EDGAR 10-K Filing

Company CIK: 1711291
Filing Year: 2022
Filename: 1711291_10-K_2022_0001711291-22-000011.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Company Overview
We are a tech-enabled, omni-channel consumer finance company serving non-prime and prime consumers in the U.S. and Canada. CURO was founded in 1997 to meet the growing consumer need for short-term loans. With more than 20 years of experience, we offer a variety of convenient, accessible financial and loan services across all of our markets.
We operate in the U.S. under several principal brands, including “Speedy Cash,” “Rapid Cash” and “Avio Credit” and, subsequent to our acquisition of Heights, "Covington Credit," "Heights Finance," "Quick Credit" and "Southern Finance." We also offer demand deposit accounts in the U.S. under Revolve Finance, and credit card programs under First Phase, which we launched in the fourth quarter of 2021. As of December 31, 2021, our store network consisted of 550 locations across 20 U.S. states and we offered our online services in 27 U.S. states.
In Canada, we operate under “CURO Canada” and “LendDirect” direct lending brands and the "Flexiti" point-of-sale brand. As of December 31, 2021, we operated our direct lending in eight Canadian provinces and offered our online services in eight Canadian provinces and one Canadian territory. Our point-of-sale operations are available at nearly 7,500 retail locations and over 3,100 merchant partners across 10 provinces and two territories.
In recent years, we have diversified our product offerings and regulatory profile through our investment in Katapult and our acquisitions of Flexiti in March 2021 and Heights in December 2021. As of December 31, 2021, on a fully diluted basis, assuming full pay-out of earn-out shares, we held an approximately 25.2% ownership stake in Katapult, an e-commerce focused, FinTech company offering an innovative lease financing solution to consumers and enabling essential transactions at the merchant POS. See "-Katapult Investment" below for additional details. 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. On December 27, 2021, we acquired Heights, 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 accelerated our strategic transition in the U.S. toward longer term, higher balance and lower credit risk products, and provided us with access to a larger addressable market while mitigating regulatory risk. See "-Flexiti Acquisition" and "-Heights Acquisition" below and Note 15, "Acquisitions" of Item 8, "Financial Statements and Supplementary Data" for additional details. These acquisitions have enabled us to offer products to a full spectrum of customers ranging from nonprime, generally served by our legacy brands, to near prime and prime as a result of our acquisitions of Heights and Flexiti, respectively. Collectively, these strategic investments and partnerships help serve our current core customers, allow us to access new markets and customers, and reduce our regulatory and credit risk.
Our direct lending operations include a broad range of direct-to-consumer finance products focusing on Revolving LOC and Installment loans. Through our investment in Katapult and acquisition of Flexiti, we offer POS financing options for consumers. We also provide a number of ancillary financial products such as optional credit protection insurance, demand deposit accounts, proprietary general-purpose credit cards, check cashing, retail installment sales and money transfer services.
We believe that our core products allow us to serve a broader group of consumers than our competitors. Our ability to tailor our core products to fit consumer needs coupled with the flexibility of our products, particularly our Revolving LOC and Installment products, allows us to continue serving customers as their credit needs evolve and mature. Our broad product suite creates a diversified revenue stream and our omni-channel platform seamlessly delivers our core products across all contact points - we refer to it as “Call, Click or Come In.” We believe these complementary channels drive brand awareness, increase approval rates, lower customer acquisition costs and improve customer satisfaction levels and customer retention.
2021 Recent Developments
Heights Acquisition
On December 27, 2021, we completed the acquisition of Heights for $360.0 million, consisting of $335.0 million in cash and $25.0 million of our common stock in accordance with the formula set forth in the Purchase Agreement. Heights is a consumer finance company that provides Installment loans and offers customary opt-in insurance and other financial products across 390 branches and 11 U.S. states. Heights provides Secured and Unsecured Installment loans to near-prime and non-prime consumers.
In connection with its lending operations, Heights offers optional insurance products, including credit life, credit accident and health, credit property insurance and credit involuntary unemployment insurance. These policies are written by unaffiliated third-party insurance companies. The type and terms of our optional insurance products vary from state to state based on applicable laws and regulations. Insurance premiums are remitted to unaffiliated insurance companies that issue the policies to the customer.
The acquisition of Heights accelerates our strategic migration into longer term, higher balance and lower credit risk products, allows us to expand our addressable market while mitigating regulatory risk, and diversifies our revenue, product and geography mix. Below are other key benefits of the Heights acquisition:
-Accelerates our post-pandemic U.S. earnings growth while enhancing cross-sell opportunities for non-prime credit card and other products.
-Provides us an up-market product that allows us to serve the full spectrum of near-prime and non-prime consumers.
-Adds over 3.4 million customers to our database.
-Diversifies products, revenue, customers and geographic mix in the U.S. and enables further geographic expansion.
-Strong synergy potential, including leveraging our existing omni-channel and digital capabilities across the Heights footprint.
The acquisition brought with it a leadership team that possesses deep industry experience and a strong performance track record. We believe there is strong synergy potential through combined branch optimization and cost efficiencies as well as cross-selling opportunities. As of December 31, 2021, Heights accounted for approximately $472 million of Gross loans receivable on the Consolidated Balance Sheet and is included within the U.S. segment operations.
In connection with the Heights acquisition, we also completed the issuance of $250.0 million in aggregate principal amount of 7.50% Senior Secured Notes, as described further below. The additional issuance was used to fund the Heights acquisition, together with cash on hand and shares of our common stock.
Flexiti Acquisition and Growth
On March 10, 2021, we completed the acquisition of Flexiti in a transaction that included cash at closing of $86.5 million and contingent cash consideration of up to $32.8 million based on the achievement of revenue less NCOs and loan origination targets on the acquisition's first and second anniversaries. The Flexiti acquisition provides us capability and scale opportunity in Canada’s credit card and POS financing markets. It enhances our long-term growth and financial and risk profiles, and allows us to access the full spectrum of Canadian consumers by adding an established private label credit card platform and POS financing capabilities. We now reach consumers in Canada through all the ways they generally access credit, directly both in-store and online, via credit cards or at the POS.
Flexiti is one of Canada's fastest-growing POS lenders, offering the customers of its retail partners a variety of promotional financing offers which feature 0% interest financing during the promotional period on big-ticket purchases such as furniture, appliances, jewelry and electronics. Flexiti generates revenue through a merchant discount fee charged to its merchant partners
at the time of loan originations, interest charged on loans after the completion of the promotional financing period, various fees and through the sale of creditor insurance. Through its award-winning BNPL platform, customers can be approved instantly to shop with their FlexitiCard®, which they can use online or in-store to make multiple purchases, within their credit limit, without needing to reapply. Accepted at nearly 7,500 locations and ecommerce sites across Canada including The Brick, Leon's, Staples, Sleep Country, Wayfair, Birks and Peoples Jewelers, Flexiti is The Flexible Way to Pay™ aiming to bring flexible payment solutions to all.
The acquisition of Flexiti provides us a high-growth engine and diversifies our revenue and channel mix by product and geography. CURO's resulting platform accesses the full spectrum of Canadian consumers by adding an established omni-channel private label credit card platform and POS financing capabilities to our existing direct-to-consumer loan offerings. Flexiti primarily serves prime consumers; thus the combination presents significant revenue and earnings growth opportunities by using our expertise to expand Flexiti’s non-prime product offerings. The acquisition also provides the opportunity to leverage our loan servicing experience to improve Flexiti’s profit margins. In connection with the acquisition, Flexiti refinanced and expanded its non-recourse asset-backed warehouse financing facility from C$380 million to C$500 million.
Subsequent to the acquisition, Flexiti continued its rapid growth and gained new merchant partners throughout 2021, the most notable being LFL, Canada's largest home furnishings retailer. Effective July 1, 2021, Flexiti commenced a 10-year agreement to become LFL's exclusive POS financing partner. LFL operates over 300 stores in Canada under multiple banners, including Leon's and The Brick. Flexiti estimates that the LFL POS relationship will generate over C$800 million in annualized loan originations beginning mid-2022, when fully onboarded. Given the signing and onboarding of LFL, as well as other top-tier Canadian merchants, year over year, Flexiti's 2021 originations increased 143.2%, or C$418.6 million, to C$710.9 million.
Katapult Investment
In 2017, we made our first investment in Katapult, an e-commerce focused FinTech company offering an innovative lease financing solution to consumers and enabling essential transactions at the merchant POS. Katapult provides the retailers' customers with payment options in store or via the Katapult link on a retailer's website. In June 2021, Katapult merged with FinServ, resulting in a new publicly traded company (NASDAQ: KPLT). As a result, in June 2021 we received cash of $146.9 million and 18.9 million shares of common stock of Katapult. Additionally, we received 3.0 million of earn-out warrants, which will vest if certain share price levels are met and expire six years from the closing of the merger. In the fourth quarter of 2021, we acquired an additional 2.6 million shares of common stock of Katapult for an aggregate purchase price of $10.0 million. Our fully diluted ownership of Katapult as of December 31, 2021 was 25.2%, which assumes full pay-out of earn-out shares.
7.50% Senior Secured Notes
On July 30, 2021, we issued $750.0 million of 7.50% Senior Secured Notes, due 2028. Interest on the notes is payable semiannually, in arrears, on February 1 and August 1, beginning February 1, 2022. The net proceeds from the sale of the notes were used (i) to redeem our outstanding $690.0 million, 8.25% Senior Secured Notes due 2025, (ii) to pay fees, expenses, premiums and accrued interest in connection therewith and (iii) for general corporate purposes. On December 3, 2021, we issued an additional $250.0 million of 7.50% Senior Secured Notes to, in part, fund the acquisition of Heights on December 27, 2021.
Store Closures
On July 13, 2021, we announced the closure of 49 U.S. stores in response to evolving customer channel preferences that were accelerated by the impacts of COVID-19. The store closures, which occurred during the second and third quarters of 2021, represented nearly 25% of our U.S. stores at that time and, other than Illinois, represented strategic consolidation of locations in dense local markets. The impacted locations generated 8% of our U.S. store revenue in 2020. Our omni-channel platform allows customers to seamlessly transition online, to an adjacent store, or to contact centers, helping to increase the likelihood of retaining a large percentage of customers that had utilized the impacted stores.
The 49 U.S. stores were in Illinois (8), Oregon (2), Colorado (2), Washington (1) Texas (31), California (2), Louisiana (1), Nevada (1) and Tennessee (1). We exited Illinois entirely during the second and third quarters of 2021 given that state's legislative changes that effectively eliminated our product offerings; however, subsequent to the Heights acquisition on December 27, 2021, we retain 26 stores in Illinois under the Heights brand. The store closure decisions in other states were made after extensive analysis and in response to ongoing migration of customer transactions toward the online channel and the impact of COVID-19 on store traffic and profitability. Of the 49 stores affected, 19 and 30 were closed in the second and third quarter of 2021, respectively.
The store closure decisions followed an extensive evaluation that considered (i) comprehensive store-level score cards, (ii) market-level store density and the related addressable local market, (iii) the lingering and potential future COVID-19 impacts on
store volume, traffic and profitability and (iv) continued migration of customer transactions toward the online channel. Of the 31 stores closed in Texas, 25 were from The Money Box acquisition in 2012. While historically successful, these stores did not have the high-profile, high-traffic advantages of our Speedy/Rapid Cash stores, thus their profitability declined more during COVID-19. As of December 31, 2021, we operated 550 stores in the U.S., including 390 acquired with Heights, and 201 stores in Canada.
COVID-19 Update
The outbreak of COVID-19 in the first quarter of 2020 contributed to significant volatility and uncertainty in markets and the global economy. From the second quarter of 2020 through the first half of 2021, relative to pre-pandemic norms, our U.S. and Canada Direct Lending segments experienced lower customer demand, better credit performance, increased or accelerated repayments and favorable payment trends as customers were aided by government stimulus programs while periodically enduring pandemic lockdowns. In the third and fourth quarters of 2021, despite the rise of the COVID-19 Delta and Omicron variants, our markets were less affected by COVID-19 Impacts, resulting in positive growth trends in revenue and receivables. Refer to Note 2, "Loans Receivable and Revenue" for a description of the general impact on our customers, our accounting related to loans impacted by COVID-19, the U.S. and Canadian government responses to the COVID-19 pandemic and the impact on our Consolidated Financial Statements.
Although most of the initial governmental restrictions imposed at the onset of the pandemic in the U.S. and Canada had been relaxed or lifted as a result of the distribution of vaccines, due to recent surges in COVID-19 cases related to the Delta and Omicron variants, some jurisdictions have reinstituted measures and restrictions to slow the transmission and mitigate public health risks.
Throughout the COVID-19 pandemic, we have remained focused on protecting the health and well-being of our employees, customers, and the communities in which we operate, while assuring the continuity of our business operations. We are considered an essential financial service and our stores have remained open to facilitate the needs of our customers during local government lock down orders. While resurgences of the pandemic have occurred and could continue to occur in both the U.S. and Canadian jurisdictions, with local governmental bodies issuing guidelines on reopening procedures depending on the severity and/or duration of resurgences, we have established processes and procedures during the crisis to help ensure that we can continue to operate safely for both our employees and customers.
To better serve our customers as they faced unprecedented economic challenges and uncertainties during the COVID-19 pandemic, we established an enhanced Customer Care Program in 2020. The program enables our team members to provide relief to customers in various ways, ranging from due date extensions, interest or fee forgiveness, payment waivers or extended payment plans, depending on a customer’s individual circumstances. As of December 31, 2021, we had granted concessions on more than 82,000 loans, or 15% of our active loans, and waived over $5.8 million in payments and fees. While relief under this program continued to be available to customers through December 2021, utilization of these benefits had slowed to insignificant levels.
Despite the prolonged uncertainty and volatility attributed to COVID-19, we have proactively taken steps to sustain and grow our business. In 2021, this included making strategic acquisitions of companies to diversify our product and geographic mix (Heights and Flexiti), making similar prudent investments in Katapult, in which we own a 25.2% share, and maintaining a low cost of debt capital (7.50% Senior Secured Notes), all discussed in more detail above.
Regulatory Developments
See "-Regulatory Environment and Compliance" for a description of the regulatory environment in which we operate in the U.S. and Canada and related 2021 developments.
Our Products and Services
We operate our business under three segments: US, Canada Direct Lending and Canada POS Lending. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information on our operating segments.
Overview of Loan Product Revenue
The following charts depict the revenue contribution, including CSO fees, of the products and services that we currently offer:
Our direct lending operations include a broad range of direct-to-consumer finance products focusing on Revolving LOC, Installment loans and Ancillary products. The December 2021 acquisition of Heights enables us to expand the geographic reach of our Installment products in the U.S. Through our continued investment in Katapult and the acquisition of Flexiti in March 2021, we have diversified our products, now allowing us to offer POS financing options for consumers in the U.S. and 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. We have tailored our products to fit our customers’ particular needs as they access and build credit. 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 and information regarding recent regulatory developments, see "-Regulatory Environment and Compliance" below.
Revolving LOC Loans
Revolving LOC loans, which are lines of credit without a specified maturity date, include our POS financing subsequent to our acquisition of Flexiti, which is included in our Canada POS Lending segment and allows us to offer BNPL products as well as Flexiti branded credit cards at merchant locations. 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. In late 2017, we began to expand the Revolving LOC product in both the U.S. and Canada. Then in 2018, following regulatory changes impacting certain Installment products, we significantly expanded the product in Canada and continued to do so through 2021. Canada Direct Lending Revolving LOC loans comprised 94.2%, 91.8%, and 83.4% of our total Canada Direct Lending loans as of December 31, 2021, 2020 and 2019, respectively. In terms of consolidated revenue, Revolving LOC loans comprised 36.0%, 29.4% and 21.5% of our consolidated revenue during the years ended December 31, 2021, 2020 and 2019, respectively. Subsequent to the acquisition of Flexiti on March 10, 2021, Canada POS Lending gross loans receivables increased $263.0 million, or 134.1% in 2021. For direct comparisons, originations at Flexiti for the three months ended December 31, 2021 were C$322.1 million, an increase of C$200.8 million, or 165.6%, from the prior-year period of C$121.3 million. Sequentially, Canada POS Revolving LOC gross loans receivable increased $156.8 million, or 51.9%.
Installment Loans
Installment loan products range from unsecured, short-term loans 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. 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 payroll cycle. Customers may prepay Installment loans without penalty or fees. Loans acquired in connection with the Heights acquisition in December 2021 are considered Installment loans, which are similar to those offered by our legacy U.S. segment, and can be unsecured or
secured. Installment loans comprised 54.9%, 63.6% and 72.9% of our consolidated revenue during the years ended December 31, 2021, 2020 and 2019, respectively.
Ancillary Products
We offer consumers a number of ancillary financial products, including check cashing, demand deposit accounts (Revolve Finance), credit protection insurance and money transfer services.
•Insurance Revenue: We earn revenue from the sale of optional credit protection insurance, which is recognized 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, 2021, 2020 and 2019, insurance revenues were $48.9 million, $35.6 million and $34.6 million, respectively. We expect our insurance revenue to grow in the future as a result of our acquisition of Heights in December 2021, which also offers insurance products in connection with its lending operations. These optional products include credit life, credit accident and health, credit property insurance and credit involuntary unemployment insurance with the policies written by unaffiliated third-party insurance companies.
•Revolve Finance: Revolve Finance launched during the first quarter of 2019 and provides customers with a checking account solution that combines a Visa-branded debit card, a number of technology-enabled tools and optional overdraft protection. For the year ended December 31, 2021, our customers loaded $119.8 million on over 30,000 Revolve Finance cards.
•First Phase: In late December, 2021, we launched First Phase, a new credit card program, which we have begun rolling out across the U.S. in 2022. First Phase provides non-prime customers a Visa-branded credit card and a number of technology-enabled tools.
Ancillary products comprised 9.1%, 7.0% and 5.6% of our consolidated revenue during the years ended December 31, 2021, 2020 and 2019, respectively.
CSO Programs
Through our CSO programs, we act as a CSO/CAB on behalf of customers in accordance with applicable state laws. We currently offer 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 earn revenue by charging the customer a CSO fee for arranging an unrelated third party to make a loan to that customer.
We currently have relationships with two unaffiliated third-party lenders for our CSO programs. We periodically evaluate the competitive terms of these lender contracts, which could result in the transfer of volume and loan balances between lenders.
Under our CSO programs, we provide certain services to a customer in exchange for a CSO fee payable to us by the customer. One of the services is to guarantee the customer’s obligation to repay the loan. For CSO loans, each lender is responsible for providing the criteria by which the customer’s application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go into default and is included in "Liability for losses on CSO lender-owned consumer loans" in our Consolidated Balance Sheets.
CSO fees are calculated based on the amount of the customer’s outstanding loan in compliance with applicable statute. We earn CSO fees ratably over the term of the loan as the customer makes payments. If a loan is paid off early, no additional CSO fees are due or collected. During the years ended December 31, 2021 and 2020, 58.3% and 66.5%, respectively, of loans originated under CSO programs were paid off prior to the original maturity date.
CSO loans are made by a third-party lender, and thus we do not include them in our Consolidated Balance Sheets as loans receivable; instead, we include fees receivable in “Prepaid expenses and other” in our Consolidated Balance Sheets.
Geography and Channel Mix
For the years ended December 31, 2021, 2020 and 2019, approximately 64.3%, 75.4% and 80.0%, respectively, of our consolidated revenues were generated from services provided within the U.S. and approximately 35.7%, 24.6% and 20.0%, respectively, were generated from services provided within Canada. For each of the years ended December 31, 2021 and 2020, approximately 59.9% and 60.7%, respectively, of our long-lived assets were located within the U.S., and approximately 40.1% and 39.3%, respectively, 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, 2021, we had 751 stores across 20 U.S. states and eight provinces in Canada, which included 390 stores acquired with the acquisition of Heights in December 2021. The geographic breakdown is as follows:
•550 U.S. locations: Texas (140), Tennessee (74), South Carolina (58), Alabama (54), California (35), Illinois (26), Missouri (24), Wisconsin (20), Georgia (18), Kentucky (18), Nevada (18), Oklahoma (18), Indiana (16), Arizona (12), Kansas (10), Louisiana (4), Mississippi (2), Colorado (1), Oregon (1), and Washington (1), and;
•201 Canadian locations: Ontario (134), Alberta (27), British Columbia (23), Saskatchewan (6), Nova Scotia (5), Manitoba (4), Newfoundland and Labrador (1), and New Brunswick (1).
Online: We lend online in 27 states in the U.S. and eight provinces and one territory in Canada. For the years ended December 31, 2021, 2020 and 2019, revenue generated through our online channel represented 48%, 49% and 46%, respectively, of consolidated revenue.
Retail: We offer POS Lending in Canada at nearly 7,500 retail locations and over 3,100 merchant partners across 10 provinces and two territories.
Industry Overview
Through December 31, 2021, we operated in a segment of the financial services industry that provides lending products to non-prime and near-prime consumers in need of convenient and flexible access to credit and other financial products. In the U.S. alone, according to a 2021 study by the Financial Health Network, despite the increase in programs designed to waive certain fees and interest to those impacted by COVID-19, underserved consumers in our target market spent an estimated $255 billion in fees and interest in 2020 related to credit products similar to those we offer.
We believe our target consumers have a need for tailored financing products to cover essential expenses and episodic cash shortfalls. In 2020, as the COVID-19 pandemic began to impact much of the global economy, lower-income consumers in the U.S. continued to increase their spending despite being impacted the most of any income group by job losses. According to an October 2020 JPMorgan Chase Institute study, spending by the unemployed increased by 22% upon receipt of unemployment, which included additional stimulus payments by the U.S. government, and then declined 14% after the expiration of the stimulus.
During times of economic volatility, our target consumers periodically exhibit higher income volatility and require access to additional financing products. A study published in 2021 by JPMorgan Chase estimated that households with lower incomes needed approximately seven weeks of take-home income to cover a simultaneous income dip and expense spike, which translates to a $2,500 cash buffer. However, most of the households in the study had approximately $600, prior to the pandemic. We believe we can meet the needs of consumers, including during periods of economic volatility, through the thoughtful and responsible use of our proprietary credit decisioning model.
In catering to these customers, we compete against a large number and wide variety of consumer finance providers, including online and branch-based consumer lenders, credit card companies, pawn shops, rent-to-own and other financial institutions that offer similar financial products or services. The Financial Health Network noted in its 2021 study that the short-term credit, compound annual growth rate from 2015 to 2018 in the U.S. for installment loans and loans originated by non-bank lenders, primarily through online channels, was 13.8% and 27.3%, respectively.
As discussed further in "-Regulatory Environment and Compliance," our industry is highly regulated at the federal, state and local levels in the U.S. and at the federal and provincial levels in Canada. In general, these regulations are designed to protect our consumers and the public, in addition to regulating our business operations. We believe our (i) experienced management team, (ii) proprietary industry technology, (iii) ability to successfully navigate previous regulatory changes, and (iv) flexibility to tailor our products or create new products to meet existing or new regulation will allow us to successfully manage future challenges and obstacles.
In addition to the broad trends impacting the consumer finance landscape, we believe we are well positioned to grow our market share as a result of several changes related to consumer preferences within our industry. Enhanced by the impacts of COVID-19 during 2020 and 2021, we believe that evolving consumer preferences, including increased use of mobile devices and overall adoption rates for technology are driving significant change in our industry that benefits CURO.
•Increasing adoption of online channels-Our experience, particularly in 2020 and 2021 as COVID-19 forced a shift in consumer behavior to transact from home, is that customers prefer service across multiple channels or touch points. For the year ended December 31, 2021, our revenue generated through online channels in the U.S. and Canada Direct Lending represented 50.3% of our total U.S. and Canada Direct Lending revenues compared to 48.5% for the year ended December 31, 2020. Canada Direct Lending online revenue as a percentage of total Canada Direct Lending revenue increased 24.6% year over year.
•Increasing adoption of mobile devices-With the proliferation of improved smartphone service plans, many of our non-prime customers have moved to mobile devices for loan origination and servicing. According to a 2021 study by the Pew Research Center covering the U.S., smartphone penetration among adults was 85%, up from 81% two years
earlier. In Canada, the penetration rate for smartphones was 66% in 2019, the last time Pew Research Center did the study there. Additionally, according to Statista, the smartphone penetration rate in the U.S., when compared to the total population, increased from 20.2% in 2010 to 72.2% in 2020, while in Canada, they project an increase in smartphone users of over 3 million people, or 10%, between 2018 and 2024. In 2012, less than 44% of our U.S. customers communicated with us via a mobile device, whereas in the fourth quarter of 2021, that percentage had grown to nearly 78%. The December 2021 acquisition of Heights provides us the opportunity to expand our online channel to a historically in-store based business model. Flexiti, with its retail merchant partnership, predominantly originates loans at merchants physical locations.
•Shifting preference toward longer term, higher balance loans-Given our experience since 2008 in offering short- and longer-term loan products, we believe that short term, small balance loans, which we refer to as Single-Pay loans and which are included in our Installment portfolio, are becoming less popular or less suitable for a growing portion of our customers. Our customers generally have shown a preference for our Unsecured and Secured Installment loan products and Revolving LOC loan products, which typically have longer terms, lower periodic payments and a lower relative cost than Single-Pay products. Offering more flexible terms and lower payment amounts also significantly expands our addressable market by broadening our products’ appeal to a larger proportion of consumers. For example, our Single-Pay loans for U.S., excluding Heights, and Canada Direct Lending represented 27.4% and 97.2%, respectively, of total Company Owned gross loans receivable at the beginning of 2015, compared to 12.4% and 4.4%, respectively, at December 31, 2021.
Our Strengths
We believe the following foundational competitive strengths differentiate us from our competitors:
•Differentiated, omni-channel platform-We believe we have the only fully-integrated store, online, mobile and contact center platform to support omni-channel customer engagement for non-prime and near-prime customers in the U.S. and Canada. We offer a seamless “Call, Click or Come In” capability for customers to apply for loans, receive loan proceeds, make loan payments and otherwise manage their accounts, whether in store, online or over the phone. We believe the strength of our online platform during the COVID-19 pandemic in 2020 and 2021 was advantageous as customers could easily utilize the channel during periods of peak pandemic outbreaks or resurgences. Our online customer transactions increased significantly relative to all types of transactions, which resulted in a similar increase in revenue from online transactions, relative to total revenue. Our customers can utilize any of our three channels at any time and in any combination to obtain a loan, make a loan payment or manage their accounts. In addition, we have our “Site-to-Store” capability, for which customers that do not qualify for a loan online are directed to a store to complete a loan transaction. Our "Site-to-Store" program resulted in approximately 120,000 loans in the year ended December 31, 2021. These aspects of our platform enable us to source a larger number of customers, serve a broad range of customers and continue serving these customers for long periods of time.
•Recession-resilient business-In addition to channel diversification, we believe our business is adaptable to various economic cycles. Our 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 not generally available to them. Changes to our products or processes are at times needed to suit the specifics of a particular economic downturn, such as the Customer Care Program we instituted in 2020 in response to the impact COVID-19 had on our customers. Our customers have historically shown a greater ability to manage credit throughout economic downturns compared to prime customers, as measured by the relative change in their delinquency and charge-off data during economic downturns. During 2020, as a result of various COVID-19 impacts such as cautious customer behavior, government stimulus programs, and our tightening of credit, demand for our products decreased relative to pre-COVID-19 levels while credit losses and delinquencies remained well below historical levels. Sequential growth in the last two quarters of 2020 outpaced the comparable quarters in 2019 as the outsized impacts of stimulus programs in the U.S. and Canada phased out.
•Compelling new products expand growth opportunities-We continue to maintain our current customer relationships and attract new customers through our consistently innovative approach to new products. In February 2019, we launched Revolve Finance, a checking account solution, with FDIC-insured deposits, that combines a Visa-branded debit card, a number of technology-enabled tools and optional overdraft protection. Meanwhile in December 2021, we launched First Phase, a new credit card program, which we will begin rolling out across the U.S. in 2022. First Phase will provide our non-prime customers with a Visa-branded credit card and a number of technology-enabled tools.
As we look to enhance our product portfolio, we acquired two strategically important companies in 2021: Flexiti in March 2021 and Heights in December 2021. Flexiti's POS and BNPL products are new offerings in our portfolio within a rapid-growth segment of the Canadian market. Heights is a provider of lower cost credit to near-prime consumers that both expands our offerings and allows us cross-sell opportunities between CURO's legacy U.S. customers and Heights' consumers.
•Experienced management and flexible platform-We believe our management team is among the most experienced in the industry, with over a century of collective experience. Importantly, our management team has experience through various economic cycles, which we have leveraged during the COVID-19 pandemic. We also have deep personnel strength across key functional areas including compliance, IT, credit decisioning, marketing, legal and finance. Our leadership experience has allowed us the ability to transition quickly to changes in regulatory environment, economic cycles and customer preferences, as we did with our (i) successful transition to lower cost revolving LOC products in Canada starting in 2018 and (ii) our ability to deploy capital efficiently as we did in relation to our investment in Katapult, allowing us to benefit with a significant return in 2021, and our acquisition of Flexiti and Heights. The acquisition of both companies brought on board their own sets of experienced management leadership, as evidenced, for example, by Flexiti's loan growth since its acquisition.
•Proprietary credit decisioning model-Curo is our legacy leading analytics and information technology tool, which drives strong credit risk management. Curo is a bespoke, proprietary IT platform that seamlessly integrates activities related to customer acquisition, underwriting, scoring, servicing, collections, compliance and reporting. Our analytics team utilizes Curo to gather data and performance records for research and development purposes to assist in our continued development of new models. Curo is underpinned with 20 years of continually updated customer data proven profitable across credit cycles and comprising over 100 million loan records (as of December 31, 2021) used to formulate our robust, proprietary underwriting algorithms. This platform then automatically applies multi-algorithmic analysis to a customer’s loan application to produce a “Curo Score” which drives our underwriting decision. This fully integrated IT platform enables us to make real-time, data-driven changes to our customer acquisition and risk models, which yield significant benefits in terms of customer acquisition costs and credit performance. The acquisition in March 2021 of Flexiti provided us access to an award-winning BNPL platform and proprietary technology to add to Curo. Flexiti's technology platform is recognized as market leading, winning ACT (Advanced Card Technologies) Canada's 2015 Technology Innovation Award for Payments Benefiting Merchants
•Sophisticated customer analytics-Our analytic tools and multi-faceted marketing strategy drive low customer acquisition costs. Our marketing strategy includes a combination of strategic direct mail, television advertisements and online and mobile-based digital campaigns, as well as strategic partnerships. Our Marketing, Risk and Credit Analytics team uses Curo to cross reference marketing spend, new customer account data and granular credit metrics to optimize our marketing budget across these channels in real time and to produce higher quality new loans. In addition to these diversified marketing programs, our stores play a critical role in creating brand awareness and driving new customer acquisition.
•Attractive and stable markets-We have increased our diversification by product (such as Canada POS Lending) and geography (such as Revolving LOC at Canada Direct Lending), allowing us to serve a broader range of customers with a flexible product offering. As part of this effort, we have also developed and launched new brands and will continue to develop new brands with differentiated marketing messages. These initiatives have helped diversify our revenue streams by enabling us to appeal to a wider array of borrowers. In addition to product and geographic diversification, we acquired Ad Astra in January 2020, which was previously our exclusive provider of third-party collection services for the U.S. business. The acquisition brought all U.S. servicing and recovery in-house, drives operational and financial synergies to ensure all aspects of the recovery portfolio are coordinated, reduces operational redundancy and increases peak volume management, improves compliance synergies, and facilitates integrated and personalized credit risk management strategies and campaign management across the servicing and recovery lifecycle.
In addition to the strengths above, we believe the following core competencies are essential to succeed in this industry:
•Focus on customer experience-We focus on customer service and experience and have designed our stores, website and mobile application interfaces to appeal to our customers’ needs. We continue to augment our web and mobile app interfaces to enhance our “Call, Click or Come In” strategy, with a focus on adding functionality across all our channels. We invest considerable time and resources on web design and mobile optimization to ensure our websites are quick and responsive, and support the mobile phone brands and sizes that our customers use. Our stores are branded with distinct and recognizable signage, are conveniently located and typically are open seven days a week. At Flexiti, we offer flexible financing solutions for retailers in-store and on-line, allowing customers to immediately finance their purchases with various promotional financing offers with 0% interest within their credit limit. Furthermore, our U.S. and Canada Direct Lending business employs highly experienced store managers, which we believe are critical elements of driving customer retention while lowering acquisition costs and maximizing store-level margins. As of December 31, 2021, the average tenure of our U.S. and Canada Direct Lending store managers, district managers and regional directors was approximately 10 years, 14 years and 16 years, respectively.
•Strong compliance culture with centralized collection operations-We consistently engage in proactive and constructive dialogue with regulators in each of our jurisdictions and have made significant investments in best-practice automated tools for monitoring, training and compliance management systems, which are integrated into Curo. In addition to conducting semi-annual compliance audits, our in-house centralized collections strategy, supported by our proprietary back-end customer database and analytics team, drives an effective, compliant and highly scalable model.
•Demonstrated access to capital markets and diversified funding sources-We have raised over $3.9 billion of debt financing across 15 separate offerings and various credit facilities since 2010, most recently in December 2021. This aggregate amount includes $1.0 billion of 7.50% Senior Secured Notes, three separate Canada revolving facilities to support the growth of Revolving LOC products in Canada Direct Lending and Canada POS Lending, and a $200 million U.S. revolving facility. We acquired a $350.0 million revolving facility concurrent with the acquisition of Heights on December 27, 2021. We also have U.S. and Canadian bank revolving credit facilities to supplement intra-period liquidity. We believe our access to the capital markets and diversified funding sources is an important significant differentiator, as certain competitors may have trouble accessing capital to fund their business models if credit markets tighten. For more information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
•History of growth and profitability-Throughout our operating history we have had strong profitability and growth. Between 2010 and 2021 we grew revenue, Adjusted EBITDA and Adjusted Net Income at a compound annual growth rate of 13.5%, 11.9% and 5.8%, respectively. For more information on non-GAAP measures, see Item 7. "Managements Discussion and Analysis of Financial Condition and Results of Operations-Supplemental Non-GAAP Financial Information." At the same time, we have significantly expanded our product offerings to better serve our growing and expanding customer base.
•Continuation of return of stockholders' capital-From 2019 through 2021, we initiated share repurchase programs and cash dividends to provide our stockholders with a return of capital. In 2019 and leading up to the onset of COVID-19 in early 2020, we maintained share repurchase programs resulting in over $50 million of shares bought back and held in treasury. We re-initiated a share repurchase program in 2021, resulting in over $37.4 million of shares bought back and held in treasury. In 2020, we instituted an annual $0.22 per share dividend, paid quarterly, which we renewed in 2021 and increased to $0.44 per share annually beginning in the second quarter of 2021.
Growth Strategy
We believe our diversification through brands, products and geography positions us well for long-term growth. Our recent investments in Canada, Heights, Katapult and card products allows us to be a full-spectrum lender to meet our target customers' evolving credit demands.
•Full Spectrum Lending-In addition to growing our existing suite of loan products, we are focused on expanding the total number of customers that we serve through product, geographic and channel expansion. These efforts include expansion of our online channel, which proved helpful to our customers during the COVID-19 pandemic in 2020 and 2021. However, we continue to invest in and introduce additional products to address our customers’ preference for longer-term products that allow for greater flexibility in managing their monthly payments.
Canada POS Lending card products offers compelling new growth opportunities
In March 2021, we acquired Flexiti, an emerging growth Canadian POS / BNPL provider. Flexiti is a growing FinTech company that provides POS financing and BNPL capabilities through an omni-channel platform to Canadian retailers. This acquisition positions us as a full-credit-spectrum lender in Canada and enhances our long-term growth trajectory, diversifies our revenue mix by product and geography and helps to mitigate regulatory risk given Canada's historically stable regulatory environment. We now reach consumers in Canada through all the ways in which they access credit directly both in-store and online by credit cards or at the POS. The addition of Flexiti is an important milestone for our continued value creation and positions CURO as a top three non-bank lender in Canada.
Canada Direct Lending contributing to future growth
Our investment in our Revolving LOC product in Canada has been successful and provides an avenue for long-term growth. We expanded Revolving LOC loan products under our LendDirect brand to include additional provinces and increased customer acquisition efforts in existing markets. We also accelerated our offering of Revolving LOC products under our Canadian CashMoney brand. In late 2017 and 2018, we launched Revolving LOC loans in Alberta and Ontario, respectively, with a significant increase in mid-2018 following regulatory changes impacting other products. In
2019, we began offering Revolving LOC loans in British Columbia. Although our revenue in Canada was negatively impacted by COVID-19 in 2020, our Revolving LOC product there continued to generate strong revenue and loan growth through 2021. Canada Direct Lending Revolving LOC loans grew 32.7% year over year. Based on market trends, we estimate that the consumer credit opportunity for installment balances is approximately C$175 billion. We also believe these customers comprised a highly fragmented market with low penetration by our industry and thus represents a growth opportunity for us.
We believe the historic stability in Canada's regulatory environment, historical performance by Canadian customers, and the continued demand by customers for a long-term and flexible product provide a growth opportunity over a longer horizon while diversifying (i) geographically, (ii) through product expansion, and (iii) through customer risk profiles, as well as helping to mitigate regulatory risk.
Heights acquisition
The December 2021 acquisition of Heights enables us to offer new near-prime credit offerings in states that we historically have not had a presence. The acquisition will allow us to expand our already robust omni-channel offerings, expand digital marketing, enhance credit decisioning, and diversify the payment options we can offer to our customers. Importantly, we have the ability to offer our non-prime credit cards to eligible customers initial pursuing a product through Heights. The aggregate purchase price for Heights was $360 million, comprised of $335 million in cash and $25 million in common stock.
Katapult Investment
In addition to our core direct-to-customer products, we made our first investment in Katapult in 2017. At the time of our initial investment, we identified multiple catalysts for Katapult's future success-an innovative e-commerce POS business model, a focus on the vast and under-penetrated non-prime financing market, and a clear and compelling value proposition for merchants and consumers. We believe Katapult's total estimated addressable market in the U.S. is between $40-$50 billion, of which Katapult currently holds less than one percent. We believe Katapult is poised to cater to this near-term demand growth. Katapult’s sophisticated end-to-end technology platform provides consumers a seamless integration with online, brick and mortar and omni-channel merchants, giving the consumer an exceptional purchasing experience. Based on a June 2021 Experian report, nearly a third of U.S. consumers are considered non-prime. In June 2021, we received cash of $146.9 million and additional stock as a result of a merger between Katapult and FinServ. To date, our cumulative cash investment in Katapult is $37.5 million and, with the latest investment made in December 2021 of $10.0 million. We own approximately 25.2% of Katapult on a fully diluted basis assuming full pay-out of earn-out shares.
Investments in our processes and technology
•Continue to improve the customer journey and experience-We continuously seek to enhance our “Call, Click or Come In” customer experience and execution, with projects ranging from continuous upgrades of our web and mobile app interfaces to enhanced service features to payment optimization.
Increased focus on online channels-As COVID-19 has demonstrated, our investments in online channels have proven to be a significant revenue driver. The pandemic enhanced customer transaction volume shift online, accelerating trends we previously observed. While customers may return to stores as the pandemic eases, we expect online channel usage will expand over time.
•Continue to focus on our core capabilities-We believe that our ability to continue to be successful in developing and managing new products is based upon our capabilities in three key areas:
•Loan Underwriting: Installment and Revolving LOC products are more affordable and useable for customers but require increasingly sophisticated underwriting and decisioning to optimize customer acquisition cost while balancing credit risk with approval rates. Our analytics platform combines data from over 100 million records (as of December 31, 2021), supplemented with predictive data from third-party reporting agencies.
•Collections and Customer Service: Installment and Revolving LOC products have longer terms than Single-Pay loans. Longer duration drives the need for a more comprehensive collection and a credit-default servicing strategy that emphasizes curing a default and returning the customer to good standing. We utilize a centralized collection model that eliminates the need for our store personnel to contact customers to resolve a delinquency. We have also invested in building new contact centers in the U.S. and Canada, each of which utilizes sophisticated dialer technologies to help us contact our customers in a scalable, efficient manner. To streamline our collection solutions, in January 2020 we purchased Ad Astra, which was previously our exclusive provider of third-party collection services for owned and managed loans in the U.S that are in later-stage delinquency. The acquisition provided significant operational, financial and compliance synergies.
•Funding: The shift to larger balance loans with extended terms requires more substantial and more diversified funding sources. Given our deep and successful track record in accessing diverse sources of capital, we believe that we are well-positioned to support future new product transitions.
•Continue to bolster our core business through enhancement of our proprietary risk scoring models-We continuously refine and update our credit models to drive additional improvements in our performance metrics. Regularly updating our credit underwriting algorithms enables us to enhance the value of each customer relationship through improved credit performance. We believe that combining these underwriting improvements with data-driven marketing spend will produce margin expansion and earnings growth.
•Monitor and appropriately increase approval rates to our applicants-Growth and optimization of customer acquisition spending depends on maintaining high approval rates balanced with credit risk management. We continually improve our scoring models to optimize a profitable balance of application approval rates and portfolio performance. We balance growth with our credit risk management in all economic cycles and are mindful as to when and how to tighten our credit approval process, such as our tightening during the COVID-19 pandemic.
•Expand credit for our borrowers-Through extensive testing and proprietary underwriting, we have successfully increased credit limits for customers, enabling us to offer “the right loan to the right customer.” The favorable customer acceptance rates and credit performance have improved overall loan-vintage and portfolio performance.
•Marketing Expansion-We reach our customers using a multi-channel approach, including addressable TV, text to apply and enhanced digital ads utilizing our site-to-store concept to stay ahead of the continually developing landscape of our customers' behavior and needs. These approaches are incorporated into our core marketing and sponsorships through certain major events, such as NASCAR auto racing, to expand our brand awareness.
Customers
Our U.S. 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 not generally available to them. In the U.S., prior to our acquisition of Heights, our customers generally earned between $15,000 and $85,000 annually. Heights' customers typically earn an average of $10,000 to $12,000 per year more than the average CURO customer. Our Canada Direct Lending customers generally earn between C$15,000 and C$75,000 annually while the average annual earnings of Canada Point of Sale customers is approximately C$100,000. Based on our experience, our target consumer utilizes the products provided by our industry for a variety of reasons, including that they often:
•have immediate need for cash between paychecks;
•have been rejected for 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;
•need access to financial services outside of normal banking hours; or
•eschew complicated fee structures in some bank products (e.g., credit cards and overdrafts).
At Canada POS Lending, our 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 like 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 nearly 7,500 partner retail locations.
Marketing
Our legacy U.S. and Canada Direct Lending businesses use a multi-channel approach to attract new customers, with a variety of targeted and direct response strategies to build brand awareness and drive customer traffic in stores, online and to our contact centers. These strategies include direct-response spot television, radio campaigns, point-of-purchase materials, multi-listing and directory program for print and online yellow pages, local store marketing activities, prescreen direct mail campaigns, robust online marketing strategies and “send a friend” and word-of-mouth referrals from satisfied customers. We also utilize our multi-channel approach to drive customers applying online to our store locations-a program we call “Site-to-Store.” We use similar multi-channel strategies at our Canada POS Lending segment to build awareness and drive repeat spend through marketing touchpoints. These touchpoints include media, digital advertising, POS / in-store materials, emails, direct mail and other merchant owned channels to drive overall results. Heights marketing primarily consists of direct mailings.
Information Systems
Curo is our proprietary IT platform for our U.S. and Canada Direct Lending segments and is a unified, centralized platform that seamlessly integrates activities related to customer acquisition, underwriting, scoring, servicing, collections, compliance and reporting. Curo is scalable and has been successfully implemented in the U.S. and Canada and is designed to support and monitor compliance with regulatory and other legal requirements. Our platform captures transactional history by store and by customer, which allows us to track loan originations, payments, defaults and payoffs, as well as historical collection activities on past-due accounts, all in a single data base. In addition, our stores perform automated daily cash reconciliation at each store and every bank account in the system. Curo enables us to 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. Each of our stores and all of our customer service collections representatives have secure, real-time access to it.
Curo and its proprietary algorithms are used for every aspect of underwriting and scoring of our loan products. The customer application, approval, origination and funding processes differ by state, country and channel. For in-store loans, the customer presents required documentation, including a recent pay stub or support for underlying bank account activity for in-person verification. For online loans, application data is verified with third-party data vendors, our proprietary algorithms and/or tech-enabled account verification. Our proprietary, highly scalable scoring system employs a champion/challenger process, whereby models compete to produce the most successful customer outcomes and profitable cohorts. Our algorithms use data relevancy and machine learning techniques to identify approximately 60 variables from a universe of approximately 11,600 that are the most predictive in terms of credit outcomes. The algorithms, which are continuously reviewed and refreshed, are focused on a number of 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 internal database of over 100 million records as of December 31, 2021 associated with loan information. 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. From 2010 to 2021, we extended over $21.1 billion in total credit across approximately 52.5 million total loans.
For Canada POS Lending, our decision management platform and information technology tools drive strong credit risk management. Our analytics team utilizes data from customer acquisition, underwriting, servicing and collections for research
and development purposes to assist in our continued development of new models. Flexiti’s proprietary 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 omnichannel instant apply-and-buy POS financing solution yield significant benefits in terms of customer acquisition costs and credit performance.
Our proprietary IT platform and Canada POS powers the entire lifecycle of customer and merchant transactions. It seamlessly integrates activities related to merchant configuration, customer acquisition, account management, collections, and reporting. Our platform allows for our suite of BNPL plans to be customized for each of our retail partners. The platform captures transactional data by retailer, store and customer. Data related to loan originations, servicing activities, collection activities, payments and defaults are also captured. The platform allows Canada POS to make data-driven decisions that optimizes performance across all aspects of the POS business.
The customer application and underwriting process can differ by province, retailer, acquisition channel and customer. Customer presented photo-identification, third-party data vendors and tech-enabled bank account verification are available for deployment in customer verification. Our underwriting models are powered by the combination of application data, purchased third-party data and our internal database of loan information.
Cybersecurity Management
We rely on information technology systems and networks in connection with many of our business activities. Many of these systems and networks are managed directly by us, while some are managed by third-party service providers and are not under our day-to-day control. However, we do have oversight of the services provided by third-party service providers. We frequently evaluate ourselves for appropriate business continuity and disaster recovery planning through the use of 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. All systems have vulnerabilities mitigated through a robust patch management program that is reviewed 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 centralized collection facilities in the U.S. and Canada in order 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 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.
We assign delinquent loan accounts in the U.S., excluding Heights, to Ad Astra typically after 91 days without a scheduled payment. We acquired Ad Astra in January 2020, and its results are included in our Consolidated Financial Statements. Under our policy, the precise number of days past-due to trigger a collection-agency referral varies by state and product, and requires, among other things, that proper notice be delivered to the customer prior to assignment. Once a loan meets the criteria set forth in the policy, it is automatically referred to Ad Astra for collection. We make changes to our policy periodically in response to various factors, including regulatory developments and market conditions. As delinquent accounts are paid, Curo updates these accounts in real time. This ensures that collection activity will cease the moment a customer’s account is brought current or paid in full and considered in “good standing.” See Note 16, “Related Party Transactions" of the Notes to Consolidated Financial Statements for a description of our relationship with Ad Astra.
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. Collection agents are trained to provide exceptional customer service with the objective of getting the customer to clear any past due amounts and emphasizing the importance of making future payments on time. 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;
•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 alternative financial services providers, banks, savings and loan institutions, short-term consumer lenders and other financial services entities. Generally, the landscape is characterized by 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.
For Canada POS Lending specifically, with the exit of Desjardins, we have partnered with merchants representing 77% of the retail market Desjardins served previously. In 2021 alone, we gained several new merchant partners, most notable of which was the LFL Group, one of Canada's largest retailer holding companies. We believe we have limited omnichannel competition, with new BNPL entrants focused primarily on small-ticket e-commerce transactions that do not require a credit card. We expect that our Canada POS business will become Canada's largest POS financing provider now that LFL has been onboarded. With our omni-channel financing solution, we expect continued market share gains for Canada POS Lending.
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 lending business in Canada is less subject to seasonality than our U.S. lending business.
Our Canada POS Lending sales are largely driven by the typical seasonality experienced in the Canadian retail markets, with an average of 45% of sales historically falling in the last quarter of the year. Modest fluctuations are seen in February driven by Valentine’s Day in the jewelry category with furniture driving the majority of the seasonal impacts, driven by The Brick / Leon’s Furniture. Black Friday, in particular, has been a large driver of originations. In 2021, weekly originations in the second half of the year were nearly five times the amount experienced in the first half of the year.
Human Capital Resources
As of December 31, 2021, we had approximately 5,200 employees, approximately 3,600 of whom work in our stores. In addition to our corporate headquarters in Wichita, Kansas, we have a FinTech office in Chicago, Illinois, which allows us to attract and retain talented IT development and data science professionals. We also have offices in Toronto, Ontario and Greenville, South Carolina servicing our Canadian segments and Heights Finance, respectively. None of our employees are unionized or covered by a collective bargaining agreement and we consider our employee relations to be good.
We believe that customer service is critical to our continued success and growth. As such, we have staffed our legacy U.S. stores, (i.e., those stores not part of the acquisition of Heights) with a full-time Store Manager, Branch Manager or Manager, who runs the day-to-day operations of the store. The Manager is typically supported by two to three Senior Assistant Managers and/or Assistant Managers and three to eight full-time Customer Advocates. Customer Advocates conduct the POS activities and greet and interact with customers from a secured area behind expansive windows. We believe staff continuity is critical to our business. We believe that our pay rates for these positions are equal to or better than our major competitors and we regularly evaluate our benefit plans to maintain their competitiveness.
We are committed to the health and safety of every person who comes into our stores. During 2020 and 2021, as a result of COVID-19, we implemented additional safety protocols to protect our frontline store employees, customers and communities, including enhanced protocols regarding social distancing and routine store cleaning. We temporarily closed a number of stores for a limited amount of time for suspected or confirmed infections, which affected our total store volume. In 2021, with the onset of new variants, we continued to maintain robust safety protocols to ensure the safety of our customers and employees. For most of our contact center and corporate support employees, a remote-work policy has been instituted and we are evaluating best practices for a hybrid home/office environment. Our experienced teams have adapted quickly to the changes and have managed our business successfully during this challenging time.
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:
•interest rates and fees;
•maximum loan amounts;
•income requirements;
•the number of simultaneous or consecutive loans and required waiting periods between loans;
•loan extensions and refinancings;
•payment schedules (including maximum and minimum loan durations);
•required repayment plans for borrowers claiming inability to repay loans;
•disclosures;
•security for loans and payment mechanisms;
•licensing; and
•database reporting, eligibility, and loan utilization information.
We are also subject to laws and regulations relating to our other financial products, including those governing recording and reporting certain financial transactions, identifying and reporting suspicious activities and safeguarding the privacy of customers’ personal information. For more information regarding the regulations applicable to our business and the risks to which they subject us, see the section entitled “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, modified or reinterpreted. 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 thus lowering costs associated with financial products and services, and enable consumers to access myriad responsible credit products that meet their needs.
Due to the evolving nature of laws and regulations, new or revised laws or regulations, or repealed laws or regulations, could adversely impact our current product offerings or alter the economic viability of our existing products and services. For example, the 2017 Final CFPB Rule will likely increase costs, created additional complication and confusion to consumers attempting to repay their loans and lessen the effectiveness of our loan servicing and collections. In addition, in December of 2020, the CFPB issued its debt collection rule - Regulation F - which applies to the third-party collection activities of Ad Astra. The new rule imposes, among other things, strict consumer contact requirements, additional information disclosures to the consumer when attempting to collect the debt and otherwise prescribes prescriptive disclosure contents.
It is possible that future changes to statutes or regulations will have a material adverse effect on our results of operations or financial condition.
U.S. Regulations
U.S. Federal Regulations
The U.S. federal government and its agencies possess significant regulatory authority over consumer financial services, and these laws and regulations have a significant impact on our operations.
Dodd-Frank. In 2010, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Title X of this legislation created the CFPB, and provides the CFPB with broad rule-making, supervisory and enforcement powers with regard to consumer financial services. Title X of Dodd-Frank also contains “UDAAP” provisions, which declare unlawful “unfair,” “deceptive” and “abusive” acts and practices in connection with the delivery of consumer financial services and gives the CFPB the power to enforce UDAAP prohibitions and to adopt UDAAP rules defining unlawful acts and practices. Additionally, the Federal Trade Commission Act, Section 5, 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.
2017 and 2020 Final CFPB Rules. Pursuant to its authority to adopt UDAAP rules, the CFPB issued the 2017 Final CFPB Rule, which contained both “mandatory underwriting” or “ability-to-repay” (“ATR”) provisions and payment restrictions. The mandatory underwriting provisions applied to short-term consumer loans (with terms of 45 days or less) and longer-term balloon payment loans (i.e., any payments more than twice the size of other payments). These provisions imposed rigid ATR requirements and verification requirements on the industry, subject to a limited exception for certain loans in a sequence starting with a loan limited to $500 and declining for each new loan in the sequence.
The repayment provisions apply to the foregoing loans and to longer-term loans with (i) annual percentage rates exceeding 36% and (ii) lender access to the consumer’s account, whether by ACH, card payment, check or otherwise (i.e., “leveraged payment mechanism”). The payment provisions generally prohibit lenders from seeking payment, without explicit reauthorization, when two consecutive payments have failed due to insufficient funds. The provisions also require a series of prescribed notices for initial payments, “unusual” payments (by amount, payment date or payment modality) and a consumer rights notice after two consecutive payment attempts have failed due to insufficient funds.
The 2017 Final CFPB Rule was originally scheduled to go into effect, in its entirety, in August 2019. However, before that time, the CFPB announced it would reconsider the mandatory underwriting provisions of the 2017 Final CFPB Rule and delay its effective date. Additionally, the Community Financial Services Association (the “CFSA”) and the Consumer Service Alliance of Texas, two industry trade groups, brought a lawsuit (the “Texas Lawsuit”) against the CFPB in a Texas federal district court. The Texas Lawsuit challenged the entire 2017 Final CFPB Rule and resulted in a court-ordered stay of the Rule. In July 2020, the CFPB adopted a new rule (the “2020 Final CFPB Rule”) that rescinded the mandatory underwriting provisions of the 2017 Final CFPB Rule, but left the payment provisions fully intact.
Following adoption of the 2020 Final CFPB Rule, the plaintiffs in the Texas Lawsuit filed an amended complaint and a motion for a preliminary injunction against the remaining payment provisions of the 2017 Final CFPB Rule, arguing that the 2017 Final CFPB Rule is arbitrary and capricious; specifically, insofar as it fails to distinguish in its treatment between declined payment card transactions, which generally do not give rise to bank charges, and dishonored ACH payments and checks, which do. It was further argued to be invalid because it was adopted by a single Director, who, at the time the Rule was enacted, was only dischargeable for cause. The Supreme Court later found this structure unconstitutional and required the Director to be dischargeable without cause under the Dodd-Frank Act. On August 31, 2021, the U.S. District Court granted the CFPB’s motion for summary judgment and denied the plaintiffs’ motion for summary judgment, and ordered compliance with the CFPB Rules by June 13, 2022. Following the Court’s August 31, 2021 Order, plaintiffs filed a Notice of Appeal with the Fifth Circuit and a Motion for Stay Pending Appeal, asking to stay the compliance date until after their appeal is fully and finally resolved. On October 14, 2021, in its unanimous decision, the Fifth Circuit granted the motion by plaintiffs to extend the compliance date until 286 days after resolution of their appeal. Briefing was completed as of January 19, 2022 and oral argument is currently scheduled for the week of May 9, 2022.
Meanwhile, in October 2020, a community group, The National Association for Latino Community Asset Builders ("NALCAB"), filed a lawsuit against the CFPB in the federal district court for the District of Columbia (the “DC Lawsuit”). The DC Lawsuit sought to overturn the 2020 Final CFPB Rule and reinstate the mandatory underwriting provisions of the 2017 Final CFPB Rule on the basis that the rule is arbitrary and capricious. The CFSA has intervened as a defendant in the case and the CFPB has filed a motion to dismiss the complaint for lack of standing, supported by the CFSA. The US District Court granted CFSA’s and the CFPB’s motion to dismiss. NALCAB has until mid-March 2022 to appeal.
We believe that complying with the mandatory underwriting provisions of the 2017 Final CFPB Rule would have been costly and would have had a material adverse effect on our business and results of operations, and would have significantly reduced the
permitted borrowings by individual consumers. We cannot provide assurance that the CFPB and CFSA will prevail on appeal nor that Congress will not pass legislation and the CFPB will not adopt a rule that could have a material adverse effect on our product offerings, business operations, results of operation or financial condition.
Likewise, we cannot provide assurance that the CFSA will prevail in the Texas Lawsuit. If it does not prevail in the district court or any ensuing appeal, either in whole or at least with respect to debit card transactions, the payment provisions as currently formulated would require significant modifications to our payment, customer notification and compliance systems, as well as create delays in initiating automated collection attempts when payments we initiate are unsuccessful. These modifications would increase our costs and reduce our revenues, albeit to a far lesser extent than the mandatory underwriting provisions. Accordingly, unless the payment provisions are declared invalid in the Texas Lawsuit, they may have a material adverse effect on our results of operations or financial condition.
For additional discussion of the potential impact of the 2017 Final CFPB Rule and 2020 Final CFPB Rule, see “Risk Factors-Risks Relating to Our Industry."
CFPB Debt Collection Rule. In May 2019, the CFPB published in the Federal Register a proposed debt collection rule to amend Regulation F which would apply to debt collectors that are subject to the Fair Debt Collection Practices Act ("FDCPA”), such as our Ad Astra subsidiary. The proposed rule addressed a variety of topics, including third-party debt collector communications, collection practices and collection disclosures. Among other things, the proposed rule announced new restrictions on collection-related communications with consumers, such as imposing a specific limit on the number of times a debt collector can place telephone calls to consumers each week, as well as a mandatory waiting period following a successful telephone communication with the consumer. The proposed rule also offered a series of new collection disclosures. In February 2020, the CFPB supplemented the proposed debt collection rule to amend Regulation F to prescribe federal rules governing disclosures when collecting time-barred debts and debts on behalf of deceased consumers.
On October 30, 2020, the CFPB issued the first part of its Final Debt Collection Practices (Regulation F) Rule (the “Debt Collection Rule”), which, among other things, addressed the use of various communication modalities to collect debts, impose new collection requirements and limitations and clarified existing prohibitions on harassment or abuse, false or misleading representations and unfair debt collection practices under the FDCPA. On December 18, 2020, the CFPB issued the second part of its Final Debt Collection Practices (Regulation F) Rule, which addressed disclosures for consumers when attempting to collect a debt by a collector (e.g., the validation notice), and imposed requirements for furnishing information about a debt to consumer reporting agencies. The CFPB ultimately decided not to mandate any uniform time-barred debt disclosure as initially suggested in the May 2019 proposal, but did set forth in the commentary to the Debt Collection Rule that disclosing the time-barred status of an account when collecting may be required to avoid a UDAAP violation. The full Debt Collection (Regulation F) Rule was effective November 30, 2021. Adoption of the Debt Collection Rule required significant changes in Ad Astra’s collection practices to ensure compliance. While the Debt Collection Rule impacts the way we collect debts in order to comply with Regulation F, we do not believe it will have a material impact on our results of operations.
CFPB Enforcement. In addition to Dodd-Frank's grant of rule-making authority to the CFPB, which resulted in the 2017 Final CFPB Rule and the CFPB Debt Collection Rule, Dodd-Frank 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). In these proceedings, the CFPB can obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from approximately $6,323 per day for ordinary violations of federal consumer financial laws to approximately $31,616 per day for reckless violations and $1,264,622 per day for knowing violations. Also, if a company has violated Title X of Dodd-Frank or CFPB regulations promulgated thereunder, 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). Potentially, if the CFPB, the FTC or one or more state officials believe we have violated the law, they could exercise their enforcement powers in ways that would have a material adverse effect on us.
CFPB Supervision and Examination. Additionally, the CFPB has supervisory powers over many providers of consumer financial products and services, including explicit authority to examine payday lenders, and has released its Supervision and Examination Manual, which includes a section on Short-Term, Small-Dollar Lending Procedures. In the past, the CFPB has conducted supervisory and/or limited scope examinations of our business. Neither these prior examinations nor any Examination Reports had a material effect on our results of operations or financial condition.
In July 2020, we received a Prioritized Assessment Information Request of Short-Term, Small Dollar Loans for the purpose of determining what changes we made in response to COVID-19 challenges, as well as any associated risks to consumers. The scope of the higher-level inquiry covered the period March 1, 2020 through June 30, 2020. In January 2021, we received a closing letter from the CFPB concerning the Prioritized Assessment Information Request Letter stating that the CFPB does not need to receive any additional information or reporting. Similarly, in June 2020, Ad Astra received a Prioritized Assessment Information Request of Debt Collection for the purpose of determining what changes Ad Astra made in response to COVID-19 challenges, as well as any associated risks to consumers. The scope of this inquiry covered the period January 1, 2020 through
May 31, 2020. In September 2020, Ad Astra received a closing letter from the CFPB concerning the Prioritized Assessment Information Request Letter stating that the CFPB does not need to receive any additional information or reporting.
The CFPB commenced its first examination of Ad Astra in October 2020, which covered the period from September 1, 2019 through August 31, 2020. The examination is ongoing and its purpose is to assess Ad Astra’s compliance management system and debt collection practices. While we do not expect that matters arising from this examination will have a material impact, Ad Astra has made, and is continuing to make, certain enhancements to its compliance procedures and debt collection practices.
For information on the civil investigative demand related to Heights' business, please see "Risk Factors--Risks Relating to our Business--CFPB investigation into certain of Heights' business practices is uncertain and may materially and adversely affect Heights' business and, ultimately, the combined business."
We cannot predict how current or future examinations or Examination Reports will impact us.
Possible Changes in Practices. While we do not expect that matters arising from our past CFPB examinations will have a material impact on us, we have made, and are continuing to make, at least in part to meet the CFPB's expectations, certain enhancements to our compliance procedures and consumer disclosures. For example, even if the payment provisions of the Final 2017 CFPB Rule do not become effective, we are likely to make changes to our payment practices in a manner that will likely increase our costs and/or reduce our consolidated revenues.
Anti-Arbitration Rule. Under its authority to regulate pre-dispute arbitration provisions pursuant to Section 1028 of Dodd-Frank, in July 2017 the CFPB issued a final rule prohibiting the use of mandatory arbitration clauses with class-action waivers in agreements for certain consumer financial products and services, including those applicable to us. Subsequently, Congress overturned this anti-arbitration rule. As a result, the rule will not become effective, and, pursuant to the Congressional Review Act, substantially similar rules may only be reissued with specific legislative authorization. However, Congress could potentially enact a law having a similar effect.
MLA. The Military Lending Act (the "MLA"), enacted in 2006, amended on July 22, 2015, and implemented by the Department of Defense (the "DoD"), 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. Accordingly, we do not meet all the requirements of the law in order to make loans to borrowers protected by the MLA.
Enumerated Consumer Financial Services Laws, Telephone Consumer Protection Act ("TCPA") and CAN-SPAM. The Truth in Lending Act ("TILA") and Regulation Z require creditors to deliver disclosures to borrowers prior to consummation of both closed-end and open-end loans and, additionally for open-end credit products, periodic billing statements and change-in-terms notices. For closed-end loans, the lender must disclose the annual percentage rate, finance charge, amount financed, total of payments, payment schedule, late fees and any security interest. For open-end credit, the borrower must be provided with key information that includes annual percentage rates and balance computation methods, various fees and charges and any security interest.
Under the Equal Credit Opportunity Act ("ECOA") and Regulation B, we may not discriminate on various prohibited bases, including race, color, religion, national origin, sex, marital status or age (provided that the applicant has the capacity to enter into a binding contract), the fact that all or part of the applicant’s income is due to receipt of government benefits, or retirement or part-time income, or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. We must also deliver notices specifying the basis for credit denials, as well as certain other notices.
The Fair Credit Reporting Act ("FCRA") regulates the use of consumer reports and reporting of information to credit reporting agencies. The FCRA limits the permissible uses of credit reports and requires us to provide notices to customers when we take adverse action or increase interest rates based on information obtained from third parties, including credit bureaus.
We are also subject to additional federal requirements with respect to electronic signatures and disclosures under the Electronic Signatures In Global And National Commerce Act ("ESIGN") and requirements with respect to electronic payments under the Electronic Funds Transfer Act ("EFTA)" and Regulation E. The EFTA and Regulation E protect consumers engaging in electronic fund transfers and contain restrictions, required disclosures and provide consumers certain rights relating to electronic fund transfers. Among other limitations, they prohibit creditors from conditioning the extension of credit on the consumer's repayment through electronic fund transfers authorized in advance to recur at substantially equal intervals.
Additionally, we are subject to the TCPA, CAN-SPAM Act and regulations of the Federal Communications Commission, which include limitations on telemarketing calls, auto-dialed calls, pre-recorded calls, text messages and unsolicited faxes. While we believe that our practices comply with the TCPA, the TCPA has nonetheless given rise to a spate of litigation nationwide.
We apply the FDCPA as a guide in conducting our first-party collection activities for delinquent loan accounts, and we are also subject to applicable state collections laws. Ad Astra must comply with the FDCPA and applicable state collections laws related to collection activities.
Bank Secrecy Act and Anti-Money Laundering Laws. Under regulations issued by the U.S. Department of the Treasury (the "Treasury Department") adopted under the Bank Secrecy Act of 1970 ("BSA"), we must report currency transactions in an amount greater than $10,000 by filing a Currency Transaction Report ("CTR"), and we must retain records for five years for purchases of monetary instruments for cash in amounts from $3,000 to $10,000. Multiple currency transactions must be treated as a single transaction if we have knowledge that the transactions are by, or on behalf of, the same person and result in either cash in or cash out totaling more than $10,000 during any one business day. We are required to file a CTR for any transaction which appears to be structured to avoid the required filing where the individual transaction or the aggregate of multiple transactions would otherwise meet the threshold and require the filing of a CTR.
The BSA also requires us to register as a money services business with the Financial Crimes Enforcement Network of the Treasury Department ("FinCEN"). This registration is intended to enable governmental authorities to better enforce laws prohibiting money laundering and other illegal activities. We are registered as a money services business with FinCEN. We must also maintain a list of names and addresses of, and other information about, our stores and must make that list available to FinCEN and any requesting law enforcement or supervisory agency. That store list must be updated at least annually.
Federal anti-money-laundering laws make it a criminal offense to own or operate a money transmittal business without the appropriate state licenses, which we maintain. In addition, the USA PATRIOT Act of 2001 and its corresponding federal regulations require us, as a “financial institution,” to establish and maintain an anti-money-laundering program. Such a program must include: (i) internal policies, procedures and controls designed to identify and report money laundering; (ii) a designated compliance officer; (iii) an ongoing employee-training program; and (iv) an independent audit function to test the program. In addition, federal regulations require us to report suspicious transactions involving at least $2,000 to FinCEN. The regulations generally describe four classes of reportable suspicious transactions: one or more related transactions that the money services business knows, suspects or has reason to suspect, (i) involve funds derived from illegal activity or are intended to hide or disguise such funds, (ii) are designed to evade the requirements of the BSA, (iii) appear to serve no business or lawful purpose, or (iv) involve the use of the money service business to facilitate criminal activity.
The Office of Foreign Assets Control ("OFAC") publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted or sanctioned countries. It also lists individuals, groups and entities, such as terrorists and narcotics traffickers, designated under programs that are not country-specific. Collectively, such individuals and companies are called “Specially Designated Nationals.” Their assets are blocked and we are generally prohibited from dealing with them.
Privacy Laws. The Gramm-Leach-Bliley Act of 1999, as updated by the FTC’s final Safeguards Rule and its implementing federal regulations, requires 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 the 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 final Safeguards Rule includes, among other things, (i) detailed requirements for an information security program; (ii) new requirements for accountability, e.g., designation of a Qualified Individual; (iii) an expansion of the definition of a financial institution; and (iv) new definitions and examples. Under the final 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.
U.S. State and Local Regulations
Currently, we make loans in approximately 27 states in the U.S. pursuant to enabling legislation that specifically allows direct loans of the type that we make. In one state, we make open-end loans pursuant to a contractual choice of Kansas law. In Texas, we operate under a CSO model, where we are paid by borrowers to facilitate loans from lenders unaffiliated with us.
Short-term consumer loans must comply with extensive laws of the states where our stores are located or, in the case of our online loans, where the borrower resides.
In the event of serious or systemic violations of state law by us or, in certain instances, our third-party service providers when acting on our behalf, we would be subject to a variety of regulatory and private sanctions. These could include license suspension or revocation (not necessarily limited to the state or product to which the violation relates); orders or injunctive relief, including orders providing for rescission or reformation of transactions or other affirmative relief; and monetary relief. Depending upon the nature and scope of any violation and/or the state in question, monetary relief could include restitution, damages, fines for each violation and/or payments to borrowers equal to a multiple of the fees we charge and, in some cases, principal as well. Thus, violations of these laws could potentially have a material adverse effect on our results of operations or financial condition. For more information regarding the regulations applicable to our business and the risks to which they subject us, see the section entitled “Item 1A - Risk Factors.”
Recent and Potential Future Changes in the Law: During the past few years, legislation, ballot initiatives and regulations have been proposed or adopted in various states that would prohibit or severely restrict our short-term consumer lending.
In California, Assembly Bill 539 became effective on January 1, 2020. AB 539 imposes an annual interest rate cap of 36% plus the Federal Funds Rate (0.25% as of December 31, 2020) on all consumer loans between $2,500 and $10,000. Our California Installment loans, impacted by AB 539, produced 2.9% of our total consolidated revenue from continuing operations for the year ended December 31, 2021. Gross loans receivable on California Installment loans impacted by AB 539 amounted to $11.3 million as of December 31, 2021. We continue to evaluate alternatives available to service customers in the California market. There can be no assurance that we will be able to implement a strategy to replace our California Installment loans at rates above 36%, or if we do, that we will be able to avoid or prevail in any legal attacks on any such strategy. We have launched a test California installment loan at rates in compliance with the new restrictions. At this point, it is too early to determine if these new lower-rate installment loans will be sustainable or profitable. Refer to “Item 1A - Risk Factors” for additional information regarding the impact of this law to our business.
We, along with others in the short-term consumer loan industry, intend to continue to inform and educate legislators and regulators and to oppose legislative or regulatory action that would unduly prohibit or severely restrict short-term consumer loans as compared with those currently allowed. Nevertheless, if legislative or regulatory action with that effect were taken in states in which we have a significant number of stores (or at the federal level), that action could have a further material adverse effect on our loan-related activities and revenues.
Texas CSO Lending: The CSO model is expressly authorized under Section 393 of the Texas Finance Code. As a CSO, we serve as a servicer for consumers to obtain credit from independent, non-bank consumer lending companies and we guaranty the lender against loss. As required by Texas law, we are registered as a CSO and, for our online services and services in some storefronts, also licensed as a CAB. Texas law subjects us to audit by the state’s Office of Consumer Credit Commissioner and requires us to provide expanded disclosures to customers regarding credit service products.
Nearly 50 Texas cities, including Austin, Dallas, San Antonio and Houston, have passed substantially similar local ordinances addressing products offered by CABs. These local ordinances place restrictions on the amounts that can be loaned to customers and the terms under which the loans can be repaid. As of December 31, 2021, we operated 54 stores in Texas cities with local ordinances. We were cited by the City of Austin in July 2016 for alleged violations of an Austin ordinance addressing products offered by CSOs. We believe that: (i) the ordinance conflicts with Texas state law, and (ii) our product in any event complies with the ordinance, when the ordinance is properly construed. The Austin Municipal Court agreed with our position that the ordinance conflicts with Texas law and, accordingly, did not address our second argument. However, in September 2017, the Travis County Court reversed this decision and remanded the case to the Municipal Court for further proceedings consistent with its opinion (including, presumably, a decision on our second argument). To date, a hearing and trial on the merits have not been scheduled.
In May 2020, the City of Austin proposed a second ordinance that became effective June 1, 202 and implemented restrictions on CSO transactions and revised certain definitions included in the original Austin ordinance. These revisions potentially affect the foundation upon which our previous arguments in municipal court were based. In June 2021, we launched a new product in the City of Austin to adhere to the updated ordinance. The City commenced audits of the new product in January 2022. The City advised that additional audits will be performed in the coming months to ensure full compliance, which would ultimately result in a resolution of all outstanding matters.
California Privacy Rights Act: The California Consumer Privacy Act (“CCPA”) became effective January 1, 2020. CCPA broadens consumer rights with respect to personal information, imposing expanded obligations to disclose the categories and uses of personal information a business collects, providing consumers a right to access that information, a right to opt out of the sale of personal information, and a right to request that a business delete personal information about the consumer subject to certain exemptions. CCPA provides for civil penalties for violations, as well as a private right of action for data breaches, which may increase the costs of data breach litigation. A ballot initiative passed November 2020 entitled California Privacy Rights Act (“CPRA”) mirrors many concepts from the European General Data Protection Regulation, which becomes effective January 1, 2023 but contains a look back provision to January 1, 2022. This initiative expands consumer rights such as a right to correct inaccurate information, restricts ability to share information, establishes an independent agency, the California Privacy Protection Agency (“CPPA”) with enforcement and rule making authority, and requires data minimization and publication requirements related thereto. The CPRA extends the exemption of the original CCPA legislation to employee and business-to-business data, except as to notice requirements, until the effective date. The CPPA is instructed to provide substantial regulations by July 1, 2022. We anticipate this having a further impact on our business leading up to the effective date of January 1, 2023 as we work to become compliant with the new provisions while awaiting the regulations. We anticipate that other states and possibly the federal government will adopt laws similar to the CPRA in the future. While it is too early to know the full impact, these developments could increase costs or otherwise adversely affect our business.
Interest Rate "Unconscionability" in California: In the 2017 case of De La Torre v. CashCall, Inc., the Ninth Circuit U.S. Court of Appeals certified the following question to the California Supreme Court: “Can a 96% interest rate on consumer loans of $2500 or more governed by California Finance Code § 22303, render the loans unconscionable under California Finance Code § 22302?” In August 2018, the California Supreme Court decided that the interest rate on a consumer loan of $2,500 or more can render the loans unconscionable under Cal. Fin. Code § 22303. However, the Court did not address whether the loans in question were in fact unconscionable. The Court stressed that in order to find that an interest rate is unconscionable, courts must conduct an individual analysis of whether "under the circumstances of the case, taking into account the bargaining process
and prevailing market conditions" a "particular rate was 'overly harsh,' 'unduly oppressive,' or 'so one-sided as to shock the conscience.'" This analysis is "highly dependent on context" and "flexible," according to the Court. The Court warned that lower courts should be wary of and must avoid remedies that amount to an "across-the-board imposition of a cap on interest rates."
Subsequent to the California Supreme Court’s decision in De La Torre, two class action lawsuits were filed against Speedy Cash, a Company subsidiary, in the Southern District of California. See "--Note 8. Commitments and Contingencies." Both cases have been dismissed and settled for immaterial amounts.
A California statute took effect as of January 1, 2020 that prohibits finance lenders from issuing loans between $2,500 and $10,000 with charges over 36% calculated as an annual simple interest rate (plus the prior month’s Federal Funds Rate).
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, unchanged, since 1980, although they have been subject to periodic review and consultation.
Providers of these types of loans 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. Such laws are relatively harmonized in most Canadian jurisdictions, with some exceptions, notably Quebec. At this time, the only loan product we offer in Quebec is the FlexitiCard, which is a credit card product that runs on Flexiti's private network.
In addition, Alberta, Manitoba and Quebec have enacted legislation that specifically regulates high-cost credit grantors. These laws define a high-cost credit product and require licensing and additional consumer protection oversight. Manitoba was the first province to enact such legislation in 2016, followed by Alberta and Quebec in 2019.
High-cost credit laws will become effective in British Columbia on May 1, 2022. Regulations, among other things, prescribe the rate and criteria for the purposes of the definition of “high-cost credit product,” establish a licensing and oversight regime, provide for additional cancellation right provisions and prohibit concurrent lending between loan products. It is too early to predict the impact of such laws and potential regulations on our results of operations.
As of December 31, 2021, we operated 23 of our 201 Canada Direct Lending stores and conducted online lending in British Columbia. Revenues in British Columbia were approximately 11.3% of our Canada Direct Lending revenues and 3.5% of total consolidated revenues for the year ended December 31, 2021.
In Ontario, Bill 59 titled “Putting Consumers First Act (the “PCF Act”), which proposed additional consumer protection measures, received Royal Assent in April 2017. The PCF Act provides the Ontario Ministry with the authority to impose additional restrictions on lenders which offer installment loans, subject to a regulatory process, including: (i) requiring a lender to take into account certain factors with respect to the borrower before entering into a credit agreement with that borrower; (ii) capping the amount of credit that may be extended; (iii) prohibiting a lender from initiating contact with a borrower for the purpose of offering to refinance a loan; and (iv) capping the amount of certain fees that do not form part of the cost of borrowing. In July 2017, the Ministry of Government and Consumer Services in Ontario issued a consultation document requesting feedback on questions regarding a new regime for high-cost credit and limits on optional services, such as optional credit protection insurance. The proposed high-cost credit regime would apply to loans with an annual interest rate that exceeds 35%. The Ministry summary accompanying the consultation document stated that a further consultation paper would be issued in the fall of 2017 on those matters and that the Ministry expected that regulations would be published in early 2019.
In January 2021, the Ontario government launched a subsequent consultation on the regulation of high-cost credit. The consultation proposals include defining high-cost credit to include loans with an annual interest rate that exceeds the Bank of Canada Bank Rate plus 25%, and additional licensing, borrower protections and fees that could be charged in connection with any loan that would fall under the definition of high-cost credit. The consultation closed in March 2021.
On March 16, 2021, Ontario held a roundtable to solicit industry feedback on a government proposal for regulation of alternative financial services other than Single-Pay loans. The consensus among stakeholders was that regulations should not be overly prescriptive (i.e., use existing Consumer Protection and Collection Practices Act for the regulatory framework), and to harmonize with provinces that are already regulating so-called high-cost credit products. There have been no further developments. It is too early to predict the outcome of this consultation process and its impact on our results operations.
As of December 31, 2021, we operated 134 of our 201 Canada Direct Lending stores and conducted online lending in Ontario. Canada Direct Lending revenues in Ontario were approximately 64.2% of our Canada Direct Lending revenues and 20.2% of total consolidated revenues for the year ended December 31, 2021.
Single Pay
In May 2007, Canadian federal legislation was enacted that 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.
Currently, Ontario, Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland, Nova Scotia, Prince Edward Island and Saskatchewan have provincial enabling legislation allowing for payday loans and have also been designated under the Criminal Code. Under the provincial payday lender legislation there are generally cost of borrowing disclosure requirements, collection activity requirements, caps on the cost of borrowing that may be recovered from borrowers and restrictions on certain types of lending practices, such as extending more than one payday loan to a borrower at any one time. At this time, we offer our Single Pay loans in British Columbia, Manitoba, Newfoundland, Nova Scotia, Ontario and Saskatchewan.
Canadian provinces periodically review the regulations for payday loan products. Some provinces specify a time period within the applicable law while other provinces are silent or simply note that reviews will be periodic. In British Columbia, the last review of the payday loan rate resulted in a decrease of the total cost of borrowing to C$15 per C$100 lent effective September 1, 2018. In Manitoba, the last review was in 2016 and the rate of C$17 per C$100 lent was kept unchanged. In Nova Scotia, the last review was in 2018 and the rate was lowered to $19 per $100. Nova Scotia has scheduled their next review for March 2022. Payday loan legislation came into force in Newfoundland in April 2019, with a maximum rate set at C$21 per $100 lent; such rate remains unchanged. In Nova Scotia, the last review was conducted in 2018 and the maximum cost of borrowing was reduced to C$19 per C$100, effective February 1, 2019. Effective February 2018, Saskatchewan amended its payday loan legislation to provide that the maximum rate that may be charged to a borrower be reduced to C$17 per C$100 lent, and the maximum fee for a dishonored check was set at C$25.
Check Cashing
In Canada, the federal government generally does not regulate check cashing businesses, except in respect of federally regulated financial institutions (and other than the Criminal Code of Canada provisions noted above in respect of charging or receiving in excess of 60% annual interest rate on the credit advanced in respect of the fee for a check cashing transaction), nor do most provincial governments generally impose any regulations specific to the check cashing industry. The exceptions are the provinces of Quebec, where check cashing stores are not permitted to charge a fee to cash a government check; and Manitoba, British Columbia and Ontario, where the province imposes a maximum fee to be charged to cash a government check. The province of Saskatchewan also regulates the check cashing business but only in respect of provincially regulated loan, trust and financing corporations. We do not offer check cashing in the province of Quebec.
Available Information
Information about us, including our Code of Business Conduct and Ethics, Corporate Governance Guidelines and charters of our standing committee 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 3615 North Ridge Road, Wichita, Kansas 67205, 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.

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ITEM 1A. RISK FACTORS
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. 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 the risk factors.
Risks Relating to Our Business
If our allowance for loan losses 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 allowance for loan losses 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 allowance for loan losses. We also maintain a liability for estimated incurred losses on loans funded by third-party lenders under our CSO programs, which we guarantee. As of December 31, 2021, our aggregate allowance for loan losses and liability for losses associated with the guaranty for loans not in default (including loans funded by third-party lenders under our CSO programs) was $94.5 million. 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 allowance for loan losses. In addition, Flexiti offers loans to consumers with a variety of 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 allowance for loan losses 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 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 will negatively and materially impact our operating results.
Because of the non-prime nature 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 will negatively and materially impact our operating results.
Because of the non-prime nature 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 on which we or the originating lenders are willing to provide credit, including the price, we and the originating lenders 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 are unable to rebuild our scoring models or if they do 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 fails, higher than forecasted losses may result. Similarly, if our scoring models overprice our products, we could lose customers. Among other things, factors such as COVID-19 impact our customers' ability to repay loans, and government programs focused on the pandemic, such as stimulus programs, or the cessation of such programs, or an inflationary environment , 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, and the originating lender (where applicable), 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 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 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 or less available, all of which could have a material adverse effect on our business, prospects, results of operations or financial condition.
If we are unable to manage growth effectively, our results of operations or financial condition may be materially adversely affected.
We may not be able to successfully grow our business. Failure to grow the business and generate sufficient levels of cash flow could inhibit our ability to service our debt obligations. Our expansion strategy, which contemplates disciplined growth in Canada and the U.S., increasing the market share of our online operations, selectively expanding our offering of installment loans and potential expansion in other international markets, is subject to significant risks. The profitability of our operations and any future growth depends upon many factors, including our ability to appropriately price our products, manage credit risk, respond to regulatory and legislative changes, obtain and maintain financing, hire, train and retain qualified employees, obtain and maintain required permits and 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 growth strategy.
We may not achieve the expected benefits of businesses we acquire, including Flexiti and Heights, and any acquisition could disrupt our business plans or operations.
From time-to-time, we may acquire other businesses that may enhance our product platform or technology, expand the breadth of our markets or customer base or advance our business strategies. The success of any acquisition depends upon our ability to effectively integrate the management, operations and technology of the acquired business into our existing management, operations and technology platforms. Integration can be complex, expensive and time-consuming. The failure to successfully integrate acquired businesses into our organization in a timely and cost-effective manner could materially adversely affect our business, prospects, results of operations or financial condition. The integration process could involve loss of key employees, disruption of ongoing businesses and/or loss of customers, incurrence of tax costs or inefficiencies or inconsistencies in standards, controls, information technology systems, procedures and policies. As a result, our ability to maintain relationships with customers, employees or other third-parties or our ability to achieve the anticipated benefits of acquisitions could be adversely affected and harm our financial performance.
The process of integrating formerly separately operated businesses may prove disruptive to both businesses, may take longer than we anticipate and may cause an interruption of and have a material adverse effect on our combined businesses. In that regard, we may not be able to successfully integrate Flexiti or Heights or otherwise realize the expected benefits of these acquisitions, including anticipated annual revenue and profits, operating costs and capital synergies, and the combined businesses could underperform relative to our expectations.
Even if we are able to successfully integrate the Heights business into our operations, we may not realize the anticipated cost saving synergies of the acquisition on the time table currently contemplated, or at all.
We acquired Heights based, in part, on the expectation that the acquisition would result in various cost saving synergies. Even if we can successfully integrate the Heights business into our operations, there can be no assurance that we will realize the expected cost saving synergies on the timetable currently contemplated, or at all. We expect to incur significant restructuring charges (including severance) and transition expenses in connection with these cost saving synergies. Achieving the expected cost saving synergies, as well as the costs of achieving them, is subject to a number of uncertainties and other factors. If these factors limit our ability to achieve the expected cost saving synergies of the acquisition or if the related costs exceed our estimates, our expectations of future results of operations, including the cost saving synergies expected to result from the acquisition, may not be met. Additionally, the actions we take to achieve cost saving synergies could have unintended consequences that adversely affect our business. If we encounter difficulties in achieving the expected cost saving synergies or do not achieve such cost saving synergies, we incur significantly greater costs related to such cost saving synergies than we anticipate or our activities related to such cost saving synergies have unintended consequences, our business, financial condition and results of operations could be adversely affected.
The outcome of a CFPB investigation into certain of Heights’ business practices is uncertain and may materially and adversely affect Heights’ business and, ultimately, the combined business.
In April 2020, Heights (then Southern Management Corporation) received a civil investigative demand (“CID”) from the CFPB. We have received and responded to additional CIDs and are fully cooperating with the investigation.
The CFPB has not yet made any allegations in the investigation, and we are currently unable to predict the eventual scope, ultimate timing or outcome of the CFPB investigation. While we are indemnified 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’s business practices or operations that could materially and adversely affect Heights’ 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, 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 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 and accruals related to self-insurance and CSO guarantee liability. 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 that will require 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. If we misinterpret or make inaccurate assumptions under the new guidance, our results of operations or financial condition could 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. 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 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.
Adverse economic conditions, including those resulting from 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 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 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.
In addition, a widespread health emergency, such as COVID-19, and perceptions regarding its impact, may continue to negatively affect the North American and global economy, travel, employment levels, employee productivity, demand for and repayment of our loan products and other macroeconomic activities, which could adversely affect our business, results of operations or financial condition. Given the dynamic nature of the COVID-19 pandemic, however, the extent to which it may impact our results of operations or financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
Failure to comply with debt collection regulations, or failure of our third-party collection agency to comply with debt collection regulations, could subject us to fines and other liabilities, which could harm our reputation and business.
In 2020, we acquired Ad Astra, our exclusive provider of third-party collection services for U.S. operations. Both federal and state law regulate debt collection communication and activities. Regulations governing debt collection are subject to changing interpretations that differ from jurisdiction to jurisdiction. Regulatory changes could make it more difficult for us and any collections agencies we may use to effectively collect on the loans we originate.
In 2016, the CFPB issued the 2016 CFPB Outline intended to increase consumer protection pertaining to third-party debt collectors and others covered by the FDCPA. The 2016 CFPB Outline would apply to the attempts of our third-party collection agency to collect debt originated by other lenders, including under our CSO programs. The proposals would not apply to our attempts to collect debt that we originate; however, the CFPB has announced that it plans to address consumer protection issues involving first-party debt collectors and creditors separately. In October 2020, the CFPB issued the first part of its Final Debt Collection Practices (Regulation F) Rule which addressed, among other things, communications in connection with debt collection and prohibitions on harassment or abuse, false or misleading representations and unfair debt collection practices. See "Regulatory Environment and Compliance-U.S. Regulations-U.S. Federal Regulations-CFPB Debt Collection Rule." Adoption of the Regulation F Rule will require significant changes in Ad Astra’s collection and we are not able to give any assurance that the effect of these new rules will not have a material impact 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.
Our impairment reviews require extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions could produce significantly different results. We may be required to recognize impairment of goodwill based on future events or circumstances. 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 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.
Our debt 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 debt agreements contain customary covenants, including limitations on indebtedness, liens, investments, subsidiary investments and asset dispositions, and require us to maintain certain leverage and interest coverage ratios. Failure to comply with these covenants could result in an event of default that, if not cured or waived, could reduce our liquidity and have a material adverse effect on our operating results and financial condition. In addition, an event of default under one of our debt agreements may result in all of our outstanding debt to become immediately due and payable.
In addition, our SPV facilities 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. Further, we may be required to redirect all excess cash to the lenders.
Failure to comply with debt 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, funds from third-party lenders under CSO programs 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 may be unable to protect our proprietary technology and analytics or keep up with that of our competitors.
The success of our business depends to a significant degree upon the protection of our proprietary technology, including Curo, our IT platform, 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 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.
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, including lenders who make loans to our customers under CSO programs and other 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.
In Texas, we rely on third-party lenders to conduct business. Regulatory actions can materially and adversely affect our third-party product offerings.
In Texas, we currently operate as a CSO or a CAB, arranging for unrelated third-parties to make loans to our customers. There are a limited number of third-party lenders that make these types of loans and there is significant demand and competition for the business of these companies. These third parties rely on borrowed funds to make consumer loans. If they lose their ability to make loans or become unwilling to make loans to us and we cannot find another lender, we would be unable to continue offering loans in Texas as a CSO or CAB, which would adversely affect our results of operations or financial condition.
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. It has been reported that U.S. federal regulators have taken or threatened actions, commonly referred to as “Operation Choke Point,” intended to discourage banks and other financial services providers from providing access to banking and third-party payment processing services to lenders in our industry. Additionally, legislation called the "Fair Access to Financial Services Act of 2020" has not yet been enacted and implemented. We can give no assurances that actions akin to Operation Choke Point will not intensify or resume, or that the effect of such actions against banks and/or third-party payment processors will not pose a threat to our ability to maintain relationships with commercial banks and third-party payment processors. 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 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, it is possible that 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 under laws that protect personal data, 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 data. We may not be able to anticipate or implement effective preventive measures against these types of breaches, especially because the techniques change frequently or are not recognized until launched. We may need to expend 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 confidential information or that of our customers or damage to our computers or systems or those of our customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure and harm to our reputation, all of which could have a material adverse effect on us. In addition, our applicants provide personal information, including bank account information when applying for loans. 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 possible liability.
As part of our business, and subject to applicable privacy laws, we may share confidential customer information and proprietary information with vendors, service providers and business partners who provide products, services or support to us. The information systems of these third parties may also be 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 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 significant 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, including consumer loans offered by us. The CFPB has regulatory, supervisory and enforcement powers over providers of consumer financial products and services.
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 are required to submit certain information regarding our business to the CFPB on a quarterly basis.
The CFPB also has broad authority to prohibit unfair, deceptive or abusive acts or practices and to investigate and penalize financial institutions. In addition to assessing financial penalties, the CFPB can require remediation of practices, pursue administrative proceedings or litigation and obtain cease and desist orders (which can include orders for restitution or 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.
On July 7, 2020, the CFPB issued the 2020 Final Rule, which rescinded part of the 2017 Final CFPB Payday Rule requiring enhanced underwriting and an "ability-to-repay" analysis; but kept intact the payment provisions around debiting consumer accounts. The 2017 Final CFPB Payday Rule is currently stayed as a result of an industry legal challenge and the effective date of the payment provisions is unknown. In light of this industry challenge, we cannot predict when it will ultimately go into effect or quantify its potential effect on us. If the payment provisions of the 2017 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 Final CFPB Payday Rule could have a material 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."
Following the Seila Law Supreme Court decision, President Biden requested and received the CFPB director's resignation and replaced her with an Acting Director. President Biden's nomination for the CFPB's next director, Rohit Chopra, who was confirmed by the Senate in October of 2021, is expected to enhance the CFPB's supervisory and enforcement regime.
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), the number and frequency of loans and reporting and use of state-wide databases;
•underwriting requirements;
•collection and servicing activity, including initiation of payments from consumer accounts;
•the establishment and operation of CSOs or CABs;
•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;
•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;
•anti-money laundering and counter-terrorist financing;
•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.
In recent years, California, Ohio and Virginia adopted lending laws that had a significant adverse impact on our business. For a description of these significant impacts, see Item 1, “Business-Regulatory Environment and Compliance-U.S. Regulations-
U.S. State and Local Regulations-Recent and Potential Future Changes in the Law” for additional details. We may not be able to implement a strategy to replace our products in these states, or, if we do, that those replacement products will be free from legal attack. Failing to successfully manage product transitions would have a material adverse effect on our results of operations or financial condition.
Several municipalities have passed laws that regulate aspects of our business, such as zoning and occupancy regulations to limit consumer lending storefronts. Similarly, nearly 50 Texas municipalities have enacted ordinances that regulate products offered under our CAB programs, including loan sizes and repayment terms. The Texas ordinances have forced us to make substantial changes to the loan products we offer and have resulted in litigation initiated by the City of Austin challenging the terms of our modified loan products. See Item 1, "Business-Regulatory Environment and Compliance-U.S. Regulations- State" and Note 8, “Commitments and Contingencies." If additional local laws are passed that affect our business, this could materially restrict our business operations, increase our compliance costs or increase the risks associated with our regulatory environment.
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 insurance operations are subject to a number of risks and uncertainties.
Heights’ customers can either purchase optional insurance products, including credit life, credit accident and health, credit property insurance and credit involuntary unemployment insurance, through a third-party independent insurer and finance the premiums with their loan from Heights, or customers may purchase their own insurance naming Heights as a “loss payee” and provide proof of insurance to Heights.
When purchased by a customer, Heights' credit insurance products insure the customer’s payment obligations on the associated loan in the event the customer is unable to make monthly payments due to death, disability, or involuntary unemployment, or in the event of a casualty event associated with the underlying collateral. Although a customer can pay the associated premiums
separately, substantially all customers finance payment of the premium, with the financed premium included in the balance of the loan. A credit insurance product may be cancelled if, for example, (i) we request cancellation due to the customer’s default on obligations under the associated loan, (ii) the customer prepays the principal balance of the associated loan in full, or (iii) the customer elects to terminate the credit insurance prior to the expiration of the term thereof (which the customer may do at any time).
Our insurance operations are subject to a number of risks and uncertainties, including changes in laws and regulations, customer demand for insurance products, claims experience and insurance carrier relationships. Changes to laws or regulations may, for example, negatively impact our ability to offer one or more of our insurance products; the way we are permitted to offer such products; capital and reserve requirements; the frequency and type of regulatory monitoring and reporting to which we are subject; benefits or loss ratio requirements; and insurance producer and agent licensing or appointment requirements. In addition, because our customers are not required to purchase the credit insurance products that we offer, we cannot be certain that customer demand for credit insurance products will not decrease in the future. Our insurance operations are also dependent on our lending operations as the sole source of business and product distribution. If our lending operations discontinue offering insurance products, our insurance operations would have no method of distribution. 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 in the future. Further, if our insurance providers are, for any reason, 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 or materialize, it could have a material adverse effect on our business, 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 8, “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 our customer loan agreements. Arbitration provisions require that disputes with 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 and Nevada Supreme Courts, 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.
The profitability of our bank-originated products could be adversely affected by the originating lenders.
We do not originate nor control the pricing or functionality of Unsecured Installment loans originated by a bank and other bank sponsored products, such as Revolve Finance and First Phase. We have agreements with third party banks that license our technology and underwriting services and that make all key decisions regarding the underwriting, product features and pricing. We generate revenues from these products through marketing, servicing and technology licensing fees, as well as, at times, through our participating interest, depending on the product. If a bank changes its pricing, underwriting or marketing of the product in a way that decreases revenues or increases losses, then the profitability could be reduced, which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows. If our relationship with a bank ended, we may not be able to find another suitable replacement bank and new arrangements, if any, may result in significantly increased costs to us. Any inability to find another bank would adversely affect our ability to continue to facilitate the bank-originated products, which in turn could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Risk Factor Relating to our Investment in Katapult
Our operating results may be adversely affected by our investment in Katapult.
As of December 31, 2021, we owned 25.2% of Katapult on a fully diluted basis assuming full pay-out of earn-out 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 made a $10 million investment in December 2021 to increase the investment to 25.2%. 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 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;
•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 growth 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;
•sales of common stock by us, our investors or members of our management team;
•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, particularly in light of our growth plans, 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 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 December 31, 2021, the Founders owned 41.5% of our outstanding common stock and each is a member of our Board of Directors. 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. On January 28, 2022, Doug Rippel, co-founder and Executive Chairman of the Board, tendered his resignation from the Board to be effective immediately following the Company’s annual meeting of shareholders in 2022.
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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
As of December 31, 2021, we leased 550 stores in the U.S. and 201 stores in Canada. Our U.S. stores include 390 branches from the acquisition of Heights, which we acquired on December 27, 2021. We lease our principal executive offices, which are located in Wichita, Kansas. We also lease administrative offices in Greenville, South Carolina and Toronto, Ontario and a FinTech office in Chicago, Illinois. Our centralized collections facilities are in the U.S. and Canada. See Note 12, "Leases" of the Notes to Consolidated Financial Statements for additional information on our operating leases with real estate entities that are related to us through common ownership.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
See Note 8, "Commitments and Contingencies" of the Notes to Consolidated Financial Statements for a summary of our legal proceedings and claims.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The principal market for our common stock is the NYSE and our shares of common stock are listed under the symbol "CURO."
As of March 3, 2022, there were approximately 130 stockholders of record of our common stock. Holders of record do not include an indeterminate number of beneficial holders whose shares are held through brokerage accounts and clearing agencies.
Dividends
Our Board of Directors approved a quarterly dividend program in 2020 for $0.055 per share ($0.22 annualized), which was increased to $0.11 per share in May of 2021 ($0.44 annualized). In February 2022, the Board also approved an $0.11 per share quarterly dividend for the calendar year 2022. Our Board of Directors has discretion to determine whether to pay dividends in the future based on a variety of factors, including our earnings, cash flow generation, financial condition, results of operations, the terms of our indebtedness and other contractual restrictions, capital requirements, business prospects and other factors our Board of Directors may deem relevant.
Issuer Purchases of Equity Securities
In May 2021, our Board of Directors authorized a share repurchase program (the "2021 Repurchase Program") providing for the repurchase of up to $50.0 million of our common stock.
The following table provides information with respect to purchases we made of our common stock during the quarter ended December 31, 2021.
Period Total Number of Shares Purchased(1)(2)
Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3)
Dollar Value of Shares that may yet be Purchased under the Plans or Programs(4)
(in millions)
October 2021 287,398 $ 18.33 286,629 $ 27.1
November 2021 794,943 18.01 294,266 21.8
December 2021 843,567 16.25 568,385 12.6
Total 1,925,908 $ 17.28 1,149,280
(1) Includes shares withheld from employees as tax payments for shares issued under our stock-based compensation plans. See Note 11, "Share-based compensation" of the Notes to the Consolidated Financial Statements for additional details on our stock-based compensation plans.
(2) Includes shares repurchased in a private transaction. See Note 23, "Share Repurchase Program" of the Notes to the Consolidated Financial Statements for additional details.
(3) All shares purchased as part of a publicly announced plan were purchased under the 2021 Repurchase Program, described in this Item 5.
(4) As of the end of the period.
In February 2022, we completed our purchases under the 2021 Repurchase Program. Refer to Note 24, "Subsequent Events" for additional details.
In February 2022, our Board authorized a new share repurchase program for up to $25.0 million of our common stock. Repurchases under this program will commence at our discretion and continue until completed or terminated. We expect the purchases to be made from time-to-time in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. Any repurchased shares will be available for use in connection with equity plans and for other corporate purposes.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition, result of operations, liquidity and capital resources and certain factors that may affect future results, including economic and industry-wide factors, should be read in conjunction with our Consolidated Financial Statements and accompanying notes included herein.
Components of Our Results of Operations
Revenue
The core consumer finance products we offer include Revolving LOC and Installment loans. Revenue in our Consolidated Statements of Operations includes: interest income, MDR, finance charges, CSO fees, insurance revenue, late fees and non-sufficient funds fees. Product offerings differ by jurisdiction and are governed by the laws in each jurisdiction.
Revolving LOC loans are lines of credits without specified maturity dates and include our POS financing products at Flexiti. We record revenue from Revolving LOC loans on a simple-interest basis. Revolving LOC revenues include interest income on outstanding revolving balances and other usage or maintenance fees as permitted by underlying statutes. Accrued interest and fees are included in "Gross loans receivable" in the Consolidated Balance Sheets. Revolving LOC revenues also include MDR, which represents a fee charged to merchant partners to facilitate customer purchases at merchant locations. The fee is recorded as unearned revenue when received and recognized over the expected loan term.
Historically, Installment loans range from unsecured, short-term, small-denomination loans, whereby a customer receives cash in exchange for a post-dated personal check or 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. With the acquisition of Heights in December 2021, we now offer long-term large loans to customers. For our short-term, small denomination loans, we recognize revenue on a constant-yield basis ratably over the team of each loan. We defer and recognize unearned fees over the remaining term of the loan at the end of each reporting period. Revenues from these short-term loans represent deferred presentment or other fees as defined by the underlying state, provincial, or national regulations. For our fixed-term, fully amortizing loans, we record revenues on a simple-interest basis. Revenue for fixed-term Installment loans includes interest income from Company-Owned loans, CSO fees, and non-sufficient funds or returned-items fees on late or defaulted payments on past-due loans, known as late fees. Late fees comprise less than 1% of Installment revenues. Accrued interest and fees are included in "Gross loans receivable" in the Consolidated Balance Sheets.
We also provide a number of ancillary financial products, including optional credit protection insurance, check cashing, demand deposit accounts, and money transfer services. Heights offers optional insurance products to its customers in connection with its lending operations, including credit life, credit accident and health, credit property insurance and credit involuntary unemployment insurance with the policies written by unaffiliated third-party insurance companies. Insurance commissions, written in connection with certain loans, are credited to unearned insurance commissions and recognized as income over the life of the related insurance contracts, using a method similar to that used for the recognition of interest income.
Provision for Losses
Credit losses are an inherent part of outstanding loans receivable. We maintain an allowance for loan losses for loans and interest receivable at a level estimated to be adequate to absorb such losses based primarily on our analysis of historical loss rates by products containing similar risk characteristics. The allowance for losses on our Company-Owned gross loans receivables reduces the outstanding gross loans receivables balance in the Consolidated Balance Sheets. The liability for estimated incurred losses related to loans originated by third-party lenders through CSO programs, which we guarantee but do not include in the Consolidated Financial Statements (referred to as "Guaranteed by the Company"), is reported in "Liability for losses on CSO lender-owned consumer loans" in the Consolidated Balance Sheets. Increases in either the allowance or the liability, net of charge-offs and recoveries, are recorded as “Provision for losses” in the Consolidated Statements of Operations.
Operating Expense
Our primary categories of operating expense are as follows:
•Salaries and Benefits-includes salaries and personnel-related costs, including benefits, bonuses and share-based compensation expense for both store and corporate costs.
•Occupancy-includes rent expense on our leased facilities and equipment, utilities, insurance and certain maintenance expenses for both store and corporate costs.
•Advertising-costs are expensed as incurred and include costs associated with attracting, retaining and/or reactivating customers as well as creating brand awareness. We have internal creative, web and print design capabilities and if we outsource these services, it is limited to mass-media production and placement. Advertising expense also includes costs for all marketing activities including paid search, advertising on social networking sites, affiliate programs, direct response television, radio air time and direct mail.
•Direct Operations-includes expenses associated with the direct operations and technology infrastructure related to loan underwriting, collections and processing, and bank service charges and credit scoring charges.
•Depreciation and amortization-includes all store and corporate depreciation and amortization expense.
•Other operating expense-includes expenses such as office expense, security expense, travel and entertainment expenses, certain taxes, legal and professional fees, foreign currency impact to our intercompany balances, gains or losses on foreign currency exchanges, disposals of fixed assets, certain store closure costs, and other miscellaneous income and expense amounts.
Other Expense
Our non-operating expenses include the following:
•Interest Expense-includes interest primarily related to our Senior Secured Notes, our SPV and SPE facilities, and our Senior Revolver.
•Income or loss from equity method investment and Gain from equity method investment - includes our share of Katapult's income or loss and a recognized gain from the merger of Katapult and FinServ. Refer to Item 1, "Business-Company History and Overview" and Note 6, "Fair Value Measurements" of the Notes to the Consolidated Financial Statements for additional details on our equity method investment.
•Loss on extinguishment of debt - includes costs associated with the extinguishment of debt facilities.
Revenue by Product and Segment and Related Loan Portfolio Performance
Consolidated Revenue by Product and Segment
The following table summarizes revenue by product, including CSO fees, for the period indicated:
For the Year Ended
December 31, 2021 December 31, 2020
(in thousands, unaudited) U.S. Canada Direct Lending Canada POS Lending Total % of Total U.S. Canada Direct Lending Canada POS Lending Total % of Total
Revolving LOC $ 106,302 $ 156,000 $ 32,289 $ 294,591 36.0 % $ 134,449 $ 115,053 $ - $ 249,502 29.4 %
Installment 405,409 43,735 - 449,144 54.9 % 489,057 49,628 - 538,685 63.6 %
Ancillary 14,251 57,304 2,553 74,108 9.1 % 15,018 44,191 - 59,209 7.0 %
Total revenue $ 525,962 $ 257,039 $ 34,842 $ 817,843 100.0 % $ 638,524 $ 208,872 $ - $ 847,396 100.0 %
For the year ended December 31, 2021, total revenue declined $29.6 million, or 3.5%, to $817.8 million, compared to the prior year. Excluding Runoff Portfolios, total revenue for the year ended December 31, 2021 increased $33.7 million, or 4.6%, compared to the prior year. Geographically, U.S. revenues declined 17.6% year over year (9.5% excluding Runoff Portfolios) largely due to COVID-19 Impacts, while Canada Direct Lending revenues increased 23.1% due to the continued popularity and growth of Revolving LOC loans. For the year ended December 31, 2021, Canada POS Lending revenue was $34.8 million, inclusive of acquisition-related adjustments which reduced total revenue by $7.5 million.
Canada POS Lending revenue includes MDR, which is recognized over the life of the underlying loan term. On March 10, 2021, we completed the acquisition of Flexiti. For the year ended December 31, 2021, Canada POS Lending results were impacted by adjustments related to that acquisition that reduced revenue by $7.5 million and net revenue by $13.9 million ("acquisition-related adjustments"). The acquisition included a loan portfolio with a fair value of approximately $196.1 million ("Acquired Portfolio"). A fair value discount of $12.5 million was based on estimated future net cash flows and is recognized in net revenue over the expected life of the Acquired Portfolio (approximately 12 months). This amortization resulted in an increase in revenue of $6.6 million and loan loss provision of $6.4 million for the year ended December 31, 2021. The Acquired Portfolio also included $14.1 million of unearned MDR and annual and administrative fees, which are not amortized to revenue for the Acquired Portfolio because they do not represent future cash flows. For the year ended December 31, 2021, Canada POS Lending revenue and net revenue were both lower by $14.1 million compared to what would have been reported if the unearned MDR and fees had been recognized over the expected life of the Acquired Portfolio. The acquisition-related adjustments related to the unearned MDR annual and administrative fees will decline each quarter, until becoming fully amortized by the end of the first quarter of 2022.
The table below presents acquisition-related adjustments to Flexiti's revenue and net revenue for the year ended December 31, 2021:
(in thousands, unaudited) Canada POS Lending Acquisition-related adjustments Adjusted Canada POS Lending
Interest income $ 22,335 $ (6,614) (1) $ 15,721
Other revenue 12,506 14,074 (2) 26,580
Total revenue $ 34,841 $ 7,460 $ 42,301
Provision for losses 24,638 (6,444) (1) 18,194
Net revenue $ 10,203 $ 13,904 $ 24,107
(1) Acquisition-related adjustments for interest income and provision for losses relate to the amortization of the fair value discount of the Acquired Portfolio.
(2) Acquisition-related adjustments for other revenue represents the unearned MDR and annual and administrative fees, which were not included in the opening balance sheet as they did not represent future cash flows as of March 10, 2021, and thus, are not amortized to revenue for the Acquired Portfolio. The acquisition-related adjustments related to the unearned MDR and annual and administrative fees will decline each quarter with the Acquired Portfolio and will be fully amortized by the end of the first quarter of 2022.
From a product perspective, Revolving LOC revenues increased $45.1 million, or 18.1%, compared to the prior year, primarily due to growth in Canada Direct Lending revenue of $40.9 million, or 35.6%, and Canada POS Lending of $32.3 million, partially offset by declines in U.S. revenue of $28.1 million, or 20.9%. Excluding Runoff Portfolios, U.S. Revolving LOC revenue decreased $1.6 million, or 1.6%, for the year ended December 31, 2021 compared to the prior year.
For the year ended December 31, 2021, Installment revenues decreased $89.5 million, or 16.6%, compared to the prior year. Excluding Runoff Portfolios, Installment revenue decreased $52.9 million, or 11.6%, primarily as a result of COVID-19 related constraints on demand and the continued shift to Revolving LOC loans.
Ancillary revenues increased $14.9 million, or 25.2%, versus the prior year from the sale of insurance products to Revolving LOC and Installment loan customers in Canada.
The following table summarizes revenue by product, including CSO fees, for 2020 and 2019 (in thousands):
Year Ended
December 31, 2020 December 31, 2019
U.S. Canada Direct Lending Canada POS Lending Total % of Total U.S. Canada Direct Lending Canada POS Lending Total % of Total
Revolving LOC $ 134,449 $ 115,053 $ - $ 249,502 29.4 % $ 147,794 $ 97,462 $ - $ 245,256 21.5 %
Installment 489,057 49,628 - 538,685 63.6 % 747,417 85,275 - 832,692 72.9 %
Ancillary 15,018 44,191 - 59,209 7.0 % 18,295 45,554 - 63,849 5.6 %
Total revenue $ 638,524 $ 208,872 $ - $ 847,396 100.0 % $ 913,506 $ 228,291 $ - $ 1,141,797 100.0 %
For a comparison of our results of operations for the years ended December 31, 2020 and 2019, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Revenue by Product and Segment and Related Loan Portfolio Performance" in Part II Item 7 of our 2020 Form 10-K.
The following table presents online revenue and online transaction compositions, including CSO fees, of the products and services that we currently offer within the U.S., excluding Heights, and Canada Direct Lending segments:
Year Ended December 31,
2021 2020
Online revenue as a percentage of consolidated revenue 50.5 % 48.5 %
Online transactions as a percentage of consolidated transactions 60.8 % 54.7 %
For the year ended December 31, 2021, online revenue as a percentage of consolidated revenue increased as a result of our store closures during the second and third quarters of 2021, as well as the continued transition of customers to our online channel.
Loan Volume and Portfolio Performance Analysis
The following table reconciles Company Owned gross loans receivable, a GAAP-basis balance sheet measure, to Gross combined loans receivable, a non-GAAP measure(1). Gross combined loans receivables includes loans originated by third-party lenders through CSO programs, which are not included in our Consolidated Financial Statements but from which we earn revenue by providing a guarantee to the unaffiliated lender (in thousands):
As of
(in thousands, unaudited) December 31,
2021 September 30,
2021 June 30,
2021 March 31,
2021 December 31,
U.S.
Revolving LOC $ 52,532 $ 51,196 $ 47,277 $ 43,387 $ 55,561
Installment - Company Owned 609,413 137,987 139,234 142,396 167,890
Canada Direct Lending
Revolving LOC 402,405 366,509 337,700 319,307 303,323
Installment 24,792 24,315 23,564 24,385 26,948
Canada POS Lending
Revolving LOC 459,176 302,349 221,453 201,539 -
Company Owned gross loans receivable $ 1,548,318 $ 882,356 $ 769,228 $ 731,014 $ 553,722
Gross loans receivable Guaranteed by the Company 46,317 43,422 37,093 32,439 44,105
Gross combined loans receivable (1)
$ 1,594,635 $ 925,778 $ 806,321 $ 763,453 $ 597,827
(1) See a description of non-GAAP Financial Measures in "Supplemental Non-GAAP Financial Information."
Gross combined loans receivable by product at quarter-end are presented below.
Gross combined loans receivable increased $996.8 million, or 166.7%, to $1,594.6 million as of December 31, 2021, from $597.8 million as of December 31, 2020. Gross combined loans receivables as of December 31, 2021 included $196.1 million and approximately $472 million of receivables acquired on the date of acquisition of Flexiti and Heights, respectively. Canada POS Lending has continued to grow rapidly throughout the year, particularly beginning in July 2021 with Flexiti beginning its exclusive POS financing partnership with LFL. In addition, the holiday season drove $114.4 million of Canada POS Lending loan growth in November and December 2021. Excluding loans acquired in connection with the Flexiti acquisition on March 10, 2021 and the Heights acquisition on December 27, 2021, gross combined loans receivables increased $329.0 million, or 41.4%, from December 31, 2020 to December 31, 2021, primarily driven by Canada Direct Lending growth of $96.9 million, or 29.3%. During such period, U.S. gross combined loans receivable, excluding Heights, decreased $30.9 million, or 11.6%, primarily due to (i) COVID-19 Impacts and (ii) the aforementioned Runoff Portfolios. Excluding Runoff Portfolios and gross loans receivables acquired with Heights, U.S. gross combined loans receivable grew $24.3 million, or 12.6%, during such period.
Sequentially, gross combined loans receivable increased $668.9 million, or 72.2%. Geographically, U.S. grew sequentially by $475.7 million, or 204.5%, as a result of our acquisition of Heights, which accounted for approximately $472 million of loans receivable as of December 31, 2021. Canada grew sequentially by $193.2 million, or 27.9%, primarily driven by Canada POS Lending growth of $156.8 million, or 51.9%, and Canada Direct Lending Revolving LOC growth of $35.9 million, or 9.8%. Excluding Heights, gross combined loans receivable increased $197.2 million, or 21.3%, sequentially, as consumer demand increased in the fourth quarter.
Consolidated Results of Operations
Beginning in the year ended December 31, 2021, we changed our presentation of operating expenses on our Statements of Operations. The December 31, 2020 and December 31, 2019 presentations have been revised to conform to the current year presentation. Refer to the comparison of "Comparison of Consolidated Results of Operations for the Years Ended December 31, 2021 and 2020" below for a description of expenses included within each operating expense line item.
The table below presents our consolidated results of operations. A further discussion of the results of our operating segments is provided under "-Segment Analysis" below.
(in thousands)
(in thousands, unaudited) Year Ended December 31,
2021 2020 (1)
2019 (1)
Revenue $ 817,843 $ 847,396 $ 1,141,797
Provision for losses 245,668 288,811 468,551
Net revenue 572,175 558,585 673,246
Operating Expenses
Salaries and benefits 237,109 196,817 206,193
Occupancy 55,559 57,271 54,895
Advertising 38,762 44,552 53,398
Direct operations 60,056 46,893 73,568
Depreciation and amortization 26,955 17,498 18,630
Other operating expense 74,682 47,048 48,049
Total operating expenses 493,123 410,079 454,733
Other expense (income)
Interest expense 97,334 72,709 69,763
(Income) loss from equity method investment (3,658) (4,546) 6,295
Gain from equity method investment (135,387) - -
Loss on extinguishment of debt 40,206 - -
Total other (income) expense (1,505) 68,163 76,058
Income from continuing operations before income taxes 80,557 80,343 142,455
Provision for incomes taxes 21,223 5,895 38,557
Net income from continuing operations 59,334 74,448 103,898
Net income from discontinued operations, net of tax - 1,285 7,590
Net income $ 59,334 $ 75,733 $ 111,488
(1) The December 31, 2020 and 2019 presentation has been revised to conform to the current period presentation.
Comparison of Consolidated Results of Operations for the Years Ended December 31, 2021 and 2020
Revenue and Net Revenue
For a discussion of revenue, see "Consolidated Revenue by Product and Segment" above.
Provision for losses decreased by $43.1 million, or 14.9%, for the year ended December 31, 2021 compared to the prior year. The decrease in provision for losses was primarily a result of lower average loan balances in the U.S. and multiple rounds of U.S. government stimulus associated with COVID-19, partially offset by provisioning on Canada Direct Lending growth and upfront loss provisioning on rapid customer receivables growth late in the quarter in Canada POS Lending. Refer to "Loan Volume and Portfolio Performance Analysis" and "Segment Analysis" sections below for additional details.
Operating Expenses
Salaries and benefits were $237.1 million for the year ended December 31, 2021, an increase of $40.3 million, or 20.5%, compared to the prior year. Excluding costs associated with Canada POS Lending, salaries and benefits increased $25.8 million, or 13.1%, primarily due to timing and level of performance-based variable compensation and personnel investments to support Canada Direct Lending growth.
Occupancy costs were $55.6 million for the year ended December 31, 2021, a decrease of $1.7 million, or 3.0%, compared to the prior year. Excluding costs associated with Canada POS Lending, occupancy costs decreased $2.2 million, or 3.9%, primarily due to store closures in the U.S. during the second and third quarters of 2021.
Advertising costs decreased $5.8 million, or 13.0%, year over year, and $7.1 million, or 15.9%, excluding Canada POS Lending. The prior-year period included costs for Verge Installment loans which have since been suspended, as described further in "Segment Analysis" below.
Direct operations were $60.1 million for the year ended December 31, 2021, an increase of $13.2 million, or 28.1%, compared to the prior year. Excluding costs associated with Canada POS Lending, direct operations decreased $1.2 million, or 2.6%, primarily driven by lower collection fees paid in the U.S. due to lower year over year demand and multiple rounds of significant U.S. government stimulus associated with the COVID-19 pandemic.
Depreciation and amortization expense increased $9.5 million, or 54.0%, year over year. Excluding costs associated with Canada POS Lending, depreciation and amortization expense decreased $1.0 million, or 5.6%, primarily driven by our store closures in the U.S. during the second and third quarters of 2021.
Other operating expenses were $74.7 million for the year ended December 31, 2021, an increase of $27.6 million, or 58.7%, compared to the prior year. Excluding costs associated with Canada POS Lending, other operating expenses increased $17.8 million, or 37.9%, primarily due to (i) $13.7 million of transaction costs related to our acquisition of Flexiti in March 2021, our acquisition of Heights in December 2021, and the Katapult and FinServ merger in June 2021, and (ii) $8.8 million of certain restructuring costs related to our second and third quarter 2021 store closures in the U.S.
Other Expense
Interest Expense
Interest expense for the year ended December 31, 2021 increased $24.6 million, or 33.9%, primarily related to (i) interest on debt acquired as part of the acquisition of Flexiti, (ii) higher year-over-year interest on our U.S. SPV, and (iii) interest expense associated with the additional issuance of our 7.50% Senior Secured Notes. An additional $2.1 million of interest was incurred for the year ended December 31, 2021, which represents interest on the 8.25% Senior Secured Notes for the period between July 30, 2021 and August 12, 2021. This is the period during which both the 8.25% Senior Secured Notes and 7.50% Senior Secured Notes were outstanding.
Equity Method Investment
We recognize our share of Katapult’s earnings or loss on a one-quarter lag. Our share of Katapult's earnings was $3.7 million for the year ended December 31, 2021, which included a gain from revaluing Katapult's public and private warrant liability. During the fourth quarter of 2021, we purchased an additional 2.6 million of Katapult's common stock for $10.0 million, which increased our ownership in Katapult from 19.3% to 25.2% on a fully diluted basis assuming full pay-out of the earn-out shares as of December 31, 2021.
On June 9, 2021, Katapult completed its merger with FinServ. As part of the merger, we received cash consideration of $146.9 million and retained ownership through shares after the merger. As of December 31, 2021, our total cash investment in Katapult is $37.6 million.
Loss on Extinguishment of Debt
Loss on extinguishment of debt for the year ended December 31, 2021 of $40.2 million was due to the redemption of the 8.25% Senior Secured Notes.
Provision for Income Taxes
The effective income tax rate for the year ended December 31, 2021 was 26.3%, consistent with the blended federal and state/provincial statutory rate of approximately 26%. The income tax expense includes nondeductible expense items related to the change in fair value of contingent consideration of $1.6 million, and nondeductible transaction costs of $1.2 million, partially offset by proportionally more net income in lower-tax rate jurisdictions, driven by the gain on the Katapult transaction of $146.9 million in the second quarter of 2021 and the loss on extinguishment of debt of $40.2 million in the third quarter of 2021.
Additionally, income tax expense includes the release of a valuation allowance of $0.4 million due to our share of Katapult's income, tax benefits related to share-based compensation of $0.8 million, $0.2 million tax expense of additional Texas accrual for 2020 due to the settlement of 2013 to 2019 Texas returns, and a tax benefit of $0.9 million for the recognition of research and development tax credit.
The effective income tax rate of adjusted tax expense included in Adjusted Net Income for the year ended December 31, 2021 was 23.5%.
Comparison of Consolidated Results of Operations for the Years Ended December 31, 2020 and 2019
For a comparison of our results of operations for the years ended December 31, 2020 and 2019, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Consolidated Results of Operations" in Part II Item 7 of our 2020 Form 10-K.
Segment Analysis
The following is a summary of portfolio performance and results of operations for the segment and period indicated (all periods unaudited except for Q4 2021 and Q4 2020). We report financial results for three reportable segments: US, Canada Direct Lending and Canada POS Lending.
U.S. Portfolio Performance
On December 27, 2021, we acquired Heights which accounted for approximately $472 million of U.S. Installment loans as of December 31, 2021. As the period between December 27, 2021 and December 31, 2021 did not result in material loan performance, we have excluded Heights from the table and related discussion below for the fourth quarter and year ended 2021.
(in thousands, except percentages) Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020
Gross combined loans receivable (1)
Revolving LOC $ 52,532 $ 51,196 $ 47,277 $ 43,387 $ 55,561
Installment loans - Company Owned 137,782 137,987 139,234 142,396 167,890
Total U.S. Company Owned gross loans receivable 190,314 189,183 186,511 185,783 223,451
Installment loans - Guaranteed by the Company (2)
46,317 43,422 37,093 32,439 44,105
Total U.S. gross combined loans receivable (1)
$ 236,631 $ 232,605 $ 223,604 $ 218,222 $ 267,556
Lending Revenue:
Revolving LOC $ 27,911 $ 27,377 $ 24,091 $ 26,923 $ 31,111
Installment loans - Company Owned 56,820 57,659 55,918 64,516 68,927
Installment loans - Guaranteed by the Company (2)
47,348 43,377 34,908 41,425 42,972
Total U.S. lending revenue $ 132,079 $ 128,413 $ 114,917 $ 132,864 $ 143,010
Lending Provision:
Revolving LOC $ 11,592 $ 8,140 $ 6,621 $ 5,039 $ 11,583
Installment loans - Company Owned 18,618 16,792 14,048 11,159 24,629
Installment loans - Guaranteed by the Company (2)
25,967 23,146 12,583 9,648 22,621
Total U.S. lending provision $ 56,177 $ 48,078 $ 33,252 $ 25,846 $ 58,833
Lending Net Revenue
Revolving LOC $ 16,319 $ 19,237 $ 17,470 $ 21,884 $ 19,528
Installment loans - Company Owned 38,202 40,867 41,870 53,357 44,298
Installment loans - Guaranteed by the Company (2)
21,381 20,231 22,325 31,777 20,351
Total U.S. lending net revenue $ 75,902 $ 80,335 $ 81,665 $ 107,018 $ 84,177
NCOs
Revolving LOC $ 11,481 $ 8,329 $ 7,271 $ 9,904 $ 12,500
Installment loans - Company Owned 19,664 19,548 18,617 17,313 19,620
Installment loans - Guaranteed by the Company (2)
26,065 21,404 12,044 12,150 21,590
Total U.S. NCOs $ 57,210 $ 49,281 $ 37,932 $ 39,367 $ 53,710
NCO rate (3)
Revolving LOC 22.1% 16.9% 16.0% 20.0% 22.3%
Installment loans - Company Owned 14.3% 14.1% 13.2% 11.2% 12.4%
(in thousands, except percentages) Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020
Total U.S. Company Owned NCO rate 16.4% 14.8% 13.9% 13.3% 15.0%
Installment loans - Guaranteed by the Company (2)
58.1% 53.2% 34.6% 31.7% 51.5%
Total U.S. NCO rate 24.4% 21.6% 17.2% 16.2% 21.0%
ALL and CSO Liability for Losses (4)
Revolving LOC $ 13,591 $ 13,480 $ 13,669 $ 14,319 $ 19,185
Installment loans - Company Owned 17,445 18,491 21,246 25,815 31,971
Installment loans - Guaranteed by the Company (2)
6,908 7,007 5,265 4,727 7,228
Total U.S. ALL and CSO Liability for Losses $ 37,944 $ 38,978 $ 40,180 $ 44,861 $ 58,384
ALL and CSO Liability for Losses rate (5)
Revolving LOC 25.9% 26.3% 28.9% 33.0% 34.5%
Installment loans - Company Owned 12.7% 13.4% 15.3% 18.1% 19.0%
Total U.S. Company Owned ALL rate 16.3% 16.9% 18.7% 21.6% 22.9%
Installment loans - Guaranteed by the Company (2)
14.9% 16.1% 14.2% 14.6% 16.4%
Total ALL and CSO Liability for Losses rate 16.0% 16.8% 18.0% 20.6% 21.8%
Past-due rate (5)
Revolving LOC 30.5% 30.5% 26.6% 26.3% 30.7%
Installment loans - Company Owned 19.4% 20.1% 18.7% 18.0% 19.0%
Total U.S. Company Owned past-due rate 22.5% 22.9% 20.7% 19.9% 21.9%
Installment loans - Guaranteed by the Company (2)
17.7% 19.8% 17.4% 12.8% 14.1%
(1) Non-GAAP measure. For a description of each non-GAAP metric, see "Supplemental Non-GAAP Financial Information."
(2) Includes loans originated by third-party lenders through CSO programs. Installment gross loans receivable Guaranteed by the Company are not included in the Consolidated Financial Statements.
(3) We calculate NCO rate as total NCOs divided by Average gross loans receivables.
(4) We report ALL as a contra-asset reducing gross loans receivable and the CSO Liability for Losses as a liability on the Consolidated Balance Sheets.
(5) We calculate (i) ALL and CSO Liability for losses rate and (ii) past-due rate as the respective totals divided by gross loans receivable at each respective quarter end.
U.S. Net Revenue
U.S. revenues, excluding Heights, decreased by $11.3 million, or 7.7%, for the three months ended December 31, 2021 to $135.3 million, compared to the prior-year period, primarily as a result of the COVID-19 Impacts on gross combined loans receivable and Runoff Portfolios due to regulatory changes. See the loan performance discussions below for further details. Excluding Runoff Portfolios, U.S. revenues increased $6.6 million, or 5.4%.
The provision for losses for the three months ended December 31, 2021 decreased $2.2 million, or 3.8%, year over year, primarily as a result of sustained favorable NCO rates and stable past-due rates since the onset of COVID-19. U.S. past-due rates, including for loans Guaranteed by the Company, increased by 90 bps, or 4.5%, year over year, but improved 75 bps, or 3.4%, sequentially. For the three months ended December 31, 2021, the U.S. NCO rate increased 340 bps, or 16.4%, year over year, and increased 280 bps, or 12.9%, sequentially, primarily due to loan growth, and a mix shift in customer and origination channel.
U.S. Revolving LOC loan performance
U.S. Revolving LOC loan balances as of December 31, 2021 decreased $3.0 million, or 5.5%, compared to the prior year, resulting in a related revenue decrease of $3.2 million, or 10.3%, for the three months ended December 31, 2021, primarily due to the runoff of Virginia Revolving LOC loans. Excluding the Runoff Portfolios, U.S. Revolving LOC gross loans receivable increased $3.8 million, or 8.2%, year over year, and related revenue increased $2.0 million, or 8.1%. Sequentially, U.S. Revolving LOC loan balances increased $1.3 million, or 2.6%. The Revolving LOC allowance coverage decreased year over year from 34.5% to 25.9% for the three months ended December 31, 2021. The decrease was due to stable past-due rates, a decline in TDR loans as a percentage of total gross loans receivable and sustained favorable NCO trends during 2021. For the three months ended December 31, 2021, NCO rates improved from 22.3% to 22.1% year over year and past-due rates improved from 30.7% to 30.5%.
U.S. Installment loan performance - Company Owned
U.S. Installment loan balances as of December 31, 2021 decreased $30.1 million, or 17.9%, year over year and revenue decreased $12.1 million, or 17.6%, for the three months ended December 31, 2021, compared to the prior year, primarily due to COVID-19 Impacts and Runoff Portfolios. Excluding the Runoff Portfolios, U.S. Installment loans increased $18.3 million, or 17.9%, year over year, and related revenue increased $0.5 million, or 1.1%. The Installment loans allowance coverage decreased from 19.0% in the prior year to 12.7% as of December 31, 2021, largely due to the aforementioned Runoff Portfolios, stable past-due rates and sustained favorable NCO rates. Sequentially, allowance coverage decreased from 13.4% to 12.7% as a result of lower past-due loans and stable NCOs.
We launched Verge Installment loans originated by Stride Bank in the fourth quarter of 2019 and executed pilot programs in several states. After testing various offers, rates, terms and approval criteria, Stride informed us in the first quarter of 2021 that it planned to focus on near-prime loans as they represented a larger addressable market and offered greater opportunity to scale. As a result, Stride discontinued new Verge Credit loans in April 2021. Verge loan balances totaled $6.2 million as of December 31, 2021. We expect to continue to see an orderly runoff of these balances over approximately the next 15 months.
U.S. Installment loan performance - Guaranteed by the Company
U.S. Installment loans Guaranteed by the Company increased $2.2 million, or 5.0%, year over year and increased $2.9 million, or 6.7%, sequentially. The CSO liability for losses rate decreased from 16.4% to 14.9% year over year due to sustained favorable NCO rates since the onset of COVID-19. Sequentially, the CSO liability for losses coverage decreased from 16.1% to 14.9% for the three months ended December 31, 2021 as a result of lower past-due rates. For the three months ended December 31, 2021, the past-due rate improved sequentially from 19.8% to 17.7%. The NCO rate for U.S. Installment loans Guaranteed by the Company increased 660 bps, or 12.8%, year over year, and increased 490 bps, or 9.3%, sequentially, primarily due to loan growth, and new customer, channel mix and seasonality.
Following is a summary of results of operations for the U.S. segment for the periods indicated.
For the Year Ended December 31,
(dollars in thousands, unaudited) 2021 2020 (1)
2019 (1)
Revenue $ 525,962 $ 638,524 $ 913,506
Provision for losses 166,033 230,164 392,105
Net revenue 359,929 408,360 521,401
Operating expenses
Salaries and benefits 170,508 151,344 159,937
Occupancy 32,565 35,814 34,028
Advertising 33,223 40,702 46,735
Direct operations 35,899 39,112 63,933
Depreciation and amortization 12,005 12,992 13,816
Other operating expense 54,508 35,357 38,180
Total operating expenses 338,708 315,321 356,629
Other expense (income)
Interest expense 72,543 63,413 59,325
Income from equity method investment (3,658) (4,546) 6,295
Gain from equity method investment (135,387) - -
Loss on extinguishment of debt 40,206 - -
Total other expense (income) (26,296) 58,867 65,620
Segment operating (loss) income 47,517 34,172 99,152
Interest expense 72,543 63,413 59,325
Depreciation and amortization 12,005 12,992 13,816
EBITDA (2)
132,065 110,577 172,293
Restructuring costs 12,717 - 1,752
Legal and other costs 2,134 2,925 2,566
Income from equity method investment (3,658) (4,546) 6,295
Gain from equity method investment (135,387) - -
Transaction costs 13,740 2,737 342
Loss on extinguishment of debt 40,206 - -
Share-based compensation 13,611 12,910 10,323
U.K. related costs - - 8,844
Other adjustments (880) (58) (184)
Adjusted EBITDA (2)
$ 74,548 $ 124,545 $ 202,231
(1) The December 31, 2020 and 2019 presentation has been revised to conform to the current period presentation.
(2) These are non-GAAP metrics. For a description of each non-GAAP metric, see "Supplemental Non-GAAP Financial Information."
Comparison of U.S. Segment Results of Operations for the Years Ended December 31, 2021 and 2020
U.S. revenues decreased $112.6 million, or 17.6%, compared to the prior-year period for the year ended December 31, 2021, as a result of decreases in combined gross loans receivable from COVID-19 Impacts and the Runoff Portfolios. Excluding the impact of Runoff Portfolios, U.S. revenues decreased $49.3 million, or 9.5%, as a result of lower consumer demand, driven by COVID-19 Impacts.
The provision for losses decreased $64.1 million, or 27.9%, for the year ended December 31, 2021, compared to the prior-year period, primarily as a result of (i) lower year-over-year demand, excluding Heights, (ii), sustained favorable lower NCO rates since the onset of COVID-19 and (iii) continued improved credit quality.
Operating expenses were $338.7 million for the year ended December 31, 2021, an increase of $23.4 million, or 7.4%, compared to $315.3 million for the year ended December 31, 2020, primarily driven by (i) $13.7 million of transaction costs related to our acquisition of Flexiti in March 2021, our acquisition of Heights in December 2021, and the Katapult and FinServ merger in June 2021, (ii) $12.7 million of store closure costs as previously discussed, and (iii) $0.7 million of higher share-based compensation expense compared to the prior year. Excluding these costs, operating expenses for the year ended December 31, 2021 decreased $2.8 million, or 0.9%, compared to the prior year.
U.S. interest expense for the year ended December 31, 2021 increased $9.1 million, or 14.4%, primarily related to interest on the additional 7.50% Senior Secured Notes issued in conjunction with our Heights acquisition and $5.0 million of interest on our U.S. SPV compared to prior year as the facility was entered into in April 2020. An additional $2.1 million of interest was incurred for the year ended December 31, 2021, which represents interest on the 8.25% Senior Secured Notes for the period between July 30, 2021 and August 12, 2021. This is the period during which both the 8.25% Senior Secured Notes and 7.50% Senior Secured Notes were outstanding.
As previously described, we recognize our share of Katapult’s income or loss on a one-quarter lag and recorded income of $3.7 million for the year ended December 31, 2021. As a result of the merger between Katapult and FinServ, which closed during the second quarter of 2021, we recorded an additional gain of $135.4 million during the year ended December 31, 2021, which represents cash we received, net of the basis of our investment in Katapult. During the fourth quarter of 2021, we purchased an additional 2.6 million of Katapult's common stock for $10.0 million, which increased our ownership in Katapult from 19.3% to 25.2% on a fully diluted basis assuming full pay-out of earn-out shares as of December 31, 2021.
Loss on extinguishment of debt of $40.2 million for the year ended December 31, 2021 was due to the redemption of the 8.25% Senior Secured Notes due 2025.
Comparison of U.S. Segment Results of Operations for the Years Ended December 31, 2020 and 2019
For a comparison of our U.S. segment results of operations for the years ended December 31, 2020 and 2019, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Segment Analysis" in Part II Item 7 of our 2020 Form 10-K.
Canada Direct Lending and Canada POS Lending Portfolio Performance
(in thousands, except percentages) Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020
Gross loans receivable
Canada Direct Lending Revolving LOC $ 402,405 $ 366,509 $ 337,700 $ 319,307 $ 303,323
Canada Direct Lending Installment loans 24,792 24,315 23,564 24,385 26,948
Total Canada Direct Lending gross loans receivable $ 427,197 $ 390,824 $ 361,264 $ 343,692 $ 330,271
Total Canada POS Lending gross loans receivable 459,176 302,349 $ 221,453 $ 201,539 $ -
Lending Revenue:
Canada Direct Lending Revolving LOC $ 43,943 $ 40,239 $ 37,450 $ 34,368 $ 31,962
Canada Direct Lending Installment loans 11,416 11,331 10,541 10,447 11,106
Total Canada Direct Lending - lending revenue $ 55,359 $ 51,570 $ 47,991 $ 44,815 $ 43,068
Canada POS Lending - lending revenue $ 13,704 $ 10,646 $ 6,495 $ 1,383 $ -
Lending Provision:
Canada Direct Lending Revolving LOC $ 20,080 $ 11,375 $ 7,066 $ 7,909 $ 8,679
Canada Direct Lending Installment loans 2,945 2,512 1,438 1,234 1,972
Total Canada Direct Lending - lending provision $ 23,025 $ 13,887 $ 8,504 $ 9,143 $ 10,651
Canada POS Lending - lending provision $ 12,511 $ 8,285 $ 2,986 $ 855 $ -
Lending Net Revenue
Canada Direct Lending Revolving LOC $ 23,863 $ 28,864 $ 30,384 $ 26,459 $ 23,283
(in thousands, except percentages) Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020
Canada Direct Lending Installment loans 8,471 8,819 9,103 9,213 9,134
Total Canada Direct Lending - lending net revenue $ 32,334 $ 37,683 $ 39,487 $ 35,672 $ 32,417
Canada POS Lending - lending net revenue $ 1,193 $ 2,361 $ 3,509 $ 528 $ -
NCOs
Canada Direct Lending Revolving LOC $ 15,112 $ 9,887 $ 10,838 $ 11,097 $ 8,907
Canada Direct Lending Installment loans 2,758 2,444 1,513 1,669 2,060
Total Canada Direct Lending NCOs $ 17,870 $ 12,331 $ 12,351 $ 12,766 $ 10,967
Canada POS Lending NCOs (1)
$ 1,731 $ 1,827 $ 1,509 $ 213 $ -
NCO rate (2)
Canada Direct Lending Revolving LOC 3.9% 2.8% 3.3% 3.6% 3.1%
Canada Direct Lending Installment loans 11.2% 10.2% 6.3% 6.5% 7.7%
Total Canada Direct Lending NCO rate 4.4% 3.3% 3.5% 3.8% 3.5%
Canada POS Lending NCO rate 0.5% 0.7% 0.7 % NM (3)
-%
ALL (4)
Canada Direct Lending Revolving LOC $ 32,360 $ 27,429 $ 26,602 $ 29,916 $ 32,773
Canada Direct Lending Installment loans 1,975 1,790 1,767 1,819 2,233
Total Canada Direct Lending ALL $ 34,335 $ 29,219 $ 28,369 $ 31,735 $ 35,006
Canada POS Lending ALL (5)
$ 22,189 $ 11,353 $ 4,577 $ 519 $ -
ALL rate (6)
Canada Direct Lending Revolving LOC 8.0 % 7.5 % 7.9 % 9.4 % 10.8 %
Canada Direct Lending Installment loans 8.0 % 7.4 % 7.5 % 7.5 % 8.3 %
Total Canada Direct Lending ALL rate 8.0 % 7.5 % 7.9 % 9.2 % 10.6 %
Canada POS Lending ALL rate 4.8 % 3.8 % 2.1 % 0.3 % - %
Past-due rate (6)
Canada Direct Lending Revolving LOC 8.9 % 6.8 % 5.8 % 6.4 % 6.8 %
Canada Direct Lending Installment loans 2.2 % 2.0 % 2.3 % 2.1 % 2.1 %
Total Canada Direct Lending past-due rate 8.5 % 6.5 % 5.5 % 6.1 % 6.4 %
Canada POS Lending past-due rate (7)
4.1 % 4.8 % 5.4 % 5.7 % - %
(1) For the second, third and fourth quarters of 2021, NCOs presented above include $2.4 million, $0.6 million and $0.8 million, respectively, of NCO's related to the fair value discount, which are excluded from provision.
(2) We calculate NCO rate as total NCOs divided by Average gross loans receivables.
(3) Not material or not meaningful.
(4) We report ALL as a contra-asset reducing gross loans receivable on the Consolidated Balance Sheets.
(5) Loans originated pre-acquisition have been adjusted to fair value at the acquisition date and included estimates of future losses. The ALL represents estimated incurred losses for loans originated after acquisition plus incurred losses for acquired loans in excess of the remaining fair value discount.
(6) We calculate ALL rate and past-due rate as the respective totals divided by gross loans receivable at each respective quarter end.
(in thousands, except percentages) Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020
(7) The past-due rate for Canada POS Lending for loans 30+ days past-due were 1.9%, 2.1%, 2.6% and 3.0% for the three months ended December 31, 2021, September 30, 2021, June 30, 2021 and March 31, 2021, respectively.
Canada Direct Lending Net Revenue
Canada Direct Lending revenue increased year over year by $15.0 million, or 27.1%, ($12.7 million, or 23.0%, on a constant currency basis), for the three months ended December 31, 2021, due to the growth of Revolving LOC loans in Canada. Sequentially, Canada Direct Lending revenue increased $4.3 million, or 6.6%.
The provision for losses increased $12.5 million, or 116.4%, ($11.8 million, or 109.7%, on a constant currency basis), to $23.2 million for the three months ended December 31, 2021, compared to $10.7 million in the prior-year period. The increase in provision for losses was primarily due to higher past-due rates, which increased from 6.4% to 8.5% year over year. NCO rates increased from 3.5% to 4.4% year over year and increased from 3.3% to 4.4% sequentially due to new customer, channel mix and seasonality. Although NCOs increased from December 31, 2020 to December 31, 2021, NCO rates have remained stable since the onset of COVID-19, resulting in an allowance coverage decrease year over year of 250 bps, or 24.2%.
Canada Direct Lending Revolving LOC loan performance
Canada Direct Lending Revolving LOC gross loans receivable increased $99.1 million, or 32.7%, ($99.9 million, or 32.9%, on a constant currency basis) year over year and $35.9 million, or 9.8% ($36.1 million, or 9.9%, on a constant currency basis), sequentially. Revolving LOC revenue increased $12.0 million, or 37.5%, year over year and $3.7 million, or 9.2%, sequentially ($10.5 million, or 33.0%, and $3.7 million, or 9.3%, respectively, on a constant currency basis). The quarterly NCO rate increased by 80 bps, or 25.5%, year-over-year and 110 bps, or 40.0%, sequentially due to new customer, channel mix and seasonality. Although NCOs increased from December 31, 2020 to December 31, 2021, NCO rates have remained stable since the onset of COVID-19, resulting in an allowance coverage decrease year over year from 10.8% to 8.0% as of December 31, 2021.
Canada Direct Lending Installment loan performance
Canada Direct Lending Installment revenue increased $0.3 million, or 2.8%, (a decrease of $0.1 million, or 0.6%, on a constant currency basis) year over year. Installment gross loans receivable decreased $2.2 million, or 8.0% ($2.1 million, or 7.8%, on a constant currency basis) year over year. The year-over-year decrease in Installment loans was due to a continued shift to Revolving LOC loans, as well as COVID-19 related constraints on demand, particularly as related to store-originated Installment loans. The Installment allowance coverage decreased year over year from 8.3% to 8.0% primarily as a result of lower sustained NCOs since the onset of COVID-19 and stable past-due rates. The year-over-year past-due rate for Installment loans improved by 15 bps, or 8.1%. Sequentially, Installment gross loans receivable and related revenue remained consistent.
Canada POS Lending Revolving LOC loan performance
Canada POS Lending Revolving LOC gross loans receivable as of December 31, 2021 was $459.2 million, including a discount of $2.3 million related to purchase accounting adjustments ($461.5 million prior to purchase accounting adjustments). For the three months ended December 31, 2021, Canada POS Lending revenue was $14.8 million, net of a $1.7 million reduction from acquisition-related adjustments for the period. For a full discussion of the purchase accounting and acquisition-related adjustments, refer to "Consolidated Revenue by Product and Segment" above.
For the three months ended December 31, 2021, allowance coverage was 4.8%, up sequentially from 3.8%. Excluding acquisition-related adjustments, allowance coverage was 5.3%, down sequentially from 5.5%, primarily due to sustained favorable NCO trends. Revolving LOC gross loans receivable generally charge-off at 180 days past due. NCOs were $1.7 million for the three months ended December 31, 2021. The Canada POS Lending NCO and past-due rates for the quarter were 0.5% and 4.1%, respectively, down sequentially from 0.7% and 4.8%, respectively.
Originations for the three months ended December 31, 2021 were C$322.1 million, an increase of C$200.8 million, or 165.6%, from the prior-year period of C$121.3 million. Sequentially, Canada POS Revolving LOC gross loans receivable increased $156.8 million, or 51.9%.
Canada Direct Lending Results of Operations
For the Year Ended December 31,
(dollars in thousands, unaudited) 2021 2020 (1)
2019 (1)
Revenue $ 257,039 $ 208,872 $ 228,291
Provision for losses 54,997 58,647 76,446
Net revenue 202,042 150,225 151,845
Operating expenses
Salaries and benefits 52,118 45,473 46,256
Occupancy 22,482 21,457 20,867
Advertising 4,267 3,850 6,663
Direct operations 9,777 7,781 9,635
Depreciation and amortization 4,505 4,506 4,814
Other operating expense 10,364 11,691 9,869
Total operating expenses 103,513 94,758 98,104
Other expense
Interest expense 9,798 9,296 10,438
Total other expense 9,798 9,296 10,438
Segment operating income 88,731 46,171 43,303
Interest expense 9,798 9,296 10,438
Depreciation and amortization 4,505 4,506 4,814
EBITDA (2)
103,034 59,973 58,555
Legal and other costs - - 135
Share-based compensation 365 - -
Canada GST adjustment - 2,160 -
Other adjustments 444 685 211
Adjusted EBITDA (2)
$ 103,843 $ 62,818 $ 58,901
(1) The December 31, 2020 and 2019 presentations have been revised to conform to the current period presentation.
(2) These are non-GAAP metrics. For a description of each non-GAAP metric, see "Supplemental Non-GAAP Financial Information."
Comparison of Canada Direct Lending Segment Results of Operations for the Years Ended December 31, 2021 and 2020
Canada Direct Lending revenue increased $48.2 million, or 23.1%, ($31.6 million, or 15.1%, on a constant currency basis), to $257.0 million for the year ended December 31, 2021, from $208.9 million in the prior year, primarily due to higher consumer demand as COVID-19 Impacts lessened. Canada Direct Lending Revolving LOC gross loans receivable grew $99.1 million, or 32.7%, year over year, contributing to related revenue growth of $40.9 million, or 35.6%, for the year ended December 31, 2021 compared to the prior year.
The provision for losses decreased $3.7 million, or 6.2%, ($7.0 million, or 12.0% on a constant currency basis), to $55.0 million for the year ended December 31, 2021, compared to $58.6 million in the prior year. The decrease in provision for losses was the result of sustained lower NCOs since the onset of COVID-19 and the related impact of changes in allowance coverage due to an increase in credit quality for Revolving LOC loans. Refer to "Canada Direct Lending and Canada POS Lending Portfolio Performance" above for additional details on quarterly loss and allowance rates.
Canada Direct Lending operating expenses for the year ended December 31, 2021 were $103.5 million, an increase of $8.8 million, or 9.2%, ($2.1 million, or 2.2%, on a constant currency basis), compared to $94.8 million for the year ended December 31, 2020, primarily related to (i) the timing and level of performance-based variable compensation, (ii) higher store operating costs as the prior year was impacted by COVID-19 store closures, and (iii) higher variable costs, primarily collection and financial service fees, on higher volume year over year.
Canada Direct Lending other expense for the year ended December 31, 2021 was $9.8 million, an increase of $0.5 million, or 5.4%, for the year ended December 31, 2020, primarily due to higher borrowings on the Canada SPV. During the fourth quarter of 2021, we increased the capacity of the Canada SPV from C$175.0 million to C$350.0 million.
Comparison of Canada Segment Results of Operations for the Years Ended December 31, 2020 and 2019
For a comparison of our Canada segment results of operations for the years ended December 31, 2020 and 2019, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Segment Analysis" in Part II Item 7 of our 2020 Form 10-K.
Canada POS Lending Results of Operations
For the Year Ended December 31,
(dollars in thousands, unaudited) 2021
Revenue $ 34,842
Provision for losses 24,638
Net revenue 10,204
Operating expenses
Salaries and benefits 14,483
Occupancy 512
Advertising 1,272
Direct operations 14,380
Depreciation and amortization 10,445
Other operating expense 9,810
Total operating expenses 50,902
Other expense
Interest expense 14,993
Total other expense 14,993
Segment operating loss (55,691)
Interest expense 14,993
Depreciation and amortization 10,445
EBITDA (1)
(30,253)
Acquisition-related adjustments 13,949
Change in fair value of contingent consideration 6,209
Other adjustments (51)
Adjusted EBITDA (1)
($ 10,146)
(1) These are non-GAAP metrics. For a description of each non-GAAP metric, see "Supplemental Non-GAAP Financial Information."
Canada POS Lending Segment Results - For the Year Ended December 31, 2021
Canada POS Lending revenue includes revenue from merchant discounts and ancillary products. MDR represents the discount merchant partners provide to help facilitate customer purchases at merchant locations. The fee is recognized over the estimated average loan term of 12 months. Ancillary revenue includes administrative fees, annual fees, insurance product fees and other fees charged to customers.
For the year ended December 31, 2021, Canada POS Lending revenue was $34.8 million, which included a $7.5 million reduction as a result of acquisition-related adjustments. For a full discussion of acquisition-related adjustments, refer to "Consolidated Revenue by Product and Segment" earlier within this 2021 Form 10-K.
Provision for losses for the year ended December 31, 2021 was $24.6 million, which included a $6.4 million increase as a result of acquisition-related adjustments. Refer to "Canada Direct Lending and Canada POS Lending Portfolio Performance," above for additional details on quarterly loss and allowance rates.
Supplemental Non-GAAP Financial Information
Use of Non-GAAP Financial Measures
In addition to the financial information prepared in conformity with U.S. GAAP, we provide certain “non-GAAP financial measures,” including:
•Adjusted Net Income and Adjusted Earnings Per Share (net income from continuing operations plus or minus certain legal and other costs, income or loss from equity method investment, goodwill and intangible asset impairments, transaction-related costs, restructuring costs, loss on extinguishment of debt, adjustments related to acquisition accounting, certain costs related to the disposition of U.K., share-based compensation, intangible asset amortization, certain tax adjustments and impacts from tax law changes and cumulative tax effect of applicable adjustments, on a total and per share basis);
•EBITDA (net income from continuing operations before interest, income taxes, depreciation and amortization);
•Adjusted EBITDA (EBITDA plus or minus certain non-cash and other adjusting items);
•Adjusted effective income tax rate (effective tax rate plus or minus certain non-cash and other adjusting items); and
•Gross Combined Loans Receivable (includes loans originated by third-party lenders through CSO programs which are not included in our Consolidated Financial Statements).
We believe that presentation of non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. We believe that these non-GAAP financial measures offer another way to view aspects of our business that, when viewed with our U.S. GAAP results, provide a more complete understanding of factors and trends affecting our business.
We believe that investors regularly rely on non-GAAP financial measures, such as Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA, to assess operating performance and that such measures may highlight trends in the business that may not otherwise be apparent when relying on financial measures calculated in accordance with U.S. GAAP. In addition, we believe that the adjustments shown below are useful to investors in order to allow them to compare our financial results during the periods shown without the effect of each of these income or expense items. In addition, we believe that Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in our industry, many of which present Adjusted Net Income, Adjusted Earnings per Share, EBITDA and/or Adjusted EBITDA when reporting their results.
We provide non-GAAP financial information for informational purposes and to enhance understanding of the U.S. GAAP Consolidated Financial Statements. Adjusted Net Income, Adjusted Earnings per Share, EBITDA, Adjusted EBITDA and Gross Combined Loans Receivable should not be considered as alternatives to income from continuing operations, segment operating income, or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities or any other liquidity measure derived in accordance with U.S. GAAP. Readers should consider the information in addition to, but not instead of or superior to, the financial statements prepared in accordance with U.S. GAAP. In addition, the non-GAAP financial measures presented in this 2021 Form 10-K may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
Description and Reconciliations of Non-GAAP Financial Measures
Adjusted Net Income, Adjusted Earnings per Share, EBITDA and Adjusted EBITDA measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our income or cash flows as reported under U.S. GAAP. Some of these limitations are:
•they do not include cash expenditures or future requirements for capital expenditures or contractual commitments;
•they do not include changes in, or cash requirements for, working capital needs;
•they do not include the interest expense, or the cash requirements, necessary to service interest or principal payments on debt;
•depreciation and amortization are non-cash expense items reported in the statements of cash flows; and
•other companies in our industry may calculate these measures differently, limiting their usefulness as comparative measures.
We calculate Adjusted Earnings per Share utilizing diluted shares outstanding at year-end. If we record a loss from continuing operations under U.S. GAAP, shares outstanding utilized to calculate Diluted Earnings per Share from continuing operations are equivalent to basic shares outstanding. Shares outstanding utilized to calculate Adjusted Earnings per Share from continuing operations reflect the number of diluted shares we would have reported if reporting net income from continuing operations under U.S. GAAP.
Gross Combined Loans Receivable includes loans originated by third-party lenders through CSO programs which are not included in the Consolidated Financial Statements but from which we earn revenue and for which we provide a guarantee to the lender. Management believes this analysis provides investors with important information needed to evaluate overall lending performance.
Reconciliation of Net income from continuing operations and Diluted Earnings per Share from continuing operations to Adjusted Net Income and Adjusted Diluted Earnings per Share, non-GAAP measures (in thousands, except per share amounts)
Year Ended December 31,
2021 2020 2019
Net income from continuing operations $ 59,334 $ 74,448 $ 103,898
Adjustments:
Restructuring costs (1)
12,717 510 1,752
Legal and other costs (2)
2,134 2,415 2,701
(Income) loss from equity method investment (3)
(3,658) (4,546) 6,295
Gain from equity method investment (4)
(135,387) - -
Transaction costs (5)
15,406 2,737 342
Acquisition-related adjustments (6)
13,949 - -
Change in fair value of contingent consideration (7)
6,209 - -
Loss on extinguishment of debt (8)
42,262 - -
Share-based compensation (9)
13,976 12,910 10,323
U.K. related costs (10)
- - 8,844
Intangible asset amortization (11)
6,282 2,951 2,884
Canada GST adjustment (12)
- 2,160 -
Income tax valuations (13)
- (3,472) -
Impact of tax law changes (14)
- (11,251) -
Cumulative tax effect of adjustments (15)
8,455 (4,534) (6,980)
Adjusted Net Income $ 41,679 $ 74,328 $ 130,059
Net income from continuing operations $ 59,334 $ 74,448 $ 103,898
Diluted Weighted Average Shares Outstanding 43,143 42,091 45,974
Diluted Earnings per Share from continuing operations
$ 1.38 $ 1.77 $ 2.26
Per Share impact of adjustments to Net Income
(0.41) - 0.57
Adjusted Diluted Earnings per Share $ 0.97 $ 1.77 $ 2.83
Note: Footnotes follow Reconciliation of Adjusted EBITDA table below.
Reconciliation of Net income from continuing operations to EBITDA and Adjusted EBITDA, non-GAAP measures (in thousands)
Year Ended December 31,
2021 2020 2019
Net income from continuing operations $ 59,334 $ 74,448 $ 103,898
Provision for income taxes 21,223 5,895 38,557
Interest expense 97,334 72,709 69,763
Depreciation and amortization 26,955 17,498 18,630
EBITDA 204,846 170,550 230,848
Restructuring costs (1)
12,717 510 1,752
Legal and other costs (2)
2,134 2,415 2,701
(Income) loss from equity method investment (3)
(3,658) (4,546) 6,295
Gain from equity method investment (4)
(135,387) - -
Transaction costs (5)
13,740 2,737 342
Acquisition-related adjustments (6)
13,949 - -
Change in fair value of contingent consideration (7)
6,209 - -
Loss on extinguishment of debt (8)
40,206 - -
Share-based compensation (9)
13,976 12,910 10,323
U.K. related costs (10)
- - 8,844
Canada GST (12)
- 2,160 -
Other adjustments (16)
(487) 627 27
Adjusted EBITDA $ 168,245 $ 187,363 $ 261,132
Adjusted EBITDA Margin 20.6% 22.1% 22.9%
(1) Restructuring costs for the year ended December 31, 2021 resulted from U.S. store closures and consisted of (i) severance costs for store employees, (ii) lease termination costs, and (iii) accelerated depreciation, partially offset by the net write-off of ROU assets and lease liabilities.
Restructuring costs for the year ended December 31, 2020 related to severance costs for certain corporate employees of $0.5 million.
Restructuring costs for the year ended December 31, 2019 related to eliminating 121 positions in North America.
(2) Legal and other costs for the year ended December 31, 2021 primarily related to fees incurred in certain legal matters in which CURO was the plaintiff. No further costs are expected for that case.
Legal and other costs for the year ended December 31, 2020 included (i) settlement costs related to certain legal matters (ii) costs for certain securities litigation and related matters and (iii) severance costs for certain corporate employees separate from restructuring costs.
Legal and other costs for the year ended December 31, 2019 included (i) costs related to certain securities litigation and related matters of $2.5 million and (ii) legal and advisory costs of $0.3 million related to the repurchase of shares from FFL.
(3) The amount reported is our share of Katapult's U.S. GAAP net income or loss. Refer to "Consolidated Results of Operations" for additional details.
(4) During the year ended December 31, 2021, we recorded an additional gain on our investment in Katapult of $135.4 million. The gain represents cash we received, net of the basis of our investment in Katapult, upon the completion of the business combination between Katapult and FinServ.
(5) Transaction costs for the year ended December 31, 2021 in determining Adjusted EBITDA and Adjusted Net Income relate to (i) our Heights acquisition in December 2021, (ii) our Flexiti acquisition in March 2021, and (iii) the Katapult and FinServ business combination in June 2021. Transaction costs in determining ANI for the year ended December 31, 2021 also included prepayment fees of $1.7 million for our Flexiti SPE in connection to the signing of the Flexiti Securitization in December 2021.
Transaction costs for the year ended December 30, 2020 relate to the acquisition of Ad Astra and legal and advisory costs related to the Flexiti acquisition.
Transaction costs for the year ended December 30, 2019 relate to the acquisition of Ad Astra.
(6) Acquisition-related costs for the year ended December 31, 2021, relate to the acquired Flexiti loan portfolio as of March 10, 2021. Refer to "Consolidated Revenue by Product and Segment" for additional details.
(7) In connection with our acquisition of Flexiti, we recorded a $6.2 million adjustment related to the fair value of the contingent consideration for the year ended December 31, 2021.
(8) On July 30, 2021, we entered into new 7.50% Senior Secured Notes due 2028, which were used on August 12, 2021 to extinguish the 8.25% Senior Secured Notes due 2025. During the year ended December 31, 2021, $40.2 million from the loss on the extinguishment of debt in determining Adjusted EBITDA was due to the early redemption of the 8.25% Senior Secured Notes due 2025. An additional $2.1 million of interest was incurred for the year ended December 31, 2021 in determining Adjusted Net income, which represents interest on the 8.25% Senior Secured Notes due 2025 for the period between July 30, 2021 and August 12, 2021. This is the period during which the 8.25% Senior Secured Notes and 7.50% Senior Secured Notes were both outstanding.
(9) The estimated fair value of share-based awards was recognized as non-cash compensation expense on a straight-line basis over the vesting period.
(10) U.K. related costs of $8.8 million for the year ended December 31, 2019 relate to placing the U.K. subsidiaries into administration on February 25, 2019, which included $7.6 million to obtain consent from the holders of the 8.25% Senior Secured Notes to deconsolidate the U.K. Segment and $1.2 million for other costs.
(11) The amortization expense on intangible assets is recognized on a straight-line basis over the life of the intangible asset. For the year ended December 31, 2021, intangible asset amortization primarily included amortization of identifiable intangible assets established in connection with the acquisition of Flexiti for the year ended December 31, 2021. .
(12) We received a Notice of Adjustment from Canadian tax authority auditors in the second quarter 2020 related to the treatment of certain expenses in prior years for purposes of calculating the GST due.
(13) During the year ended December 31, 2020, a Texas court ruling related to the apportionment of income to the state for an unrelated company resulted in a change in estimate regarding the realization of a tax benefit previously taken. Accordingly, we recorded a $1.1 million liability for our estimated exposure related to this position, which was settled in April 2021. Also in the year ended December 31, 2020, we released a $4.6 million valuation allowance related to NOLs for certain entities in Canada.
(14) On March 27, 2020, the CARES Act was enacted by the U.S. Federal government in response to the COVID-19 pandemic. The CARES Act, among other things, allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. For the year ended December 31, 2020, we recorded an income tax benefit of $11.3 million related to the carryback of NOL from tax years 2018 and 2019.
(15) Cumulative tax effect of adjustments included in Reconciliation of Net income from continuing operations Adjusted Net Income table is calculated using the estimated incremental tax rate by country.
(16) Other adjustments primarily reflect the intercompany foreign-currency exchange impact.
Currency Information
We operate in the U.S. and Canada and our consolidated results are reported in U.S. dollars.
Changes in our reported revenues and net income include the effect of changes in currency exchange rates. We translate all balance sheet accounts into U.S. dollars at the currency exchange rate in effect at the end of each period. We translate the statement of operations at the average rates of exchange for the period. We record currency translation adjustments as a component of Accumulated Other Comprehensive Income in Stockholders’ Equity.
Constant Currency Analysis
For the years ended December 31, 2021 and 2020, approximately 35.7% and 24.6%, respectively, of our revenues were originated in Canadian Dollars. As a result, changes in our reported results include the impacts of changes in the foreign currency exchange rates for the Canadian Dollar.
Income Statement
Year Ended December 31, Year Ended December 31,
2021 2020 % Change 2020 2019 % Change
Average Exchange Rates for the Canadian Dollar $ 0.7979 $ 0.7462 6.9 % $ 0.7462 $ 0.7539 (1.0) %
Balance Sheet - Exchange Rate as of December 31, 2021 and 2020
December 31, Change
2021 2020 $ %
Exchange Rate for the Canadian Dollar $ 0.7846 $ 0.7863 ($0.0017) (0.2) %
The following constant currency analysis removes the impact of the fluctuation in foreign exchange rates and utilizes constant currency results in our analysis of the Canada Direct Lending segment performance. The fluctuation in foreign exchange rates between March 10, 2021, the date we acquired Flexiti, and December 31, 2021 was minimal and thus the constant currency impact on our Canada POS Lending segment was not material. Our constant currency assessment assumes foreign exchange rates in the current fiscal periods remained the same as in the prior fiscal periods. All conversion rates below are based on the U.S. Dollar equivalent to the Canadian Dollar. We believe that the constant currency assessment below is a useful measure in assessing the comparable growth and profitability of our operations.
For our Canada Direct Lending segment, we calculated the revenues, net revenue and segment operating income below for the year ended December 31, 2021 using the actual average exchange rate for the year ended December 31, 2020 (in thousands).
Year Ended December 31, Change
2021 2020 $ %
Canada Direct Lending - constant currency basis:
Revenues $ 240,474 $ 208,872 $ 31,602 15.1 %
Net revenue 188,843 150,225 38,618 25.7 %
Segment operating income 82,841 46,171 36,670 79.4 %
We calculated the revenues and gross margin below for the year ended December 31, 2020 using the actual average exchange rate for the year ended December 31, 2019 (in thousands).
Year Ended December 31, Change
2020 2019 $ %
Canada Direct Lending - constant currency basis:
Revenues $ 210,786 $ 228,291 $ (17,505) (7.7) %
Net revenue 151,371 151,845 (474) (0.3) %
Segment operating income 46,279 43,303 2,976 6.9 %
We calculated gross loans receivable below as of December 31, 2021 using the actual exchange rate as of December 31, 2020 (in thousands).
December 31, December 31, Change
2021 2020 $ %
Canada Direct Lending - constant currency basis:
Gross loans receivable $ 428,104 $ 330,271 $ 97,833 29.6 %
Liquidity and Capital Resources
Our principal sources of liquidity to fund the loans we make to our customers are (i) cash provided by operations, (ii) our revolving credit facilities and our non-recourse funding facilities, as further described in Note 7, "Debt" of the Notes to the Consolidated Financial Statements, and (iii) funds from third-party lenders under our CSO programs. In July 2021, we issued $750.0 million of 7.50% Senior Secured Notes, due 2028. The net proceeds from the sale of the 7.50% Senior Secured Notes were used (i) to redeem our outstanding 8.25% Senior Secured Notes, (ii) to pay fees, expenses, premiums and accrued interest in connection therewith and (iii) for general corporate purposes. In connection with our acquisition of Heights, we issued an additional $250.0 million of our 7.50% Senior Secured Notes. Refer to Note 7, "Debt" of the Notes to the Consolidated Financial Statements for additional details.
As of December 31, 2021, we were in compliance with all financial ratios, covenants and other requirements in our debt agreements. We anticipate that our primary use of cash will be to fund growth in our working capital, finance capital expenditures to further our growth strategy in both the U.S. and Canada and meet our debt obligations. We may also use cash for potential strategic investments in and acquisitions of other companies that help us extend our reach and product portfolio. Additionally, we may use cash to fund a return on capital for our stockholders through share repurchase programs, or in the form of dividends. In May 2021, our Board of Directors increased the quarterly dividend to $0.11 per share, an increase of 100%, which continued into 2022. Additionally, in May 2021 our Board of Directors authorized a $50.0 million share repurchase program which concluded in February 2022. A new $25.0 million share repurchase program was authorized in February 2022, which will commence at our discretion. Refer to Note 23, "Share Repurchase Program" of the Notes to the Consolidated Financial Statements for further details of the program.
Our level of cash flow provided by operating activities typically experiences seasonal fluctuations related to our levels of net income and changes in working capital levels, particularly loans receivable. Unexpected changes in our financial condition or other unforeseen factors may result in our inability to obtain third-party financing or could increase our borrowing costs in the future. We have the ability to adjust our volume of lending to consumers to the extent we experience any short-term or long-term funding shortfalls, such as tightening our credit approval practices (as we did during the COVID-19 pandemic), which has the effect of reducing cash outflow requirements while increasing cash inflows through loan repayments.
We may also sell or securitize our assets, draw on our available revolving credit facility or line of credit, enter into additional refinancing agreements or reduce our capital spending to generate additional liquidity. The impacts to cash as described in "-Cash Flows" below and other factors resulted in our available cash on hand of $63.2 million and our total liquidity of $214.1 million as of December 31, 2021. We believe our cash on hand and available borrowings provide us with sufficient liquidity for at least the next 12 months.
Our recent acquisitions of Flexiti and Heights have increased our product offerings to include customers in the near-prime and prime space. The acquisition of Flexiti allows us to tailor our current product structure to its POS model, potentially expanding to sub-prime customers. The acquisition of Heights accelerates our strategic transition in the U.S. toward longer term, higher balance and lower rate credit products and provides us with access to a larger addressable market while mitigating regulatory risk. These initiatives to expand our product offerings and grow the U.S. and Canada business can materially impact our future cash flows. For further information regarding the acquisitions, refer to Note 1, "Summary of Significant Accounting Policies and Nature of Operations," Note 5, "Goodwill and Intangibles," and Note 15, "Acquisitions" of the Notes to the Consolidated Financial Statements.
We have no additional material commitments or demands that are likely to affect our liquidity.
Borrowings
Our debt consisted of the following as of December 31, 2021, net of deferred financing costs (in thousands):
Capacity Interest Rate Maturity Counterparties Balance as of December 31, 2021 (in USD)
7.50% Senior Secured Notes (due 2028) (2)
$1.0 billion 7.50% August 1, 2028 $ 980,721
Senior Secured Revolving Credit Facility $50.0 million 1-Mo LIBOR + 5.00% June 30, 2022 BayCoast Bank; Stride Bank; Hancock-Whitney Bank; Metropolitan Commercial Bank -
U.S. SPV $200.0 million 1-Mo LIBOR + 6.25% April 8, 2024 Atalaya Capital Management, MetaBank 45,392
Heights SPV $350.0 million 1-Mo LIBOR + 5.25% December 31, 2024 Ares Capital 350,000
Canada SPV (1)
C$350.0 million 3-Mo CDOR + 6.00% August 2, 2026 Waterfall Asset Management 157,813
Flexiti SPE (1)
C$500.0 million 3-Mo CDOR + 4.40% March 10, 2024 Credit Suisse (Class A); SPF (Class B) 172,739
Flexiti Securitization (1)
C$526.5 million 1-Mo CDOR + 3.59% December 9, 2025 National Bank of Canada; an affiliate of the Bank of Montreal; WF Torca, Ltd. 239,128
Cash Money Revolving Credit Facility (1)
C$10.0 million Canada Prime Rate +1.95% On-demand Royal Bank of Canada -
(1) Capacity amounts are denominated in Canadian dollars, while outstanding balances as of December 31, 2021 are denominated in U.S. dollars.
(2) On July 30, 2021, we issued our $750 million aggregate principal amount of new 7.50% Senior Secured Notes, which was used to redeem our $690.0 million 8.25% Senior Secured Notes due 2025. During December 2021, we issued an additional $250.0 million of our 7.50% Senior Secured Notes for a total capacity of $1.0 billion.
Refer to Note 7, "Debt," for details on each of our credit facilities and resources.
Cash Flows
The following highlights our cash flow activity and the sources and uses of funding during the periods indicated:
Year Ended December 31,
(in thousands) 2021 2020 2019
Net cash provided by continuing operating activities $ 323,173 $ 403,505 $ 651,135
Net cash used in continuing investing activities (923,488) (255,056) (530,260)
Net cash provided by (used in) continuing financing activities 491,291 7,329 (97,968)
Years Ended December 31, 2021 and 2020
As previously described, year-over-year comparisons were impacted by COVID-19 Impacts and Runoff Portfolios due to regulatory changes. Additionally, the Company acquired Flexiti and Heights during the year ended December 31, 2021.
Continuing Operating Activities
Net cash provided by operating activities from continuing operations for the year ended December 31, 2021 was $323.2 million, primarily attributable to net income from continuing operations of $59.3 million, the effect of non-cash reconciling items of $189.6 million, and changes in our operating assets and liabilities of $74.2 million. Our non-cash reconciling items of $189.6 million included (i) $245.7 million of provision for losses, (ii) $40.2 million loss on the extinguishment of our 8.25% Senior Secured Notes, (iii) $27.0 million of depreciation and amortization, and (iv) $14.0 million of share-based compensation, partially offset by (i) a $135.4 million cash gain on our equity method investment related to the Katapult and FinServ merger and (ii) changes in deferred income tax of $18.3 million. Our changes in operating assets and liabilities of $74.2 million related to (i) $8.8 million increase in accrued interest on our gross loans receivable due to overall volume increases, as previously discussed, (ii) $43.8 million of higher accounts payable and accrued liabilities as a result of the timing and extent of variable compensation, and (iii) $16.6 million of higher deferred revenue, primarily as a result of Canada POS Lending gross loans receivable as of December 31, 2021.
Continuing Investing Activities
Net cash used in investing activities from continuing operations for the year ended December 31, 2021 was $923.5 million, primarily reflecting (i) the acquisition of Heights for $356.5 million, net of cash received (ii) the acquisition of Flexiti for $91.2 million, net of cash received and (iii) net origination of loans of $589.0 million, partially offset by $146.9 million of cash we received as a result of the Katapult and FinServ merger. Additionally, we used cash to purchase (i) $10.0 million of additional shares of Katapult and (ii) $23.6 million of property, equipment and software.
Continuing Financing Activities
Net cash used in financing activities from continuing operations for the year ended December 31, 2021 was $491.3 million. During the third quarter of 2021, we extinguished our $690.0 million 8.25% Senior Secured Notes from the issuance of our 7.50% Senior Secured Notes of $750.0 million. As part of the refinancing, we paid a $31.3 million call premium and debt issuance costs of $16.0 million. In connection with the acquisition of Heights, we issued an additional $250.0 million of 7.50% Senior Secured Notes and paid additional debt issuance costs of $4.5 million. In addition, net cash provided by financing activities included $304.9 million of net proceeds from our funding facilities primarily due to the new Flexiti Securitization facility, entered into during the fourth quarter of 2021 for C$526.5 million, partially offset by common stock repurchases of $45.4 million and cash dividends of $15.9 million. See Note 7, "Debt" of our Notes to Consolidated Financial Statements for additional information related to our funding facilities and corporate debt.
Years Ended December 31, 2020 and 2019
For a comparison of our cash flows for the years ended December 31, 2020 and 2019, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Cash Flows" in Part II Item 7 of our 2020 Form 10-K.
Recently Issued Accounting Pronouncements
See Note 1, "Summary of Significant Accounting Policies and Nature of Operations" of our Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We consider the following accounting policies to be critical in understanding our historical and future performance and require management's most subjective and complex judgments.
Allowance for Loan Losses
Credit losses are an inherent part of outstanding loans receivable. We maintain an allowance for loan losses for loans and interest receivable at a level we estimate to be adequate to absorb incurred losses based primarily on our analysis of historical loss or charge-off rates by products containing similar risk characteristics. The allowance for loan losses on our Company Owned gross loans receivables reduces the outstanding gross loans receivables balance in the Consolidated Balance Sheets. We report the liability for losses related to loans Guaranteed by the Company under CSO programs in “Liability for losses on CSO lender-owned consumer loans” in the Consolidated Balance Sheets. We record increases in either the allowance or the liability, net of charge-offs and recoveries, as “Provision for losses” in the Consolidated Statements of Operations.
We also consider delinquency trends as well as macro-economic conditions we believe may affect portfolio losses. If a loan is deemed to be uncollectible before it is fully reserved based on information we become aware of (e.g., receipt of customer bankruptcy notice or death), we charge off such loan at that time. Qualitative factors such as the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions impact management’s judgment on the overall adequacy of the allowance for loan losses. Any recoveries on loans previously charged to the allowance are credited to the allowance when collected.
Business Combinations and Contingent Consideration
We include the results of operations of acquired businesses from the date of acquisition. We determine the fair value of the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition. The excess purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill.
Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and
selection of comparable companies. Our estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill. After the conclusion of the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. When we grant equity to employees of the selling stockholders in connection with an acquisition, we evaluate whether the awards are compensatory. This evaluation includes whether stock award vesting is contingent on the continued employment beyond the acquisition date. If continued employment is required for stock awards to vest, the award is treated as compensation for post-acquisition services and is recognized as compensation expense.
Transaction costs associated with business combinations are expensed as incurred and are included in Corporate, district and other expenses in our unaudited Condensed Consolidated Statements of Operations.
On March 10, 2021, we acquired 100% of the outstanding stock of Flexiti. The fair value of total consideration paid as part of the acquisition was comprised of $86.5 million in cash, $6.3 million in debt costs and $20.6 million in contingent cash consideration subject to future operating metrics, including revenue less NCOs and loan originations. Net assets acquired were $68.5 million, resulting in goodwill of $44.9 million. During the second quarter of 2021, we recorded $5.0 million of additional net assets acquired as of the acquisition date, as a measurement period adjustment, resulting in a $5.0 million decrease in goodwill. During the third quarter of 2021, we recorded a $0.5 million decrease to net assets acquired as of the acquisition date, as a measurement period adjustment, resulting in a $0.5 million increase in goodwill. Changes in the fair value of contingent consideration is recognized each reporting period and included in our Consolidated Statements of Operations. For the year ended December 31, 2021, we recorded a $6.2 million expense related to the increase in fair value of contingent consideration.
On December 27, 2021, we acquired 100% of the outstanding stock of Heights. The fair value of total consideration paid as part of the acquisition was comprised of $335.0 million in cash and $25.0 million of the Company's common stock. Net assets acquired, after giving effect of initial purchase price fair value adjustments, were $562.6 million, resulting in goodwill of $253.9 million.
Goodwill
We exercise judgment in evaluating assets for impairment. Goodwill is tested for impairment annually, or when circumstances arise which could more likely than not reduce the fair value of a reporting unit below its carrying value. These tests require comparing carrying values to estimated fair values of the reporting unit under review.
Following the acquisition of Flexiti during the first quarter of 2021, our reporting units consist of the U.S. (inclusive of Heights, acquired on December 27, 2021), Canada Direct Lending and Canada POS Lending segments, as defined by FASB’s ASC 280, Segment Reporting, for which we assess goodwill for impairment. During the fourth quarter of 2021, we performed a quantitative assessment for the U.S., Canada Direct Lending and Canada POS Lending reporting units as of October 1, 2021. As further described in Note 1, "Summary of Significant Accounting Policies and Nature of Operations, an impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. Events or circumstances that could indicate an impairment 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 economic outlook. Fair value of each reporting unit is sensitive to changes in macroeconomic factors in the U.S. and Canada, including as a result of COVID-19, which could impact all reporting units. Changes in the expected length of the current economic downturn, timing of recovery, or long-term revenue growth or profitability for these reporting units could increase the likelihood of a future goodwill impairment. Additionally, changes in market participant assumptions such as an increased discount rate or further share price reductions could increase the likelihood of a future impairment. These and other macroeconomic factors were considered when performing the annual test as of October 1, 2021.
Based upon the qualitative assessment as of October 1, 2021, management concluded that the reporting units' estimated fair values exceeded their carrying value. As a result, we did not record impairment losses on goodwill for the year ended December 31, 2021.
The following table summarizes the segment allocation of recorded goodwill on our Consolidated Balance Sheets for the periods indicated:
December 31, 2021 Percent of Total December 31, 2020 Percent of Total
U.S. $ 359,779 83.7 % $ 105,922 77.8 %
Canada Direct Lending 30,105 7.0 % 30,169 22.2 %
Canada POS Lending 39,908 9.3 % - - %
Total Goodwill $ 429,792 $ 136,091
Credit Services Organization
Through our CSO programs, we act as a CSO/CAB on behalf of customers in accordance with applicable state laws. We currently offer loans through CSO programs in stores and online in the state of Texas. See Item 1. “Business-Regulatory Environment and Compliance” for additional details.
As described above in "-Allowance for Loan Losses," we estimate a liability for losses associated with the guaranty provided to the CSO lenders using assumptions and methodologies similar to the allowance for loan losses, which we recognize for our consumer loans. The liability for losses on CSO lender-owned consumer loans was $6.9 million at December 31, 2021 and $7.2 million at December 31, 2020, which we include as "Liability for losses on CSO lender-owned consumer loans" on the Consolidated Balance Sheets.
We calculate CSO fees based on the amount of the customer’s outstanding loan and in accordance with the applicable jurisdiction’s laws. For services we provide under our CSO programs, we receive payments from customers on their scheduled loan repayment due dates. The CSO fee is earned ratably over the term of the loan as the customers make payments. If a loan is paid off early, no additional CSO fees are due or collected. The maximum CSO loan term is 180 days in Texas. During the years ended December 31, 2021 and 2020, approximately 58.3% and 66.5%, respectively, of loans originated under CSO programs were paid off prior to the original maturity date.
Since CSO loans are made by a third-party lender, we do not include them in our Consolidated Balance Sheets as loans receivable; instead, we include them in “Prepaid expense and other” in our Consolidated Balance Sheets. We receive payments from customers for these fees on their scheduled loan repayment due dates.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk on our revolving credit facilities and non-recourse funding facilities, as further described in Note 7, "Debt." Our variable interest expense is sensitive to changes in the general level of interest rates. We may enter into interest rate caps, interest rate swaps, collars or similar instruments with the objective of reducing our borrowing cost volatility. We do not use derivative financial instruments for speculative or trading purposes.
Interest expense on such borrowings is sensitive to changes in the market rate of interest. Hypothetically, a 1% increase in the average market rate would result in an increase in our annual interest expense of $5.3 million. This amount is determined by considering the impact of the hypothetical interest rates on our borrowing cost, but does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Due to the uncertainty of the specific changes and their possible effects, the foregoing sensitivity analysis assumes no changes in our financial structure.
All of our customer loan portfolios have fixed interest rates and fees that do not fluctuate over the life of the loan. Notwithstanding that, we support fixed rate lending in part with variable rate borrowing. We do not believe there is any material interest rate sensitivity associated with our customer loan portfolio, primarily due to their short duration.
We are required to transition from LIBOR to an alternative benchmark rate as required by ASU 2020-04, Reference Rate Reform (Topic 848). The majority of our exposure to LIBOR relates to our Senior Revolver, U.S. SPV, and our recently acquired Heights SPV. Our agreements governing these debt facilities contain customary provisions to provide for replacement of LIBOR with an alternative benchmark rate when LIBOR ceases to be available. We anticipate to transition our facilities from LIBOR to SOFR and, based on our most current understanding, the transition is not expected to have a material impact on our Consolidated Financial Statements. See Note 1, "Summary of Significant Accounting Policies and Nature of Operations" for additional information on ASU 2020-04.
Foreign Currency Exchange Rate Risk
Foreign currency exchange rate fluctuations impact the translation of the financial results of the Canadian operations from Canadian Dollars to U.S. Dollars. Our operations in Canada represent a significant portion of our total operations, and as a result, material changes in the currency exchange rate between these countries could have a significant impact on our consolidated results of operations, financial condition or cash flows. At December 31, 2021, revenue and net income from continuing operations before income taxes would decrease by approximately $30.5 million and $3.5 million, respectively, if average foreign exchange rates had declined by 10% against the U.S. dollar in 2021. These amounts were determined by considering the adverse impact of a hypothetical foreign exchange rate on the revenue and net loss before income taxes of the Company based on Canadian operations.
We may elect to purchase derivatives as hedges against foreign exchange rate risks with the objective of mitigating the impact of foreign currency fluctuations on our results of operations. We typically hedge existing short-term balance sheet exposures, as well as anticipated cash flows between our foreign subsidiaries and domestic subsidiaries. We do not purchase derivatives for speculative purposes.
We record derivative instruments at fair value on the balance sheet as either an asset or liability. Changes in the options intrinsic value, to the extent that they are effective as a hedge, are recorded in other comprehensive income (loss). For derivatives that qualify and have been designated as cash flow or fair value hedges for accounting purposes, changes in fair value have no net impact on earnings to the extent the derivative is considered perfectly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2021 and 2020
Consolidated Statements of Operations - Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) - Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Equity - Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows - Years Ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of CURO Group Holdings Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CURO Group Holdings Corp. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses - Refer to Notes 1 and 2 to the financial statements
Critical Audit Matter Description
The Company originates various loan products in the United States (“U.S.”) and Canada, including Unsecured Installment, Secured Installment, Revolving Line of Credit, and Single-Pay loans. The Company estimates and records an allowance for loans and interest receivable based on historical loss rates and other factors for loans containing similar risk characteristics. In
addition, management evaluates whether qualitative adjustments to historical loss rates should be made based on relevant factors. The allowance for loan losses at December 31, 2021 was $87.6 million.
There is a significant amount of judgment required by management in evaluating qualitative factors. Auditing the allowance for loan losses, inclusive of assessing the adequacy of qualitative adjustments requires a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the allowance for loan losses included the following, among others:
•We tested the design and operating effectiveness of management’s controls over the allowance for loan losses including controls over identification of qualitative adjustments.
•With the assistance of our credit specialists, we evaluated the reasonableness of the quantitative model and methodology used to determine the allowance.
•We reviewed management’s modeling methodology including underlying assumptions such as the loss development period and lookback period to assess the reasonableness of the methodology and assumptions used by management.
•We reviewed independent economic statistics such as common macroeconomic indicators, as well as industry peers, and we used data analytics to identify any changes in the loan portfolio to assess the completeness of management’s qualitative adjustments on the allowance for loan losses.
•We tested the completeness and accuracy of underlying loan data used in management’s models and we recalculated management’s model to validate its mathematical accuracy.
•We assessed the reasonableness of the model by comparing modeled losses to actual historical losses incurred.
Business Combinations - Refer to Notes 1 and 15 to the financial statements
Critical Audit Matter Description
The Company completed the acquisitions of Flexiti Financial Inc. (“Flexiti”) and Heights Finance (“Heights”) on March 10, 2021 and December 27, 2021, respectively. Total consideration paid for the acquisitions was approximately $113 million and $428 million, respectively. The Company accounted for the acquisitions under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values as of the date of acquisition, including loans receivable of $196 million acquired from Flexiti and loans receivable of $472 million acquired from Heights. The acquisition of Flexiti included contingent consideration recorded at fair value of $20.6 million as of the acquisition date.
Determining the fair value of assets acquired and liabilities and contingent consideration assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future cash flows, and discount rates.
Given the fair value determination of loans receivable and contingent consideration requires management to make significant estimates and assumptions regarding projected cash flows and discount rates, performing audit procedures to evaluate the reasonableness of those estimates and assumptions required a high degree of auditor judgment, and an increased extent of effort, including involving fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the fair value of loans receivable from Flexiti and Heights and contingent consideration from Flexiti included the following, among others:
•We tested the effectiveness of controls over the valuation methodology used, including management’s controls over assumptions used to develop estimated future cash flows, and discounts rates used to present value future cash flows.
•We assessed the knowledge, skill, ability and objectivity of management’s valuation specialist and evaluated the work performed.
•We assessed the reasonableness of management’s forecasts and performed sensitivity analyses to evaluate the impact of changes in assumptions to the valuation of the assets acquired.
•With the assistance of fair value specialists, we evaluated:
◦The reasonableness of the valuation methodology, and
◦The reasonableness of the discount rates used to present value the expected cash flows by:
▪Testing the source information underlying the determination of the discount rate and testing mathematical accuracy of the calculation.
▪Developing a range of independent estimates and comparing those to the discount rate selected by management to evaluate the inputs used in the calculation.
•We evaluated whether the estimated cash flows were consistent with evidence obtained in other areas of the audit.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 7, 2022
We have served as the Company's auditor since 2019.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of CURO Group Holdings Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of CURO Group Holdings Corp. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated March 7, 2022, expressed an unqualified opinion on those financial statements.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Flexiti Financial, Inc., which was acquired on March 10, 2021, and SouthernCo., Inc. d/b/a Heights Finance which was acquired on December 27, 2021, and whose financial statements constitute 20.6% and 22.4% of total assets, respectively, and 4.3% and 0.5% of revenues, respectively, of the consolidated financial statement amounts as of and for the year ended December 31, 2021. Accordingly, our audit did not include the internal control over financial reporting at Flexiti Financial, Inc. and Heights Finance.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 7, 2022
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
2021 December 31,
ASSETS
Cash and cash equivalents $ 63,179 $ 213,343
Restricted cash (includes Restricted cash of consolidated VIEs of $57,155 and $31,994 as of December 31, 2021 and 2020, respectively)
98,896 54,765
Gross loans receivable (includes Gross loans receivable of consolidated VIEs of $1,294,706 and $360,431 as of December 31, 2021 and 2020, respectively)
1,548,318 553,722
Less: allowance for loan losses (includes allowance for losses of consolidated VIEs of $66,618 and $54,129 as of December 31, 2021 and 2020, respectively)
(87,560) (86,162)
Loans receivable, net
1,460,758 467,560
Income taxes receivable 31,774 32,062
Prepaid expenses and other (includes Prepaid expenses and other of consolidated VIEs of $0 and $388 as of December 31, 2021 and 2020, respectively)
42,038 27,994
Property and equipment, net 54,635 59,749
Investments in Katapult 27,900 27,370
Right of use asset - operating leases 116,300 115,032
Deferred tax assets 15,639 -
Goodwill 429,792 136,091
Intangibles, net 109,930 40,425
Other assets 9,755 8,595
Total Assets $ 2,460,596 $ 1,182,986
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities (includes Accounts payable and accrued liabilities of consolidated VIEs of $9,886 and $34,055 as of December 31, 2021 and 2020, respectively)
$ 121,434 $ 49,624
Deferred revenue 21,649 5,394
Lease liability - operating leases 122,431 122,648
Contingent consideration related to acquisition 26,508 -
Income taxes payable 680 -
Accrued interest (includes Accrued interest of consolidated VIEs of $3,279 and $1,147 as of December 31, 2021 and 2020, respectively)
34,974 20,123
Liability for losses on CSO lender-owned consumer loans 6,908 7,228
Debt (includes Debt and related issuance costs of consolidated VIEs of $979,500 and $14,428 as of December 31, 2021 and $147,427 and $7,766 as of December 31, 2020, respectively)
1,945,793 819,661
Other long-term liabilities 13,845 15,382
Deferred tax liabilities 6,044 11,021
Total Liabilities 2,300,266 1,051,081
Commitments and contingencies (Note 8)
Stockholders' Equity
Preferred stock - $0.001 par value, 25,000,000 shares authorized; no shares were issued
- -
Common stock - $0.001 par value; 225,000,000 shares authorized; 49,684,080 and 47,525,807 shares issued; and 40,810,444 and 41,370,504 shares outstanding at the respective period ends
23 9
Treasury stock, at cost - 8,873,636 and 6,155,303 shares at the respective period ends
(124,302) (77,852)
Paid-in capital 113,520 79,812
Retained earnings 203,467 160,068
Accumulated other comprehensive loss (32,378) (30,132)
Total Stockholders' Equity 160,330 131,905
Total Liabilities and Stockholders' Equity $ 2,460,596 $ 1,182,986
See the accompanying Notes to Consolidated Financial Statements
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
Year Ended December 31,
2021 2020 2019
Revenue $ 817,843 $ 847,396 $ 1,141,797
Provision for losses 245,668 288,811 468,551
Net revenue 572,175 558,585 673,246
Operating expenses
Salaries and benefits 237,109 196,817 206,193
Occupancy 55,559 57,271 54,895
Advertising 38,762 44,552 53,398
Direct operations 60,056 46,893 73,568
Depreciation and amortization 26,955 17,498 18,630
Other operating expense 74,682 47,048 48,049
Total operating expenses 493,123 410,079 454,733
Other (income) expense
Interest expense 97,334 72,709 69,763
(Income) loss from equity method investment (3,658) (4,546) 6,295
Gain from equity method investment (135,387) - -
Loss on extinguishment of debt 40,206 - -
Total other (income) expense (1,505) 68,163 76,058
Income from continuing operations before income taxes 80,557 80,343 142,455
Provision for income taxes 21,223 5,895 38,557
Net income from continuing operations 59,334 74,448 103,898
Income (loss) from discontinued operations, before income taxes - 1,714 (39,048)
Income tax expense (benefit) related to disposition - 429 (46,638)
Net income from discontinued operations - 1,285 7,590
Net income $ 59,334 $ 75,733 $ 111,488
Basic earnings per share:
Continuing operations $ 1.44 $ 1.82 $ 2.33
Discontinued operations - 0.03 0.17
Basic earnings per share $ 1.44 $ 1.85 $ 2.50
Diluted earnings per share:
Continuing operations $ 1.38 $ 1.77 $ 2.26
Discontinued operations - 0.03 0.17
Diluted earnings (loss) per share $ 1.38 $ 1.80 $ 2.43
Weighted average common shares outstanding:
Basic 41,155 40,886 44,685
Diluted 43,143 42,091 45,974
See the accompanying Notes to Consolidated Financial Statements
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
2021 2020 2019
Net income $ 59,334 $ 75,733 $ 111,488
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax (2,246) 8,531 22,397
Other comprehensive (loss) income (2,246) 8,531 22,397
Comprehensive income $ 57,088 $ 84,264 $ 133,885
See the accompanying Notes to Consolidated Financial Statements
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except share data)
Common Stock Treasury Stock, at cost Paid-in capital Retained Earnings (Deficit) AOCI (1)
Total Stockholders' Equity
Shares Outstanding Par Value
Balances at December 31, 2018 46,412,231 $ 9 $ - $ 60,015 $ (18,065) $ (61,060) $ (19,101)
Net income - - - - 111,488 - 111,488
Foreign currency translation adjustment - - - - - 22,397 22,397
Share-based compensation - - - 10,323 - - 10,323
Proceeds from exercise of stock options 40,014 - - 149 - - 149
Repurchase of common stock (2)
(5,614,541) - (72,343) - - - (72,343)
Net settlement of share-based awards 318,520 - - (2,400) - - (2,400)
Balances at December 31, 2019 41,156,224 $ 9 $ (72,343) $ 68,087 $ 93,423 $ (38,663) $ 50,513
Net income - - - - 75,733 - 75,733
Foreign currency translation adjustment and other - - - - - 8,531 8,531
Dividends - - - - (9,088) - (9,088)
Share-based compensation - - - 12,910 - - 12,910
Proceeds from exercise of stock options 274,510 - - 765 - - 765
Repurchase of common stock (540,762) - (5,509) - - - (5,509)
Net settlement of share-based awards 480,532 - - (1,950) - - (1,950)
Balances at December 31, 2020 41,370,504 $ 9 $ (77,852) $ 79,812 $ 160,068 $ (30,132) $ 131,905
Net income - - - - 59,334 - 59,334
Foreign currency translation adjustment and other - - - - - (2,246) (2,246)
Dividends - - - - (15,935) - (15,935)
Common stock issued for acquisition of Heights 1,446,257 14 - 24,355 - - 24,369
Share-based compensation - - - 13,976 - - 13,976
Proceeds from exercise of stock options 66,972 - - 272 - - 272
Repurchase of common stock (3)
(2,718,333) - (46,450) - - - (46,450)
Net settlement of share-based awards 645,044 - - (4,895) - - (4,895)
Balances at December 31, 2021 40,810,444 $ 23 $ (124,302) $ 113,520 $ 203,467 $ (32,378) $ 160,330
(1) Accumulated other comprehensive income (loss)
(2)Includes the repurchase of 2,000,000 shares of common stock from FFL for $13.55 per share. See Note 23 - "Share Repurchase Program" for additional information.
(3)Includes the repurchase of 500,000 shares of common stock from a related party for $18.10 per share. See Note 23 - "Share Repurchase Program" for additional information.
See the accompanying Notes to Consolidated Financial Statements
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(in thousands) 2021 2020 2019
Cash flows from operating activities
Net income from continuing operations $ 59,334 $ 74,448 $ 103,898
Adjustments to reconcile net income to net cash provided by continuing operating activities:
Depreciation and amortization 26,955 17,498 18,630
Provision for losses 245,668 288,811 468,551
Amortization of debt issuance costs and bond discount 6,871 3,935 2,971
Deferred income tax (benefit) expense (18,297) 11,691 (6,396)
Loss on disposal of property and equipment 7,054 150 85
Loss on extinguishment of debt 40,206 - -
(Income) loss from equity method investment (3,658) (4,546) 6,295
Gain from equity method investment (135,387) - -
Change in fair value of contingent consideration 6,209 - -
Share-based compensation 13,976 12,910 10,323
Changes in operating assets and liabilities:
Accrued interest on loans receivable 8,751 23,714 (12,844)
Prepaid expenses and other assets (6,053) 8,058 10,771
Accounts payable and accrued liabilities 43,832 (11,876) 9,798
Deferred revenue 16,581 (4,769) 527
Income taxes payable 678 - 34,102
Income taxes receivable 3,829 (20,603) 9,798
Accrued interest 13,069 264 -
Other assets and liabilities (6,445) 3,820 (5,374)
Net cash provided by continuing operating activities 323,173 403,505 651,135
Net cash provided by (used in) discontinued operating activities - 1,714 (504)
Net cash provided by operating activities 323,173 405,219 650,631
Cash flows from investing activities
Purchase of property, equipment and software (23,648) (10,920) (13,981)
Loans receivable originated or acquired (1,517,275) (1,296,398) (1,835,301)
Loans receivable repaid 928,302 1,079,437 1,327,190
Proceeds from (Investment in) Katapult 136,879 (12,757) (8,168)
Acquisition of Ad Astra, net of acquiree's cash received - (14,418) -
Acquisition of Flexiti, net of acquiree's cash received (91,203) - -
Acquisition of Heights, net of acquiree's cash received (356,543) - -
Net cash used in continuing investing activities (923,488) (255,056) (530,260)
Net cash used in discontinued investing activities - - (14,213)
Net cash used in investing activities (923,488) (255,056) (544,473)
Cash flows from financing activities
Proceeds from SPV and SPE facilities 549,511 73,037 23,558
Payments on SPV and SPE facilities (244,577) (42,535) (24,877)
Payments on 8.25% Senior Secured Notes
(690,000) - -
Proceeds from issuance of 7.50% Senior Secured Notes
1,000,000 - -
Proceeds from credit facilities 68,108 69,947 210,346
Payments on credit facilities (68,108) (69,947) (230,346)
Payments on subordinated stockholder debt - - (2,256)
Debt issuance costs paid (26,387) (6,992) (200)
Payments of call premiums from early debt extinguishments (31,250) - -
Payments to net share settle equity awards (4,895) (1,950) (2,400)
Proceeds from exercise of stock options 272 765 149
Repurchase of common stock (45,448) (5,908) (71,942)
Dividends paid to stockholders (15,935) (9,088) -
Net cash provided by (used in) financing activities 491,291 7,329 (97,968)
Effect of exchange rate changes on cash and restricted cash 2,991 595 1,974
Net (decrease) increase in cash and restricted cash (106,033) 158,087 10,164
Cash and restricted cash at beginning of period 268,108 110,021 99,857
Cash and restricted cash at end of period 162,075 268,108 110,021
Less: Cash and restricted cash of discontinued operations at end of period - - -
Cash and restricted cash of continuing operations at end of period $ 162,075 $ 268,108 $ 110,021
See the accompanying Notes to Consolidated Financial Statements
SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets as of December 31, 2021, 2020 and 2019 to the cash, cash equivalents and restricted cash used in the Statement of Cash Flows:
December 31,
2021 2020 2019
Cash and cash equivalents $ 63,179 $ 213,343 $ 75,242
Restricted cash (includes restricted cash of consolidated VIEs of $57,155 and $31,994 as of December 31, 2021 and December 31, 2020, respectively)
98,896 54,765 34,779
Total cash, cash equivalents and restricted cash from continuing operations 162,075 268,108 110,021
Cash and restricted cash from discontinued operations - - -
Total cash, cash equivalents and restricted cash used in the Statements of Cash Flows $ 162,075 $ 268,108 $ 110,021
The following table provides supplemental cash flow information for the periods indicated (in thousands):
Year Ended December 31,
2021 2020 2019
Cash paid for:
Interest $ 81,536 $ 69,212 $ 69,134
Income taxes, net of refunds 34,878 15,841 2,355
Non-cash investing activities:
Property and equipment accrued in accounts payable 883 861 631
Glossary
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Nature of Operations and Basis of Presentation
The terms “CURO" and the “Company” refer to CURO Group Holdings Corp. and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated.
The Company is a tech-enabled, omni-channel consumer finance company serving non-prime and near-prime consumers in the U.S. and non-prime and prime consumers in Canada. CURO was founded in 1997 to meet the growing needs of consumers looking for alternative access to credit. With nearly 25 years of experience, the Company offers a variety of convenient, easily accessible financial and loan services in all of its markets.
In the U.S., CURO operates under several principal brands, including “Speedy Cash,” “Rapid Cash” and “Avio Credit”. With its acquisition of Heights on December 27, 2021, the Company added the brands "Covington Credit," "Heights Finance," "Quick Credit" and "Southern Finance" to its U.S. portfolio. The Company also offers demand deposit accounts in the U.S. under Revolve Finance, and credit card programs under First Phase, which was launched in the fourth quarter of 2021. As of December 31, 2021, CURO's store network consisted of 550 locations across 20 U.S. states and offered online services in 27 U.S. states.
In Canada, CURO operates under “CURO Canada” and “LendDirect” direct lending brands. With its acquisition of Flexiti on March 10, 2021, the Company added the "Flexiti" point-of-sale brand to its Canada portfolio. As of December 31, 2021, CURO operated its direct lending in eight Canadian provinces and offered online services in eight Canadian provinces and one Canadian territory. Point-of-sale operations are available at nearly 7,500 retail locations and over 3,100 merchant partners across 10 provinces and two territories.
Following the acquisitions in 2021, the Company reports Flexiti operations as the "Canada POS Lending" segment and Heights operations are included within the U.S. segment throughout this 2021 Form 10-K. Refer to Note 14, "Segment Reporting" for further information.
The Company has prepared the accompanying audited Consolidated Financial Statements in accordance with U.S. GAAP. The Company will continue to take advantage of the scaled disclosure requirements permitted by the SEC for SRCs for the periods presented. SRC status is determined on an annual basis as of the last business day of the most recently completed second fiscal quarter. The Company qualified as an SRC until June 30, 2021, but after that date, the Company no longer qualified as an SRC and thus will begin to report as a non-SRC beginning with the first quarter of 2022.
Revised Operating Expense Presentation
Beginning with the fourth quarter of 2021, the Company revised its presentation of operating expenses on the Statement of Operations. Where applicable, prior period amounts have been reclassified to conform to the current period presentation. These changes had no impact on the Company's previously reported consolidated results of operations or financial position.
U.K. Segment Financial Information Recast for Discontinued Operations
On February 25, 2019, the Company placed its U.K. segment into administration, which resulted in treatment of the U.K. segment as discontinued operations for all periods presented. Throughout this report, financial information for all periods are presented on a continuing operations basis, excluding the results and positions of the U.K. segment. See Note 22, "Discontinued Operations" for additional information.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of CURO and its direct and indirect subsidiaries, including Heights, which was acquired on December 27, 2021, Flexiti, which was acquired on March 10, 2021, and Ad Astra, which was acquired on January 3, 2020. Refer to Note 15, "Acquisitions" for further disclosures related to these acquisitions. Intercompany transactions and balances have been eliminated in consolidation.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Some estimates may also affect the reported amounts of revenues and expenses during the periods reported. Significant estimates that the Company made in the accompanying Consolidated Financial Statements include ALL, certain assumptions related to equity investments, goodwill and intangibles, accruals related to self-insurance, CSO liability for losses, estimated tax liabilities and the accounting for the Heights and Flexiti acquisitions. Actual results may differ from those estimates.
Acquisitions
Heights
On December 27, 2021, CURO closed its acquisition of Heights, a consumer finance company that provides Installment loans and offers customary opt-in insurance and other financial products, in a transaction accounted for as a business combination. Refer to Note 15, "Acquisitions" for further information regarding the acquisition and Note 5, "Goodwill and Intangibles" for the impact to the Company's goodwill balance as a result of the acquisition.
Flexiti
On March 10, 2021, CURO closed its acquisition of Flexiti, a POS and BNPL provider, in a transaction accounted for as a business combination. Flexiti is one of Canada's fastest-growing POS lenders, offering customers flexible payment plans at retailers that sell large-scale goods such as furniture, appliances, jewelry and electronics. Through its BNPL platform, customers can be approved instantly to shop with their FlexitiCard, which they can use online or in-store to make multiple purchases, within their credit limit, without needing to reapply. Refer to Note 15, "Acquisitions" for further information regarding the acquisition and Note 5, "Goodwill and Intangibles" for the impact to the Company's goodwill balance as a result of the acquisition.
Ad Astra
On January 3, 2020, the Company acquired 100% of the outstanding stock of Ad Astra, a related party, for $14.4 million, net of cash received. Prior to the acquisition, Ad Astra was the Company's exclusive provider of third-party collection services for owned and managed loans in the U.S. that are in later-stage delinquency. Ad Astra, now a wholly-owned subsidiary, is included in the Consolidated Financial Statements. See Note 15, "Acquisitions" for further information.
Change in Accounting Principle Related to Equity Method Investment in Katapult
Katapult is an e-commerce focused, FinTech company offering an innovative lease financing solution to consumers and enabling essential transactions at the merchant POS. CURO first invested in Katapult in 2017 as the Company identified multiple catalysts for Katapult's future success. The Company accounts for its investment in Katapult under the equity method of accounting as of December 31, 2021. Refer to Note 6, "Fair Value Measurements" for further disclosures regarding the accounting for the Company's investment in Katapult.
Historically, the Company reported income and loss from its equity method investment in Katapult on a two-month reporting lag. The merger between Katapult and FinServ in June 2021 triggered a change in Katapult's control environment and reporting structure to coincide with SEC reporting requirements. As a result, during the first quarter of 2021 the Company applied a change in accounting principle to reflect the Company's share of Katapult's historical and ongoing results from a two-month reporting lag to a one-quarter reporting lag. The Company believes this change in accounting principle is preferable as it provides the Company with the ability to present the results of its equity method investment after Katapult’s results are publicly available and related internal controls have been completed. The Company has not retrospectively applied the change in accounting principle because the impact on the financial statements was immaterial for all periods presented.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Continuing Impacts of COVID-19
As a result of COVID-19, our customers and their overall credit performance were impacted through the year ended December 31, 2021 and 2020. Throughout much of 2020 and the first half of 2021, the U.S. and Canadian governments instituted several initiatives to ease the personal burden of the pandemic, including various federal and provincial financial aid and economic stimulus programs. During the second half of 2020, consumer demand gradually increased, reflecting both the gradual lifting of certain regions' stay-at-home and self-quarantine orders in response to the pandemic's easing and the expiration of governmental stimulus programs. There was an additional round of stimulus in the U.S. in March 2021 which contributed to the decrease in loan balances and ALL during the first quarter of 2021. With stimulus programs running off in the U.S. and continued demand in Canada for loan products, loan balances generally increased between March 31, 2021 and December 31, 2021. We have maintained our historical allowance approach, but have adjusted estimates for changes in past-due gross loans receivable due to market conditions. The estimates and assumptions used to determine an appropriate ALL and liability for losses on CSO lender-owned consumer loans are those that are available through the filing of this 2021 Form 10-K and are indicative of conditions as of December 31, 2021.
As government stimulus programs have wound down, U.S. Company Owned loan balances, excluding Heights, have stabilized modestly increasing from $185.8 million as of March 31, 2021 to $190.3 million as of December 31, 2021. While the NCO rate has increased sequentially for total U.S. Company Owned gross loans receivable, they remain at low levels relative to pre-COVID-19.
In Canada, despite recent COVID-19 lockdown mandates and resurgences in the first half of 2021, on a sequential basis, Canada Direct Lending gross loans receivable and Canada POS Lending gross loans receivable grew 9.3% and 51.9%, respectively. The NCO rate for Canada POS Lending was 0.5% in the fourth quarter of 2021.
Revenue Recognition
CURO offers a broad range of consumer finance products including Revolving LOC, Unsecured Installment, Secured Installment and Single-Pay loans. Revenue in the Consolidated Statements of Operations includes: interest income, Merchant Discount Revenue ("MDR"), finance charges, CSO fees, late fees, insurance protection fees, non-sufficient funds fees and other ancillary fees. Product offerings differ by jurisdiction and are governed by the laws in each separate jurisdiction.
Revolving LOC revenues include interest income on outstanding revolving balances, MDR related to Canada POS Lending and other usage or maintenance fees as permitted by underlying statutes. Revolving LOC loans have a periodic payment that is a fixed percentage of the customer’s outstanding loan balance, and there is no defined loan term. The Company records revenue from Revolving LOC loans on a simple-interest basis. Accrued interest and fees are included in gross loans receivable in the Consolidated Balance Sheets.
Unsecured and Secured Installment revenue includes interest income and non-sufficient-funds or returned-items fees on late or defaulted payments on past-due loans, known as late fees. Late fees comprise less than 1.0% of Installment revenues. Installment loans are fully amortizing, with a fixed payment amount, which includes principal and accrued interest, due each period during the loan term. The loan terms for Installment loans can range up to 60 months depending on state or provincial regulations. The Company records revenue from Installment loans on a simple-interest basis. Accrued interest and fees are included in gross loans receivable in the Consolidated Balance Sheets as earned. CSO fees are recognized ratably over the term of the loan as earned. Secured Installment loans are similar to Unsecured Installment loans but are secured by a clear vehicle title or security interest in the vehicle.
Single-Pay loans are primarily unsecured, short-term, small denomination loans, with a small portion being auto title loans, which allow a customer to obtain a loan using their car as collateral. Revenues from Single-Pay loan products are recognized each period on a constant-yield basis ratably over the term of each loan as earned. The Company defers recognition of the unearned fees the Company expects to collect based on the remaining term of the loan at the end of each reporting period.
Ancillary revenue includes revenue from a number of financial products such as check cashing, demand deposit accounts, optional credit protection insurance, and money transfer services. Check cashing fees, money order fees and other fees from ancillary products and services are generally recognized at the point-of-sale when the transaction is completed. The sale of credit protection insurance and additional insurance the Company now offers as a result of the acquisition of Heights is recognized ratably over the term of the loan. The Company is required to maintain an actuarial determined reserve for Heights insurance products. As of December 31, 2021, the reserve was $2.8 million and is reported in "Accounts payable and accrued liabilities" in the Condensed Balance Sheet.
Merchant Discount Revenue
Following the acquisition of Flexiti, the Company recognizes merchant discount revenue. Merchant discount revenue represents a fee charged to merchant partners to facilitate customer purchases at merchant locations. The fee is recorded as unearned revenue when received and recognized over the expected loan term. The amount of fees charged, or merchant discount, is
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
generally deducted from the payment to the merchant at the time a customer enters into a POS transaction with the merchant. The merchant discount rate is individually negotiated between the Company and each merchant and is initially recorded as deferred revenue upon the completion of each POS transaction. As a result of purchase accounting resulting from the acquisition of Flexiti, no fair value is assigned to unearned revenue at the time of acquisition. Therefore, the Company only recognizes revenue on merchant discounts received after the acquisition of Flexiti.
Cash and cash equivalents
The Company considers deposits in banks and short-term investments with original maturities of 90 days or less as cash and cash equivalents.
Restricted Cash
The Company's restricted cash includes deposits in collateral accounts with financial institutions, consumer deposits related to prepaid cards and checking account programs and funds related to loan facilities disclosed in Note 4, "Variable Interest Entities." In connection with insurance products offered by Heights, certain of the Company's cash is restricted by agreements with financial institutions to meet certain state licensing requirements as required under various reinsurance agreements. As of December 31, 2021, the restricted cash related to Heights' insurance program was $17.4 million.
Consumer Loans Receivable
Consumer loans receivable are net of the allowance for loan losses and unamortized fair value discount for acquired loans receivable and are comprised of Revolving LOC, Unsecured Installment, Secured Installment and Single-Pay loans.
Revolving LOC loans are lines of credit without a specified maturity date and include POS financing subsequent to the acquisition of Flexiti, which is included in the Canada POS Lending segment. Revolving LOC loans require periodic payments of principal and interest that is a fixed percentage of the customer's outstanding loan balance. Customers in good standing may draw against their line of credit, repay with minimum, partial or full payments and redraws as needed.
Unsecured Installment and Secured Installment loans are fully amortized loans with a fixed payment amount due each period during the term of the loan. The loan terms for Unsecured Installment and Secured Installment loans can range up to 60 months, depending on state regulations. With the acquisition of Heights in December 2021, the Company expanded into longer term, higher balance and lower credit risk products. Heights provides Secured and Unsecured Installment loans to near-prime and non-prime consumers and offers customary opt-in insurance. The Company categorizes both unsecured loans and loans secured by non-essential household goods as Unsecured Installment loans. Secured Installment loans are typically collateralized by titled vehicles. Revolving LOC loans are primarily unsecured. The product offerings differ by jurisdiction and are governed by the laws in each separate jurisdiction.
Single-Pay loans are primarily unsecured, short-term, small denomination loans, with a small portion being auto title loans, which allow a customer to obtain a loan using their car as collateral. A Single-Pay loan transaction consists of providing a customer cash in exchange for the customer’s personal check or ACH authorization (in the aggregate amount of that cash plus a service fee), with an agreement to defer the presentment or deposit of that check or scheduled ACH withdrawal until the customer’s next payday, which is typically either two weeks or a month from the loan’s origination date. An auto title loan allows a customer to obtain a loan using the customer’s car as collateral for the loan, with a typical loan term of 30 days.
Current and Past-Due Loans Receivable
CURO classifies loans receivable as either current or past-due. Single-Pay loans are considered past-due if a customer misses a scheduled payment, at which point the loan is charged-off. If a customer misses a scheduled payment for Revolving LOC, Unsecured Installment and Secured Installment loans, the entire customer balance is classified as past-due. Revolving LOC, Unsecured Installment and Secured Installment loans are charged-off when the loan has been contractually past-due for 90 consecutive days. Canada POS Lending loans are charged-off when the loan has been contractually past due for 180 days or when notice of customer bankruptcy or consumer proposal has been received. Unsecured and Secured Installment loans associated with the Heights acquisition are classified as past-due 31 days after a missed payment and are charged-off at the earlier of the date such loans are deemed to be uncollectible or when the loan becomes more than 180 days past due.
Allowance for Loan Losses
The Company maintains an ALL for loans and interest receivable at a level estimated to be adequate to absorb incurred losses based primarily on the Company's analysis of historical loss or charge-off rates for loans containing similar risk characteristics. The ALL on the Company-Owned gross loans receivables reduces the outstanding gross loans receivables balance in the Consolidated Balance Sheets. The liability for estimated losses related to loans Guaranteed by the Company under CSO programs is reported in “Liability for losses on CSO lender-owned consumer loans” in the Consolidated Balance Sheets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Changes in either the ALL or the liability, net of charge-offs and recoveries, are recorded as “Provision for losses” in the Consolidated Statements of Operations.
In addition to an analysis of historical loss and charge-off rates, the Company also considers delinquency trends and any macro-economic conditions that it believes may affect portfolio losses. If a loan is deemed to be uncollectible before it is fully reserved based on received information (e.g., receipt of customer bankruptcy notice or death), the Company charges off such loan at that time. Qualitative factors such as the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions impact management’s judgment on the overall adequacy of the ALL. Any recoveries on loans previously charged to the ALL are credited to the ALL when collected.
Troubled Debt Restructuring
In certain circumstances, the Company modifies the terms of its loans receivable for borrowers. Under U.S. GAAP, a modification of loans receivable terms is considered a TDR if the borrower is experiencing financial difficulty and the Company grants a concession to the borrower it would not have otherwise granted under the terms of the original agreement. In light of COVID-19, the Company established an enhanced Customer Care Program, which enables its team members to provide relief to customers in various ways, ranging from due date changes, interest or fee forgiveness, payment waivers or extended payment plans, depending on a customer’s individual circumstances. The Company modifies loans only if it believes the customer has the ability to pay under the restructured terms. The Company continues to accrue and collect interest on these loans in accordance with the restructured terms.
The Company records its ALL related to TDRs by discounting the estimated cash flows associated with the respective TDR at the effective interest rate immediately after the loan modification and records any difference between the discounted cash flows and the carrying value as an ALL adjustment. A loan that has been classified as a TDR remains so classified until the loan is paid off or charged-off. A TDR is charged off consistent with the Company's policies for the related loan product.
Loans Receivable on a Non-Accrual Basis
The Company may place loans receivable on non-accrual status due to statutory requirements or, if in management’s judgment, the timely collection of principal and interest becomes uncertain. After a loan is placed on non-accrual status, no further interest is accrued. Loans remain on non-accrual status until payment or charged-off. Payments are applied initially to any outstanding past due loan balances prior to current loan balances. Not all past-due payments will bring a loan off non-accrual status. The Company's policy for determining past due status is consistent with the accounts receivable aging disclosure.
Credit Services Organization
Through the CSO programs, the Company acts as a CSO/CAB on behalf of customers in accordance with applicable state laws. The Company currently offers loans through CSO programs in stores and online in the state of Texas. As a CSO, CURO earns revenue by charging the customer a CSO fee for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with CURO under the CSO programs, the Company agrees, for a CSO fee payable to the Company by the customer, to provide certain services to the customer, one of which is to guarantee the customer’s obligation to repay the loan to the third-party lender. CSO fees are calculated based on the amount of the customer's outstanding loan. For CSO loans, each lender is responsible for providing the criteria by which the customer’s application is underwritten and, if approved, determining the amount of the customer loan. The Company is, in turn, responsible for assessing whether or not to guarantee the loan. This guarantee represents an obligation to purchase loans if they are charged-off.
CURO currently has relationships with two unaffiliated third-party lenders for CSO programs. The Company periodically evaluates the competitive terms of the unaffiliated third-party lender contracts and such evaluation may result in the transfer of volume and loan balances between lenders. The process does not require significant effort or resources outside the normal course of business and the Company believes the incremental cost of changing or acquiring new unaffiliated third-party lender relationships to be immaterial.
CURO estimates a liability for losses associated with the guaranty provided to the CSO lenders using assumptions and methodologies similar to the ALL, which is recognized for the consumer loans and is included as "Liability for losses on CSO lender-owned consumer loans" on the Consolidated Balance Sheets.
CSO fees are calculated based on the amount of the customer’s outstanding loan. The Company complies with the applicable jurisdiction’s Credit Services Organization Act or a similar statue. These laws generally define the services that CURO can provide to consumers and require the Company to provide a contract to the customer outlining its services and related costs. For services provided under the CSO programs, the Company receives payments from customers on their scheduled loan repayment due dates. The CSO fee is earned ratably over the term of the loan as the customers make payments. If a loan is paid off early, no additional CSO fees are due or collected. The maximum CSO loan term is 180 days. During the years ended
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
December 31, 2021, 2020 and 2019, approximately 58.3%, 66.5% and 63.8%, respectively, of loans originated under CSO programs were paid off prior to the original maturity date.
Since CSO loans are made by a third-party lender, they are not included in the Company's Consolidated Balance Sheets as loans receivable. CSO fees receivable are included in “Prepaid expenses and other” in the Consolidated Balance Sheets. The Company receives cash from customers for these fees on their scheduled loan repayment due dates.
For additional information on CSO loans, refer to Note 3, "Credit Services Organization."
Variable Interest Entities
As part of the Company's funding strategy and efforts to support the liquidity from sources other than the traditional capital market sources, the Company established a securitization program through the U.S. SPV, Canada SPV, Flexiti SPE, Flexiti Securitization and Heights SPV facilities. In addition, upon closing of the Heights acquisition, the Company assumed the Heights SPV facility. See Note 4, "Variable Interest Entities" and Note 7, "Debt" for further discussion on these facilities. The Company transfers certain consumer loan receivables to the VIEs that issues term notes backed by the underlying consumer loan receivables which are serviced by other wholly-owned subsidiaries.
For each facility, the Company has the ability to direct the activities of the VIE that most significantly impact the economic performance of the entities as the servicer of the securitized loan receivables. Additionally, CURO has the right to receive residual payments, which exposes the Company to the potential for significant losses and returns. Accordingly, the Company determined that they are the primary beneficiary of the VIEs and are required to consolidate them.
Derivatives
As foreign currency exchange rates change, translation of the financial results of the Canadian operations into U.S. Dollars will be impacted. Operations in Canada represent a significant portion of total operations, and as a result, material changes in the currency exchange rates as between these two countries could have a significant impact on the Company's consolidated financial condition, results of operations or cash flows. The Company may elect to purchase derivatives to hedge exposures that would qualify as a cash flow or fair value hedge. The Company records derivative instruments at fair value as either an asset or liability on the Consolidated Balance Sheet. Changes in the options intrinsic value, to the extent that they are effective as a hedge, are recorded in Other Comprehensive Income (Loss). For derivatives that qualify and have been designated as cash flow or fair value hedges for accounting purposes, the changes in fair value have no net impact on earnings, to the extent the derivative is considered perfectly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged, until the hedged item is recognized in earnings (commonly referred to as the “hedge accounting” method).
As of December 31, 2021 and 2020, the Company had $157.8 million and $96.1 million, respectively, in variable interest rate debt outstanding related to the Canada SPV. In August 2018, the Company entered into a four-year C$175.0 million interest rate cap agreement with the Royal Bank of Canada that capped the related three-month CDOR rate at 4.50% beginning in September 2018. During the year ended December 31, 2021 and 2020, the three-month CDOR rate did not exceed 4.50% and did not have a material impact on the Company's Statement of Operations.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and amortization, except for property and equipment accounted for as part of a business combination, which is carried at fair value as of the acquisition date less accumulated depreciation and amortization. Expenditures for significant additions and improvements are capitalized. Maintenance repairs and renewals, that do not materially add to the fixed asset's value or appreciably prolong its life, are charged to expense as incurred. Gains and losses on dispositions of property and equipment are included in results of operations.
The estimated useful lives for furniture, fixtures and equipment are five years to seven years. The estimated useful lives for leasehold improvements can vary from five years to fifteen years. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the depreciable or amortizable assets.
Business Combination Accounting
Business combination accounting requires that the Company determines the fair value of all assets acquired, including identifiable intangible assets, liabilities assumed and contingent consideration issued in a business combination. The cost of the acquisition is allocated to these assets and liabilities in amounts equal to the estimated fair value of each asset and liability as of the acquisition date, and any remaining acquisition cost is classified as goodwill. This allocation process requires extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets. The Company engages third-party appraisal firms to assist in fair value determination when appropriate. The acquisitions may also include contingent consideration, or earn-out provisions, which provide for additional consideration to be paid to the seller if certain conditions are met in the future. These earn-out provisions are estimated and recognized at fair value at the acquisition date
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
based on projected earnings or other financial metrics over specified future periods. These estimates are reviewed during each subsequent reporting period and adjusted based upon actual results. Acquisition-related costs for potential and completed acquisitions are expensed as incurred and included in "Other operating expense" in the Consolidated Statements of Operations.
Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair value of the acquired net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Intangible assets other than goodwill are initially valued at fair value. When appropriate, the Company utilizes independent valuation experts to advise and assist in determining the fair value of the identified intangible assets acquired in connection with a business acquisition and in determining appropriate amortization methods and periods for those intangible assets. Any contingent consideration included as part of the purchase is recognized at its fair value on the acquisition date.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination at the time of acquisition. In accordance with ASC 350, Intangibles - Goodwill and Other ("ASC 350"), the Company performs impairment testing for goodwill and indefinite-lived intangible assets annually, as of October 1st, or whenever indicators of impairment exist. An impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. 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 economic outlook. The Company did not record any impairment losses on goodwill from continuing operations during the years ended December 31, 2021, 2020 or 2019.
Goodwill
The annual impairment review for goodwill consists of performing a qualitative assessment to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount as a basis for determining whether or not further testing is required. The Company may elect to bypass the qualitative assessment and proceed directly to the two-step process, for any reporting unit, in any period. The Company can resume the qualitative assessment for any reporting unit in any subsequent period. If the Company determines, on the basis of qualitative factors, that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, the Company will then apply a two-step process of (i) determining the fair value of the reporting unit and (ii) comparing it to the carrying value of the net assets allocated to the reporting unit. When performing the two-step process, if the fair value of the reporting unit exceeds it carrying value, no further analysis or write-down of goodwill is required. In the event the estimated fair value of a reporting unit is less than the carrying value, the Company would recognize an impairment loss equal to such excess, which could significantly and adversely impact reported results of operations and stockholders’ equity. See Note 5, "Goodwill and Intangibles" for additional information.
Intangible Assets
The Company's identifiable intangible assets, resulting from business combinations and internally developed capitalized software, consist of trade names, developed technology, merchant relationships, customer relationships and computer software. See Note 15, "Acquisitions" for additional information on intangible assets resulting from business combinations.
The Company applied the guidance under ASC 350 to software that is purchased or internally developed. Under ASC 350, eligible internal and external costs incurred for the development of computer software applications, as well as for upgrades and enhancements that result in additional functionality of the applications, are capitalized to "Intangibles, net" in the Consolidated Balance Sheets. Internal and external training and maintenance costs are charged to expense as incurred or over the related service period. When a software application is placed in service, the Company begins amortizing the related capitalized software costs using the straight-line method over its estimated useful life, which ranges from three years to ten years.
The “Cash Money” trade name was determined to be an intangible asset with an indefinite life. Intangible assets with indefinite lives are not amortized, but instead are tested annually for impairment and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset might not be recoverable. Impairment of identifiable intangible assets with indefinite lives occurs when the fair value of the asset is less than its carrying amount. If deemed impaired, the asset’s carrying amount is reduced to its estimated fair value. No indefinite life intangible impairments were recorded during the years ended December 31, 2021, 2020 or 2019. See Note 5, "Goodwill and Intangibles" for further information.
The Company's finite lived intangible assets are amortized over their estimated economic benefit period, generally from three to ten years. The Company reviews the intangible assets for impairment annually in the fourth quarter or whenever events or changes in circumstances have indicated that the carrying amount of these assets might not be recoverable. If the Company were to determine that events and circumstances warrant a change to the estimate of an identifiable intangible asset’s remaining useful life, then the remaining carrying amount of the identifiable intangible asset would be amortized prospectively over that revised remaining useful life. Additionally, information resulting from the annual assessment, or other events and circumstances, may indicate that the carrying value of one or more identifiable intangible assets is not recoverable which would result in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
recognition of an impairment charge. There were no changes in events or circumstances related to the Company's continuing operations that caused the Company to review the finite lived intangible assets for impairment for the years ended December 31, 2021, 2020 or 2019. Additionally, no finite lived impairments were recorded during the years ended December 31, 2021, 2020 or 2019. See Note 5, "Goodwill and Intangibles" for further information.
Deferred Financing Costs
Deferred financing costs consist of debt issuance costs incurred in obtaining financing. These costs are presented in the Consolidated Balance Sheets as a direct reduction from the carrying amount of associated debt, consistent with discounts or premiums. The effective interest rate method is used to amortize the deferred financing costs over the life of the Senior Secured Notes and the straight-line method is used to amortize the deferred financing costs of the SPV and SPE facilities. See Note 7, "Debt" for additional details on the Company's capital resources.
Fair Value Measurements
The Company determines fair value measurements of financial and non-financial assets and liabilities in accordance with FASB ASC 820, Fair Value Measurements and Disclosures. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price). This guidance also establishes a framework for measuring fair value and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. See Note 6, “Fair Value Measurements” for additional information.
Concentration Risk
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of its loans receivable.
Direct Lending operations in the U.S. and Canada are subject to concentration risk at the state and province level. To the extent that laws and regulations are passed that affect the manner in which the Company conducts business in a heavily concentrated market, its financial condition, results of operations and cash flows could be adversely affected. Additionally, the Company's ability to meet its financial obligations could be negatively impacted.
Revenues originated in Texas and Ontario represented approximately 21.0% and 20.2%, respectively, of the Company's consolidated revenues for the year ended December 31, 2021. As a result of regulatory impacts and the related run-off of certain Installment portfolios, California no longer represents a concentration risk as a percentage of consolidated revenues for the year ended December 31, 2021. Revenues originated in Texas, California and Ontario represented approximately 22.6%, 13.6% and 16.6%, respectively, of the Company's consolidated revenues for the year ended December 31, 2020. Revenues originated in Texas, California and Ontario represented approximately 24.6%, 18.4% and 13.6%, respectively, of the Company's consolidated revenues for the year ended December 31, 2019.
The Company operates its Canada POS Lending operations with various merchant partners. To the extent that the Company were to discontinue its relationship with a merchant, the Company believes it could find other merchants to provide its products. From a revenue perspective, there are no material concentrations in the Canada POS Lending operations for the year ended December 31, 2021. However, as originations and gross loans receivables continue to grow as a result of its merchant relationship with LFL, which the Company entered into in the third quarter of 2021, revenue contribution from LFL could become a material component of total revenue for Canada POS Lending.
Following the acquisition of Heights, which accounted for approximately $472 million of gross loans receivable as of December 31, 2021, the Company operates in new U.S. markets, primarily the southern and eastern states. As the revenue contribution was minimal, there were no material concentrations for the year ended December 31, 2021.
The Company holds cash at major financial institutions that often exceed FDIC insured limits. The Company manages its concentration risk by maintaining cash deposits in high quality financial institutions and by periodically evaluating the credit quality of the financial institutions holding such deposits. Historically, the Company has not experienced any losses due to such cash concentration.
Leases
Leases entered into by the Company are primarily for retail stores in certain U.S. states and Canadian provinces. Upon entering into an agreement, the Company determines if an arrangement is a lease.
Typically, a contract constitutes a lease if it conveys the right to control the use of an identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. To determine whether a contract conveys the right to control the use of an identified asset for a period of time, the Company must assess whether, throughout the period of use, the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
customer has both (i) the right to obtain substantially all of the economic benefits from use of the identified asset and (ii) the right to direct the use of the identified asset. If the customer has the right to control the use of an identified asset for only a portion of the term of the contract, the contract contains a lease for that portion of the term.
Leases classified as finance are immaterial to the Company as of December 31, 2021. Operating leases expire at various times through 2033. Operating leases are included in "Right of use asset - operating leases" and "Lease liability - operating leases" on the Consolidated Balance Sheets.
The Company recognizes ROU assets and lease liabilities based on the present value of lease payments over the lease term at commencement date. The rate implicit in the Company's leases typically are not readily determinable. As a result, the Company uses its estimated incremental borrowing rate, as allowed by ASC 842, Leases, in determining the present value of lease payments. The incremental borrowing rate is based on internal and external information available at the lease commencement date and is determined using a portfolio approach (i.e., using the weighted average terms of all leases in the Company's portfolio). This rate is the theoretical rate the Company would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term as that of the portfolio.
The Company uses quoted interest rates obtained from financial institutions as an input, adjusted for Company-specific factors, to derive the incremental borrowing rate as the discount rate for the leases. As new leases are added each period, the Company evaluates whether the incremental borrowing rate has changed. If the incremental borrowing rate has changed, the Company will apply the rate to new leases if not doing so would result in a material difference to the ROU asset and lease liability presented on the balance sheet.
The majority of the leases have an original term up to five years plus renewal options for additional similar terms. The Consumer Price Index is used in determining future lease payments and for purposes of calculating operating lease liabilities. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Most of the leases have escalation clauses and certain leases also require payment of period costs, including maintenance, insurance and property taxes. The Company has elected to combine lease and non-lease components and to exclude short-term leases, defined as having an initial term of 12 months or less, from the Consolidated Balance Sheets. Some of the leases are with related parties and have terms similar to the non-related party leases. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For additional information related to the Company's leases, refer to Note 12, "Leases."
Operating Expenses
Salaries and Benefits-Salaries and benefits include personnel-related costs, including salaries, benefits, bonuses and share-based compensation and are driven by the number of global employees.
Occupancy-Occupancy includes costs related to the Company's leased facilities, including rent, utilities, maintenance, repairs and insurance expense.
Advertising-Advertising costs are expensed as incurred.
Direct operations-Direct operations include costs related to the Company's Direct Lending and POS operations, including collections and financial services fees.
Depreciation and amortization-includes the depreciation and amortization of property and equipment and intangible assets.
Other operating expense-Other operating expense includes office expense, professional fees, security expense, travel and entertainment, and non-routine costs such as transaction costs and store closure costs.
Other Expense (Income)
Interest Expense-includes interest related to the Company's Senior Secured Notes, SPV, SPE and securitization facilities and Senior Revolvers.
Loss (income) from equity method investment-includes the Company's share of the net income from its equity method investments.
Gain from equity method investment-includes the Company's net gain from its equity method investment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Share-Based Compensation
CURO accounts for share-based compensation expense for awards to employees and directors at the estimated fair value on the grant date. The Company determines the fair value of stock option grants using the Black-Scholes option pricing model, which requires CURO to make several assumptions including, but not limited to, the risk-free interest rate and the expected volatility of publicly-traded stocks in the financial services industry. The expected option term is calculated using the average of the vesting period and the original contractual term. For RSUs, the value of the award is calculated using the closing market price of the common stock on the grant date for time-based and performance-based RSUs, and using the Monte Carlo simulation pricing model for the market-based RSUs. The Company recognizes the estimated fair value of share-based awards as compensation expense on a straight-line basis over the vesting period. The Company accounts for forfeitures as they occur for all share-based awards.
In accordance with ASC 718, Compensation - Stock Compensation, the Company may choose, upon vesting of employees' RSUs, to return shares of common stock underlying the vested RSUs to the Company in satisfaction of employees' tax withholding obligations (collectively, "net-share settlements") rather than requiring shares of common stock to be sold on the open market to satisfy these tax withholding obligations. The total number of shares of common stock returned to the Company is based on the closing price of the Company's common stock on the applicable vesting date. These net-share settlements reduced the number of shares of common stock that would have otherwise been outstanding on the open market, and the cash CURO paid to satisfy the employee portion of the tax withholding obligations are reflected as a reduction to "Paid-in capital" in the Company's Consolidated Balance Sheets and Consolidated Statements of Changes in Equity.
Income Taxes
A deferred tax asset or liability is recognized for the anticipated future tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements and for operating loss and tax credit carryforwards. A valuation allowance is provided when, in the opinion of management, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Realization of the deferred tax assets is dependent on the Company's ability to generate sufficient future taxable income and, if necessary, execution of tax planning strategies. In the event CURO determines that future taxable income, taking into consideration tax planning strategies, may not generate sufficient taxable income to fully realize net deferred tax assets, the Company may be required to establish or increase valuation allowances by a charge to income tax expense in the period such a determination is made, which may have a material impact on the Consolidated Statements of Operations. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which they expect those temporary differences to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date and it may have a material impact on the Consolidated Statements of Operations.
CURO follows accounting guidance which prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements unrecognized tax benefits for tax positions taken or expected to be taken on a tax return. Under this guidance, tax positions are initially recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Application of this guidance requires numerous estimates based on available information. The Company considers many factors when evaluating and estimating tax positions and tax benefits, and the recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As the Company obtains additional information, they may need to adjust the recognized tax positions and tax benefits. For additional information related to unrecognized tax benefits, see Note 9, "Income Taxes."
Foreign Currency Translation
The Canadian dollar is considered the functional currency for operations in Canada. All balance sheet accounts are translated into U.S. dollars at the exchange rate in effect at each Balance Sheet date. The Statements of Operations are translated at the average rates of exchange during each period. The Company has determined that certain intercompany balances are long-term in nature, and therefore, currency translation adjustments related to those accounts are recorded as a component of "Accumulated other comprehensive income (loss)" in the Statements of Stockholders' Equity. For intercompany balances that are settled on a regular basis, currency translation adjustments related to those accounts are recorded as a component of "Other operating expense" in the Consolidated Statements of Operations.
Legal and Other Commitments and Contingencies
The Company is subject to litigation in the normal course of its business. The Company applies the provisions as defined in the guidance related to accounting for contingencies in determining the recognition and measurement of expense recognition associated with legal claims against the Company. Management uses guidance from internal and external legal counsel on the potential outcome of litigation in determining the need to record liabilities for potential losses and the disclosure of pending legal claims.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Recently Adopted Accounting Pronouncements
ASU 2020-01
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (ASU 2020-01). ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323 and the accounting for certain forward contracts and purchased options in Topic 815. The Company adopted ASU 2020-01 as of January 1, 2021, which did not have a material impact on the Consolidated Financial Statements.
ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (Topic 740). The ASU intends to simplify various aspects related to accounting for income taxes and removes certain exceptions to the general principles in Topic 740. Additionally, the ASU clarifies and amends existing guidance to improve consistent application of its requirements. The Company adopted ASU 2019-12 as of January 1, 2021, which did not have a material impact on the Company's Consolidated Financial Statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
ASU 2016-13 and subsequent amendments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendments to the guidance: ASU 2018-19 in November 2018, ASU 2019-04 in April 2019, ASU 2019-05 in May 2019, ASU 2019-10 and -11 in November 2019 and ASU 2020-02 in February 2020. The amended standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash.
ASU 2019-10 amends the mandatory effective date for ASU 2016-13. As a result, ASU 2016-13 and related amendments are effective for fiscal years beginning after December 15, 2022 for entities that qualified as an SRC as of June 30, 2019, such as the Company. ASU 2016-13 and its amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. Early adoption is permitted. The Company is evaluating its alternatives with respect to the available accounting methods under ASU 2016-13, including the fair value option. If the fair value option is not utilized, adoption of ASU 2016-13 will increase the allowance for credit losses, with a resulting negative adjustment to retained earnings on the date of adoption. The Company deferred the adoption of ASU 2016-13 as permitted under ASU 2019-10. The Company is currently assessing the impact that adoption of ASU 2016-13 will have on its Consolidated Financial Statements.
ASU 2020-04 and subsequent amendments
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the upcoming market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by this reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities also can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The FASB also issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope in January 2021. It clarifies that certain optional expedients and exceptions in Topic 848 apply to derivatives that are affected by the discounting transition. The amendments in this ASU affect the guidance in ASU 2020-04 and are effective in the same timeframe as ASU 2020-04. The Company anticipates to transition applicable debt facilities from LIBOR to SOFR and currently does not expect the adoption of these ASUs to have a material impact on its Consolidated Financial Statements.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ASU 2021-08
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with ASC 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. While the Company is continuing to assess the timing of adoption and the potential impacts of ASU 2021-08, it does not expect ASU 2021-08 to have a material effect, if any, on its Consolidated Financial Statements.
NOTE 2 - REVENUE AND LOANS RECEIVABLE
Revenue
The following table summarizes revenue by product (in thousands):
Year Ended December 31,
2021 2020 2019
Revolving LOC $ 294,591 $ 249,502 $ 245,256
Unsecured Installment 290,321 339,116 530,730
Secured Installment 56,418 79,136 110,513
Single-Pay 102,405 120,433 191,449
Total Installment 449,144 538,685 832,692
Ancillary 74,108 59,209 63,849
Total revenue(1)
$ 817,843 $ 847,396 $ 1,141,797
(1) Includes revenue from CSO programs of $167.1 million, $185.5 million and $281.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Loans receivable, net of allowance for loan losses
The Company acquired Heights on December 27, 2021, which resulted in approximately $472 million of gross loans receivable as of December 31, 2021. As a result of purchase accounting adjustments and the timing of the acquisition, Heights did not contribute to ALL as of December 31, 2021. For additional information regarding the acquisition and related impacts to the results of operations, see Note 15, "Acquisitions."
The following tables summarize loans receivable by product and the related delinquent loans receivable (in thousands):
December 31, 2021
Revolving LOC Unsecured Installment Secured Installment Single-Pay(1)
Total Installment - Company Owned Total
Current loans receivable $ 843,379 $ 359,512 $ 110,232 $ 42,463 $ 512,207 $ 1,355,586
Delinquent loans receivable 70,734 98,174 23,824 - 121,998 192,732
Total loans receivable 914,113 457,686 134,056 42,463 634,205 1,548,318
Less: allowance for loan losses (68,140) (13,387) (3,327) (2,706) (19,420) (87,560)
Loans receivable, net $ 845,973 $ 444,299 $ 130,729 $ 39,757 $ 614,785 $ 1,460,758
(1) Of the $42.5 million of Single-Pay receivables, $11.3 million relate to mandated extended payment options for certain Canada Single-Pay loans.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
December 31, 2021
Revolving LOC Unsecured Installment Secured Installment Total Installment - Company Owned Total
Delinquent loans receivable
1-30 days past-due $ 35,657 $ 45,160 $ 13,213 $ 58,373 $ 94,030
31-60 days past-due 15,452 16,646 4,539 21,185 36,637
61-90 days past-due 13,397 13,933 3,213 17,146 30,543
91 + days past-due 6,228 22,435 2,859 25,294 31,522
Total delinquent loans receivable $ 70,734 $ 98,174 $ 23,824 $ 121,998 $ 192,732
December 31, 2020
Revolving LOC Unsecured Installment Secured Installment Single-Pay(1)
Total Installment - Company Owned Total
Current loans receivable $ 321,105 $ 78,235 $ 40,358 $ 43,780 $ 162,373 $ 483,478
Delinquent loans receivable 37,779 24,190 8,275 - 32,465 70,244
Total loans receivable 358,884 102,425 48,633 43,780 194,838 553,722
Less: allowance for loan losses (51,958) (24,073) (7,047) (3,084) (34,204) (86,162)
Loans receivable, net $ 306,926 $ 78,352 $ 41,586 $ 40,696 $ 160,634 $ 467,560
(1) Of the $43.8 million of Single-Pay receivables, $11.2 million relate to mandated extended payment options for certain Canada Single-Pay loans.
December 31, 2020
Revolving LOC Unsecured Installment Secured Installment Total Installment - Company Owned Total
Delinquent loans receivable
1-30 days past-due $ 17,517 $ 10,361 $ 3,764 $ 14,125 $ 31,642
31-60 days past-due 9,276 7,124 2,199 9,323 18,599
61-90 days past-due 8,597 6,167 1,971 8,138 16,735
91 + days past due 2,389 538 341 879 3,268
Total delinquent loans receivable $ 37,779 $ 24,190 $ 8,275 $ 32,465 $ 70,244
The following tables summarize loans Guaranteed by the Company under CSO programs and the related delinquent receivables (in thousands):
December 31, 2021
Unsecured Installment Secured Installment Total Installment - Guaranteed by the Company
Current loans receivable Guaranteed by the Company $ 37,303 $ 799 $ 38,102
Delinquent loans receivable Guaranteed by the Company 8,011 204 8,215
Total loans receivable Guaranteed by the Company 45,314 1,003 46,317
Less: Liability for losses on CSO lender-owned consumer loans (6,869) (39) (6,908)
Loans receivable Guaranteed by the Company, net $ 38,445 $ 964 $ 39,409
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
December 31, 2021
Unsecured Installment Secured Installment Total Installment - Guaranteed by the Company
Delinquent loans receivable
1-30 days past-due $ 6,633 $ 162 $ 6,795
31-60 days past-due 1,003 28 1,031
61-90 days past-due 277 8 285
91+ days past-due 98 6 104
Total delinquent loans receivable $ 8,011 $ 204 $ 8,215
December 31, 2020
Unsecured Installment Secured Installment Total Installment - Guaranteed by the Company
Current loans receivable guaranteed by the Company $ 37,096 $ 775 $ 37,871
Delinquent loans receivable guaranteed by the Company 6,079 155 6,234
Total loans receivable guaranteed by the Company 43,175 930 44,105
Less: Liability for losses on CSO lender-owned consumer loans (7,160) (68) (7,228)
Loans receivable guaranteed by the Company, net $ 36,015 $ 862 $ 36,877
December 31, 2020
Unsecured Installment Secured Installment Total Installment - Guaranteed by the Company
Delinquent loans receivable
0-30 days past-due $ 5,435 $ 103 $ 5,538
31-60 days past-due 490 37 527
61-90 days past-due 124 9 133
91+ days past-due 30 6 36
Total delinquent loans receivable $ 6,079 $ 155 $ 6,234
The following tables summarize activity in the ALL and the liability for losses on CSO lender-owned consumer loans in total (in thousands):
Year Ended December 31, 2021
Revolving LOC Unsecured Installment Secured Installment Single-Pay Total Installment Other Total
Allowance for loan losses:
Balance, beginning of period $ 51,958 $ 24,073 $ 7,047 $ 3,084 $ 34,204 $ - $ 86,162
Charge-offs (114,827) (77,123) (20,874) (93,737) (191,734) (3,911) (310,472)
Recoveries 29,454 21,815 9,329 76,003 107,147 1,810 138,411
Net charge-offs (85,373) (55,308) (11,545) (17,734) (84,587) (2,101) (172,061)
Provision for losses 102,457 44,584 7,825 17,357 69,766 2,101 174,324
Effect of foreign currency translation (902) 38 - (1) 37 - (865)
Balance, end of period $ 68,140 $ 13,387 $ 3,327 $ 2,706 $ 19,420 $ - $ 87,560
Liability for losses on CSO lender-owned consumer loans:
Balance, beginning of period $ - $ 7,160 $ 68 $ - $ 7,228 $ - $ 7,228
Increase in liability - (291) (29) - (320) - (320)
Balance, end of period $ - $ 6,869 $ 39 $ - $ 6,908 $ - $ 6,908
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Year Ended December 31, 2020
Revolving LOC Unsecured Installment Secured Installment Single-Pay Total Installment Other Total
Allowance for loan losses:
Balance, beginning of period $ 55,074 $ 35,587 $ 10,305 $ 5,869 $ 51,761 $ - $ 106,835
Charge-offs (129,664) (98,870) (37,243) (106,817) (242,930) (3,856) (376,450)
Recoveries 21,312 22,076 10,239 86,092 118,407 1,983 141,702
Net charge-offs (108,352) (76,794) (27,004) (20,725) (124,523) (1,873) (234,748)
Provision for losses 104,249 65,272 23,746 18,003 107,021 1,873 213,143
Effect of foreign currency translation 987 8 - (63) (55) - 932
Balance, end of period $ 51,958 $ 24,073 $ 7,047 $ 3,084 $ 34,204 $ - $ 86,162
Liability for losses on CSO lender-owned consumer loans:
Balance, beginning of period $ - $ 10,553 $ 70 $ - $ 10,623 $ - $ 10,623
Decrease in liability $ - (3,393) (2) $ - (3,395) $ - (3,395)
Balance, end of period $ - $ 7,160 $ 68 $ - $ 7,228 $ - $ 7,228
As of December 31, 2021, Revolving LOC and Installment loans classified as nonaccrual were $5.9 million and $41.4 million, respectively. As of December 31, 2020, Revolving LOC and Installment loans classified as nonaccrual were $4.4 million and $6.2 million, respectively. The Company considers nonaccrual loans in its estimate of the ALL as delinquencies are a primary input into the Company's allowance model.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TDR Loans Receivable
In certain circumstances, the Company modifies the terms of its loans receivable for borrowers. Under U.S. GAAP, a modification of loans receivable terms is considered a TDR if the borrower is experiencing financial difficulty and the Company grants a concession to the borrower it would not have otherwise granted under the terms of the original agreement. In response to COVID-19, in 2020 the Company established an enhanced Customer Care Program, which enables its team members to provide relief to customers in various ways, ranging from due date changes, interest or fee forgiveness, payment waivers or extended payment plans, depending on a customer’s individual circumstances. The Company modifies loans only if it believes the customer has the ability to pay under the restructured terms. The Company continues to accrue and collect interest on these loans in accordance with the restructured terms.
The Company records its ALL related to TDRs by discounting the estimated cash flows associated with the respective TDR at the effective interest rate immediately after the loan modification and records any difference between the discounted cash flows and the carrying value as an allowance adjustment. A loan that has been classified as a TDR remains so classified until the loan is paid off or charged off. A TDR is charged off consistent with the Company's policies for the related loan product. For additional information on the Company's loss recognition policy, see Note 1, "Significant Accounting Policies and Nature of Operations".
The table below presents TDRs, which are related to the Customer Care Program the Company implemented in response to COVID-19, included in gross loans receivable and the impairment included in the ALL (in thousands):
As of
December 31, 2021
As of
December 31, 2020
Current TDR gross receivables $ 11,580 $ 13,563
Delinquent TDR gross receivables 5,066 6,309
Total TDR gross receivables 16,646 19,872
Less: Impairment included in the allowance for loan losses (3,632) (3,482)
Less: Additional allowance (2,212) (4,497)
Outstanding TDR receivables, net of impairment $ 10,802 $ 11,893
The tables below reflect new loans modified and classified as TDRs during the periods presented (in thousands):
Year Ended December 31, 2021 Year Ended December 31, 2020
Pre-modification TDR loans receivable $ 16,255 $ 38,930
Post-modification TDR loans receivable 14,538 34,252
Total concessions included in gross charge-offs $ 1,717 $ 4,678
There were $14.0 million and $11.6 million of loans classified as TDRs that were charged off and included as a reduction in the ALL for the years ended December 31, 2021 and 2020, respectively. The Company had commitments to lend additional funds of approximately $2.1 million to customers with available and unfunded Revolving LOC loans classified as TDRs as of December 31, 2021.
The table below presents the Company's average outstanding TDR loans receivable, interest income recognized on TDR loans and number of TDR loans for the years ended December 31, 2021 and 2020 (dollars in thousands):
Year Ended December 31, 2021 Year Ended December 31, 2020
Average outstanding TDR loans receivable (1)
$ 18,259 $ 20,631
Interest income recognized 18,328 17,074
Number of TDR loans(2)
11,693 27,082
(1) For the year ended December 31, 2020, the average is calculated based on the amount immediately after the loan was classified as a TDR and the ending TDR balance as of December 31, 2020 as there were no TDRs prior to April 1, 2020.
(2) Presented in ones
There were no loans classified as TDRs during the year ended December 31, 2019.
NOTE 3 - CREDIT SERVICES ORGANIZATION
The CSO fee receivables were $5.2 million and $5.0 million at December 31, 2021 and December 31, 2020, respectively, and are reflected in "Prepaid expenses and other" in the Consolidated Balance Sheets. The Company bears the risk of loss through
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
its guarantee to purchase customer loans that are charged-off. The terms of these loans range up to six months. See Note 1, "Significant Accounting Policies and Nature of Operations" for further details of the Company's accounting policy.
As of December 31, 2021 and December 31, 2020, the incremental maximum amount payable under all such guarantees was $38.4 million and $36.6 million, respectively. This liability is not included in the Company's Consolidated Balance Sheets. If the Company is required to pay any portion of the total amount of the loans it has guaranteed, it will attempt to recover the entire amount or a portion from the applicable customers. The Company holds no collateral in respect to the guarantees. The Company estimates a liability for losses associated with the guaranty provided to the CSO lenders, which was $6.9 million and $7.2 million at December 31, 2021 and December 31, 2020, respectively. This liability is reflected in "Liability for losses on CSO lender-owned consumer loans" in the Consolidated Balance Sheets.
The Company placed $5.5 million in collateral accounts for the benefit of lenders for both years ended December 31, 2021 and December 31, 2020, which is reflected in "Prepaid expenses and other" in the Consolidated Balance Sheets. The balances required to be maintained in these collateral accounts vary by lender, typically based on a percentage of the outstanding loan balances held by the lender. The percentage of outstanding loan balances required for collateral is negotiated between the Company and each lender.
Deferred revenue associated with the CSO program was immaterial for the years ended December 31, 2021 and 2020, during which there were no costs to obtain or costs to fulfill capitalized loans under the program. See Note 2, "Loans Receivable and Revenue" for additional information related to loan balances and the revenue recognized under the program.
NOTE 4 - VARIABLE INTEREST ENTITIES
As of December 31, 2021, the Company had five credit facilities, compared to two credit facilities as of December 31, 2020, whereby certain loans receivables were sold to wholly-owned VIEs to collateralize debt incurred under each facility. See Note 7, "Debt" for additional details on each facility.
The Company has determined that it is the primary beneficiary of the VIEs and thus is required to consolidate them. The Company includes the assets and liabilities related to the VIEs in the Consolidated Financial Statements.
The carrying amounts of consolidated VIEs' assets and liabilities were as follows (in thousands):
December 31, 2021 December 31, 2020
Assets
Restricted cash $ 57,155 $ 31,994
Loans receivable less allowance for loan losses 1,228,088 306,302
Intercompany receivable(1)
48,333 15,382
Prepaid expenses and other - 388
Deferred tax assets - 105
Total Assets $ 1,333,576 $ 354,171
Liabilities
Accounts payable and accrued liabilities $ 9,886 $ 34,055
Deferred revenue 106 136
Deferred tax liability 269 -
Accrued interest 3,279 1,147
Debt 965,072 139,661
Total Liabilities $ 978,612 $ 174,999
(1) Intercompany receivable and payable VIE balances eliminate upon consolidation.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 5 - GOODWILL AND INTANGIBLES
Goodwill
The Goodwill balance includes no accumulated impairment. The change in the carrying amount of Goodwill by operating segment, known as reporting unit for goodwill testing purposes, for the years ended December 31, 2021 and 2020, was as follows (in thousands):
U.S. Canada Direct Lending Canada POS Lending Total
Goodwill at December 31, 2019 $ 91,131 $ 29,478 $ - $ 120,609
Acquisition (Note 15) 14,791 - - 14,791
Foreign currency translation - 691 - 691
Goodwill at December 31, 2020 105,922 30,169 - 136,091
Acquisition (Note 15) 253,857 - 44,901 298,758
Foreign currency translation - (64) (515) (579)
Measurement period adjustment - - (4,478) (4,478)
Goodwill at December 31, 2021 $ 359,779 $ 30,105 $ 39,908 $ 429,792
The Company tests goodwill at least annually for potential impairment, as of October 1, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The indicators include, among others, declines in sales, earning or cash flows or the development of a material adverse change in business climate. The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a reporting unit. See Note 1, "Summary of Significant Accounting Policies and Nature of Operations" for additional information on the Company's policy for assessing goodwill for impairment.
During the fourth quarter of 2021, the Company performed a qualitative assessment for the U.S., Canada Direct Lending and Canada POS Lending reporting units. Management concluded that the estimated fair values of these three reporting units were greater than their respective carrying values. As such, no further analysis was required for these reporting units. The qualitative assessment for the U.S. excluded Heights as it was acquired on December 27, 2021.
During the fourth quarter of 2020, the Company performed a quantitative assessment for the U.S. and Canada Direct Lending reporting units. Management concluded that the estimated fair values of these two reporting units were greater than their respective carrying values. As such, no further analysis was required for these reporting units.
Flexiti Acquisition
The Company completed the acquisition of Flexiti on March 10, 2021, resulting in $39.9 million of goodwill as of December 31, 2021, based on the excess of the purchase price of the business combination over the fair value of the acquired net assets. Goodwill of $39.9 million was net of $4.5 million adjustments upon the conclusion of the measurement period, and $0.5 million of foreign currency translation impact as of December 31, 2021. See Note 15, "Acquisitions" for more information related to the business combination.
Heights Acquisition
The Company completed the acquisition of Heights on December 31, 2021. Provisional goodwill was estimated at $253.9 million, based on the preliminary valuation. See Note 15, "Acquisitions" for more information related to the business combination.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Intangibles
Identifiable intangible assets consisted of the following:
December 31, 2021 December 31, 2020
Weighted-Average Remaining Life (Years) Gross
Carrying
Amount Accumulated
Amortization Net Gross
Carrying
Amount Accumulated
Amortization Net
Assets not subject to amortization
Trade name - $ 22,832 $ - $ 22,832 $ 22,881 $ - $ 22,881
Assets subject to amortization
Merchant relationships 4.3 19,459 (3,151) 16,308 - - -
Customer relationships 2.8 20,285 (10,295) 9,990 9,782 (9,249) 533
Computer software(1)
5.2 81,844 (25,453) 56,391 33,186 (16,386) 16,800
Trade name 9.8 4,621 (212) 4,409 321 (110) 211
Balance, end of year $ 149,041 $ (39,111) $ 109,930 $ 66,170 $ (25,745) $ 40,425
(1) Includes internally developed software, of $44.7 million and $8.2 million, net, as of December 31, 2021 and 2020, respectfully.
The Company's identifiable intangible assets are amortized using the straight-line method over the estimated remaining useful lives, except for the Cash Money trade name intangible asset that has a carrying amount of $22.8 million, which was determined to have an indefinite life and is not amortized. The estimated useful lives for the Company's other intangible assets range from 1 to 10 years. Aggregate amortization expense related to identifiable intangible assets was $13.8 million, $3.0 million and $2.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The following table outlines the estimated future amortization expense related to intangible assets held at December 31, 2021 for each of the following five fiscal years (in thousands):
Year Ending December 31,
2022 $ 19,231
2023 18,457
2024 16,396
2025 12,555
2026 4,328
NOTE 6 - FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company is required to use valuation techniques that are consistent with the market approach, income approach and/or cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability based on observable market data obtained from independent sources, or unobservable, meaning those that reflect the Company's own judgement about the assumptions market participants would use in pricing the asset or liability based on the best information available for the specific circumstances. Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are listed below.
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has access to at the measurement date.
Level 2 - Inputs include quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs reflecting the Company's own judgments about the assumptions market participants would use in pricing the asset or liability as a result of limited market data. The Company develops these inputs based on the best information available, including its own data.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Financial Assets and Liabilities Carried at Fair Value
The table below presents the assets and liabilities that were carried at fair value on the Consolidated Balance Sheets at December 31, 2021 (in thousands):
Estimated Fair Value
Carrying Value December 31,
2021 Level 1 Level 2 Level 3 Total
Financial assets:
Cash Surrender Value of Life Insurance $ 8,242 $ 8,242 $ - $ - $ 8,242
Financial liabilities:
Non-qualified deferred compensation plan $ 5,109 $ 5,109 $ - $ - $ 5,109
Contingent consideration related to acquisition $ 26,508 $ - $ - $ 26,508 $ 26,508
Contingent consideration related to acquisition
In connection with the acquisition of Flexiti during the first quarter of 2021, the Company recorded a liability for contingent consideration based on the achievement of revenue less NCOs and loan origination targets over the two years following closing of the acquisition that could result in additional cash consideration up to $32.8 million to Flexiti's former stockholders. The fair value of the liability is estimated using the option-based income approach using a Monte Carlo simulation model discounted back to the reporting date. The significant unobservable inputs (Level 3) used to estimate the fair value included the expected future tax benefits associated with the acquisition, the probability that the risk adjusted-revenue and origination targets will be achieved and discount rates. The contingent consideration measured at fair value using unobservable inputs increased from the initial measurement of $20.6 million as of March 31, 2021 to $26.5 million as of December 31, 2021. For additional information on Flexiti and the related contingent consideration, refer to Note 15, "Acquisitions."
Cash Surrender Value of Life Insurance and Non-qualified deferred compensation plan
The cash surrender value of life insurance is included in “Other assets” in the Company’s Consolidated Balance Sheets. The non-qualified deferred compensation plan liability is included in “Accounts payable and accrued liabilities” in the Company’s Consolidated Balance Sheets.
The table below presents the assets and liabilities that were carried at fair value on the Consolidated Balance Sheets at December 31, 2020 (in thousands):
Estimated Fair Value
Carrying Value December 31,
2020 Level 1 Level 2 Level 3 Total
Financial assets:
Cash Surrender Value of Life Insurance $ 7,140 $ 7,140 $ - $ - $ 7,140
Financial liabilities:
Non-qualified deferred compensation plan $ 4,690 $ 4,690 $ - $ - $ 4,690
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Financial Assets and Liabilities Not Carried at Fair Value
The table below presents the assets and liabilities that were not carried at fair value on the Consolidated Balance Sheets at December 31, 2021 (in thousands).
Estimated Fair Value
Carrying Value December 31,
2021 Level 1 Level 2 Level 3 Total
Financial assets:
Cash and cash equivalents $ 63,179 $ 63,179 $ - $ - $ 63,179
Restricted cash 98,896 98,896 - - 98,896
Loans receivable, net 1,460,758 - - 1,460,758 1,460,758
Financial liabilities:
Liability for losses on CSO lender-owned consumer loans $ 6,908 $ - $ - $ 6,908 $ 6,908
7.50% Senior Secured Notes
980,721 - 1,005,700 - 1,005,700
U.S. SPV 45,392 - - 49,456 49,456
Canada SPV 157,813 - - 160,533 160,533
Flexiti SPE 172,739 - - 176,625 176,625
Flexiti Securitization 239,128 - - 242,886 242,886
Heights SPV 350,000 - - 350,000 350,000
The table below presents the assets and liabilities that were not carried at fair value on the Consolidated Balance Sheets at December 31, 2020 (in thousands).
Estimated Fair Value
Carrying Value December 31,
2020 Level 1 Level 2 Level 3 Total
Financial assets:
Cash and cash equivalents $ 213,343 $ 213,343 $ - $ - $ 213,343
Restricted cash 54,765 54,765 - - 54,765
Loans receivable, net 467,560 - - 467,560 467,560
Financial liabilities:
Liability for losses on CSO lender-owned consumer loans $ 7,228 $ - $ - $ 7,228 $ 7,228
8.25% Senior Secured Notes
680,000 - 646,000 - 646,000
U.S. SPV 43,586 - - 49,456 49,456
Canada SPV 96,075 - - 97,971 97,971
Loans Receivable, Net
Loans receivable are carried on the Consolidated Balance Sheets net of the ALL. The unobservable inputs used to calculate the carrying values include quantitative factors, such as current default trends. Also considered in evaluating the accuracy of the models are changes to the loan portfolio mix, the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. The carrying value of Loans receivable, net approximates their fair value. Refer to Note 2, "Loans Receivable and Revenue" for additional information. Loans receivable, net of unamortized fair value discount and ALL, associated with the Flexiti and Heights acquisitions represent $437.0 million and approximately $472 million of the $1,460.8 million as of December 31, 2021.
CSO Program
In connection with CSO programs, the Company guarantees consumer loan payment obligations to unrelated third-party lenders for loans that the Company arranges for consumers on the third-party lenders’ behalf. The Company is required to purchase from the lender charged-off loans that it has guaranteed. Refer to Note 2, "Loans Receivable and Revenue" and Note 3, "Credit Services Organization" for additional information.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
7.50% Senior Secured Notes, 8.25% Senior Secured Notes, U.S. SPV, Canada SPV, Flexiti SPE, Flexiti Securitization and Heights SPV
The fair value disclosure for the 7.50% Senior Secured Notes as of December 31, 2021 and 8.25% Senior Secured Notes as of December 31, 2020 were based on observable market trading data. The fair values of the U.S. SPV, Canada SPV, Flexiti SPE, Flexiti Securitization and Heights SPV were based on the cash needed for their respective final settlements.
Investment in Katapult
The table below presents the Company's investment in Katapult (in thousands):
Equity Method Investment Measurement Alternative (1)
Total Investment in Katapult
Balance at December 31, 2019 $ 10,068 $ - $ 10,068
Equity method (loss) - Q1 2020 (1,618) - (1,618)
Balance at March 31, 2020 8,450 - 8,450
Equity method income - Q2 2020 741 - 741
Balance at June 30, 2020 9,191 - 9,191
Equity method income - Q3 2020 3,530 - 3,530
Accounting policy change for certain securities from equity method investment to measurement alternative (12,452) 12,452 -
Purchases of common stock warrants and preferred shares 4,030 7,157 11,187
Balance at September 30, 2020 4,299 19,609 23,908
Equity method income - Q4 2020 1,893 - 1,893
Purchases of common stock 1,570 - 1,570
Balance at December 31, 2020 7,762 19,609 27,371
Equity method income - Q1 2021 546 - 546
Balance at March 31, 2021 8,308 19,609 27,917
Equity method income - Q2 2021 1,712 - 1,712
Conversion of investment(2)
6,481 (19,609) (13,128)
Balance at June 30, 2021 16,501 - 16,501
Equity method loss - Q3 2021 (1,582) - (1,582)
Balance at September 30, 2021 14,919 - 14,919
Equity method income - Q4 2021 2,982 - 2,982
Purchases of common stock 9,999 - 9,999
Balance at December 31, 2021 $ 27,900 $ - $ 27,900
Classification as of December 31, 2020 Level 3, not carried at fair value Level 3, carried at measurement alternative
Classification as of December 31, 2021 Level 3, not carried at fair value N/A
(1) The Company elected to measure this equity security without a readily determinable fair value equal to its cost minus impairment. If the Company identifies an observable price change in orderly transactions for the same or similar investment in Katapult, it will measure the equity security at fair value as of the date that the observable transaction occurred.
(2) On June 9, 2021, Katapult completed its merger with FinServ. Immediately prior to the merger, the Company first converted all of its preferred stock and exercised all common stock warrants, and then exchanged all shares of Katapult common stock for $146.9 million in cash and 18.9 million shares of common stock in the resulting public company, Katapult (NASDAQ: KPLT). The Company's entire investment in Katapult is now accounted for under the equity method of accounting. The Company recorded a related net gain of $135.4 million on its equity method investment in Katapult, based on the pro rata cost basis of the investment and the discharge of the guarantee provided during the year ended December 31, 2021.
Prior to September 2020, the Company owned 42.5% of the outstanding shares (excluding unexercised options) of Katapult. These shares were comprised of multiple classes of equity including preferred stock and certain common stock warrants, which met the accounting criteria for in-substance common stock at the time of acquisition. This financial asset was not carried at fair value. The Company accounted for this investment under the equity method and recognized a proportionate share of Katapult’s income or loss on a two-month lag.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In September 2020, the Company acquired common stock warrants and preferred shares of Katapult from existing shareholders for $11.2 million in cash. This transaction resulted in the reevaluation of the accounting for all of the Company’s holdings in Katapult. The Company determined that its holdings of certain common stock warrants qualified as in-substance common stock and were required to be accounted for using the equity method. The Company’s holdings in preferred stock and certain other common stock warrants did not meet the criteria for in-substance common stock and therefore are carried at cost minus impairment under the measurement alternative. As a result, the Company (i) reclassified $12.5 million from an equity method investment to cost minus impairment under the measurement alternative, (ii) recorded a purchase of common stock warrants for $4.0 million determined to be in-substance common stock within its equity method investment and (iii) recorded a purchase of preferred stock for $7.2 million that was accounted for under the measurement alternative.
In October and November 2020, the Company acquired common stock of Katapult from existing shareholders for an aggregate $1.6 million. The Company recorded this purchase within its equity method investment.
During the first quarter of 2021, the Company changed the two-month reporting lag to a one-quarter reporting lag, as discussed in Note 1, "Summary of Significant Accounting Policies and Nature of Operations." The Company recorded earnings of $3.7 million for the year ended December 31, 2021, based on its share of Katapult’s earnings for the respective period.
On June 9, 2021, Katapult completed its merger with FinServ. As a result, the Company received $146.9 million in cash and 18.9 million shares of common stock of the resulting public company, Katapult (NASDAQ: KPLT), which were subject to a six-month trading restriction and expired during December 2021. The Company recorded a related net gain of $135.4 million on its equity method investment in Katapult during the year ended December 31, 2021. Additionally, as part of the merger, CURO received 3.0 million earn-out warrants and holds two of the eight board of director seats for Katapult. For further information regarding the merger between Katapult and FinServ and its impact on CURO, refer to the description immediately following the table above.
During the fourth quarter of 2021, the Company purchased an additional 2.6 million shares of common stock of Katapult for an aggregate purchase price of $10.0 million.
Both the equity method investment and the previously recognized investment measured at cost minus impairment are presented within "Investments in Katapult" on the Consolidated Balance Sheets.
The Company's total ownership of Katapult's shares, on a fully diluted basis assuming full pay-out of earn-out shares, was 25.2% as of December 31, 2021.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 7 - DEBT
LIBOR is expected to no longer be available after June 30, 2023. Certain of the Company's debt facilities, including the U.S. SPV, Senior Revolver and Heights SPV, contain customary provisions to provide for replacement of LIBOR with an alternative benchmark rate when LIBOR ceases to be available. The Company anticipates converting these facilities from LIBOR to SOFR, and currently does not expect the transition to have a material impact on its Consolidated Financial Statements. Refer to Note 1, "Summary of Significant Accounting Policies and Nature of Operations" for additional details on the transition from LIBOR.
The Company's debt instruments and balances outstanding as of December 31, 2021 and 2020, including maturity date, effective interest rate and borrowing capacity were as follows (dollars in thousands):
Effective interest rate Outstanding as of
Maturity Date Borrowing Capacity December 31, 2021 December 31, 2020
Corporate Debt:
7.50% Senior Secured Notes
August 1, 2028 7.50 % $ 1,000,000 $ -
8.25% Senior Secured Notes (2)
September 1, 2025 8.25 % - 690,000
Total corporate debt 1,000,000 690,000
Funding Debt:
U.S. SPV April 8, 2024 1-Mo LIBOR + 6.25%
$200.0 million
$ 49,456 $ 49,456
Canada SPV (1)
August 2, 2026 3-Mo CDOR + 6.00%
C$350.0 million
160,533 97,971
Cash Money Revolving Credit Facility (1)
On-demand Canada Prime Rate + 1.95%
C$10.0 million
- -
Flexiti SPE (1)
March 10, 2024 3-Mo CDOR + 4.40%
C$500.0 million
176,625 -
Flexiti Securitization (1)
December 9, 2025 1-Mo CDOR + 3.59%
C$526.5 million
242,886 -
Heights SPV December 31, 2024 1-Mo LIBOR + 5.25%
$350.0 million
350,000 -
Senior Revolver June 30, 2022 1-Mo LIBOR + 5.00%
$50.0 million
- -
Total funding debt $ 979,500 $ 147,427
Less: debt issuance costs (33,707) (17,766)
Total Debt $ 1,945,793 $ 819,661
(1) Capacity amounts are denominated in Canadian dollars, while outstanding balances as of December 31, 2021 and 2020 are denominated in U.S. dollars.
(2) The 8.25% Senior Secured Notes were extinguished in July 2021.
Corporate Debt
7.50% Senior Secured Notes
In July 2021, the Company issued $750.0 million of 7.50% Senior Secured Notes which mature on August 1, 2028. Interest on the notes is payable semiannually, in arrears, on February 1 and August 1. In December, 2021, we issued an additional $250.0 million of 7.50% Senior Secured Notes to fund the acquisition of Heights. Refer to Note 15, "Acquisitions" for additional details. In connection with the 7.50% Senior Secured Notes, financing costs of $19.3 million were capitalized, net of amortization, and included in the Consolidated Balance Sheets as a component of "Debt." These costs are amortized over the term of the 7.50% Senior Secured Notes as a component of interest expense.
8.25% Senior Secured Notes
In August 2018, the Company issued $690.0 million of 8.25% Senior Secured Notes maturing on September 1, 2025. In connection with the 8.25% Senior Secured Notes, the Company capitalized financing costs of $13.9 million, which were being amortized as a component of interest expense over its term.
During the third quarter of 2021, the 8.25% Senior Secured Notes were extinguished using proceeds from the 7.50% Senior Secured Notes described above. The early extinguishment of the 8.25% Senior Secured Notes resulted in related costs of $40.2 million.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Funding Debt
As of December 31, 2021, the Company had five credit facilities whereby certain loans receivables were sold to wholly-owned VIEs to collateralize debt incurred under each facility. These facilities are the (i) U.S. SPV, (ii) Canada SPV, (iii) Flexiti SPE, (iv) Flexiti Securitization and (v) Heights SPV. For further information on these facilities, refer to Note 4, "Variable Interest Entities".
U.S. SPV
In April 2020, CURO Receivables Finance II, LLC, a wholly-owned subsidiary of the Company, entered into the U.S. SPV. As of December 31, 2021, the U.S. SPV provided for $200.0 million of borrowing capacity.
As of December 31, 2021, the effective interest rate on the Company's borrowings was one-month LIBOR plus 6.25%. The borrower pays the lenders a monthly commitment fee at an annual rate of 0.50% on the unused portion of the commitments. The U.S. SPV matures on April 8, 2024.
Canada SPV
In August 2018, CURO Canada Receivables Limited Partnership, a wholly-owned subsidiary of the Company, entered into the Canada SPV. During the fourth quarter of 2021, the Company amended the existing credit facility in order to, among other things, extend the borrowing capacity from C$175.0 million to C$350.0 million, (ii) reduce borrowing costs, and (iii) extend the initial maturity date by three years to August 2026. As of December 31, 2021, the effective interest rate was three-month CDOR plus 6.00%. The borrower also pays a 0.50% per annum commitment fee on the unused portion of the commitments. The Canada SPV matures on August 2, 2026.
Flexiti SPE
In March 2021, concurrent with the acquisition of Flexiti, Flexiti Financing SPE Corp., a wholly-owned Canadian subsidiary of the Company, refinanced and increased its Flexiti SPE to C$500.0 million, with a maturity on March 10, 2024. As of December 31, 2021, the effective interest rate was three-month CDOR plus 4.40%. The borrower also pays a 0.50% to 1.00% per annum commitment fee on the unused portion of the commitments.
Flexiti Securitization
In December 2021, Flexiti Securitization Limited Partnership, a wholly-owned Canadian subsidiary of the Company, entered into the Flexiti Securitization. The facility provides for C$526.5 million of borrowing capacity, with maturity on December 9, 2025. As of December 31, 2021, the effective interest was one-month CDOR plus 3.59%. The borrower also pays a 0.45% per annum commitment fee on the unused portion of the commitments.
Heights SPV
In December 2021, the Company acquired Heights, including the Heights SPV. Heights entered into the Heights SPV in December 2019 with a total revolving commitment of $350.0 million. The interest rate on the facility is one-month LIBOR plus 5.25%.
Senior Revolver
The Company maintains the Senior Revolver that provides $50.0 million of borrowing capacity, including up to $5.0 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The current term expires June 30, 2022. The Senior Revolver accrues interest at one-month LIBOR plus 5.00%. The Senior Revolver is syndicated among four banks.
The Senior Revolver is guaranteed by all subsidiaries that guarantee the 7.50% Senior Secured Notes, and is secured by a lien on substantially all assets of CURO and the guarantor subsidiaries that are senior to the lien securing the 7.50% Senior Secured Notes.
The revolver was undrawn at December 31, 2021.
Cash Money Revolving Credit Facility
CURO Canada maintains the Cash Money Revolving Credit Facility, a C$10.0 million revolving credit facility, which provides short-term liquidity for the Company's Canadian direct lending operations. As of December 31, 2021, the borrowing capacity under the Cash Money Revolving Credit Facility, was C$9.9 million, net of C$0.1 million in outstanding stand-by-letters of credit.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Cash Money Revolving Credit Facility is collateralized by substantially all of CURO Canada’s assets and contains various covenants that require, among other things, that the aggregate borrowings outstanding under the facility not exceed the borrowing base, as well as restrictions on the encumbrance of assets and the creation of indebtedness. Borrowings under the Cash Money Revolving Credit Facility bear interest per annum at the prime rate of a Canadian chartered bank plus 1.95%.
The Cash Money Revolving Credit Facility was undrawn at December 31, 2021.
Ranking and Guarantees
The 7.50% Senior Secured Notes rank senior in right of payment to all of the Company's and the Company's guarantor entities’ existing and future subordinated indebtedness and equal in right of payment with all of the Company's and the Company's guarantor entities’ existing and future senior indebtedness, including borrowings under revolving credit facilities. Pursuant to the Inter-creditor Agreement, these notes and the guarantees will be effectively subordinated to credit facilities and certain other indebtedness to the extent of the value of the assets securing such indebtedness and to liabilities of subsidiaries that are not guarantors.
The 7.50% Senior Secured Notes are secured by liens on substantially all of the Company's and the guarantors’ assets, subject to certain exceptions. At any time prior to August 1, 2024, the Company may redeem (i) up to 40% of the aggregate principal amount of the notes at a price equal to 107.5% of the principal amount, plus accrued and unpaid interest, if any, to the applicable redemption date with the net proceeds to the Company of certain equity offerings; and (ii) some or all of the notes at a make-whole price. On or after August 1, 2024, the Company may redeem some or all of the Notes at a premium that will decrease over time, plus accrued and unpaid interest, if any, to the applicable date of redemption. The redemption price for the notes if redeemed during the 12 months beginning (i) August 1, 2024 is 103.8%, (ii) August 1, 2025 is 101.9% and (iii) on or after August 1, 2026 is 100.0%.
Future Maturities of Debt
Annual maturities of outstanding debt for each of the five years after December 31, 2021 are as follows (in thousands):
Amount
2022 $ -
2023 359,280
2024 237,042
2025 289,534
2026 93,644
Thereafter 1,000,000
Debt (before deferred financing costs and discounts) 1,979,500
Less: deferred financing costs and discounts 33,707
Debt, net $ 1,945,793
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Securities Litigation and Enforcement
In 2018, a putative securities fraud class action lawsuit was filed against the Company and certain of its officers and directors and other related parties in the United States District Court for the District of Kansas, captioned Yellowdog Partners, LP v. CURO Group Holdings Corp., Donald F. Gayhardt, William Baker and Roger W. Dean, Civil Action No. 18-2662 (the "Yellowdog Action"). The suit alleged the Company made misleading statements and omitted material information regarding the Company's efforts to transition the Canadian inventory of products from Installment loans to Revolving LOC loans.
In December 2020, the Court granted final approval of the $9.0 million settlement and dismissed the case with prejudice. The Company's directors' and officers' insurance policy required the Company to pay the first $2.5 million in fees and settlement and the insurance carriers paid the remaining amounts. For the year ended December 31, 2021 there was no further expense related to the litigation.
In June and July 2020, three shareholder derivative lawsuits were filed in the United States District Court for the District of Delaware against the Company, certain of its directors and officers, and in two of the three lawsuits, a large stockholder. Plaintiffs generally allege the same underlying facts of the Yellowdog Action. In July 2021, the derivative lawsuits were voluntarily dismissed and Plaintiffs refiled two cases in the United States District Court for the District of Kansas. While the Company is vigorously contesting these derivative lawsuits, it cannot determine the timing or nature of their ultimate resolution. The Company does not expect that these derivative lawsuits will have a material adverse impact on the Company's results of operations or financial condition.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
City of Austin
The Company was cited in July 2016 by the City of Austin, Texas for alleged violations of an Austin ordinance addressing products offered by CSOs, which regulates aspects of products offered under the Company's CAB program. The Company believes that: (i) the Austin ordinance (similar to its counterparts elsewhere in Texas) conflicts with Texas state law and (ii) in any event, the Company's product complies with this ordinance, when the ordinance is properly construed. In 2017, the Austin Municipal Court agreed with the Company's position that this ordinance conflicts with Texas law and, accordingly, did not address the second argument. In September 2017, the Travis County Court reversed the Municipal Court’s decision and remanded the case for further proceedings. To date, a hearing and trial on the merits have not been scheduled.
In May 2020, the City of Austin proposed a second ordinance that became effective June 1, 2020 and implemented restrictions on CSO transactions and revised certain definitions included in the original Austin ordinance. These revisions potentially affect the foundation upon which the Company's previous arguments in municipal court were based.
In June 2021, the Company launched a new product in the City of Austin to adhere to the updated ordinance. The City commenced audits of the new product in January 2022. The City advised that additional audits will be performed in the coming months to ensure full compliance, which would ultimately result in a resolution of all outstanding matters.
On January 27, 2021, the City of Dallas adopted an ordinance identical to the second ordinance in the City of Austin.
Given the change the Company has made in its products in response to these ordinances, the Company does not anticipate that the CAB program’s past operations will result in material monetary liability in Austin or elsewhere in Texas at this time.
Delisle and Kato Class Action Lawsuits
In August of 2018, a putative class action lawsuit, Delisle v. Speedy Cash, was filed against Speedy Cash, a wholly-owned subsidiary of the Company, in the Southern District of California. The complaint alleged that Speedy Cash charged unconscionable interest rates on loans of $2,500 or above, in violation of consumer protection statutes, and sought restitution and public injunctive relief. On July 2, 2021, the California District Court granted the parties’ Stipulation of Dismissal and Joint Motion to dismiss the Delisle matter, with prejudice as to plaintiffs’ individual claims and without prejudice as to the claims of the putative class members.
On September 3, 2021, a putative class action lawsuit, Kato v. Speedy Cash, was filed against Speedy Cash in the Superior Court of Los Angeles County, alleging similar facts as in Delisle, which were removed to the United States District Court for the Central District of California on October 14, 2021. On December 2, 2021, the California District Court granted the parties’ Stipulation of Dismissal and Joint Motion to dismiss the Kato matter, with prejudice as to plaintiffs’ individual claims and without prejudice as to the claims of the putative class members.
Both matters were settled for an immaterial amount.
Other Legal Matters
The Company is a defendant in certain other litigation matters encountered from time-to-time in the ordinary course of business, some of which may be covered to an extent by insurance. While it is difficult to predict the outcome of any particular proceeding, the Company does not believe the result of any of these matters will have a material adverse effect on the Company's business, results of operations or financial condition.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 9 - INCOME TAXES
Income before taxes and income tax expense (benefit) was comprised of the following (in thousands):
Year Ended December 31,
2021 2020 2019
Income before taxes:
U.S. $ 86,106 $ 59,741 $ 119,241
Non-U.S. (5,549) 20,602 23,214
Total income before taxes $ 80,557 $ 80,343 $ 142,455
Current tax provision (benefit)
Federal $ 21,549 $ (14,585) $ 3,160
State 4,553 5,959 395
Foreign 13,639 3,925 930
Total current provision (benefit) $ 39,741 $ (4,701) $ 4,485
Deferred tax provision (benefit)
Federal $ (5,022) $ 14,949 $ 22,978
State 154 (1,247) 5,145
Foreign (13,650) (3,106) 5,949
Total deferred tax provision (benefit) $ (18,518) $ 10,596 $ 34,072
Total provision for income taxes $ 21,223 $ 5,895 $ 38,557
Differences between the Company's effective income tax rate computed on net earnings or loss before income taxes and the statutory federal income tax rate were as follows (dollars in thousands):
Year Ended December 31,
2021 2020 2019
Income tax expense using the statutory federal rate in effect $ 16,917 $ 16,872 $ 29,916
Tax effect of:
Effects of foreign rates different than U.S. statutory rate 518 (1,236) (1,393)
State, local and provincial income taxes, net of federal benefit 3,359 6,619 8,959
Tax credits (802) (3,188) (138)
Nondeductible expenses 1,090 564 33
Valuation allowance (275) (2,686) 1,609
Share-based compensation (705) 1,119 150
Federal NOL carryback - (11,251) -
Prior year basis adjustment - (659) -
Change in fair value of contingent consideration 944 - -
Other 177 (259) (579)
Total provision for income taxes $ 21,223 $ 5,895 $ 38,557
Effective income tax rate 26.3 % 7.3 % 27.1 %
Statutory federal income tax rate 21.0 % 21.0 % 21.0 %
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic, which, among other things, allowed U.S. federal NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. In 2020, the Company recorded an income tax benefit of $11.3 million due to the differential in income tax rates related to the carryback of NOLs from tax years 2018 and 2019 to pre- 2017 Tax Act years.
The Company's major tax jurisdictions are U.S. federal jurisdiction, various state jurisdictions and Canada (including provinces). In the U.S., the tax years 2018 through 2020 remain open to examination by the taxing authorities as well as tax years 2013 through 2017 to the extent of refund claims resulting from 2018 and 2019 NOL carrybacks. The tax years 2016 through 2020 remain open to examination by the taxing authorities in Canada. As of December 31, 2021, the Company is under income tax examinations in the U.S. by the Internal Revenue Service of tax years 2018 and 2019, and in Canada by the Canadian Revenue Agency of tax years June 30, 2017 and 2018.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The total amount of gross unrecognized tax benefits was $0.3 million and $1.1 million at December 31, 2021 and 2020, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.3 million at December 31, 2021. The Company expects no material change related to its current positions in recorded unrecognized income tax benefit liability in the next 12 months.
The Company classifies interest and penalties related to income taxes as other expenses. The Company did not record any interest or penalties related to unrecognized tax benefits during each of the years ended December 31, 2021 and 2020.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
Year Ended December 31,
2021 2020
Balance at the beginning of year $ 1,100 $ -
Additions for tax positions related to prior years 125 960
Additions for tax positions related to the current year 125 140
Settlements with taxing authorities (1,100) -
Balance at end of year $ 250 $ 1,100
The sources of deferred income tax assets (liabilities) are summarized as follows (in thousands):
Year Ended December 31,
2021 2020
Deferred tax assets related to:
Accrued expenses and other reserves 2,960 1,264
Lease liability 26,777 31,025
Compensation accruals 5,845 5,828
Deferred revenue 204 303
State and provincial NOL carryforwards 15,547 4,653
Foreign NOL and capital loss carryforwards 17,090 4,047
Tax credit carryforwards 3,905 3,183
Gross deferred tax assets 72,328 50,303
Less: Valuation allowance (7,732) (5,695)
Net deferred tax assets $ 64,596 $ 44,608
Deferred tax liabilities related to:
Property and equipment $ (14,950) $ (11,601)
Right of use asset (25,304) (29,134)
Goodwill and other intangible assets (9,914) (6,824)
Prepaid expenses and other assets (466) (1,054)
Loans receivable (4,367) (7,016)
Gross deferred tax liabilities (55,001) (55,629)
Net deferred tax assets (liabilities) $ 9,595 $ (11,021)
Deferred tax assets and liabilities are included in the following line items in the Consolidated Balance Sheets (in thousands):
Year Ended December 31,
2021 2020
Deferred tax assets $ 15,639 $ -
Deferred tax liabilities (6,044) (11,021)
Net deferred tax assets (liabilities) $ 9,595 $ (11,021)
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
For the year ended December 31, 2020, the Company recorded a deferred tax asset of $3.0 million related to Foreign Tax Credit ("FTC") carryovers from prior years with a corresponding full valuation allowance, as the Company determined the FTC carryover will expire prior to utilization.
As of December 31, 2021, the Company had undistributed earnings of certain foreign subsidiaries of $230.7 million. The Company intends to reinvest its foreign earnings indefinitely in the non-U.S. operations and therefore have not provided for any non-U.S. withholding tax that would be assessed on dividend distributions. If the earnings of $230.7 million were distributed to the U.S., the Company would be subject to estimated Canadian withholding taxes of approximately $11.5 million. The determination of the U.S. state income taxes upon a potential foreign earnings distribution is impractical. In the event the earnings were distributed to the U.S., the Company would adjust its income tax provision for the period and would determine the amount of foreign tax credit that would be available.
A summary of the valuation allowance was as follows (in thousands):
Year Ended December 31,
2021 2020 2019
Balance at the beginning of year $ 5,695 $ 8,328 $ 6,996
(Decrease) increase to balance charged as expense (275) (2,686) 1,609
Increase to balance charged to opening balance sheet of the acquisition 1,873 - -
Increase (decrease) to balance charged to Other Comprehensive Income 392 (378) -
Effect of foreign currency translation 47 431 (277)
Balance at end of year $ 7,732 $ 5,695 $ 8,328
As of December 31, 2021, the Company's deferred tax assets from Canadian federal and provincial NOL carryforwards were approximately $26.9 million. The Canadian NOL carryforwards expire in varying amounts between 2034 and 2041. During the tax year ended December 31, 2020, the Company concluded that a planning strategy is prudent and feasible and that it will be implemented if needed to prevent Canadian NOLs from expiring. As such, the Company released a $4.6 million valuation allowance related to these NOLs and had no valuation allowance related to these NOLs as of December 31, 2020. Relying on this tax strategy for most of its Canadian NOLs, as of December 31, 2021, the Company had a small valuation allowance of $1.3 million for NOLs without a feasible tax planning strategy. As of December 31, 2021, the Company's deferred tax assets from Canadian capital losses were $1.9 million. These losses can be carried forward indefinitely, however, the Company does not have material sources of generating capital gains, therefore, a full valuation allowance has been recorded against these losses. As of December 31, 2021, the Company had state NOL carryforward deferred tax assets of $3.8 million. These carryforwards expire in varying amounts between 2022 and 2041. The Company has recorded a valuation allowance of $1.2 million related to the NOLs generated in states in which the Company may not have taxable income in the near future.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 10 - EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Year Ended December 31,
2021 2020 2019
Net income from continuing operations $ 59,334 $ 74,448 $ 103,898
Income from discontinued operations, net of tax - 1,285 7,590
Net income $ 59,334 $ 75,733 $ 111,488
Weighted average common shares - basic 41,155 40,886 44,685
Dilutive effect of stock options and restricted stock units 1,988 1,205 1,289
Weighted average common shares - diluted 43,143 42,091 45,974
Basic earnings per share:
Continuing operations $ 1.44 $ 1.82 $ 2.33
Discontinued operations - 0.03 0.17
Basic earnings per share $ 1.44 $ 1.85 $ 2.50
Diluted earnings per share:
Continuing operations $ 1.38 $ 1.77 $ 2.26
Discontinued operations - 0.03 0.17
Diluted earnings per share $ 1.38 $ 1.80 $ 2.43
Potential shares of common stock that would have the effect of increasing diluted earnings per share or decreasing diluted loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted earnings per share. For the years ended December 31, 2021, 2020 and 2019, there were 0.2 million, 0.8 million and 0.4 million of potential shares of common stock excluded from the calculation of Diluted earnings per share because their effect was anti-dilutive.
The Company utilizes the "control number" concept in the computation of diluted earnings per share to determine whether potential common stock instruments are dilutive. The control number used is income from continuing operations. The control number concept requires that the same number of potentially dilutive securities applied in computing diluted earnings per share from continuing operations be applied to all other categories of income or loss, regardless of their anti-dilutive effect on such categories.
NOTE 11 - SHARE-BASED COMPENSATION
The Company's 2017 Incentive Plan provides for the issuance of up to 5.0 million shares, subject to certain adjustments, which may be issued in the form of stock options, restricted stock awards, RSUs, stock appreciation rights, performance awards or other awards. Grants issued to date under the plan may be settled in or based on common stock. Awards may be granted to officers, employees, consultants and directors. The 2017 Incentive Plan provides that shares of common stock subject to awards granted become available for re-issuance if such awards expire, or are canceled, forfeited, settled in cash or otherwise terminated.
See Note 1, "Summary of Significant Accounting Policies and Nature of Operations" for additional information on share-based compensation.
Stock Options
Stock options are awards which allow the grantee to purchase shares of common stock at prices equal to the fair value at the date of grant. Stock options typically vest at a rate of 20% per year over a 5-year period, have a term of 10 years and are subject to limitations on transferability. The Company did not grant stock option awards under the 2017 Incentive Plan in 2021, 2020 or 2019.
At the time of grant, the Company uses the Black-Scholes option pricing model to determine the fair value of stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by individuals who receive equity awards, and subsequent events are not indicative of the reasonableness of the Company's original estimates of fair value. The Company has estimated the expected term of stock options using a formula considering the weighted average vesting term and the original contract term. The expected volatility is estimated based upon the historical volatility of publicly traded stocks
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
from the Company's industry sector (the alternative financial services sector). The expected risk-free interest rate is based on an average of various U.S. Treasury rates based on the expected term of the awards.
The following table summarizes the Company's stock option activity for the years ended December 31, 2021, 2020 and 2019:
Stock Options Weighted Average Exercise Price Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2019 1,445,332 $ 3.56 3.7 $ 8.6
Granted - $ - $ -
Exercised (40,014) $ 3.71 $ 0.3
Forfeited (696) $ 8.86 $ 4.07
Outstanding at December 31, 2019 1,404,622 $ 3.56 2.6 $ 12.1
Granted - $ - $ -
Exercised (274,510) $ 2.79 $ 3.2
Forfeited - $ - $ -
Outstanding at December 31, 2020 1,130,112 $ 3.74 2.6 $ 12.0
Granted - $ - $ -
Exercised (615,024) $ 2.83 $ 8.1
Forfeited - $ - $ -
Outstanding at December 31, 2021 515,088 $ 4.83 4.2 $ 5.8
Options exercisable at December 31, 2021 506,088 $ 4.76 4.2 $ 5.7
RSUs
As of December 31, 2021, the Company has granted three types of RSUs: time-based, market-based and, in connection with the Flexiti acquisition, performance-based.
Grants of time-based RSUs are valued at the date of grant based on the closing market price of the Company's common stock and are expensed using the straight-line method over the service period. Time-based RSUs typically vest over a three-year period.
Grants of market-based RSUs are valued using the Monte Carlo simulation pricing model. The market-based RSUs granted to date vest after three years if the Company's total stockholder return over the three-year performance period meets a specified target relative to other companies in its selected peer group. Expense recognition for the market-based RSUs occurs over the service period using the straight-line method.
Upon closing of the Flexiti acquisition in March 2021, the Company granted performance-based RSUs to certain Flexiti employees. Grants of performance-based RSUs are valued at the grant date based on the closing market price of the Company's common stock. The performance-based RSUs vest over two years if Flexiti achieves specified internal targets, including revenue less NCOs and loan originations metrics. Expense recognition for performance-based RSUs occurs ratably over the service period if it is probable that the targets will be achieved as of each period end. If such results are not probable, no share-based compensation expense is recognized and any previously recognized share-based compensation expense is reversed.
Unvested shares of RSUs generally are forfeited upon termination of employment, or failure to achieve the required performance condition, if applicable.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
A summary of the activity of time-based, market-based, and performance-based unvested RSUs for the years ended December 31, 2021, 2020 and 2019 are presented in the following table:
Number of RSUs Weighted Average
Grant Date Fair Value per Share
Time-Based Market-Based Performance-Based
January 1, 2019 1,060,350 - - $ 14.29
Granted 598,114 397,752 - $ 10.08
Vested (514,552) - - $ 14.21
Forfeited (82,159) (2,891) - $ 13.71
December 31, 2019 1,061,753 394,861 - $ 11.47
Granted 694,213 368,539 - $ 10.40
Vested (716,268) - - $ 12.86
Forfeited (26,906) (4,687) - $ 11.89
December 31, 2020 1,012,792 758,713 - $ 10.26
Granted 1,238,564 299,053 253,310 $ 15.51
Vested (494,790) - - $ 11.04
Forfeited (80,638) (51,032) - $ 11.46
December 31, 2021 1,675,928 1,006,734 253,310 $ 13.27
Share-based compensation expense, which includes compensation costs from stock options and RSUs, included in the Consolidated Statements of Operations as a component of "Salaries and benefits" is summarized in the following table (in thousands):
For the year ended,
2021 2020 2019
Pre-tax share-based compensation expense $ 13,976 $ 12,910 $ 10,323
Income tax benefit (4,475) (1,164) (2,632)
Total share-based compensation expense, net of tax $ 9,501 $ 11,746 $ 7,691
As of December 31, 2021, there was $23.2 million of unrecognized compensation cost related to stock options and RSUs. Total unrecognized compensation costs will be recognized over a weighted-average period of 1.9 years.
NOTE 12 - LEASES
The Company has operating leases for its corporate offices and its retail stores in certain U.S. states and Canadian provinces.
The following table summarizes the operating lease costs and other information for the years ended December 31, 2021, 2020 and 2019 (in thousands):
Year Ended December 31,
2021 2020 2019
Operating lease costs:
Third-Party
$ 31,197 $ 30,828 $ 30,479
Related-Party
3,394 3,386 3,464
Total operating lease costs(1)
$ 34,591 $ 34,214 $ 33,943
Cash paid for amounts included in the measurement of operating lease liabilities $ 36,235 $ 34,651 $ 34,864
ROU assets obtained $ 9,682 $ 18,847 $ 15,804
Weighted average remaining lease term - Operating leases 4.9 years 5.7 years 6.1 years
Weighted average discount rate - Operating leases 8.3 % 9.9 % 10.3 %
(1)Includes immaterial variable lease costs.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table summarizes the aggregate operating lease payments that the Company is contractually obligated to make under operating leases as of December 31, 2021 (in thousands):
Third-Party Related-Party Total
2022 $ 37,996 $ 3,578 $ 41,574
2023 31,604 1,332 32,936
2024 24,002 972 24,974
2025 16,652 868 17,520
2026 11,257 882 12,139
Thereafter 20,967 1,791 22,758
Total 142,478 9,423 151,901
Less: Imputed interest (27,458) (2,012) (29,470)
Present value of operating lease liabilities $ 115,020 $ 7,411 $ 122,431
There are no material leases entered into subsequent to the balance sheet date.
NOTE 13 - STOCKHOLDERS' EQUITY
Dividend Program
In February 2020, the Company initiated a dividend program which provided a quarterly dividend of $0.055 per share ($0.22 per share annualized). In May 2021, the Company increased its quarterly dividend to $0.11 per share.
The tables below summarize the Company's quarterly dividends for the years ended December 31, 2021 and 2020 .
Dividends Paid
Date of declaration Stockholders of record Date paid Dividend per share (in thousands)
Q1 2021 January 29, 2021 February 16, 2021 March 2, 2021 $ 0.055 $ 2,284
Q2 2021 May 3, 2021 May 14, 2021 May 27, 2021 $ 0.11 $ 4,580
Q3 2021 July 28, 2021 August 9, 2021 August 19, 2021 $ 0.11 $ 4,556
Q4 2021 October 27, 2021 November 12, 2021 November 22, 2021 $ 0.11 $ 4,453
Dividends Paid
Date of declaration Stockholders of record Date paid Dividend per share (in thousands)
Q1 2020 February 5, 2020 February 18, 2020 March 2, 2020 $ 0.055 $ 2,247
Q2 2020 April 30, 2020 May 13, 2020 May 27, 2020 $ 0.055 $ 2,243
Q3 2020 August 3, 2020 August 13, 2020 August 24, 2020 $ 0.055 $ 2,249
Q4 2020 October 29, 2020 November 9, 2020 November 19, 2020 $ 0.055 $ 2,250
Refer to Note 24, "Subsequent Events" for information on the dividend declared during the first quarter of 2022.
As part of the acquisition of Heights, the Company issued 1,446,257 shares of CURO's common stock in December 2021. Refer to Note 15, "Acquisitions" for further details.
For activity related to our share repurchase programs, refer to Note 23, "Share Repurchase Program."
NOTE 14 - SEGMENT REPORTING
Segment information is prepared on the same basis that the Company's CODM reviews financial information for operational decision making purposes, including revenues, net revenue, gross margin, segment operating income and other items.
As described in Note 5, "Goodwill and Intangibles" and Note 15, "Acquisitions." the Company acquired Ad Astra in January 2020, Flexiti in March 2021 and Heights in December 2021. Under ASC 280, Segment Reporting, Flexiti met the definition of a separate reportable segment, whereas Ad Astra and Heights did not. In conjunction with the acquisition of Flexiti, the Company made required disclosures for Flexiti as a separate reportable segment known as "Canada POS Lending," further described below. The Company also renamed the "Canada" reportable segment to the "Canada Direct Lending" reportable segment. The results of Heights and Ad Astra are included within the U.S. reporting segment below.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
U.S. As of December 31, 2021, the Company operated a total of 550 U.S. retail locations and had an online presence in 27 states. Refer to Note 21, "Store Closures" for additional details related to recent store closures. The Company provides Revolving LOC loans and Installment loans, which include Single-Pay loans and vehicle title loans, check cashing, money transfer services, reloadable prepaid debit cards and a number of other ancillary financial products and services to its customers in the U.S.
Canada Direct Lending. As of December 31, 2021, the Company operated a total of 201 stores across eight Canadian provinces and had an online presence in eight provinces and one territory. The Company provides Revolving LOC loans and Installment loans, which includes Single-Pay loans, optional credit protection insurance products to Revolving LOC and Installment loan customers, check cashing, money transfer services, foreign currency exchange, reloadable prepaid debit cards and a number of other ancillary financial products and services to its customers in Canada.
Canada POS Lending. As of December 31, 2021, the Company served Canadian customers through POS financing available at nearly 7,500 retail locations and over 3,100 merchant partners across 10 provinces and two territories. The Company provides Revolving LOC loans and a number of ancillary financial products to its customers in Canada. Results of operations for the year ended December 31, 2021 from Canada POS Lending represent results from the date of Flexiti's acquisition, March 10, 2021, through December 31, 2021.
The following table illustrates summarized financial information concerning reportable segments (in thousands):
Year Ended December 31,
2021 2020 2019
Revenues by segment: (1)
U.S. $ 525,962 $ 638,524 $ 913,506
Canada Direct Lending 257,039 208,872 228,291
Canada POS Lending 34,842 - -
Consolidated revenue $ 817,843 $ 847,396 $ 1,141,797
Net revenues by segment:
U.S. $ 359,929 $ 408,360 $ 521,401
Canada Direct Lending 202,042 150,225 151,845
Canada POS Lending 10,204 - -
Consolidated net revenue $ 572,175 $ 558,585 $ 673,246
Segment operating income:
U.S. $ 47,517 $ 34,172 $ 99,152
Canada Direct Lending 88,731 46,171 43,303
Canada POS Lending (55,691) - -
Consolidated operating income $ 80,557 $ 80,343 $ 142,455
Expenditures for long-lived assets by segment:
U.S. $ 13,450 $ 10,079 $ 12,733
Canada Direct Lending 2,238 639 1,879
Canada POS Lending 7,891 - -
Consolidated expenditures for long-lived assets $ 23,579 $ 10,718 $ 14,612
(1) For revenue by product, see Note 2, "Loans Receivable and Revenue."
The following table provides the proportion of gross loans receivable by segment (in thousands):
December 31,
2021 December 31,
U.S. $ 661,945 $ 223,451
Canada Direct Lending 427,197 330,271
Canada POS Lending 459,176 -
Total gross loans receivable $ 1,548,318 $ 553,722
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table represents the Company's net long-lived assets, comprised of property and equipment, by segment. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located (in thousands):
December 31, 2021 December 31, 2020
U.S. $ 32,753 $ 36,258
Canada Direct Lending 21,072 23,491
Canada POS Lending 810 -
Total net long-lived assets $ 54,635 $ 59,749
The Company's CODM does not review assets by segment for purposes of allocating resources or decision-making purposes; therefore, total assets by segment are not disclosed.
NOTE 15 - ACQUISITIONS
Heights
On December 27, 2021, the Company acquired 100% of the outstanding stock of Heights for $360.0 million, consisting of $335.0 million in cash and $25.0 million of our common stock. Heights is a consumer finance company that provides secured and unsecured Installment loans to near-prime and non-prime consumers, and offers customary opt-in insurance and other financial products across 390 branches in 11 U.S. states. The acquisition of Heights accelerates the Company's strategic migration into longer term, higher balance and lower credit risk products, allows the Company to expand its addressable market with relatively less regulatory risk, and diversifies the Company's revenue, product and geography mix.
The Company began consolidating the financial results of Heights in the Consolidated Financial Statements on December 27, 2021 within the U.S. operating segment. Heights contributed $2.7 million of net revenue and $0.2 million of net income, and incurred $1.9 million of operating expenses, during the year ended December 31, 2021.
This transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The Company was the acquirer for purposes of accounting for the business combination. The values assigned to the acquired assets and liabilities assumed are provisional based on the preliminary fair value estimates as of the acquisition date. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this 2021 Form 10-K and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of December 31, 2021, the primary areas that remain preliminary relate to the valuation of certain loans receivables, intangible assets and certain tax-related balances.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table presents the preliminary purchase price allocation recorded in the Company’s Consolidated Balance Sheet as of the date of acquisition (in thousands):
Amounts acquired on December 27, 2021 (as adjusted)
Assets
Cash and cash equivalents
$ 13,564
Restricted cash 33,630
Gross loans receivable(1)
471,630
Income tax receivable 3,526
Prepaid expenses and other 7,410
Property and equipment 4,748
Right-of-use assets
16,111
Intangibles, net 11,900
Other assets 98
Total assets $ 562,617
Liabilities
Accounts payable and accrued liabilities $ 19,186
Lease liabilities 16,315
Deferred tax liability 1,077
Accrued interest on debt 1,781
Debt 350,000
Total liabilities $ 388,359
Net assets acquired $ 174,258
Total consideration paid 428,115
Goodwill $ 253,857
(1) The gross contractual loans receivables as of December 27, 2021 were $485.4 million of which the Company estimates $13.7 million will not be collected.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (dollars in thousands):
Fair Value Useful Life
Trade name $ 4,300 10.0 years
Customer relationships 7,600 3.0 years
Total identified intangible assets $ 11,900
Goodwill of $253.9 million represents the excess of the consideration paid over the fair value of the net tangible and intangible assets acquired. The goodwill was primarily attributed to expected synergies created with the Company’s future product offerings and the value of the combined workforce. Goodwill from this transaction is not deductible for income tax purposes because this was a stock acquisition.
The Company incurred costs related to this acquisition of $7.2 million that were recorded in "Other operating expense" in the U.S. segment in the accompanying Consolidated Statement of Operations for the year ended December 31, 2021.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following supplemental unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisition had occurred on January 1, 2020 (in thousands):
Unaudited pro forma results for the Year Ended December 31,
2021 2020
Revenue $ 1,065,773 $ 1,112,467
Net income 106,614 130,942
As part of preparing the pro forma financial information, the Company conducted a review of the accounting policies of Heights and did not note any material differences in accounting policies that would require pro forma adjustments to conform to the Company’s accounting policies for purposes of this presentation.
The accounting policies used in the preparation of the unaudited pro forma financial information are those set out in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2021. The following adjustments were made to give effect to the acquisition as if it had been consummated on January 1, 2020.
•The removal of certain balances excluded per the Stock Purchase Agreement upon close of the acquisition.
•The net adjustment to depreciation and amortization expense as a result of the identified intangible assets acquired.
•The recognition of interest expense related to the $250 million of 7.50% Senior Notes, which were issued on December 3, 2021 to fund the acquisition, and have been adjusted to give effect to pro forma operations as if they were issued on January 1, 2020.
•The adjustment to the provision for income taxes, assuming a combined company, including the tax impact of the aforementioned pro forma adjustments.
The supplemental unaudited pro forma financial information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations would have been had the acquisition actually occurred on January 1, 2020, nor does it purport to project the future consolidated results of operations.
Flexiti
On March 10, 2021, the Company acquired 100% of the outstanding stock of Flexiti. The fair value of total consideration paid was $86.5 million in cash, $6.3 million in debt costs and $20.6 million in contingent cash consideration subject to future operating metrics, including revenue less NCOs and loan originations. Flexiti provides POS financing solution to retailers across Canada and provides the Company capability and scale opportunity in Canada’s credit card and POS financing markets. It enhances the Company's long-term growth and financial and risk profiles, and allows access to the full spectrum of Canadian consumers by adding an established private label credit card platform and POS financing capabilities. The Company now reaches consumers in Canada through all the ways they access credit, directly both in-store and online, via credit cards or at the POS.
The Company began consolidating the financial results of Flexiti in the Consolidated Financial Statements on March 10, 2021. Flexiti generated $34.8 million of revenue and incurred $50.9 million of operating expenses during the year ended December 31, 2021.
This transaction was accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The Company was the acquirer for purposes of accounting for the business combination. The values assigned to the assets acquired and liabilities assumed were based on their estimates of fair value available. As of December 31, 2021, the Company completed the determination of the fair values of the acquired identifiable assets and liabilities.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table presents the preliminary purchase price allocation recorded in the Company’s Condensed Consolidated Balance Sheet as of the date of acquisition (in thousands):
Amounts acquired on March 10, 2021 Measurement period adjustments Amounts acquired on March 10, 2021 (as adjusted)
Assets
Cash and cash equivalents
$ 1,267 $ - $ 1,267
Gross loans receivable(1)
196,138 - 196,138
Prepaid expenses and other 687 - 687
Property and equipment 460 - 460
Right-of-use assets
616 - 616
Intangibles
50,876 3,572 54,448
Deferred tax assets
2,741 908 3,649
Total assets $ 252,785 $ 4,480 $ 257,265
Liabilities
Accounts payable and accrued liabilities $ 9,356 $ - $ 9,356
Credit facilities 174,367 - 174,367
Lease liabilities 616 - 616
Total liabilities $ 184,339 $ - $ 184,339
Net assets acquired $ 68,446 $ 4,480 $ 72,926
Total consideration paid 113,347 113,347
Goodwill $ 44,901 $ (4,480) $ 40,421
(1) The gross contractual loans receivables as of March 10, 2021 were $208.6 million of which the Company estimates $12.5 million will not be collected.
During the year ended December 31, 2021, the Company recorded a cumulative net measurement period adjustment that decreased goodwill by $4.5 million. The measurement period adjustment would have resulted in an insignificant increase in amortization expense related to the merchant relationships intangible asset during the first quarter of 2021 when the Company acquired Flexiti. The Company made these measurement period adjustments to reflect facts and circumstances that existed as of the acquisition date and did not result from intervening events subsequent to such date. As of December 31, 2021, the Company completed the determination of the fair values of the acquired identifiable assets and liabilities.
The following table sets forth the components of identifiable intangible assets acquired, as adjusted for measurement period adjustments, and their estimated useful lives as of the date of acquisition (dollars in thousands):
Fair Value Useful Life
Developed technology $ 31,827 5.0 years
Merchant relationships 19,684 5.0 years
Customer relationships 2,937 3.0 years
Total identified intangible assets $ 54,448
Goodwill of $40.4 million represents the excess of the consideration paid over the fair value of the net tangible and intangible assets acquired. The goodwill was primarily attributed to expected synergies created with the Company’s future product offerings and the value of the combined workforce. Goodwill and the intangibles from this transaction are not deductible for Canadian income tax purposes because this was a stock acquisition.
In connection with the acquisition, the Company recognized contingent cash consideration of $20.6 million as of the acquisition date. The contingent consideration is based on Flexiti achieving certain operating metrics from April 1, 2021 through March 31, 2023, including revenue less NCOs and loan originations. Cash consideration can range from zero to $32.8 million over the period. As of December 31, 2021, the estimated value of the contingent cash consideration increased to $26.5 million. Refer to Note 6, "Fair Value Measurements" for additional information regarding fair value inputs related to the contingent cash consideration.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In connection with the acquisition, the Company also granted RSUs to certain Flexiti employees who joined the Company, with grant-date fair value totaling approximately $8.1 million. Of that total, $4.0 million relates to RSU contingent consideration structured similar to the contingent cash consideration described above. All RSU grants to Flexiti employees will be ratably recognized as stock-based compensation over the requisite service period of two years. Refer to Note 11, "Share-based Compensation" for further information related to these RSUs.
The Company incurred costs related to this acquisition of $3.3 million that were recorded in "Other operating expense" in the U.S. segment in the accompanying Consolidated Statement of Operations for the year ended December 31, 2021.
Ad Astra
On January 3, 2020, the Company acquired 100% of the outstanding stock of Ad Astra, a related party, for $14.4 million, net of cash received. Prior to the acquisition, Ad Astra had been the Company's exclusive provider of third-party collection services for owned and managed loans in the U.S. that are in later-stage delinquency.
The Company began consolidating the financial results of this acquisition in Consolidated Financial Statements on January 3, 2020. Prior to the acquisition, and for the year ended December 31, 2019, Ad Astra incurred $15.5 million of costs that were reflected in "Direct operations," consistent with the presentation of other internal collection costs. Subsequent to the acquisition, Ad Astra incurred $10.0 million and $9.6 million of operating expense during the years ended December 31, 2021 and 2020.
The transaction was accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The Company was the acquirer for purposes of accounting for the business combination. The values assigned to the assets acquired and liabilities assumed were based on their estimates of fair value available. During March 2020, the Company completed the determination of the fair values of the acquired identifiable assets and liabilities.
The following table summarizes the allocation of the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
(in thousands) Amounts acquired on January 3, 2020
Assets
Cash and cash equivalents
3,360
Accounts receivable
Property and equipment
Intangible assets
1,101
Goodwill
14,791
Operating lease asset
Total assets $ 20,310
Liabilities
Accounts payable and accrued liabilities
2,264
Operating lease liabilities
Total liabilities $ 2,499
Total cash consideration transferred $ 17,811
Goodwill of $14.8 million represents the excess over the fair value of the net tangible and intangible assets acquired. The goodwill was primarily attributed to expected synergies created through cost and process efficiencies in the collections process. The total estimated tax-deductible Goodwill as a result of this transaction is $15.4 million.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 16 - RELATED-PARTY TRANSACTIONS
In November 2021, the Company entered into a Share Repurchase Agreement with a trust advised by a Director and 10% owner of the Company. See Note 23 - "Share Repurchase Program" for further information.
The Company has historically used Ad Astra as its third-party collection service for U.S. operations. The Company acquired Ad Astra from the founders of the Company on January 3, 2020. See Note 15 - "Acquisitions" for further information. Prior to the acquisition, the Company generally referred loans that were between 91 and 121 days delinquent to Ad Astra for collections and Ad Astra earned a commission fee equal to 30% of any amounts successfully recovered. The commission expense paid to Ad Astra for the year ended December 31, 2019 was $15.5 million, and is included in “Direct operations” in the Consolidated Statements of Operations.
The Company has entered into several lease agreements for its corporate office and stores in which the Company operates, with several real estate entities that are owned by one or more of the founders of the Company. These leases are discussed in Note 12 - "Leases."
NOTE 17 - PREPAID EXPENSES AND OTHER
Components of Prepaid expenses and other assets were as follows (in thousands):
December 31, 2021 December 31, 2020
Settlements and collateral due from third-party lenders $ 5,465 $ 5,488
Fees receivable from customers under CSO programs 8,412 7,774
Prepaid expenses 16,243 5,357
Other assets 11,918 9,375
Total prepaid expenses and other $ 42,038 $ 27,994
NOTE 18 - PROPERTY AND EQUIPMENT
The classification of property and equipment was as follows (in thousands):
December 31, 2021 December 31, 2020
Leasehold improvements $ 122,049 $ 136,015
Furniture, fixtures and equipment 43,276 36,705
Property and equipment, gross 165,325 172,720
Accumulated depreciation and amortization (110,690) (112,971)
Property and equipment, net $ 54,635 $ 59,749
Depreciation expense for continuing operations was $13.2 million, $14.5 million and $15.8 million for the years ended December 31, 2021, 2020 and 2019, respectively.
NOTE 19 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Components of Accounts payable and accrued liabilities were as follows (in thousands):
December 31, 2021 December 31, 2020
Trade accounts payable $ 43,094 $ 28,983
Money orders payable 3,460 4,414
Accrued taxes, other than income taxes 1,053 540
Accrued payroll and fringe benefits 41,658 13,918
Other accrued liabilities 32,169 1,769
Total accounts payable and accrued liabilities $ 121,434 $ 49,624
The increase in accounts payable and accrued liabilities from December 31, 2020 to December 31, 2021 was primarily a result of the acquisitions of Flexiti in the first quarter of 2021 and Heights in the fourth quarter of 2021.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 20 - BENEFIT PLANS
In 2015, the Company instituted a nonqualified deferred compensation plan that provides certain of its employees with the opportunity to elect to defer base salary and performance-based compensation, which, upon such election, will be credited to the participant’s deferred compensation account. Participant contributions are fully vested at all times. Each deferred compensation account will be invested in one or more investment funds made available by the Company and selected by the participant. The Company may make discretionary contributions to the individual deferred compensation accounts, with the amount, if any, determined annually by us. The Company's contributions vest over three years. Each vested deferred compensation account will be paid out in a lump sum either upon a participant’s separation from service or a future date chosen by the participant at the time of enrollment. The amount deferred under this plan totaled $5.1 million, $4.7 million and $4.7 million as of December 31, 2021, 2020 and 2019, respectively, and was recorded in "Other long-term liabilities" on the Consolidated Statement of Operations.
In 2013, the Company instituted a Registered Retirement Savings Plan (“RRSP”) which covers all Canadian employees. The Company matches the employee contribution at a rate of 50% of the first 6% of compensation contributed to the RRSP. Employee contributions vest immediately. Employer contributions vest 50% after one year and 100% after two years. The Company's contributions to the RRSP were $0.4 million, $0.3 million and $0.3 million as of December 31, 2021, 2020 and 2019, respectively.
In 2010, the Company instituted a 401(k) retirement savings plan which covers all U.S. employees. Employees may voluntarily contribute up to 90% of their compensation, as defined, to the 401(k) plan. The Company matches the employee contribution at a rate of 50% of the first 6% of compensation contributed to the plan. Employee contributions vest immediately. Employer contributions vest one-third for each of the first three years of employment until fully vested after three years of employment. The Company's contributions to the plan were $1.7 million, $1.7 million and $1.5 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company also provides a 401(k) plan covering the recently acquired Heights full-time employees, whereby employees can invest their gross pay up to the maximum percentage allowable not, to exceed the limits of the Internal Revenue Code. The Company makes a matching contribution in an amount equal to: (i) 100% of the first 3% of an employee’s gross income contributed to the plan, plus (ii) 50% of the next 2% of an employee’s amount of the employee contributions that exceed 3% of gross pay but that do not exceed 5% of gross pay.
The Company owns life insurance policies on plan beneficiaries as an informal funding vehicle to meet future benefit obligations. These policies are recorded at their cash surrender value and are included in other assets. Income generated from policies is recorded in "Salaries and benefits" on the Consolidated Statement of Operations.
NOTE 21 - STORE CLOSURES
The Company closed or did not renew leases for 49 U.S. stores in Illinois (8), Oregon (2), Colorado (2), Washington (1), Texas (31), California (2), Louisiana (1), Nevada (1) and Tennessee (1), of which 19 and 30 closed in the second and third quarters of 2021, respectively. The Company exited Illinois entirely given that state's legislative changes that effectively eliminated the Company's product offerings. The store closure decisions in other states were made after extensive analysis and in response to ongoing migration of customer transactions toward the online channel and the impact of COVID-19 on store traffic and profitability.
The Company incurred $12.7 million of total one-time charges associated with the U.S. store closures during the year ended December 31, 2021, as follows:
(in thousands) Year Ended
December 31, 2021 (1)
Store closure costs
Severance and employee costs $ 3,943
Lease termination costs 1,710
Net accelerated depreciation and write-off of ROU assets and lease liabilities 7,064
Total store closure costs $ 12,717
(1) During the year ended December 31, 2021, the Statement of Operations included $3.9 million of store closure costs recorded within "Salaries and benefits" and $8.7 million recorded within "Other operating expense."
NOTE 22 - DISCONTINUED OPERATIONS
On February 25, 2019, in accordance with the provisions of the U.K. Insolvency Act 1986 and as approved by the Boards of Directors of the U.K. Subsidiaries, insolvency practitioners from KPMG were appointed as Administrators for the U.K.
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Subsidiaries. The effect of the U.K. Subsidiaries’ entry into administration was to place their management, affairs, business and property of the U.K. Subsidiaries under the direct control of the Administrators. Accordingly, the Company deconsolidated the U.K. Subsidiaries, which comprised the U.K. reportable operating segment, as of February 25, 2019 and classified them as Discontinued Operations for all periods presented.
The following table presents the results of operations of the U.K. Subsidiaries, which meet the criteria of Discontinued Operations and, therefore, are excluded from the Company's results of continuing operations (in thousands):
For the Year Ended December 31,
2021 2020 2019(1)
Revenue $ - $ - $ 6,957
Provision for losses - - 1,703
Net revenue - - 5,254
Cost of providing services
Advertising - - 775
Non-advertising costs of providing services - - 307
Total cost of providing services - - 1,082
Gross margin - - 4,172
Operating expense (income)
Corporate, district and other expenses - - 3,810
Interest income - - (4)
(Gain) loss on disposition - (1,714) 39,414
Total operating (income) expense - (1,714) 43,220
Pre-tax income (loss) from operations of discontinued operations - 1,714 (39,048)
Income tax expense (benefit) related to disposition - 429 (46,638)
Net income (loss) from discontinued operations $ - $ 1,285 $ 7,590
(1) Includes U.K. Subsidiaries financial results from January 1, 2019 to February 25, 2019.
The effective tax benefit rate for the year ending December 31, 2019 was 119.4%, and primarily relates to the worthlessness of the U.K. stock resulting in a U.S. tax benefit.
As of December 31, 2021 and 2020, the Consolidated Balance Sheets were not impacted by the U.K. Subsidiaries as all balances were written off when the U.K. segment entered into administration during the first quarter of 2019.
The following table presents cash flows of the U.K. Subsidiaries (in thousands):
Year Ended December 31,
2021 2020 2019(1)
Net cash (used in) provided by discontinued operating activities $ - $ 1,714 $ (504)
Net cash used in discontinued investing activities - - (14,213)
Net cash used in discontinued financing activities - - -
(1) Includes U.K. Subsidiaries financial results from January 1, 2019 to February 25, 2019.
NOTE 23 - SHARE REPURCHASE PROGRAM
In May 2021, the Company's Board of Directors authorized a new share repurchase program for up to $50.0 million of its common stock.
The table below summarizes share repurchase activity during the year ended December 31, 2021 (in thousands, except for per share amounts and number of share amounts):
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Year Ended
December 31, 2021
Total number of shares repurchased 2,218,333
Average price paid per share $ 16.86
Total value of shares repurchased $ 37,400
Total authorized repurchase amount for the period presented $ 50,000
Total value of shares repurchased $ 37,400
Total remaining authorized repurchase amount $ 12,600
In November 2021, the Company entered into a Share Repurchase Agreement with the Leah M. Faulkner 2017 Dynasty Trust ("Seller"), a Trust advised by a Director and 10% owner of the Company. Pursuant to the Share Repurchase Agreement, the Company repurchased 500,000 shares of its common stock, par value $0.001 per share, owned by the Seller, in a private transaction at a purchase price equal to $18.10 per share of common stock. This transaction occurred outside of the share repurchase program authorized in May 2021.
In February 2020, the Company's Board of Directors authorized a share repurchase program for up to $25.0 million of its common stock. Due to uncertainty caused by COVID-19, the Board terminated the program on March 15, 2020. There were no material purchases under the program during the year ended December 31, 2020.
In April 2019, the Board of Directors authorized a share repurchase program providing for the repurchase of up to $50.0 million of its common stock. The repurchase program, which commenced June 2019, was completed in February 2020. Under this program, the Company repurchased 455,255 shares of its common stock at an average price of $10.45 per share for total consideration of $4.8 million during the year ended December 31, 2020.
Separately, in August 2019, the Company entered into a Share Repurchase Agreement with FFL, a related party at the time. Pursuant to the Share Repurchase Agreement, the Company repurchased 2,000,000 shares of its common stock, par value $0.001 per share, owned by FFL, in a private transaction at a purchase price equal to $13.55 per share of common stock. The purchase price was determined by using the Company's closing common stock price on August 29, 2019 of $13.97, less a discount of 3.0%. This transaction occurred outside of the share repurchase program authorized in April 2019.
NOTE 24 - SUBSEQUENT EVENTS
Share Repurchase Program
The Company repurchased 824,477 shares from January 1, 2022 through February 8, 2022 under the share repurchase program initiated in May 2021, as further discussed in Note 23, "Share Repurchase Program." The total value of shares repurchased was $12.6 million at an average price per share of $15.20.
New Share Repurchase Program
On February 4, 2022, the Company's Board of Directors authorized a new share repurchase program for the repurchase of up to $25.0 million of CURO common stock. The repurchase will commence at the Company's discretion and continue until completed or terminated. The Company expects the purchases to be made from time-to-time in the open market and/or in privately-negotiated transactions at the Company's discretion, subject to market conditions and other factors. Any repurchased shares will be available for use in connection with equity plans and for other corporate purposes.
Dividend
On February 4, 2022, the Company's Board of Directors declared a dividend under its previously announced dividend program, of $0.11 per share ($0.44 per share annualized). The dividend was paid on March 1, 2022 to stockholders of record as of the close of business on February 18, 2022.
Glossary

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Prior to the filing of this 2021 Form 10-K and under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the last day of the period covered by this 2021 Form 10-K.
Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time frames specified in the SEC's rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Inherent Limitations of the Effectiveness of Internal Control
Our ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our ICFR includes those policies and procedures that:
(i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets;
(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate ICFR. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of our published financial statements.
Prior to the filing of this 2021 Form 10-K, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our ICFR, excluding the operations of Flexiti and Heights as noted below, as of the last day of the period covered by the report. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in the Internal Control-Integrated Framework (“2013 Framework”). Based on our Evaluation under the 2013 Framework, our management concluded that our ICFR was effective as of December 31, 2021. Deloitte & Touche LLP has audited the Consolidated Financial Statements included in this 2021 Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of our ICFR.
Glossary
In conducting the evaluation of effectiveness of its internal control over financial reporting as of December 31, 2021, the Company has excluded the operations of Flexiti and Heights as permitted by the guidance issued by the Office of the Chief Accountant of the SEC (provided that the period of such exclusion does not extend more than one year beyond the date of acquisition or for more than one annual reporting period). In conducting the evaluation of the effectiveness of its disclosure on controls and procedures as of December 31, 2021, the Company has excluded those disclosure controls and procedures of Flexiti and Heights that are subsumed by the Company's internal control over financial reporting. The Flexiti and Heights acquisitions were completed on March 10, 2021 and December 27, 2021. As of and for the year ended December 31, 2021, Flexiti's assets represented approximately 20.6% of the Company's consolidated assets and 4.3% of the Company's consolidated revenues. As of and for the year ended December 31, 2021, Heights' assets represented approximately 22.4% of the Company's consolidated assets and 0.5% of the Company's consolidated revenues. See Note 15, "Acquisitions" for additional information on the Company's acquisition of Flexiti and Heights and the impact on the Company's consolidated financial statements.
Changes in Internal Control over Financial Reporting
The Company is working to integrate Flexiti and Heights into its overall internal control over financial reporting processes. Except for changes made in connection with the integration of Flexiti and Heights, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the year ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this Item 10 is incorporated by reference to the sections entitled "Election of Directors," "Executive Officers," "Corporate Governance," "Certain Relationships and Related Transactions" and "Delinquent Section 16(a) Reports" of our Proxy Statement for the Annual Meeting of Stockholders to be held on June 15, 2022. We intend to file such Proxy Statement with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this 2021 Form 10-K.
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive, principal financial and principal accounting officers, or persons performing similar functions. Our Code of Business Conduct and Ethics is posted on our website located at https://www.ir.curo.com/corporate-governance/governance-documents. We intend to disclose future amendments to certain provisions of the Code of Business Conduct and Ethics, and waivers of the Code of Business Conduct and Ethics granted to executive officers and directors, on the website within four business days following the date of the amendment or waiver.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item 11 is incorporated by reference to the sections entitled "Non-Employee Director Compensation" and "Executive Compensation" of our Proxy Statement referenced above in Item 10.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by this Item 12 is incorporated by reference to the sections entitled "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan for Information" of our Proxy Statement referenced above in Item 10.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by this Item 13 is incorporated by reference to the section entitled "Certain Relationships and Related Transactions" of our Proxy Statement referenced above in Item 10.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our independent registered public accounting firm is Deloitte & Touche LLP; Chicago, IL; Firm ID: 34
The information called for by this Item 14 is incorporated by reference to the section entitled "Ratification of Appointment of Independent Registered Public Accounting Firm" of our Proxy Statement referenced above in Item 10.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as part of this report
(1) Consolidated Financial Statements
The consolidated financial statements and related notes, together with the report of Deloitte & Touche LLP, appear in Part II, Item 8. "Financial Statements and Supplementary Data" of this Report.
The consolidated financial statements consist of the following:
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Equity for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules
All schedules have been omitted because they are not applicable, are insignificant or the required information is shown in the consolidated financial statements or notes thereto.
(3) Exhibits
The exhibits are listed on the Exhibit Index.