equity incentive compensation awards and the conversion of the Class B Common Stock, we had approximately 10.4 million shares of authorized Class A Common Stock available for other uses as of September 30, 2020.

Therefore, our ability to issue shares of Class A Common Stock (other than pursuant to the existing reserved-for commitments), or securities or instruments that are convertible into or exchangeable for shares of Class A Common Stock, may be limited until such time that additional authorized, unissued and unreserved shares become available or unless we determine that we are unlikely to issue all of the shares that are currently reserved.

Taking into consideration the shares that are issued and outstanding, as well as the shares that have been reserved for issuance pursuant to convertible notes, warrants and outstanding equity incentive compensation awards and the conversion of the Class B Common Stock, we had approximately 10.0 million shar es of authorized Class A Common Stock available for other uses as of September 30, 2021.

Therefore, our ability to issue shares of Class A Common Stock (other than pursuant to the existing reserved-for commitments), or securities or instruments that are convertible into or exchangeable for shares of Class A Common Stock, may be limited until such time additional authorized, unissued and unreserved shares become available or unless we determine we are unlikely to issue all of the shares that are currently reserved.

During this time, for example, our ability to complete equity or equity-linked financings or other transactions (including strategic acquisitions) that involve the issuance or potential issuance of Class A Common Stock may be limited.

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General Risks

Public health issues could adversely affect our financial condition, results of operations or liquidity.

Our business may be impacted by public health issues, including other pandemics and the spread of contagious diseases.

Public health issues, including the continuing COVID-19 pandemic, could adversely affect our financial condition, results of operations or liquidity.

Our business may be impacted by public health issues, including the continuing COVID-19 pandemic, other pandemics and the spread of contagious diseases.

Such public health issues, and the government and consumer responses thereto, may (i) limit our ability to supply products and services to our customers as a result of store closures, reduced access to or foot traffic in our stores, or labor shortages, (ii) adversely affect the demand for our products and services or (iii) cause other unforeseen negative developments.

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We have significant operations in Latin America, and changes in the business, regulatory, political or social climate could impact our operations there, which could adversely affect our results of operations and growth plans.

We own and operate a significant number of pawn stores in Latin America (primarily Mexico, but also Guatemala, El Salvador, Honduras and Peru).

We own and operate a significant number of pawn stores in Latin America (primarily Mexico, but also Guatemala, El Salvador and Honduras).

Further, our growth plans include potential expansion in some of those countries as well as potentially other countries in Latin America.

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Furthermore, changes in the business, regulatory or political climate in any of those countries, or significant fluctuations in currency exchange rates, could affect our ability to expand or continue our operations there, which could have a material adverse impact on our prospects, results of operations and cash flows.

For a description of the current regulatory environment in the Latin American countries in which we operate, see “Mexico Regulations” and “Other Latin America Regulations” under “Part I, Item 1 — Business — Regulation.”

description of the current regulatory environment in the Latin American countries in which we operate, see “Mexico Regulations” and “Other Latin America Regulations” under “Part I, Item 1 — Business — Regulation.”

A significant change in foreign currency exchange rates could have a material adverse impact on our earnings and financial position.

We have foreign operations in Latin America (Mexico, Guatemala, Honduras, El Salvador and Peru) and an equity investment in Australia.

We have foreign operations in Latin America (primarily Mexico, but also Guatemala, El Salvador and Honduras) and an equity investment in Australia.

Our assets and investments in, and earnings and dividends from each of these countries must be translated to U.S.

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However, our insurance coverage is subject to deductibles and there may be elements of the costs or liabilities that are not covered under the insurance policies.

In addition, to the extent that our ultimate liability in any such proceeding (or any combination of proceedings that are included in the same policy year) exceeds the management liability policy limits, our results of operations and financial condition could be adversely affected.

In addition, to the extent our ultimate liability in any such proceeding (or any combination of proceedings that are included in the same policy year) exceeds the management liability policy limits, our results of operations and financial condition could be adversely affected.

Our acquisitions, investments and other transactions could disrupt our ongoing business and harm our results of operations.

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A significant reduction in cash flows from operations or the availability of debt or equity financing could materially and adversely affect our ability to achieve our planned growth and operating results.

Our ability to obtain debt or equity financing, including the possible refinancing of existing indebtedness, will depend upon market conditions, our financial condition and the willingness of financing sources to make capital available to us at acceptable rates and terms.

Our ability to obtain debt or equity financing, including the possible refinancing of

existing indebtedness, will depend upon market conditions, our financial condition and the willingness of financing sources to make capital available to us at acceptable rates and terms.

The inability to access capital at acceptable rates and terms could restrict or limit our ability to achieve our growth objectives, which could adversely affect our financial condition and results of operations.

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We face other risks discussed under "Part II, Item 7A — Quantitative and Qualitative Disclosures about Market Risk."

ITEM 1B — UNRESOLVED STAFF COMMENTS

UNRESOLVED STAFF COMMENTS

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