PRICESMART INC - Quarter Report: 2020 November (Form 10-Q)

Three Months Ended

November 30,

November 30,

Effect on other comprehensive income/(loss) due to foreign currency translation

psmt-20201130x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2020


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to

COMMISSION FILE NUMBER 0-22793

PriceSmart, Inc.

(Exact name of registrant as specified in its charter)

Delaware

33-0628530

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


9740 Scranton Road, San Diego, CA		92121
(Address of principal executive offices)		(Zip Code)

(858) 404-8800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value	PSMT	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.


Yes x	No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).


Yes x	No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer x		Accelerated filer ¨
Non-accelerated filer ¨		Smaller Reporting Company ¨
		Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes ¨	No x

The registrant had 30,738,334 shares of its common stock, par value $0.0001 per share, outstanding at December 31, 2020.

PRICESMART, INC.

INDEX TO FORM 10-Q


		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	1
	CONSOLIDATED BALANCE SHEETS AS OF NOVEMBER 30, 2020 (UNAUDITED) AND AUGUST 31, 2020	2
	CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED NOVEMBER 30, 2020 AND 2019 - UNAUDITED	4
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED NOVEMBER 30, 2020 AND 2019 - UNAUDITED	5
	CONSOLIDATED STATEMENTS OF EQUITY FOR THE THREE MONTHS ENDED NOVEMBER 30, 2020 AND 2019 - UNAUDITED	6
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2020 AND 2019 - UNAUDITED	7
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	49
ITEM 4.	CONTROLS AND PROCEDURES	50
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	51
ITEM 1A.	RISK FACTORS	51
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	51
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	52
ITEM 4.	MINE SAFETY DISCLOSURES	52
ITEM 5.	OTHER INFORMATION	52
ITEM 6.	EXHIBITS	53

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of November 30, 2020 and the consolidated balance sheet as of August 31, 2020, the unaudited consolidated statements of income for the three months ended November 30, 2020 and 2019 and, the unaudited consolidated statements of comprehensive income for the three months ended November 30, 2020 and 2019, the unaudited consolidated statements of equity for the three months ended November 30, 2020 and 2019, and the unaudited consolidated statements of cash flows for the three months ended November 30, 2020 and 2019 are included herein. Also included herein are the notes to the unaudited consolidated financial statements.

‎

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PRICESMART, INC.

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



	November 30,
	2020		August 31,
	(Unaudited)		2020
ASSETS
Current Assets:
Cash and cash equivalents	$	207,955	$	299,481
Short-term restricted cash		185		185
Short-term investments		73,980		46,509
Receivables, net of allowance for doubtful accounts of $157 as of November 30, 2020 and $147 as of August 31, 2020, respectively		15,150		13,153
Merchandise inventories		373,178		309,509
Prepaid expenses and other current assets		40,103		30,165
Total current assets		710,551		699,002
Long-term restricted cash		4,255		4,105
Property and equipment, net		700,837		692,279
Operating lease right-of-use assets, net		119,316		119,533
Goodwill		45,123		45,206
Other intangibles, net		9,566		10,166
Deferred tax assets		20,246		21,672
Other non-current assets (includes $144 and $872 as of November 30, 2020 and August 31, 2020, respectively, for the fair value of derivative instruments)		57,508		54,260
Investment in unconsolidated affiliates		10,593		10,602
Total Assets	$	1,677,995	$	1,656,825
LIABILITIES AND EQUITY
Current Liabilities:
Short-term borrowings	$	47,349	$	65,143
Accounts payable		384,086		373,172
Accrued salaries and benefits		28,630		32,946
Deferred income		25,125		23,525
Income taxes payable		9,559		7,727
Other accrued expenses and other current liabilities		35,228		37,731
Operating lease liabilities, current portion		8,649		8,594
Long-term debt, current portion		19,771		19,437
Total current liabilities		558,397		568,275
Deferred tax liability		1,401		1,713
Long-term income taxes payable, net of current portion		5,243		5,132
Long-term operating lease liabilities		124,383		124,181
Long-term debt, net of current portion		108,104		112,610
Other long-term liabilities (includes $5,321 and $4,685 for the fair value of derivative instruments and $6,313 and $6,155 for post-employment plans as of November 30, 2020 and August 31, 2020, respectively)		13,176		12,182
Total Liabilities		810,704		824,093

‎

Table of Contents



Stockholders' Equity:
Common stock $0.0001 par value, 45,000,000 shares authorized; 31,395,847 and 31,417,576 shares issued and 30,738,334 and 30,670,712 shares outstanding (net of treasury shares) as of November 30, 2020 and August 31, 2020, respectively		3		3
Additional paid-in capital		450,666		454,455
Accumulated other comprehensive loss		(173,658)		(176,820)
Retained earnings		610,224		582,487
Less: treasury stock at cost, 657,513 shares as of November 30, 2020 and 746,864 shares as of August 31, 2020		(21,068)		(28,406)
Total stockholders' equity attributable to PriceSmart, Inc. stockholders		866,167		831,719
Noncontrolling interest in consolidated subsidiaries		1,124		1,013
Total stockholders' equity		867,291		832,732
Total Liabilities and Equity	$	1,677,995	$	1,656,825

See accompanying notes.
‎

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PRICESMART, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)



	Three Months Ended
	November 30,		November 30,
	2020		2019
Revenues:
Net merchandise sales	$	838,369	$	778,728
Export sales		10,881		8,274
Membership income		13,299		13,746
Other revenue and income		14,883		11,193
Total revenues		877,432		811,941
Operating expenses:
Cost of goods sold:
Net merchandise sales		703,619		662,724
Export sales		10,433		7,971
Non-merchandise		5,824		4,251
Selling, general and administrative:
Warehouse club and other operations		84,832		79,373
General and administrative		27,521		25,884
Pre-opening expenses		602		953
Loss on disposal of assets		70		71
Total operating expenses		832,901		781,227
Operating income		44,531		30,714
Other income (expense):
Interest income		491		293
Interest expense		(2,033)		(862)
Other expense, net		(1,545)		(985)
Total other expense		(3,087)		(1,554)
Income before provision for income taxes and ‎loss of unconsolidated affiliates		41,444		29,160
Provision for income taxes		(13,618)		(9,403)
Loss of unconsolidated affiliates		(9)		(48)
Net income		27,817		19,709
Less: net (income) loss attributable to noncontrolling interest		(80)		19
Net income attributable to PriceSmart, Inc.	$	27,737	$	19,728
Net income attributable to PriceSmart, Inc. per share available for distribution:
Basic	$	0.90	$	0.64
Diluted	$	0.90	$	0.64
Shares used in per share computations:
Basic		30,398		30,277
Diluted		30,420		30,284
Dividends per share	$	—	$	—

See accompanying notes.
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PRICESMART, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED—AMOUNTS IN THOUSANDS)



	Three Months Ended
	November 30,		November 30,
	2020		2019
Net income	$	27,817	$	19,709
Less: net (income) loss attributable to noncontrolling interest		(80)		19
Net income attributable to PriceSmart, Inc.	$	27,737	$	19,728

Other Comprehensive Income, net of tax:
Foreign currency translation adjustments ⁽¹⁾		2,761		(3,724)
Defined benefit pension plan:
Net gain arising during period		60		7
Amortization of prior service cost and actuarial gains included in net periodic pensions cost		33		19
Total defined benefit pension plan		93		26
Derivative instruments:⁽²⁾
Unrealized gains/(losses) on change in derivative obligations		1,230		(432)
Unrealized gains/(losses) on change in fair value of interest rate swaps		(922)		941
Amounts reclassified from accumulated other comprehensive income to other expense, net for settlement of derivatives		—		4
Total derivative instruments		308		513
Other comprehensive income (loss)		3,162		(3,185)
Comprehensive income		30,899		16,543
Less: comprehensive income attributable to noncontrolling interest		31		34
Comprehensive income attributable to PriceSmart, Inc. to stockholders	$	30,868	$	16,509

⁽¹⁾Translation adjustments arising in translating the financial statements of a foreign entity have no effect on the income taxes of that foreign entity. They may, however, affect: (a) the amount, measured in the parent entity's reporting currency, of withholding taxes assessed on dividends paid to the parent entity and (b) the amount of taxes assessed on the parent entity by the government of its country. The Company has determined that the reinvestment of earnings of its foreign subsidiaries are indefinite because of the long-term nature of the Company's foreign investment plans. Therefore, deferred taxes are not provided for on translation adjustments related to non-remitted earnings of the Company's foreign subsidiaries.

⁽²⁾See Note 8 - Derivative Instruments and Hedging Activities.

See accompanying notes.

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PRICESMART, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED—AMOUNTS IN THOUSANDS)


	Three Months Ended
														Total
						Accumulated								Stockholders'
				Additional		Other								Equity
	Common Stock			Paid-in		Comprehensive		Retained		Treasury Stock				Attributable to		Noncontrolling	Total
	Shares	Amount		Capital		Income (Loss)		Earnings		Shares	Amount			PriceSmart, Inc.		Interest	Equity
Balance at August 31, 2019	31,461	$	3	$	454,570	$	(144,339)	$	525,804	924	$	(38,687)	$	797,351	$	928	$	798,279
Purchase of treasury stock	—		—		—		—		—	7		(461)		(461)		—		(461)
Issuance of treasury stock	(69)		—		(5,724)		—		—	(69)		5,724		—		—		—
Issuance of restricted stock award	85		—		—		—		—	—		—		—		—		—
Forfeiture of restricted stock awards	(2)		—		—		—		—	—		—		—		—		—
Stock-based compensation	—		—		3,396		—		—	—		—		3,396		—		3,396
Net income (loss)	—		—		—		—		19,728	—		—		19,728		(19)		19,709
Other comprehensive income (loss)	—		—		—		(3,185)		—	—		—		(3,185)		34		(3,151)
Balance at November 30, 2019	31,475	$	3	$	452,242	$	(147,524)	$	545,532	862	$	(33,424)	$	816,829	$	943	$	817,772

Balance at August 31, 2020	31,418	$	3	$	454,455	$	(176,820)	$	582,487	747	$	(28,406)	$	831,719	$	1,013	$	832,732
Purchase of treasury stock	—		—		—		—		—	7		(526)		(526)		—		(526)
Issuance of treasury stock	(96)		—		(7,864)		—		—	(96)		7,864		—		—		—
Issuance of restricted stock award	77		—		—		—		—	—		—		—		—		—
Forfeiture of restricted stock awards	(3)		—		—		—		—	—		—		—		—		—
Stock-based compensation	—		—		4,075		—		—	—		—		4,075		—		4,075
Net income	—		—		—		—		27,737	—		—		27,737		80		27,817
Other comprehensive income	—		—		—		3,162		—	—		—		3,162		31		3,193
Balance at November 30, 2020	31,396	$	3	$	450,666	$	(173,658)	$	610,224	658	$	(21,068)	$	866,167	$	1,124	$	867,291

See accompanying notes.

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PRICESMART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED—AMOUNTS IN THOUSANDS)



	Three Months Ended
	November 30,		November 30,
	2020		2019
Operating Activities:
Net income	$	27,817	$	19,709
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		15,485		14,814
Allowance for doubtful accounts		10		(19)
Loss on sale of property and equipment		70		71
Deferred income taxes		798		(1,234)
Equity in losses of unconsolidated affiliates		9		48
Stock-based compensation		4,075		3,396
Change in operating assets and liabilities:
Receivables, prepaid expenses and other current assets, non-current assets, accrued salaries and benefits, deferred membership income and other accruals		(8,907)		(9,762)
Merchandise inventories		(63,669)		(56,799)
Accounts payable		6,539		45,880
Net cash provided by (used in) operating activities		(17,773)		16,104
Investing Activities:
Additions to property and equipment		(21,171)		(37,582)
Purchases of short-term investments		(32,121)		(10,184)
Proceeds from settlements of short-term investments		4,433		2,066
Purchases of long-term investments		(1,478)		—
Proceeds from disposal of property and equipment		27		13
Net cash used in investing activities		(50,310)		(45,687)
Financing Activities:
Proceeds from long-term bank borrowings		—		25,000
Repayment of long-term bank borrowings		(3,897)		(2,836)
Proceeds from short-term bank borrowings		—		81,202
Repayment of short-term bank borrowings		(17,695)		(65,581)
Purchase of treasury stock		(526)		(461)
Other financing activities		(80)		19
Net cash provided by (used in) financing activities		(22,198)		37,343
Effect of exchange rate changes on cash and cash equivalents and restricted cash		(1,095)		1,117
Net increase (decrease) in cash, cash equivalents		(91,376)		8,877
Cash, cash equivalents and restricted cash at beginning of period		303,771		106,236
Cash, cash equivalents and restricted cash at end of period	$	212,395	$	115,113

Supplemental disclosure of noncash investing activities:
Capital expenditures accrued, but not yet paid	$	9,150	$	10,282

The following table provides a breakdown of cash and cash equivalents, and restricted cash reported within the statement of cash flows:


	Three Months Ended
	November 30,		November 30,
	2020		2019
Cash and cash equivalents	$	207,955	$	111,359
Short-term restricted cash		185		65
Long-term restricted cash	$	4,255	$	3,689
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows	$	212,395	$	115,113

See accompanying notes.

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PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

November 30, 2020

NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION

PriceSmart, Inc.’s (“PriceSmart,” the “Company,” or "we") business consists primarily of international membership shopping warehouse clubs similar to, but typically smaller in size than, warehouse clubs in the United States. As of November 30, 2020, the Company had 46 warehouse clubs in operation in 12 countries and one U.S. territory (eight in Costa Rica; seven each in Colombia and Panama; five in the Dominican Republic, four in Trinidad and Guatemala; three in Honduras; two each in El Salvador and Nicaragua; and one each in Aruba, Barbados, Jamaica and the United States Virgin Islands), of which the Company owns 100% of the corresponding legal entities (see Note 2 - Summary of Significant Accounting Policies). The Company held the grand opening for its 47^thwarehouse club, on December 4, 2020 in Bogotá, Colombia. This is the Company’s third warehouse club in the greater metropolitan area of Bogotá and the eighth in Colombia. The Company also plans to open new warehouse clubs in Guatemala City, Guatemala and Portmore, Jamaica in the fall of 2021 and the spring of 2022, respectively. Once these two new clubs are open, the Company will operate 49 warehouse clubs.

PriceSmart continues to invest in technology to increase operational efficiencies that lead to greater value to the member, to gain insights about our members and to enhance overall member experience by offering additional services and time-saving features. Technology developments are driving omni-channel capabilities, including online shopping and services. As of November 30, 2020, the Company offered the Click & Go™ curbside pickup and delivery service in all 13 of its markets. These services provide an alternative and convenient way for members to shop, while reducing physical contact. PriceSmart also operates a package forwarding (casillero) and marketplace business under the “Aeropost” banner in 38 countries in Latin America and the Caribbean, many of which overlap with markets where it operates warehouse clubs.

Basis of Presentation – The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for annual financial reporting pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The novel coronavirus (COVID-19) pandemic has severely impacted the economies of the U.S. and the countries where the Company operates. The Company has assessed the impact that COVID-19 has had on our estimates, assumptions and accounting policies and made additional disclosures, if and as necessary.

These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2020 (the “2020 Form 10-K”). The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation.

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PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation – The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s wholly owned subsidiaries, subsidiaries in which it has a controlling interest, and the Company’s joint ventures for which the Company has determined that it is the primary beneficiary. The Company’s net income excludes income attributable to noncontrolling interests. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. The interim consolidated financial statements also include the Company's investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows for the periods presented. The results for interim periods are not necessarily indicative of the results for the year.

The Company determines whether any of the joint ventures in which it has made investments is a Variable Interest Entity (“VIE”) at the start of each new venture and if a reconsideration event has occurred. At this time, the Company also considers whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) and is determined to be the primary beneficiary. If the Company determines that it is not the primary beneficiary of the VIE, then the Company records its investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. Due to the nature of the joint ventures that the Company participates in and the continued commitments for additional financing, the Company determined these joint ventures are VIEs.

In the case of the Company's ownership interest in real estate development joint ventures, both parties to each joint venture share all rights, obligations and the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. As a result, the Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method. Under the equity method, the Company's investments in unconsolidated affiliates are initially recorded as an investment in the stock of an investee at cost and are adjusted for the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of the initial investment. The Company's ownership interest in real estate development joint ventures the Company has recorded under the equity method as of November 30, 2020 are listed below:



Real Estate Development Joint Ventures	Countries	Ownership		Basis of ‎Presentation
GolfPark Plaza, S.A.	Panama	50.0	%	Equity⁽¹⁾
Price Plaza Alajuela PPA, S.A.	Costa Rica	50.0	%	Equity⁽¹⁾

⁽¹⁾Joint venture interests are recorded as investment in unconsolidated affiliates on the consolidated balance sheets.

The Company has determined that for its ownership interest in store-front joint ventures within its marketplace and casillero business, the Company has the power to direct the activities that most significantly impact the economic performance of these VIEs. Therefore, the Company has determined that it is the primary beneficiary of these VIEs and has consolidated these entities within its consolidated financial statements. The Company's ownership interest in store-front joint ventures for which the Company has consolidated their financial statements as of November 30, 2020 are listed below:


Marketplace and Casillero Store-front Joint Ventures	Countries	Ownership		Basis of ‎Presentation
Guatemala	Guatemala	60.0	%	Consolidated
Tortola	British Virgin Islands	50.0	%	Consolidated
Trinidad	Trinidad	50.0	%	Consolidated

Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

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PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

Cash and Cash Equivalents – The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase and proceeds due from credit and debit card transactions in the process of settlement.

Restricted Cash – The changes in restricted cash are disclosed within the consolidated statement of cash flows based on the nature of the restriction. The following table summarizes the restricted cash reported by the Company (in thousands):


	November 30,		August 31,
	2020		2020
Short-term restricted cash	$	185	$	185
Long-term restricted cash ⁽¹⁾		4,255		4,105
Total restricted cash	$	4,440	$	4,290

⁽¹⁾Long-term restricted cash consists mainly of cash deposits held within banking institutions in compliance with federal regulatory requirements in Costa Rica and Panama.

Short-Term Investments – The Company considers as short-term investments certificates of deposit and similar time-based deposits with financial institutions with maturities over three months and up to one year.

Long-Term Investments – The Company considers as long-term investments certificates of deposit and similar time-based deposits with financial institutions with maturities over one year.

Goodwill and Other Intangibles, net – Goodwill and other intangibles totaled $54.7 million as of November 30, 2020 and $55.4 million as of August 31, 2020. The Company reviews reported goodwill and other intangibles at the cash-generating unit level for impairment. The Company tests goodwill for impairment at least annually or when events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

Receivables – Receivables consist primarily of credit card receivables and receivables from vendors and are stated net of allowances for credit losses. The determination of the allowance for credit losses is based on the Company’s assessment of collectability along with the consideration of current and expected market conditions that could impact collectability.

Tax Receivables – The Company pays Value Added Tax (“VAT”) or similar taxes, income taxes, and other taxes within the normal course of business in most of the countries in which it operates related to the procurement of merchandise and/or services the Company acquires and/or on sales and taxable income. VAT is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is similar to, but operates somewhat differently than, sales tax paid in the United States. The Company generally collects VAT from its members upon sale of goods and services and pays VAT to its vendors upon purchase of goods and services. Periodically, the Company submits VAT reports to governmental agencies and reconciles the VAT paid and VAT received. The net overpaid VAT may be refunded or applied to subsequent returns, and the net underpaid VAT must be remitted to the government. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. In most countries where the Company operates, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit and debit cards directly to the government as advance payments of VAT and/or income tax. This collection mechanism generally leaves the Company with net VAT and/or income tax receivables, forcing the Company to process significant refund claims on a recurring basis. These refund or offset processes can take anywhere from several months to several years to complete.

In most countries where the Company operates, there are defined and structured processes to recover VAT receivables via refunds or offsets. However, in one country without a clearly defined refund process, the Company is actively engaged with the local government to recover VAT receivables totaling $8.4 million and $7.0 million as of November 30, 2020 and August 31, 2020, respectively. In two other countries, there have been changes in the method of computing minimum tax payments, under which the governments have sought to require the Company to pay taxes based on a percentage of sales rather than taxable income. As a result, the Company has made and may continue to make income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $10.9 million and $10.4 million and

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deferred tax assets of $2.9 million and $2.8 million as of November 30, 2020 and August 31, 2020, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests. Similarly, we have not placed any recoverability allowances on tax receivables that arise from payments we are required to make originating from tax assessments that we are appealing, as we believe it is more likely than not that we will ultimately prevail in the related appeals.

The Company’s policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:

Short-term VAT and Income tax receivables, recorded as Prepaid expenses and other current assets: This classification is used for any countries where the Company’s subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year.

Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where the Company’s subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery. The Company does not currently have any allowances provided against VAT and income tax receivables.

The following table summarizes the VAT receivables reported by the Company (in thousands):



	November 30,		August 31,
	2020		2020
Prepaid expenses and other current assets	$	3,313	$	1,749
Other non-current assets		26,828		25,851
Total amount of VAT receivables reported	$	30,141	$	27,600

The following table summarizes the Income tax receivables reported by the Company (in thousands):



	November 30,		August 31,
	2020		2020
Prepaid expenses and other current assets	$	12,363	$	10,944
Other non-current assets		21,863		20,116
Total amount of income tax receivables reported	$	34,226	$	31,060

Lease Accounting – The Company’s leases are operating leases for warehouse clubs and non-warehouse club facilities such as corporate headquarters, regional offices, and regional distribution centers. The Company determines if an arrangement is a lease and classifies it as either a finance or operating lease at lease inception. Operating leases are included in Operating lease right-of-use assets, net; Operating lease liabilities, current portion; and Long-term operating lease liabilities on the consolidated balance sheets. The Company does not have finance leases.

Operating lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. The Company’s leases generally do not have a readily determinable implicit rate; therefore, the Company uses a collateralized incremental borrowing rate at the commencement date in determining the present value of future payments. The incremental borrowing rate is based on a yield curve derived from publicly traded bond offerings for companies with credit characteristics that approximate the Company's market risk profile. In addition, we adjust the incremental borrowing rate for jurisdictional risk derived from quoted interest rates from financial institutions to reflect the cost of borrowing in the Company’s local markets. The Company’s lease terms may include options to purchase, extend or terminate the lease, which are

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recognized when it is reasonably certain that the Company will exercise that option. The Company does not combine lease and non-lease components.

The Company measures Right-of-use (“ROU”) assets based on the corresponding lease liabilities, adjusted for any initial direct costs and prepaid lease payments made to the lessor before or at the commencement date (net of lease incentives). The lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are not included in the calculation of the ROU asset and the related lease liability and are recognized as this lease expense is incurred. The Company’s variable lease payments generally relate to amounts the Company pays for additional contingent rent based on a contractually stipulated percentage of sales.

Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or net realizable value. The Company provides for estimated inventory losses and obsolescence based on a percentage of sales. The provision is adjusted every reporting period to reflect the trend of actual physical inventory and cycle count results. In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.

Stock Based Compensation – The Company utilizes three types of equity awards: restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”). Compensation related to RSAs, RSUs and PSUs is based on the fair market value at the time of grant. The Company recognizes the compensation cost related to RSAs and RSUs over the requisite service period as determined by the grant, amortized ratably or on a straight-line basis over the life of the grant. The Company also recognizes compensation cost for PSUs over the performance period of each tranche, adjusting this cost based on the probability that performance metrics will be achieved. If the Company determines that an award is unlikely to vest, any previously recorded expense is then reversed.

The Company accounts for actual forfeitures as they occur. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as income tax expense or benefit. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as an operating cash flow in its consolidated statement of cash flows.

RSAs are outstanding shares of common stock and have the same cash dividend and voting rights as other shares of common stock. Shares of common stock subject to RSUs are not issued nor outstanding until vested, and RSUs do not have the same dividend and voting rights as common stock. However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding. Payments of dividend equivalents to employees are recorded as compensation expense.

PSUs, similar to RSUs, are awarded with dividend equivalents, provided that such amounts become payable only if the performance metric is achieved. At the time the Compensation Committee confirms the performance metric has been achieved, the accrued dividend equivalents are paid on the PSUs.

Treasury Stock – Shares of common stock repurchased by the Company are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in the Company’s consolidated balance sheets. The Company may reissue these treasury shares as part of its stock-based compensation programs. When treasury shares are reissued, the Company uses the first in/first out (“FIFO”) cost method for determining cost of the reissued shares. If the issuance price is higher than the cost, the excess of the issuance price over the cost is credited to additional paid-in capital (“APIC”). If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings. During the three months ended November 30, 2020, the Company reissued approximately 96,400 treasury shares.

Fair Value Measurements – The Company measures the fair value for all financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring basis. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.

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The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company was not required to revalue any assets or liabilities utilizing Level 1 or Level 3 inputs at the balance sheet dates. The Company's Level 2 assets and liabilities revalued at the balance sheet dates, on a recurring basis, consisted of cash flow hedges (interest rate swaps and cross-currency interest rate swaps) and forward foreign exchange contracts. In addition, the Company utilizes Level 2 inputs in determining the fair value of long-term debt.

Non-financial assets and liabilities are revalued and recognized at fair value subsequent to initial recognition when there is evidence of impairment. For the periods reported, no impairment of such non-financial assets was recorded.

The Company’s current and long-term financial assets and liabilities have fair values that approximate their carrying values. The Company’s long-term financial liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted for any applicable unamortized discounts or premiums and debt issuance costs. There have been no significant changes in fair market value of the Company’s current and long-term financial assets, and there have been no material changes to the valuation techniques utilized in the fair value measurement of assets and liabilities disclosed in the Company’s 2020 Annual Report on Form 10-K.

Derivatives Instruments and Hedging Activities – The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates. In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting. If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be reported in accumulated other comprehensive loss until the hedged item completes its contractual term. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company did not change valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets from previous practice during the reporting period. The Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance, however, that this practice effectively mitigates counterparty risk.

Cash Flow Instruments. The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries. The swaps are designated as cash flow hedges of interest expense risk. These instruments are considered effective hedges and are recorded using hedge accounting. The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S. dollar. The swaps are designated as cash flow hedges of the currency risk and interest-rate risk related to payments on the U.S. denominated debt. These instruments are also considered to be effective hedges and are recorded using hedge accounting. Under cash flow hedging, the entire gain or loss of the derivative, calculated as the net present value of the future cash flows, is reported on the consolidated balance sheets in accumulated other comprehensive loss. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. Refer to “Note 8 - Derivative Instruments and Hedging Activities” for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of November 30, 2020 and August 31, 2020.

Fair Value Instruments. The Company is exposed to foreign currency exchange rate fluctuations in the normal course of business. This includes exposure to foreign currency exchange rate fluctuations on U.S. dollar denominated liabilities within the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flows attributable to currency exchange movements. The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts are treated for accounting purposes as fair value instruments and do not qualify for derivative hedge accounting, and as such the Company does not apply derivative hedge accounting to record these transactions. As a result, these contracts are valued at fair value with unrealized gains or losses reported in earnings during the

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period of the change. The Company seeks to mitigate foreign currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features and are limited to less than one year in duration.

Other Instruments. Other derivatives not designated as hedging instruments consist primarily of written call options in which the Company receives a premium that it uses to reduce the costs associated with its hedging activities. For derivative instruments not designated as hedging instruments, the Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Other expense, net in the consolidated statements of income in the period of change.

Revenue Recognition – The accounting policies and other disclosures such as the disclosure of disaggregated revenues are described in “Note 3 – Revenue Recognition”.

Insurance Reimbursements – Receipts from insurance reimbursements up to the amount of the losses recognized are considered recoveries. These recoveries are accounted for when they are probable of receipt. Insurance recoveries are not recognized prior to the recognition of the related cost. Anticipated proceeds in excess of the amount of loss recognized are considered gains and are subject to gain contingency guidance. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the insurance claim are resolved.

Cost of Goods Sold – The Company includes the cost of merchandise, food service and bakery raw materials in cost of goods sold, net merchandise sales. The Company also includes in cost of goods sold: net merchandise sales the external and internal distribution and handling costs for supplying merchandise, raw materials and supplies to the warehouse clubs, and, when applicable, costs of shipping to members. External costs include inbound freight, duties, drayage, fees, insurance, and non-recoverable value-added tax related to inventory shrink, spoilage and damage. Internal costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense and building and equipment depreciation at the Company's distribution facilities and payroll and other direct costs for in-club demonstrations.

For export sales, the Company includes the cost of merchandise and external and internal distribution and handling costs for supplying merchandise in cost of goods sold, exports.

For the marketplace and casillero operations, the Company includes the costs of external and internal shipping, handling and other direct costs incurred to provide delivery, insurance and customs processing services in cost of goods sold, non-merchandise.

Vendor consideration consists primarily of volume rebates, time-limited product promotions, cooperative marketing efforts, digital advertising, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates that are not threshold based are incorporated into the unit cost of merchandise reducing the inventory cost and cost of goods sold. Volume rebates that are threshold based are recorded as a reduction to cost of goods sold when the Company achieves established purchase levels that are confirmed by the vendor in writing or upon receipt of funds. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is reclassified as a reduction to inventory, if significant. Cooperative marketing efforts and digital advertising are related to consideration received by the Company from vendors for non-distinct online advertising services on the Company’s website and social media platforms. Slotting fees are related to consideration received by the Company from vendors for preferential "end cap" placement of the vendor's products within the warehouse club. Demonstration reimbursements are related to consideration received by the Company from vendors for the in-club promotion of the vendors' products. The Company records the reduction in cost of goods sold on a transactional basis for these programs. Prompt payment discounts are taken in substantially all cases and therefore are applied directly to reduce the acquisition cost of the related inventory, with the resulting effect recorded to cost of goods sold when the inventory is sold.

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Selling, General and Administrative – Selling, general and administrative costs are comprised primarily of expenses associated with operating warehouse clubs and freight forwarding operations. These costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation, bank, credit card processing fees, and amortization of intangibles. Also included in selling, general and administrative expenses are the payroll and related costs for the Company’s U.S. and regional management and purchasing centers.

Pre-Opening Costs – The Company expenses pre-opening costs (the costs of start-up activities, including organization costs and rent) for new warehouse clubs as incurred.

Contingencies and Litigation – The Company records and reserves for loss contingencies if (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can be reasonably estimated. If one or both criteria for accrual are not met, but there is at least a reasonable possibility that a material loss will occur, the Company does not record and reserve for a loss contingency but describes the contingency within a note and provides detail, when possible, of the estimated potential loss or range of loss. If an estimate cannot be made, a statement to that effect is made.

Foreign Currency Translation – The assets and liabilities of the Company’s foreign operations are translated to U.S. dollars when the functional currency in the Company’s international subsidiaries is the local currency and not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss. These adjustments will affect net income upon the sale or liquidation of the underlying investment.

The following table discloses the net effect of translation into the reporting currency on other comprehensive loss for these local currency denominated accounts for the three months ended November 30, 2020 and 2019 (in thousands):

Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of income (in thousands):

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Recent Accounting Pronouncements – Not Yet Adopted

FASB ASC 848 ASU 2020-04—Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU No. 2020-04 provides optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships, and other transactions affected by reference rate reform. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the impact adoption of this guidance may have on the Company’s consolidated financial statements.

FASB ASC 740 ASU 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The ASU is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. The Company expects to adopt ASU No. 2019-12 on September 1, 2021, the first quarter of fiscal year 2022. The Company is currently evaluating the impact adoption of this guidance may have on the Company’s consolidated financial statements.

FASB ASC 715 ASU 2018-14 – Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement benefits (Topic 715-20). The standard amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other post-retirement plans. This ASU is effective for fiscal years ending after December 15, 2020 and must be applied on a retrospective basis. The Company expects to adopt ASU No. 2018-14 on September 1, 2021, the first quarter of fiscal year 2022. The Company is currently evaluating the impact adoption of this guidance may have on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Adopted

FASB ASC 810 ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As such, the amendment in this ASU requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in subtopic 350-40 in order to determine which implementation costs to capitalize as an asset and which costs to expense.

Additionally, the amendments in this ASU require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this ASU are effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted ASU No. 2018-15 on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

FASB ASC 820 ASU 2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The standard eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. ASU No. 2018-13 adds new disclosure requirements for Level 3 measurements. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. The Company adopted ASU No. 2018-13 on a prospective basis on September 1, 2020, the

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first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

FASB ASC 350 ASU 2017-04 – Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this ASU, entities should now perform their goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. The Company adopted ASU No. 2017-04 on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

FASB ASC 326 ASU 2016-13 – Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the FASB’s guidance on the impairment of financial instruments. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments to clarify and address certain items related to the amendments in ASU 2016-13. These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the amendments on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

There were no other new accounting standards that had a material impact on the Company’s consolidated financial statements during the three month period ended November 30, 2020, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of November 30, 2020 that the Company expects to have a material impact on its consolidated financial statements.

NOTE 3 – REVENUE RECOGNITION

Performance Obligations

The Company identifies each distinct performance obligation to transfer goods (or bundle of goods) or services. The Company recognizes revenue when (or as) it satisfies a performance obligation by transferring control of the goods or services to the customer.

Net Merchandise Sales. The Company recognizes net merchandise sales revenue, net of sales taxes, on transactions where the Company has determined that it is the principal in the sale of merchandise. These transactions may include shipping commitments and/or shipping revenue if the transaction involves delivery to the customer.

Non-merchandise Sales. The Company recognizes non-merchandise revenue, net of sales taxes, on transactions where the Company has determined that it is the agent in the transaction. These transactions primarily consist of contracts the Company enters into with its customers to provide delivery, insurance and customs processing services for products its customers purchase online in the United States either directly from other vendors utilizing the vendor’s website or through the Company’s marketplace site. Revenue is recognized when the Company’s performance obligations have been completed (that is when delivery of the items have been made to the destination point) and is recorded in “non-merchandise revenue” on the Consolidated Statements of Income. Prepayment for orders for which the Company has not fulfilled its performance obligation are recorded as deferred income. Additionally, the Company records revenue at the net amounts retained, i.e., the amount paid by the customer less

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amounts remitted to the respective merchandise vendors, as the Company is acting as an agent and is not the principal in the sale of those goods being purchased from the vendors by the Company’s customers.

Membership Fee Revenue. Membership income represents annual membership fees paid by the Company’s warehouse club members, which are recognized ratably over the 12-month term of the membership. Our membership policy allows members to cancel their membership in the first 60 days and receive a full refund. After the 60-day period, membership refunds are prorated over the remaining term of the membership. The Company has significant experience with membership refund patterns and expects membership refunds will not be material. Therefore, no refund reserve was required for the periods presented. Membership fee revenue is included in membership income in the Company's consolidated statements of income. The deferred membership fee is included in deferred income in the Company's consolidated balance sheets.

Platinum Points Reward Programs. The Company currently offers Platinum memberships in twelve of its thirteen countries. The annual fee for a Platinum membership is approximately $75. The Platinum membership provides members with a 2% rebate on most items, up to an annual maximum of $500. The rebate is issued annually to Platinum members on March 1 and expires August 31. Platinum members can apply this rebate to future purchases at the warehouse club during the redemption period. The Company records this 2% rebate as a reduction of revenue at the time of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses and other current liabilities, platinum rewards. The Company has determined that breakage revenue is 5% of the awards issued; therefore, it records 95% of the Platinum membership liability at the time of sale. Annually, the Company reviews for expired unused rebates outstanding, and the expired unused rebates are recognized as “Other revenue and income” on the consolidated statements of income.

Co-branded Credit Card Points Reward Programs. Most of the Company’s subsidiaries have points reward programs related to co-branded Credit Cards. These points reward programs provide incremental points that can be used at a future time to acquire merchandise within the Company’s warehouse clubs. This results in two performance obligations, the first performance obligation being the initial sale of the merchandise or services purchased with the co-branded credit card and the second performance obligation being the future use of the points rewards to purchase merchandise or services. As a result, upon the initial sale, the Company allocates the transaction price to each performance obligation with the amount allocated to the future use points rewards recorded as a contract liability within other accrued expenses and other current liabilities on the consolidated balance sheet. The portion of the selling price allocated to the reward points is recognized as Net merchandise sales when the points are used or when the points expire. The Company reviews on an annual basis expired points rewards outstanding, and the expired rewards are recognized as Net merchandise sales on the consolidated statements of income within markets where the co-branded credit card agreement allows for such treatment.

Gift Cards. Members’ purchases of gift cards to be utilized at the Company's warehouse clubs are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card. The outstanding gift cards are reflected as other accrued expenses and other current liabilities in the consolidated balance sheets. These gift cards generally have a one-year stated expiration date from the date of issuance and are generally redeemed prior to expiration. However, the absence of a large volume of transactions for gift cards impairs the Company's ability to make a reasonable estimate of the redemption levels for gift certificates; therefore, the Company assumes a 100% redemption rate prior to expiration of the gift certificate. The Company periodically reviews unredeemed outstanding gift certificates, and the gift certificates that have expired are recognized as “Other revenue and income” on the consolidated statements of income.

Co-branded Credit Card Revenue Sharing Agreements. As part of the co-branded credit card agreements that the Company has entered into with financial institutions within its markets, the Company often enters into revenue sharing agreements. As part of these agreements, in some countries, the Company receives a portion of the interest income generated from the average outstanding balances on the co-branded credit cards from these financial institutions (“interest generating portfolio” or “IGP”). The Company recognizes its portion of interest received as revenue during the period it is earned. The Company has determined that this revenue should be recognized as “Other revenue and income” on the consolidated statements of income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

Contract Performance Liabilities

Contract performance liabilities as a result of transactions with customers primarily consist of deferred membership income, other deferred income, deferred gift card revenue, Platinum points programs, and liabilities related to co-branded credit card points rewards programs which are included in deferred income and other accrued expenses and other current liabilities in the Company’s consolidated balance sheets. The following table provides these contract balances from transactions with customers as of the dates listed (in thousands):


	Contract Liabilities
	November 30, 2020		August 31, 2020
Deferred membership income	$	24,522	$	23,051
Other contract performance liabilities	$	8,104	$	5,190

Disaggregated Revenues

In the following table, net merchandise sales are disaggregated by merchandise category (in thousands):



		Three Months Ended
		November 30, 2020		November 30, ‎2019
Foods & Sundries	$	418,374	$	392,805
Fresh Foods		235,289		215,238
Hardlines		112,785		90,804
Softlines		40,329		40,324
Other Business		31,592		39,557
Net Merchandise Sales	$	838,369	$	778,728

NOTE 4 – EARNINGS PER SHARE

The Company presents basic net income per share using the two-class method. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders and that determines basic net income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to common stockholders. A participating security is defined as a security that may participate in undistributed earnings with common stock. The Company’s capital structure includes securities that participate with common stock on a one-for-one basis for distribution of dividends. These are the restricted stock awards and restricted stock units issued pursuant to the 2013 Equity Incentive Award Plan. The Company does not include performance stock units as participating securities until they vest. The Company determines the diluted net income per share by using the more dilutive of the two class-method or the treasury stock method and by including the basic weighted average of outstanding performance stock units in the calculation of diluted net income per share under the two-class method and including all potential common shares assumed issued in the calculation of diluted net income per share under the treasury stock method.

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

The following table sets forth the computation of net income per share for the three months ended November 30, 2020 and 2019 (in thousands, except per share amounts):



	Three Months Ended
	November 30,		November 30,
	2020		2019
Net income attributable to PriceSmart, Inc.	$	27,737	$	19,728
Less: Allocation of income to unvested stockholders		(459)		(258)
Net income attributable to PriceSmart, Inc. per share available for distribution	$	27,278	$	19,470
Basic weighted average shares outstanding		30,398		30,277
Add dilutive effect of performance stock units (two-class method)		22		7
Diluted average shares outstanding		30,420		30,284
Basic net income per share	$	0.90	$	0.64
Diluted net income per share	$	0.90	$	0.64

NOTE 5 – STOCKHOLDERS’ EQUITY

Dividends

No dividends were declared by the Company’s Board of Directors during the first three months of fiscal year 2021. The following table summarizes the dividends declared and paid during fiscal year 2020.

First Payment

Second Payment

Declared

Amount

Record
‎Date

Date
‎Paid

Amount

Record
‎Date

Date
‎Paid

Amount

2/6/2020

0.70

2/15/2020

2/28/2020

0.35

8/15/2020

8/31/2020

0.35

The Company anticipates the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, the amount of such dividends, and the establishment of record and payment dates is subject to final determination by the Board of Directors at its discretion after its review of the Company’s financial performance and anticipated capital requirements, taking into account the uncertainty surrounding the ongoing effects of the COVID-19 pandemic on our results of operations and cash flows.

Comprehensive Income and Accumulated Other Comprehensive Loss

The following tables disclose the effects of each component of other comprehensive income (loss), net of tax (in thousands):


	Attributable to		Noncontrolling
	PriceSmart		Interests		Total
Beginning balance, September 1, 2020	$	(176,820)	$	134	$	(176,686)
Foreign currency translation adjustments		2,761		31		2,792
Defined benefit pension plans ⁽¹⁾		93		—		93
Derivative instruments ⁽²⁾		308		—		308
Ending balance, November 30, 2020	$	(173,658)	$	165	$	(173,493)

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PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)


	Attributable to		Noncontrolling
	PriceSmart		Interests		Total
Beginning balance, September 1, 2019	$	(144,339)	$	20	$	(144,319)
Foreign currency translation adjustments		(3,724)		34		(3,690)
Defined benefit pension plans ⁽¹⁾		26		—		26
Derivative Instruments ⁽²⁾		513		—		513
Ending balance, November 30, 2019	$	(147,524)	$	54	$	(147,470)


	Attributable to		Noncontrolling
	PriceSmart		Interests		Total
Beginning balance, September 1, 2019	$	(144,339)	$	20	$	(144,319)
Foreign currency translation adjustments		(29,413)		114		(29,299)
Defined benefit pension plans ⁽¹⁾		(79)		—		(79)
Derivative Instruments ⁽²⁾		(5,803)		—		(5,803)
Amounts reclassified from accumulated other comprehensive income (loss)		2,814		—		2,814
Ending balance, August 31, 2020	$	(176,820)	$	134	$	(176,686)

⁽¹⁾Amounts reclassified from accumulated other comprehensive loss related to the minimum pension liability are included in warehouse club and other operations in the Company's consolidated statements of income.

⁽²⁾Refer to Note 8 - Derivative Instruments and Hedging Activities.

Retained Earnings Not Available for Distribution

The following table summarizes retained earnings designated as legal reserves of various subsidiaries which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations (in thousands):

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business related to the Company’s operations and property ownership. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit. The Company believes that the final disposition of these matters will not have a material adverse effect on its financial position, results of operations or liquidity. It is possible, however, that the Company's results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to such matters.

The Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjusts the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency.

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

PERA filed a consolidated class action complaint, which alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company intends to vigorously defend itself against any obligations or liability to the plaintiffs with respect to such claims. The Company believes the claims are without merit. During the third quarter of fiscal 2020, the Company filed a Motion to Dismiss the Plaintiff’s Consolidated Amended Complaint and the Plaintiff filed an Opposition to the Motion to Dismiss. During the fourth quarter of fiscal 2020, the Company filed a Reply to the Opposition. The Court has taken the matter under advisement.

Income Taxes – For interim reporting, the Company uses an estimated annual effective tax rate (AETR), pursuant to ASC 740-270, to calculate income tax expense. Income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating its ability to recover deferred tax assets in the jurisdictions from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results adjusted for the results of discontinued operations and incorporates assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income (loss).

The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes.

The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. There were no significant changes in the Company's uncertain income tax positions since August 31, 2020.

In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies. As of November 30, 2020 and August 31, 2020, the Company has recorded within other accrued expenses and other current liabilities a total of $2.3 million and $2.5 million, respectively, for various non-income tax related tax contingencies.

While the Company believes the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of litigation, in estimating probable additional income tax liability taking into account uncertain tax positions and in evaluating the probable additional tax associated with various non-income tax filing positions. As such, the Company is unable to make a reasonable estimate of the sensitivity to change of estimates affecting its recorded liabilities. As additional information becomes available, the Company assesses the potential liability and revises its estimates as appropriate.

In two other countries where the Company operates, minimum income tax rules require the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $10.9 million and $10.4 million and deferred tax assets of $2.9 million and $2.8 million as of November 30, 2020 and August 31, 2020, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests.

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

Other Commitments

The Company is also committed to non-cancelable construction service obligations for various warehouse club developments and expansions. As of November 30, 2020 and August 31, 2020, the Company had approximately $8.2 million and $5.1 million, respectively, in contractual obligations for construction services not yet rendered.

From time to time, the Company has entered into general land purchase and land purchase option agreements. The Company’s land purchase agreements are typically subject to various conditions, including, but not limited to, the ability to obtain necessary governmental permits or approvals. A deposit under an agreement is typically returned to the Company if all permits or approvals are not obtained. Generally, the Company has the right to cancel any of its agreements to purchase land without cause by forfeiture of some or all of the deposits it has made pursuant to the agreement. As of November 30, 2020, the Company did not have any pending land purchase option agreements.

The table below summarizes the Company’s interest in real estate joint ventures, commitments to additional future investments and the Company’s maximum exposure to loss as a result of its involvement in these joint venture as of November 30, 2020 (in thousands):



Entity	% ‎Ownership		Initial ‎Investment		Additional ‎Investments		Net Income Inception to Date		Company’s ‎Variable ‎Interest ‎in Entity		Commitment ‎to Future ‎Additional ‎Investments⁽¹⁾		Company's ‎Maximum ‎Exposure ‎to Loss in ‎Entity⁽²⁾
GolfPark Plaza, S.A.	50	%	$	4,616	$	2,402	$	57	$	7,075	$	99	$	7,174
Price Plaza Alajuela PPA, S.A.	50	%		2,193		1,236		89		3,518		785		4,303
Total			$	6,809	$	3,638	$	146	$	10,593	$	884	$	11,477

⁽¹⁾The parties intend to seek alternate financing for the project, which could reduce the amount of investments each party would be required to provide. The parties may mutually agree on changes to the project, which could increase or decrease the amount of contributions each party is required to provide.

⁽²⁾The maximum exposure is determined by adding the Company’s variable interest in the entity and any explicit or implicit arrangements that could require the Company to provide additional financial support.

NOTE 7 – DEBT

Short-term borrowings consist of unsecured lines of credit. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands):


			Facilities Used
	Total Amount		Short-term		Letters of		Facilities		Weighted average
	of Facilities		Borrowings		Credit		Available		interest rate
November 30, 2020	$	121,000	$	47,349	$	125	$	73,526	2.9	%
August 31, 2020	$	81,210	$	65,143	$	388	$	15,679	3.7	%

As of November 30, 2020 and August 31, 2020, the Company had approximately $40.0 million of short-term facilities in the U.S. As of November 30, 2020 and August 31, 2020, the Company was in compliance with all covenants or amended covenants for each of its short-term facility agreements. Each of the facilities expires annually except for the U.S. facility, which expires bi-annually. The facilities are normally renewed.

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PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

The following table provides the changes in long-term debt for the three-months ended November 30, 2020:


(Amounts in thousands)	Current ‎portion of ‎long-term debt		Long-term ‎debt (net of current portion)		Total
Balances as of August 31, 2020	$	19,437	$	112,610	$	132,047	⁽¹⁾
Regularly scheduled loan payments		(287)		(3,610)		(3,897)
Reclassifications of long-term debt due in the next 12 months		625		(625)		—
Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar⁽²⁾		(4)		(271)		(275)
Balances as of November 30, 2020	$	19,771	$	108,104	$	127,875	⁽³⁾

⁽¹⁾The carrying amount of non-cash assets assigned as collateral for these loans was $158.6 million. No cash assets were assigned as collateral for these loans.

⁽²⁾These foreign currency translation adjustments are recorded within Other comprehensive income.

⁽³⁾The carrying amount of non-cash assets assigned as collateral for these loans was $154.1 million. No cash assets were assigned as collateral for these loans.

As of November 30, 2020, the Company had approximately $104.0 million of long-term loans in several foreign subsidiaries that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of November 30, 2020, the Company was in compliance with all covenants or amended covenants.

As of August 31, 2020, the Company had approximately $107.4 million of long-term loans in several foreign subsidiaries that require these subsidiaries to comply with certain annual or quarterly financial covenants.

Annual maturities of long-term debt are as follows (in thousands):


Twelve Months Ended November 30,	Amount
2021	$	19,771
2022		15,455
2023		23,906
2024		23,335
2025		7,777
Thereafter		37,631
Total	$	127,875

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to interest rate risk relating to its ongoing business operations. To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.

In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of three of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company’s subsidiaries entered into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.

These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the entire gain or loss on the derivative reported as a component of other comprehensive loss. Amounts are deferred in other comprehensive loss and reclassified into earnings in the same income statement line item that is used to present earnings effect of the hedged item when the hedged item affects earnings.

The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, including foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts (NDFs) that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features.

The Company uses other derivatives not designated as hedging instruments that consist primarily of written call options in which the Company receives a premium from the holder. This premium lowers the cost of the Company’s hedging activities. The Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Other expense, net in the consolidated statements of income in the period of change.

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

Cash Flow Hedges

As of November 30, 2020, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting.

The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the three months ended November 30, 2020:

Subsidiary

Date
‎Entered
‎into

Derivative
‎Financial
‎Counter-
‎party

Derivative
‎Financial
‎Instruments

Initial
‎US$
‎Notional
‎Amount

Bank
‎US$
‎loan
‎Held
‎with

Floating Leg
‎(swap
‎counter-party)

Fixed Rate
‎for PSMT
‎Subsidiary

Settlement
‎Dates

Effective
‎Period of swap

Colombia

3-Dec-19

Citibank, N.A. ("Citi")

Cross currency interest rate swap

7,875,000

Citibank, N.A.

Variable rate 3-month Libor plus 2.45%

7.87

3rd day of each December, March, June, and September, beginning on March 3, 2020

December 3, 2019 -
‎December 3, 2024

Colombia

27-Nov-19

Citibank, N.A. ("Citi")

Cross currency interest rate swap

25,000,000

Citibank, N.A.

Variable rate 3-month Libor plus 2.45%

7.93

27th day of each November, February, May and August beginning February 27, 2020

November 27, 2019 -
‎November 27, 2024

Colombia

24-Sep-19

Citibank, N.A. ("Citi")

Cross currency interest rate swap

12,500,000

PriceSmart, Inc.

Variable rate 3-month Libor plus 2.50%

7.09

24th day of each December, March, June and September beginning December 24, 2019

September 24, 2019 -
‎September 26, 2022

Panama

25-Jun-18

Bank of Nova Scotia ("Scotiabank")

Interest rate swap

14,625,000

Bank of Nova Scotia

Variable rate 3-month Libor plus 3.0%

5.99

23rd day of each month beginning on July 23, 2018

June 25, 2018 -
‎March 23, 2023

Honduras

26-Feb-18

Citibank, N.A. ("Citi")

Cross currency interest rate swap

13,500,000

Citibank, N.A.

Variable rate 3-month Libor plus 3.00%

9.75

29th day of May, August, November and February beginning May 29, 2018

February 26, 2018 -
‎February 24, 2024

PriceSmart, Inc

7-Nov-16

MUFG Union Bank, N.A. ("Union Bank")

Interest rate swap

35,700,000

Union Bank

Variable rate 1-month Libor plus 1.7%

3.65

1st day of each month beginning on April 1, 2017

March 1, 2017 - March 1, 2027

For the three months ended November 30, 2020 and 2019, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):



Income Statement Classification	Interest ‎expense on ‎borrowings⁽¹⁾		Cost of ‎swaps⁽²⁾		Total
Interest expense for the three months ended November 30, 2020	$	642	$	925	$	1,567
Interest expense for the three months ended November 30, 2019	$	1,014	$	261	$	1,275

⁽¹⁾This amount is representative of the interest expense recognized on the underlying hedged transactions.

⁽²⁾This amount is representative of the interest expense recognized on the interest rate swaps and cross-currency swaps designated as cash flow hedging instruments.

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

The total notional balance of the Company’s pay-fixed/receive-variable interest rate swaps and cross-currency interest rate swaps was as follows (in thousands):



	Notional Amount as of
	November 30,		August 31,
Floating Rate Payer (Swap Counterparty)	2020		2020
Union Bank	$	33,575	$	33,894
Citibank N.A.		54,541		55,086
Scotiabank		11,250		11,625
Total	$	99,366	$	100,605

Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income)/loss (in thousands):


		November 30, 2020						August 31, 2020
Derivatives designated as cash flow hedging instruments	Balance Sheet ‎Classification	Fair ‎Value		Net Tax ‎Effect		Net ‎OCI		Fair ‎Value		Net Tax ‎Effect		Net ‎OCI
Cross-currency interest rate swaps	Other non-current assets	$	144	$	(43)	$	101	$	872	$	(265)	$	607
Interest rate swaps	Other long-term liabilities		(3,531)		825		(2,706)		(3,857)		898		(2,959)
Cross-currency interest rate swaps	Other long-term liabilities		(1,790)		541		(1,249)		(828)		248		(580)
Net fair value of derivatives designated as hedging instruments		$	(5,177)	$	1,323	$	(3,854)	$	(3,813)	$	881	$	(2,932)

Fair Value Instruments

From time to time the Company enters into non-deliverable forward foreign-exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. As of November 30, 2020, the Company did not have any material non-deliverable forward foreign-exchange contracts.

Other Instruments

Other derivatives not designated as hedging instruments consist primarily of written call options in which the Company receives a premium that it uses to reduce the costs associated with its hedging activities. As of November 30, 2020, the Company does not have any contracts not designated as hedging instruments.

For the three months ended November 30, 2020 and 2019, the Company included in its consolidated statements of income the loss of its other non-designated derivative contracts as follows (in thousands):


		Three Months Ended
		November 30,	November 30,
Income Statement Classification		2020	2019
Other expense, net	$	—	$	(1,270)

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

NOTE 9 – SEGMENTS

The Company and its subsidiaries are principally engaged in the international operation of membership shopping in 46 warehouse clubs located in 12 countries and one U.S. territory that are located in Central America, the Caribbean and Colombia. In addition, the Company operates distribution centers and corporate offices in the United States. The Company has aggregated its warehouse clubs, distribution centers and corporate offices into reportable segments. The Company’s reportable segments are based on management’s organization of these locations into operating segments by general geographic location, used by management and the Company's chief operating decision maker in setting up management lines of responsibility, providing support services, and making operational decisions and assessments of financial performance. Segment amounts are presented after converting to U.S. dollars and consolidating eliminations. Certain revenues, operating costs and inter-company charges included in the United States segment are not allocated to the segments within this presentation, as it is impractical to do so, and they appear as reconciling items to reflect the amount eliminated on consolidation of intersegment transactions. From time to time, the Company revises the measurement of each segment's operating income and net income, including certain corporate overhead allocations, and other measures as determined by the information regularly reviewed by the Company's chief operating decision maker. When the Company does so, the previous period amounts and balances are reclassified to conform to the current period's presentation.

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

The following tables summarize by segment certain revenues, operating costs and balance sheet items (in thousands):



	United ‎States ‎Operations		Central ‎American ‎Operations		Caribbean ‎Operations⁽¹⁾		Colombia Operations		Reconciling ‎Items⁽²⁾		Total
Three Months Ended November 30, 2020
Revenue from external customers	$	23,617	$	494,692	$	258,516	$	100,607	$	—	$	877,432
Intersegment revenues		350,103		4,736		1,146		1,129		(357,114)		—
Depreciation, Property and equipment		1,665		7,694		3,792		1,735		—		14,886
Amortization, Intangibles		599		—		—		—		—		599
Operating income		5,742		34,445		21,594		5,565		(22,815)		44,531
Net income (loss) attributable to PriceSmart, Inc.		(372)		29,238		17,170		4,596		(22,895)		27,737
Long-lived assets (other than deferred tax assets)		81,277		472,892		178,879		159,459		—		892,507
Intangibles, net		9,566		—		—		—		—		9,566
Goodwill		10,695		24,317		10,111		—		—		45,123
Total assets		212,434		771,933		436,418		257,210		—		1,677,995
Capital expenditures, net		1,218		7,544		2,458		8,539		—		19,759

Three Months Ended November 30, 2019
Revenue from external customers	$	17,339	$	466,802	$	235,017	$	92,783	$	—	$	811,941
Intersegment revenues		349,950		4,045		1,202		536		(355,733)		—
Depreciation, Property and equipment		1,348		6,882		3,966		2,018		—		14,214
Amortization, Intangibles		599		—		—				—		599
Operating income		2,587		31,700		11,810		4,524		(19,907)		30,714
Net income (loss) attributable to PriceSmart, Inc.		(724)		26,751		10,318		3,271		(19,888)		19,728
Long-lived assets (other than deferred tax assets)		84,117		471,366		177,742		143,818		—		877,043
Intangibles, net		11,977		—		—		—		—		11,977
Goodwill		10,695		24,532		10,198		—		—		45,425
Total assets		168,375		754,364		369,575		231,797		—		1,524,111
Capital expenditures, net		629		15,243		4,520		20,834		—		41,226

As of August 31, 2020
Long-lived assets (other than deferred tax assets)	$	81,008	$	475,744	$	177,166	$	146,862	$	—	$	880,780
Intangibles, net		10,166		—		—		—		—		10,166
Goodwill		10,696		24,418		10,092		—		—		45,206
Total assets		272,190		741,523		395,244		247,868		—		1,656,825

⁽¹⁾Management considers its club in the U.S. Virgin Islands to be part of its Caribbean operations.

⁽²⁾The reconciling items reflect the amount eliminated on consolidation of intersegment transactions.

NOTE 10 – SUBSEQUENT EVENTS

The Company has evaluated all events subsequent to the balance sheet date of November 30, 2020 through the date of issuance of these consolidated financial statements and has determined that there are no subsequent events that require disclosure.

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PRICESMART, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements concerning PriceSmart, Inc.'s ("PriceSmart", the "Company" or "we") anticipated future revenues and earnings, adequacy of future cash flows, omni-channel initiatives, proposed warehouse club openings, the Company's performance relative to competitors and related matters. These forward-looking statements include, but are not limited to, statements containing the words “expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “anticipated,” “scheduled,” and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially including, but not limited to: adverse changes in economic conditions in the Company’s markets, natural disasters, compliance risks, volatility in currency exchange rates, competition, consumer and small business spending patterns, political instability, increased costs associated with the integration of online commerce with our traditional business, whether the Company can successfully execute strategic initiatives, cybersecurity breaches that could cause disruptions in our systems or jeopardize the security of member or business information, cost increases from product and service providers, interruption of supply chains, COVID-19 related factors and challenges, including among others, the duration of the pandemic, the unknown long-term economic impact, the impact of government policies and restrictions that have limited access for our members, and shifts in demand away from discretionary or higher priced products to lower priced products, exposure to product liability claims and product recalls, recoverability of moneys owed to PriceSmart from governments, and other important factors discussed under the captions “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2020 filed with the United States Securities and Exchange Commission (“SEC”) on October 30, 2020. These risk factors may be updated from time to time in our other filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Forward-looking statements speak only as of the date that they are made, and the Company does not undertake to update them, except as required by law. In addition, these risks are not the only risks that the Company faces. The Company could also be affected by additional factors that apply to all companies operating globally and in the U.S., as well as other risks that are not presently known to the Company or that the Company currently considers to be immaterial.

The following discussion and analysis compares the results of operations for the three months ended November 30, 2020 and 2019 and should be read in conjunction with the consolidated financial statements, and the accompanying notes included therein.

Overview

PriceSmart began operations in 1996 in San Diego, California. We own and operate U.S. style membership shopping warehouse clubs in Central America, the Caribbean and Colombia. We also function as a wholesale supplier to a retailer in the Philippines. We sell high quality brand name and private label consumer products, offer prepared foods through our bakeries and food courts with the option for delivery, and in certain clubs we provide services such as optical and tires at low prices to individuals and businesses. Historically, our typical warehouse buildings have ranged in sales floor size from approximately 40,000 to 60,000 square feet and are located primarily in and around the major cities in our markets to take advantage of dense populations and relatively higher levels of disposable income. Additionally, we operate smaller format clubs, with sales floors ranging from approximately 30,000 to 40,000 square feet. These smaller format clubs are an alternative intended to serve markets where the population is likely to support a smaller club or densely populated urban areas where it is challenging to secure sufficient real estate at a reasonable cost for a larger club. We believe this smaller format has the potential to expand our geographic reach in existing markets and provide more convenience for our members. We continue to invest in technology to increase efficiencies and to enhance the member shopping experience with omni-channel capabilities, including e-commerce online shopping. Most notably, the Company launched its Click & Go™ online order, curbside pickup and delivery service, in fiscal 2020, which provides contactless shopping in all 13 of our markets.

We believe that our business success depends on our ability to be the low-cost, high-quality operators in our markets and, in turn, to offer the best value on attractive products and services in a safe and responsible environment. We believe that lower prices on products and services drive sales volume, which increases the Company’s buying leverage, which in turn leads to better pricing that we can then offer to our members, validating the annual membership investment that they make.

Logistics and distribution efficiencies are fundamental to delivering high quality merchandise at low prices to our members. To reduce the risk of supply chain disruption, we have developed greater supply chain flexibility between our U.S. and regional distribution centers, which provides us increased flexibility amidst this evolving global environment. We continue to

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explore ways to deliver value, improve efficiency, reduce costs and ensure a flow of high quality, curated merchandise to our warehouse clubs.

Purchasing land and constructing warehouse clubs is generally our largest ongoing capital investment. Securing land for warehouse club locations is challenging in several of our markets because suitable sites at economically feasible prices are difficult to find. We believe real estate ownership provides a number of advantages as compared to leasing, including lower operating expenses, flexibility to expand or otherwise enhance our buildings, long-term control over the use of the property and the residual value that the real estate may have in future years. While our preference is to own rather than lease real estate, we have entered into real estate leases in certain cases and will likely continue to do so in the future.

Our warehouse clubs currently operate in emerging markets that historically have had higher growth rates and lower warehouse club market penetration than the U.S. market. In the countries in which we operate, we do not currently face direct competition from U.S. membership warehouse club operators. However, we do face competition from various retail formats such as hypermarkets, supermarkets, cash and carry, home improvement centers, electronic retailers, specialty stores, convenience stores, traditional wholesale distribution and growing online sales.

The number of warehouse clubs as of November 30, 2020 for each country or territory were as follows:



	Number of	Number of
	Warehouse Clubs	Warehouse Clubs
	in Operation as of	in Operation as of
Country/Territory	November 30, 2019	November 30, 2020
Costa Rica	7	8
Colombia	7	7
Panama	7	7
Dominican Republic	5	5
Trinidad	4	4
Guatemala	4	4
Honduras	3	3
El Salvador	2	2
Nicaragua	2	2
Aruba	1	1
Barbados	1	1
U.S. Virgin Islands	1	1
Jamaica	1	1
Totals	45	46

Our warehouse clubs and local distribution centers are located in Latin America and the Caribbean, and our corporate headquarters, U.S. buying operations and regional distribution centers are located primarily in the United States. Our operating segments are the United States, Central America, the Caribbean and Colombia. We held the grand opening of our newest warehouse club in Bogotá, Colombia on December 4, 2020, bringing to 47 the total number of warehouse clubs in operation. This warehouse club is located within the Usaquén locality on the northern side of Bogotá, Colombia. The Usaquén club is our third warehouse club in the greater metropolitan area of Bogotá and eighth in Colombia.

While we continue to closely monitor developments arising from the outbreak of COVID-19 and recognize that the potential social and economic impacts in the markets where we operate and any resulting consequences to our results of operations and cash flow remain unknown, we have decided to proceed with the construction of two standard format warehouse clubs on land we previously acquired. First, will be a warehouse club located within the Zone 5 locality of Guatemala City, Guatemala, which will be our fifth warehouse club located in Guatemala. We expect to open this warehouse club in the first quarter of fiscal 2022. Second, will be a warehouse club located within the city of Portmore, Jamaica. Portmore is a suburb west of the capital city of Kingston. We expect to open this warehouse club, which will be our second warehouse club in Jamaica, in the third quarter of fiscal 2022.

We also operate a package forwarding business (casillero) and marketplace business under the “Aeropost” banner in 38 countries in Latin America and the Caribbean, many of which overlap with markets where we operate warehouse clubs.

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Factors Affecting Our Business

The COVID-19 pandemic resulted in significant challenges across our 13 markets in the second half of fiscal 2020. Many markets imposed limitations, varying by market and in frequency, on access to the Company’s clubs and on the Company’s club operations, including in some cases frequent temporary club closures, a reduction in the number of days during the week and hours per day the Company’s clubs are permitted to be open, restrictions on segments of the population permitted to shop or circulate on particular days, and significant limits on the number of people permitted to be in the club at the same time. We also experienced product mix shifts due to changing consumer habits, decreases in purchases by many business members, particularly restaurants and hotels, and sporadic supply chain challenges, which can impact inventory levels. In response, early in calendar year 2020 we identified four main priorities:

Protect the safety and well-being of our employees and our members.

Take proactive measures to protect our supply chain.

Expand technology-enabled shopping.

Manage cash and capital resources.

Our priorities today remain the same and have become an integral part of our normal, everyday business operations. However, due to the unpredictability of the duration and intensity of the COVID-19 pandemic, we continue to see periodic reinstatements of stay-at-home orders and other restrictions. In addition, we expect continued uncertainty in the economies of our markets as a result of the pandemic and expect volatility in employment trends, industry and consumer confidence; volatility in foreign currency exchange rates and commodity prices; and possible fiscal austerity measures taken by governments in our markets, which will likely impact our results for the foreseeable future. For additional information, refer to the risk factors discussed in Part I. “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2020. Yet, as we have adapted to this continuing crisis, we are focused on opportunities for the future. We have decided to move forward with plans to construct two new warehouse clubs. One in Portmore, Jamaica and the other in Guatemala City, Guatemala. Although we do expect some transfer of sales from the existing warehouse clubs that are in close proximity to these new locations, these locations provide opportunity for incremental membership, net merchandise sales growth, and greater convenience for our existing members.

Our Click & Go™ curbside and delivery service contributed approximately 3.1% of total net merchandise sales for the fiscal first quarter ended November 30, 2020. The demand for delivery through our Click &Go™ service has been increasing and represents a growing proportion of total Click & Go™ sales. Developing greater efficiencies remains a priority especially within these new sales channels. We believe that Click & Go™ curbside and delivery services will remain important alternative shopping methods and provide increased value for our members by enabling them to leverage their membership across multiple shopping platforms. We also see value in the insights gained by communicating with our members through a variety of our online channels. Beyond Click & Go™, we continue to invest in technology to increase efficiencies, enhance our member experience by enabling additional omni-channel capabilities, and finding new ways to generate value and benefits for our members and the Company.

Increasing “same store” sales is an important element of our growth strategy. We believe that there is a number of ways to increase same store sales. We are committed to increasing same store sales by increasing the number of member transactions and by increasing the average ticket. We have started or recently completed expansions and/or remodels of several clubs in our Central America segment in fiscal 2021 that we believe will contribute to same store sales growth. Also, at the end of fiscal year 2020 we had our first “Membership Appreciation Week” promotion, and at end of our first quarter of fiscal 2021, we expanded the duration of our “Smart Week” promotion and held it across all of our markets. We have also increased our digital marketing efforts, which has resulted in enhanced reach and visibility of our promotions, contributing to the success of these programs.

In an effort to provide healthy options for our members, we source additional high quality fresh products through our Direct Farm Program. We believe that our Direct Farm Program reduces costs and improves quality on our fresh produce offerings, while simultaneously supporting local farmers and industry. Our produce distribution centers allow us to provide farm-to-table produce quicker and more efficiently. We opened two produce distribution centers in fiscal 2020 and expect to continue to expand this program and build additional produce distribution centers as we expand into more of our markets in fiscal 2021.

Overall economic trends, foreign currency exchange volatility, and other factors impacting the business

Our sales and profits vary from market to market depending on general economic factors, including GDP growth; consumer preferences; foreign currency exchange rates; political policies and social conditions; local demographic characteristics (such as population growth); the number of years we have operated in a particular market; and the level of retail and wholesale competition in that market. The economies of many of our markets are dependent on foreign trade, tourism, and foreign direct

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investments. Global and local travel restrictions and the general slowdown in global economic activity as a result of COVID-19 have significantly impacted and may continue to impact the economies in our markets, causing significant declines in GDP and employment and devaluations and illiquidity of local currencies against the U.S. dollar. In general, positive conditions in the broader economy promote greater member spending in our warehouse clubs, and economic weakness generally results in a reduction of customer spending.

Currency fluctuations can be one of the largest variables affecting our overall sales and profit performance, as we have experienced in prior fiscal years, because many of our markets are susceptible to foreign currency exchange rate volatility. During the first three months of fiscal year 2021 and 2020, approximately 77.8% and 77.0%, respectively, of our net merchandise sales were in currencies other than the U.S. dollar. Of those sales, 49.5% and 52.0% were comprised of sales of products we purchased in U.S. dollars for each period, respectively.

A devaluation of local currency reduces the value of sales and membership income that is generated in that country when translated to U.S. dollars for our consolidated results. In addition, when local currency experiences devaluation, we may elect to increase the local currency price of imported merchandise to maintain our target margins, which could impact demand for the merchandise affected by the price increase. We may also modify the mix of imported versus local merchandise and/or the source of imported merchandise to mitigate the impact of currency fluctuations. Information about the effect of local currency devaluations is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net Merchandise Sales and Comparable Sales.”

Our capture of total retail and wholesale sales can vary from market to market due to competition and the availability of other shopping options for our members. Demographic characteristics within each of our markets can affect both the overall level of sales and future sales growth opportunities. Island markets such as Aruba, Barbados and the U.S. Virgin Islands offer us limited upside for sales growth given their overall market size. Countries with smaller upper and middle class consumer populations, such as Honduras, El Salvador, Jamaica and Nicaragua, offer growth potential but may have a more limited market opportunity for sales growth as compared to more developed countries with larger or growing upper and middle class consumer populations.

Political and other factors in each of our markets may have significant effects on our business. U.S. foreign policy can also have an impact on the social and economic stability in the countries where we operate. For example, the transition in the U.S. Government, as a result of the recent presidential election, could result in changes in U.S. foreign policy towards Latin America that could impact the business environment in the countries we serve.

Our operations are subject to volatile weather conditions and natural disasters. In November 2020, Hurricanes Eta and Iota brought severe rainfall, winds, and flooding to a significant portion of Central America, especially Honduras, that caused significant damage to parts of that country’s infrastructure. Although our warehouse clubs in the region are operating normally and we have been able to manage our supply chain to keep our warehouse clubs stocked with merchandise, the combination of the COVID-19 pandemic and the damage caused by the hurricanes could adversely impact our overall sales and profit performance in the future.

In the past, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity), particularly in Trinidad. This can and has impeded our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products or to otherwise redeploy these funds in our Company, increasing our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. We continued to experience significant limitations on our ability to convert Trinidad dollars to U.S. dollars or other tradeable currencies during fiscal 2020, with a further deterioration and the problem becoming more acute in August 2020 and into the second quarter of fiscal year 2021. We are working with our banks in Trinidad and government officials to source tradeable currencies, but until more U.S. dollars or other tradeable securities become available, this illiquidity condition is likely to continue. As of November 30, 2020, our Trinidad subsidiary had Trinidad dollar denominated cash and cash equivalents and short and long-term investments measured in U.S. dollars of approximately $100.5 million, an increase of $20.9 million from August 31, 2020 when these same balances were approximately $79.6 million. The Trinidad central bank manages the exchange rate of the Trinidad dollar with the U.S. dollar. While the recently elected government has publicly stated it has no intention to devalue the Trinidad dollar, the Trinidad government could in the future decide to devalue the currency to improve market liquidity, resulting in a devaluation in the U.S. dollar value of these cash and investments balances. If, for example, a hypothetical 20% devaluation of the Trinidad dollar were to occur, the value of our Trinidad dollar cash and investments position, measured in U.S. dollars, would decrease by approximately $20.1 million, with a corresponding increase in Accumulated other comprehensive loss reflected on our consolidated balance sheet. Separate from the Trinidad dollar denominated cash and investments balances described above, as of November 30, 2020, we had a U.S. dollar denominated monetary liability position of approximately $14.4 million in Trinidad (net of U.S. dollar denominated assets) that would produce a loss from a potential devaluation of Trinidad dollars. If, for example, a hypothetical 20% devaluation of the Trinidad dollar occurred, the net effect on

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Other income (expense), net on our consolidated statement of operations of revaluing these U.S. dollar denominated net monetary liabilities would be an approximate $2.9 million loss.

We are carefully monitoring the situation in Trinidad and are taking various steps to mitigate the risks. For example, as liquidity conditions have tightened, we have methodically raised prices on imported goods and have sought to shift the purchase of certain goods to local sources, where appropriate. Additionally, we are actively seeking to exchange Trinidad dollars for tradeable currencies, in order to manage our exposure to any potential devaluation. Moreover, in the first quarter of fiscal 2021, we began limiting shipments of goods from the U.S. to Trinidad. As a result, beginning in the second quarter of fiscal 2021, our Trinidad subsidiary will not carry its usual mix and quantity of merchandise. We believe this reduction in imported merchandise will negatively impact sales in Trinidad in our second fiscal quarter by an estimated $14.0 million to $18.0 million. We plan to increase or decrease shipments from the U.S. in line with our ability to exchange Trinidad dollars for other hard currencies.

Our Barbados subsidiary also recently began facing a U.S. dollar liquidity situation. The Barbados dollar has a conventional fixed-peg currency arrangement, in which the Barbados dollar exchange rate is fixed to the U.S. dollar. Thus, although we do not expect a devaluation of this currency, at this time, as of November 30, 2020, our Barbados subsidiary had Barbados dollar denominated cash and cash equivalents measured in U.S. dollars of approximately $12.8 million, which cannot be readily converted to U.S. dollars for general use within the Company.

Mission and Business Strategy

Our mission is to serve as a model company, which operates profitably and provides a good return to our investors, by serving our members in emerging and developing markets, with safe, clean buildings, equipment and work environment, and by providing good jobs, fair wages and benefits, quality merchandise and services at compelling prices that are made accessible to a broader segment of the population, while treating our suppliers right, empowering them where we can, and conducting ourselves in a socially responsible manner and by respecting the environment and the laws of all the countries in which we operate. To do this, we make available a wide range of high quality, curated merchandise sourced from around the world at good value. The annual membership fee enables us to operate our business with lower margins than traditional retail stores. Through the use of technology and the development of an omni-channel platform, we are pursuing opportunities to satisfy our members’ shopping expectations, create additional efficiencies in the supply chain and better understand and serve our members’ needs to play greater role in their lives. We strive to establish a relationship with our members that enhances their lives with quality goods and services and offers a shopping experience that blends the excitement and appeal of our brick and mortar business with the convenience of online shopping and services.

Growth

We measure our growth primarily by the amount of the period-over-period activity in our net merchandise sales, our comparable club net merchandise sales, membership income and total revenues. Our investments are geared toward creating greater efficiencies, which enable us to offer lower prices, better services, enhanced convenience and exciting experiences for our members, which we believe will support membership renewals and sustained growth for the Company. However, these investments can impact near-term results, such as when we invest in technology and talent that are expected to yield long-term benefits or when we incur fixed costs in advance of achieving full projected sales, negatively impacting near-term operating profit and net income. When we open a new warehouse club in an existing market, which may reduce reported comparable net merchandise sales due to the transfer of sales from existing warehouse clubs, we do so to enhance the member experience, grow membership and support long-term sales growth and profitability.

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Financial highlights for the first quarter of fiscal year 2021 included:

Total revenues increased 8.1% over the comparable prior year period.

Net merchandise sales increased 7.7% over the comparable prior year period. We ended the quarter with 46 warehouse clubs compared to 45 warehouse clubs at the end of the first quarter of fiscal 2020. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 3.5% versus the comparable three-month period.

Comparable net merchandise sales (that is, sales in the 43 warehouse clubs that have been open for greater than 13 ½

calendar months) for the 13 weeks ended November 29, 2020 increased 3.6%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 3.5%.

Membership income for the first quarter of fiscal 2021 decreased 3.3% to $13.3 million primarily due to a decline in the overall account base because of a decrease in in-club traffic from COVID-19.

Total gross margins (net merchandise sales less associated cost of goods sold) increased 16.2% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 16.1%, an increase of 120 basis points (1.2%) from the same period in the prior year. The increase is attributable to more focused merchandising strategies, inventory management, and pricing actions to offset foreign currency exchange costs.

Operating income for the first quarter of fiscal 2021 was $44.5 million, an increase of 45.0%, or $13.8 million, compared to the first quarter of fiscal 2020.

We recorded a $1.5 million net currency loss from currency transactions in the first quarter of fiscal 2021 compared to a $1.7 net currency loss in the same period last year.

Our effective tax rate increased in the first quarter of fiscal 2021 to 32.9% from 32.2% in the first quarter of fiscal 2020 primarily from the unfavorable impact in the current period from the effect of changes in foreign currency value and related adjustments.

Net income attributable to PriceSmart for the first quarter of fiscal 2021 was $27.7 million, or $0.90 per diluted share, compared to $19.7 million, or $0.64 per diluted share, in the first quarter of fiscal 2020.

COMPARISON OF THE three months ended November 30, 2020 and 2019

The following discussion and analysis compares the results of operations for the three-month period ended on November 30, 2020 with the three-month period ended on November 30, 2019 and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. Unless otherwise noted, all tables on the following pages present U.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding.

Net Merchandise Sales

The following tables indicate the net merchandise club sales in the segments in which we operate and the percentage growth in net merchandise sales by segment during the three months ended November 30, 2020 and 2019.


	Three Months Ended
	November 30, 2020								November 30, 2019
	Amount		% of net ‎sales		Increase ‎from ‎prior year		Change		Amount		% of net ‎sales
Central America	$	485,040	57.8	%	$	28,289	6.2	%	$	456,751	58.6	%
Caribbean		254,606	30.4			23,455	10.1			231,151	29.7
Colombia		98,723	11.8			7,897	8.7			90,826	11.7
Net merchandise sales	$	838,369	100.0	%	$	59,641	7.7	%	$	778,728	100.0	%

Comparison of Three Months Ended November 30, 2020 and 2019

Overall, total net merchandise sales grew 7.7% for the first quarter ended November 30, 2020 compared to the same quarter in the prior year. The increase resulted from a 15.9% increase in average ticket, partially offset by a 7.1% decrease in transactions. Transactions represent the total number of visits our members make to our warehouse clubs and Click & Go™ curbside pickup and delivery service transactions. Average ticket represents the amount our members spend on each visit or Click & Go™ order.

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During the first quarter of fiscal year 2021, net merchandise sales were positively impacted by a higher average ticket for the period, but the number of transactions decreased in comparison to the three-month period ended November 30, 2019, as the COVID-19 pandemic has reduced the number of visits our members make due to governmental restrictions and/or health concerns regarding the virus. In addition, during the last week of November 2020, we held our Smart Week promotion across all of our markets for an entire week, compared to the Smart Weekend promotion we held only in the Caribbean segment for one weekend the previous year. Lastly, we had 46 clubs in operation as of November 30, 2020 compared to 45 clubs as of November 30, 2019. Two of our warehouse clubs opened in late October and mid-November of 2019 and therefore, had sales activity for an entire quarter in the current fiscal year compared to only a partial quarter in the comparable prior year period.

Net merchandise sales in our Central America segment increased 6.2% for the first quarter ended November 30, 2020 compared to the same period last year. This increase had a 370 basis point (3.7%) positive impact on total net merchandise sales growth. All of the growth in this market is attributable to the three new clubs in this segment that were not open for the entire quarter in the comparable prior year period.

Net merchandise sales in our Caribbean segment grew 10.1% for the first quarter ended November 30, 2020 compared to the same period last year. This increase had a 300 basis point (3.0%) positive impact on total net merchandise sales growth. Our Dominican Republic and Trinidad markets led the way in this segment with 18.4% and 11.9% growth, respectively. Both markets have continued to perform well in the current COVID-19 pandemic, despite our Dominican Republic market experiencing significant foreign currency devaluation compared to the prior year period.

Net merchandise sales in our Colombia segment increased 8.7% for the first quarter ended November 30, 2020 compared to the same period last year. The increase for the three-month period had a 100 basis point (1.0%) positive impact on total net merchandise sales growth. Although the traffic decreased during the first quarter of fiscal 2021 compared to the same three-month period of the prior year, average ticket increased considerably. Relative to some of our other large markets, Colombia had a much smaller decrease in traffic during the first three months of fiscal 2021 as the COVID-19 related restrictions eased during the period and members returned to more normalized shopping patterns in our warehouse clubs.

The following table indicates the impact that currency exchange rates had on our net merchandise sales in dollars and the percentage change from the three-month period ended November 30, 2020. The term “currency exchange rates” refers to the currency exchange rates we use to convert net merchandise and comparable net merchandise sales for all countries where the functional currency is not the U.S. dollar into U.S. dollars. We calculate the effect of changes in currency exchange rates as the difference between current period activities translated using the current period’s currency exchange rates and the comparable prior year period’s currency exchange rates. We believe the disclosure of the effects of currency exchange rate fluctuations on our results permits investors to understand better the Company’s underlying performance.


	Currency exchange rate fluctuations for the
	Three months ended
	November 30, 2020
	Amount		% change
Central America	$	(7,463)	(1.7)	%
Caribbean		(10,264)	(4.4)
Colombia		(9,701)	(10.7)
Net merchandise sales	$	(27,428)	(3.5)	%

Overall, the effects of currency fluctuations within our markets had an approximate $27.4 million, or 350 basis point (3.5%), negative impact on net merchandise sales for quarter ended November 30, 2020.

Currency fluctuations had a $7.5 million, or 170 basis point (1.7%), negative impact on net merchandise sales in our Central America segment for the three months ended November 30, 2020. The currency fluctuations contributed approximately 100 basis points (1.0%) of the total negative impact on total net merchandise sales. This is primarily due to the Costa Rica market currency devaluation when compared to the same period a year ago.

Currency devaluations had a $10.3 million, or 440 basis point (4.4%), negative impact on net merchandise sales in our Caribbean segment for the three months ended November 30, 2020. The currency devaluations contributed approximately 130 basis points (1.3%) of the total negative impact on total net merchandise sales for the quarter. Jamaica and the Dominican Republic markets both experienced currency devaluation when compared to the same period last year.

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Currency devaluations had a $9.7 million, or 1,070 basis point (10.7%), negative impact on net merchandise sales in our Colombia segment for the three months ended November 30, 2020. The currency devaluations contributed approximately 120 basis points (1.2%) to the total negative impact on total net merchandise sales.

Comparable Merchandise Sales

We report comparable net merchandise sales on a “same week” basis with 13 weeks in each quarter beginning on a Monday and ending on a Sunday. The periods are established at the beginning of the fiscal year to provide as close of a match as possible to the calendar month and quarter that is used for financial reporting purposes. This approach equalizes the number of weekend days and weekdays in each period for improved sales comparison, as we experience higher merchandise club sales on the weekends. Each of the warehouse clubs used in the calculations was open for at least 13 ½ calendar months before its results for the current period were compared with its results for the prior period. As a result, sales related to two of our four warehouse clubs opened during calendar year 2019 and the one club opened during calendar year 2020, will not be used in the calculation of comparable sales until they have been open for at least 13 ½ months. Therefore, comparable net merchandise sales include 43 warehouse clubs for the thirteen week period ended November 29, 2020.

The following tables indicate the comparable net merchandise sales in the reportable segments in which we operate and the percentage changes in net merchandise sales by segment during the thirteen-week period ended November 29, 2020 and December 1, 2019.


	Thirteen Weeks Ended
	November 29, 2020		December 1, 2019
	% Increase/(decrease) in comparable net merchandise sales		% Increase/(decrease) in comparable net merchandise sales
Central America	(0.7)	%	1.8	%
Caribbean	9.9		2.1
Colombia	8.6		(5.2)
Consolidated comparable net merchandise sales	3.6	%	1.0	%

Comparison of Thirteen-Week Periods Ended November 29, 2020 and December 1, 2019

Comparable net merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the thirteen-week period ended November 29, 2020 increased 3.6%.

Comparable net merchandise sales in our Central America segment decreased 0.7% for the thirteen-week period ended November 29, 2020. This decrease contributed approximately 40 basis points (0.4%) of negative impact in total comparable merchandise sales.

For the thirteen weeks ended November 29, 2020, strong performance in our Honduras, El Salvador and Nicaragua markets, contributed approximately 150 basis points (1.5%) of positive impact on the segments comparable net merchandise sales, which was offset by a 190 basis point (1.9%) decrease in Panama, Costa Rica, and Guatemala. During the quarter, Panama and Guatemala experienced sales transfers from existing clubs included in the comparable net merchandise sales calculation to new clubs not included in the calculation, and Costa Rica experienced foreign exchange headwinds, with the Costa Rica Colón devaluing versus the comparable prior year period.

Comparable net merchandise sales in our Caribbean segment increased 9.9% for the thirteen-week period ended November 29, 2020. This increase contributed approximately 300 basis points (3.0%) of positive impact in total comparable merchandise sales.

For the thirteen weeks ended November 29, 2020, most of the markets in our Caribbean segment showed double-digit comparable sales growth compared to the same period in the prior year. Trinidad and the Dominican Republic contributed 270 basis points (2.7%) of positive impact on the segment. Up through this quarter, both markets performed well in the current COVID-19 pandemic, despite a significant foreign currency exchange devaluation compared to the prior year period in the Dominican Republic.

Comparable net merchandise sales in our Colombia segment increased 8.6% for the thirteen-week period ended November 29, 2020. This increase contributed approximately 100 basis points (1.0%) of positive impact in total comparable

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merchandise sales. Average ticket grew compared to the prior year three-month period and is the primary driver of the increase as COVID-19 restrictions eased during the period and members were more easily able to shop in our warehouse clubs.

The following tables illustrate the impact that changes in foreign currency exchange rates had on our comparable merchandise sales in dollars and the percentage change from the thirteen-week period ended November 29, 2020.


	Currency Exchange Rate Fluctuations for the
	Thirteen Weeks Ended
	November 29, 2020
	Amount		% change
Central America	$	(7,206)	(1.6)	%
Caribbean		(10,253)	(4.4)
Colombia		(9,533)	(10.5)
Consolidated comparable net merchandise sales	$	(26,992)	(3.5)	%

Overall, the mix of currency fluctuations within our markets had an approximate $27.0 million, or 350 basis point (3.5%), negative impact on comparable net merchandise sales for the thirteen-week period ended November 29, 2020.

Currency fluctuations within our Central America segment accounted for approximately 90 basis points (0.9%) of negative impact in total comparable merchandise sales for the thirteen-week period. Our Costa Rica market experienced currency devaluation when compared to the same period last year.

Currency devaluations within our Caribbean segment accounted for approximately 130 basis points (1.3%) of the negative impact on total comparable merchandise sales for the thirteen-week period ended November 29, 2020. Our Dominican Republic and Jamaica markets experienced currency devaluation when compared to the same period last year.

Currency devaluations within our Colombia segment accounted for approximately 130 basis points (1.3%) of the negative impact on total comparable merchandise sales for the thirteen-week period ended November 29, 2020. This reflects the devaluation of the Colombian peso when compared to the same period a year ago.

Membership Income

Membership income is recognized ratably over the one-year life of the membership.



	Three Months Ended
	November 30,								November 30,
	2020								2019
	Amount		Increase (decrease) from prior year		% Change		Membership ‎income % to ‎net merchandise ‎club sales		Amount
Membership income - Central America	$	7,875	$	(421)	(5.1)	%	1.6	%	$	8,296
Membership income - Caribbean		3,711		34	0.9		1.5			3,677
Membership income - Colombia		1,713		(60)	(3.4)		1.7			1,773
Membership income - Total	$	13,299	$	(447)	(3.3)	%	1.6	%	$	13,746

Number of accounts - Central America		839,387		(30,286)	(3.5)	%				869,673
Number of accounts - Caribbean		427,871		(8,222)	(1.9)					436,093
Number of accounts - Colombia		314,160		(23,863)	(7.1)					338,023
Number of accounts - Total		1,581,418		(62,371)	(3.8)	%				1,643,789

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Comparison of Three Months Ended November 30, 2020 and 2019

The number of member accounts as of November 30, 2020 was 3.8% lower than the prior year period. Membership income decreased 3.3% over the three month period ended November 30, 2020, compared to the prior-year period.

Membership income declined in Central America and Colombia while staying flat in our Caribbean segment due to a declining membership base in the second half of fiscal year 2020 as a result of lower member traffic in our clubs during the COVID-19 pandemic. Although the membership base is down compared to the comparable prior-year period, we have seen incremental increases in our membership base since the end of our last fiscal year. Since August 31, 2020, all segments have increased their membership base. Colombia had the largest increase in membership base in the first quarter with 3.7% growth, followed by Central America with a 1.3% increase and the Caribbean with a 0.3% increase.

We began offering our Platinum membership program in Nicaragua in October 2020 and we intend to expand our Platinum membership program to our one remaining market this fiscal year. The annual fee for a Platinum membership in most markets is approximately $75. The Platinum membership program provides members with a 2% rebate on most items, up to an annual maximum of $500. We record the 2% rebate as a reduction on net merchandise sales at the time of the sales transaction.

Our trailing twelve-month renewal rate was 81.9% and 86.1% for the periods ended November 30, 2020 and November 30, 2019, respectively. Historically, membership renewals have been transacted primarily at the registers in the club at the time of purchase of merchandise or services when a membership has expired. The renewal rate decline contributed to the overall decrease in membership accounts of 3.8% over the same period because of a significant decline of in-club traffic in some of our markets due to governmental COVID-19 movement restrictions on their respective general populaces. Reductions in in-club traffic resulting from the COVID-19 pandemic and a notable increase in online traffic due to our launch of a new online catalogue and Click & Go™ services have driven increased sign-ups and renewals completed online. Approximately 11% and 2% of our membership sign-ups were completed using our online platform for the periods ended November 30, 2020 and 2019, respectively. Our online platform facilitates capturing data and provides the opportunity for automatic renewal of memberships.

Other Revenue

Other revenue primarily consists of non-merchandise revenue from freight and handling fees generated from our marketplace and casillero operations, interest-generating portfolio from our co-branded credit cards, and rental income from operating leases where the Company is the lessor.


	Three Months Ended
	November 30, 2020						November 30, 2019
	Amount		Increase (decrease) from prior year		% Change		Amount
Non-merchandise revenue	$	12,655	$	3,810	43.1	%	$	8,845
Miscellaneous income		1,497		(112)	(7.0)			1,609
Rental income		731		(8)	(1.1)			739
Other revenue	$	14,883	$	3,690	33.0	%	$	11,193

Comparison of Three Months Ended November 30, 2020 and 2019

Other revenue for the three months ended November 30, 2020 includes non-merchandise revenue generated by the marketplace and casillero operations of a company we acquired in March 2018, primarily from freight and handling charges for online orders placed from customers in Latin America to retailers in the United States and delivered to locations throughout Latin America. The primary driver of the $3.7 million increase in other revenue is due to a $3.8 million increase in non-merchandise revenue compared to the prior year from higher package volume in our marketplace and casillero operations during the current quarter compared to the comparable prior year period.

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Results of Operations



	Three Months Ended
Results of Operations Consolidated		November 30, 2020			November 30, 2019			Increase/(Decrease)
(Amounts in thousands, except percentages and ‎number of warehouse clubs)
Net merchandise sales
Net merchandise sales	$	838,369		$	778,728		$	59,641
Total gross margin	$	134,750		$	116,004		$	18,746
Total gross margin percentage		16.1	%		14.9	%		1.2	%

Revenues
Total revenues	$	877,432		$	811,941		$	65,491
Percentage change from prior period								8.1	%

Comparable net merchandise sales
Total comparable net merchandise sales increase		3.6	%		1.0	%		2.6	%

Total revenue margin
Total revenue margin	$	157,556		$	136,995		$	20,561
Total revenue margin percentage		18.0	%		16.9	%		1.1	%

Selling, general and administrative
Selling, general and administrative	$	113,025		$	106,281		$	6,744
Selling, general and administrative percentage of total revenues		12.9	%		13.1	%		(0.2)	%

Warehouse clubs
Warehouse clubs at period end		46			45			1
Warehouse club sales square feet at period end	$	2,267		$	2,244		$	23


	Three Months Ended
		November 30,	% of			November 30,	% of
Results of Operations Consolidated		2020	Total Revenue			2019	Total Revenue
Operating income - by segment
Central America	$	34,445	3.9	%	$	31,700	3.9	%
Caribbean		21,594	2.5			11,810	1.5
Colombia		5,565	0.6			4,524	0.6
United States		5,742	0.7			2,587	0.3
Reconciling Items ⁽¹⁾		(22,815)	(2.6)			(19,907)	(2.5)
Operating income - Total	$	44,531	5.1	%	$	30,714	3.8	%

⁽¹⁾The reconciling items reflect the amount eliminated upon consolidation of intersegment transactions.

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The following table summarizes the selling, general and administrative expense for the periods disclosed.


	Three Months Ended
		November 30,	% of			November 30,	% of
		2020	Total Revenue			2019	Total Revenue
Warehouse club and other operations	$	84,832	9.7	%	$	79,373	9.8	%
General and administrative		27,521	3.1			25,884	3.2
Pre-opening expenses		602	0.1			953	0.1
Loss on disposal of assets		70	—			71	—
Total Selling, general and administrative	$	113,025	12.9	%	$	106,281	13.1	%

Comparison of Three Months Ended November 30, 2020 and 2019

Total gross margin is derived from our Revenue – Net merchandise sales less our Cost of goods sold – Net merchandise sales and represents our sales and cost of sales generated from the business activities of our warehouse clubs. We express our Total gross margin percentage as a percentage of our Net merchandise sales.

On a consolidated basis, total gross margin for the three months ended November 30, 2020 was 16.1%, 120 basis points (1.2%) higher than the comparable prior year period. Approximately half of this increase is due to certain pricing actions we took to offset foreign currency exchange costs. In particular, we substantially increased the liquidity premium we factor into our sales prices in Trinidad on our imported merchandise, as we continue to experience a shortage of available U.S. dollars for exchange in that market. Refer to “Item 2. Management’s Discussion & Analysis – Factors Affecting Our Business” for additional discussion. The rest of this improvement is primarily attributable to more focused merchandising strategies and inventory management that primarily resulted from fewer markdowns. Total gross margins increased across all segments with the Central America segment contributing 70 basis points (0.7%), the Caribbean segment contributing 40 basis points (0.4%), and the Colombia segment contributing 10 basis points (0.1%) to the overall increase.

Total revenue margin is derived from Total revenues, which includes our Net merchandise sales, Membership income, Export sales, and Other revenue and income less our Cost of goods sold for net merchandise sales, Export sales, and Non-merchandise revenues. We express our Total revenue margin as percentage of Total revenues.

Total revenue margin increased 110 basis points (1.1%) for the three-month period presented, which is the result of the higher total gross margins 120 basis points (1.2%) and higher revenue margins from our casillero and marketplace business in the quarter of 20 basis points (0.2%). This increase was offset by 20 basis points (0.2%) from lower membership income and 10 basis points (0.1%) from fewer margin dollars as a percentage of total revenue from our export sales business.

Selling, general, and administrative expenses consist of warehouse club and other operations, general and administrative expenses, pre-opening expenses, and loss on disposal of assets. In total, selling, general and administrative expenses increased $6.7 million compared to the prior year but decreased as a percentage of total revenue, declining 20 basis points (0.2%) to 12.9% of total revenues compared to 13.1% of total revenues in the first quarter of fiscal year 2020.

Warehouse club and other operations expenses decreased to 9.7% of total revenues compared to 9.8% for the first quarter of fiscal year 2020. Higher comparable sales growth resulted in a lower warehouse club operations expense ratio in Colombia, Trinidad and the Dominican Republic. These savings were offset by the lower comparable sales growth in Panama, Guatemala, Costa Rica, and Honduras, which had increased warehouse expenses as a percent of sales. Panama, Guatemala, and Costa Rica all have new clubs that had not reached sales maturity as of November 30, 2020, thus increasing the operational expense ratios in those markets.

General and administrative expenses decreased to 3.1% of total revenues compared to 3.2% for the first quarter of fiscal year 2020. The 10 basis point (0.1%) decrease as a percentage of total revenue is primarily a result of improved leverage from the 8.1% consolidated revenue growth quarter over quarter. The total increase in general and administrative expenses of $1.6 million is primarily due to our continued investments to support our technology development, talent acquisition, and employee development.

Pre-opening expenses, as a percentage of total revenues, remained flat at 0.1% for the three-month periods ended November 30, 2020 and November 30, 2019.

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Operating income in the first quarter of fiscal year 2021 increased to $44.5 million (5.1% of total revenue) compared to $30.7 million (3.8% of total revenue) for the same period last year. This reflects the increase in total revenue margin dollars primarily from net merchandise sales of 110 basis points (1.1%) and a 20 basis point (0.2%) increase due to leveraging of selling, general and administrative expenses over the comparable prior-year period. These were the primary factors for the overall 130 basis point (1.3%) as percentage of total revenue increase in operating income.

Interest Expense

Net interest expense reflects borrowings by PriceSmart, Inc. and our wholly owned foreign subsidiaries to finance new land acquisition and construction for new warehouse clubs, warehouse club expansions and distribution centers, the capital requirements of warehouse club and other operations and ongoing working capital requirements.


	Three Months Ended
	November 30,				November 30,
	2020				2019
	Amount		Change		Amount
Interest expense on loans	$	1,725	$	460	$	1,265
Interest expense related to hedging activity		925		664		261
Less: Capitalized interest		(617)		47		(664)
Net interest expense	$	2,033	$	1,171	$	862

Comparison of Three Months Ended November 30, 2020 and 2019

Net interest expense increased for the three-month period ended November 30, 2020 primarily due to higher average long-term loan balances to fund our capital projects and recent drawdowns on short-term lines of credit as part of our COVID-19 related efforts to secure cash. The increase in interest expense related to hedging activity is a result of the incremental loans and their related cross-currency interest rate hedges for our Colombia subsidiary.

Other expense, net

Other expense, net, consists of currency gains or losses, as well as net benefit costs related to our defined benefit plans and the receipt of a one-time indemnification payment from a business combination escrow account.



	Three Months Ended
	November 30,						November 30,
	2020						2019
	Amount		Increase from prior year		% Change		Amount
Other expense, net	$	(1,545)	$	(560)	56.9	%	$	(985)

Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses) are recorded as currency gains or losses. Additionally, gains or losses from transactions denominated in currencies other that the functional currency of the respective entity also generate currency gains or losses.

Comparison of Three Months Ended November 30, 2020 and 2019

For the three-month period ended November 30, 2020 the primary driver of Other expense, net included a $1.5 million loss associated with foreign currency transactions and the revaluation of monetary assets and liabilities in several of our markets. The foreign currency gains and losses resulted from the revaluation of net U.S. dollar assets and liabilities in markets where the local functional currency revalued or devalued against the U.S. dollar, and from exchange transactions. The primary impacts were from a strengthening of the Jamaican dollar, which resulted in a loss recognized on our net USD asset position in that market and from higher transaction costs associated with converting Trinidad dollars into available tradeable currencies such as Euros or Canadian dollars before converting them to U.S. dollars.

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Provision for Income Taxes


	Three Months Ended
	November 30,					November 30,
	2020					2019
	Amount			Increase from prior year		Amount
Provision for income taxes	$	13,618		$	4,215	$	9,403
Effective tax rate		32.9	%				32.2	%

Comparison of Three Months Ended November 30, 2020 and 2019

For the three months ended November 30, 2020, the effective tax rate was 32.9%. The increase in the effective tax rate versus the prior year was primarily attributable to the following factors:

A comparably favorable net impact of 1.6% resulting from changes in income tax liabilities for uncertain tax positions;

The comparably unfavorable impact of 3.3% in the current period from the effect of changes in foreign currency value and related adjustments; and

A comparably favorable net impact of 1.1% in the current period resulting from the reduced impact of the loss of benefit of foreign tax credits due to the higher income before the provision for income taxes for the quarter.

Other Comprehensive Income (Loss)


	Three Months Ended
	November 30,						November 30,
	2020						2019
	Amount		Increase ‎from ‎prior year		% Change		Amount
Other comprehensive income (loss)	$	3,162	$	6,347	199.3	%	$	(3,185)

Comparison of Three Months Ended November 30, 2020 and 2019

Our other comprehensive income of approximately $3.2 million for the three-months ended November 30, 2020 resulted primarily from the comprehensive income of approximately $2.8 million from foreign currency translation adjustments related to assets and liabilities and the translation of revenue, costs and expenses on the statements of income of our subsidiaries whose functional currency is not the U.S. dollar. During the first quarter of fiscal year 2021, the largest translation adjustments were related to the appreciation of the local currencies against the U.S. dollar for our Colombia and Jamaica subsidiaries partially offset by the translation adjustment for the depreciation of the local currency against the U.S. dollar of our Guatemala and Costa Rica subsidiaries. Additional gains of approximately $308,000 were related to unrealized gains on changes in our derivative obligations.

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LIQUIDITY AND CAPITAL RESOURCES

Financial Position and Cash Flow

Our operations have historically supplied us with a significant source of liquidity. Our cash flows provided by operating activities, supplemented with our long-term debt and short-term borrowings, have generally been sufficient to fund our operations while allowing us to invest in activities that support the long-term growth of our operations and to pay dividends on our common stock. We evaluate our funding requirements on a regular basis to cover any shortfall in our ability to generate sufficient cash from operations to meet our capital requirements. We may consider funding alternatives to provide additional liquidity if necessary. There is some uncertainty surrounding the continuing potential impact of the novel coronavirus outbreak (COVID-19) on our results of operations and cash flows. As a result, we have taken steps to increase cash available on-hand, including, but not limited to, drawing funds on our short-term facilities. Refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 7 - Debt” for additional information regarding our drawdown on our short-term facilities and long-term borrowings.

Repatriation of cash and cash equivalents held by foreign subsidiaries may require us to accrue and pay taxes. We have no plans at this time to repatriate cash through the payment of cash dividends by our foreign subsidiaries to our domestic operations and, therefore, have not accrued taxes that would be due from repatriation.

The following table summarizes the cash and cash equivalents, including restricted cash, held by our foreign subsidiaries and domestically (in thousands).



	November 30,		August 31,
	2020		2020
Amounts held by foreign subsidiaries	$	174,134	$	203,598
Amounts held domestically		38,261		100,173
Total cash and cash equivalents, including restricted cash	$	212,395	$	303,771

The following table summarizes the short-term investments held by our foreign subsidiaries and domestically (in thousands).


	November 30,		August 31,
	2020		2020
Amounts held by foreign subsidiaries	$	73,980	$	46,509
Amounts held domestically		—		—
Total short-term investments	$	73,980	$	46,509

As of November 30, 2020 and August 30, 2020, certificates of deposits with a maturity of over a year held by our foreign subsidiaries and domestically were $3.0 million and $1.5 million, respectively.

From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. Since fiscal 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradeable currencies. We are working with our banks in Trinidad and government officials to source tradeable currencies. We expect the illiquid market conditions in Trinidad to continue. In addition, our Barbados subsidiary recently began facing a similar U.S. dollar liquidity situation. Refer to “Item 2. Management’s Discussion & Analysis – Factors Affecting Our Business” for our quantitative analysis and discussion.

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Our cash flows are summarized as follows (in thousands):


	Three Months Ended
	November 30,		November 30,
	2020		2019		Decrease
Net cash provided by (used in) operating activities	$	(17,773)	$	16,104	$	(33,877)
Net cash used in investing activities		(50,310)		(45,687)		(4,623)
Net cash provided by (used in) financing activities		(22,198)		37,343		(59,541)
Effect of exchange rates		(1,095)		1,117		(2,212)
Net increase (decrease) in cash and cash equivalents	$	(91,376)	$	8,877	$	(100,253)

Net cash used in operating activities totaled $17.8 million and net cash provided by operating activities was $16.1 million for the three months ended November 30, 2020 and 2019, respectively. We generate cash from operations primarily through net merchandise sales and membership fees. Cash used in operations generally consist of payments to our merchandise vendors, warehouse operating costs (including payroll, employee benefits and utilities), as well as payments for income taxes. The $33.9 million shift from net cash provided by to net cash used in operating activities was primarily due to a net decrease of $45.4 million from changes in operating assets and liabilities, offset by a net increase of $11.5 million from changes in non-cash reconciling items.

The $45.4 million decrease from changes in operating assets and liabilities is primarily due to decreases in net working capital of $46.2 million, which resulted from a $6.9 million increase from the change in merchandise inventories and a $39.3 million decrease from the change in accounts payable over the comparable three-months ended November 30, 2020 and 2019. The increase in merchandise inventories is primarily the result of having two additional clubs in the current year as we build up inventory for the holiday shopping season. The accounts payable decrease is largely the result of expiration of temporary extensions of vendor terms negotiated as part of our response to the COVID-19 pandemic. The $11.5 million change in non-cash reconciling items was primarily due to the increase in net income, deferred income taxes, stock compensation, and depreciation for the three-month period ended November 30, 2020 compared to the prior year.

Net cash used in investing activities totaled $50.3 million and $45.7 million for the three months ended November 30, 2020 and 2019, respectively. Our cash used in investing activities is primarily for the construction of and improvements to our warehouse clubs and management of our cash investments. The $4.6 million increase in cash used in investing activities is primarily the result of a net $21.0 million increase in short-term and long-term certificate of deposit purchases and fewer settlements compared to the same three-month period a year-ago. The increase in purchases and fewer settlements is the result of additional Trinidad dollars we have on-hand and that we have invested into certificates of deposit to generate interest income while we actively work to convert those Trinidad dollars into U.S. dollars as availability allows. Refer to “Item 2. Management’s Discussion and Analysis – Factors Affecting Our Business” for additional discussion of the current U.S. dollar illiquidity we are experiencing in that market. The net increase in investments in short-term and long-term certificate of deposits was offset by a $16.4 million decrease in construction expenditures versus the same three-month period a year ago.

Net cash used in financing activities totaled $22.2 million and net cash provided by financing activities was $37.3 million for the three months ended November 30, 2020 and 2019, respectively. We use cash flows provided by financing primarily to fund our working capital needs and our warehouse club expansions and investments. The $59.5 million shift from cash provided by to cash used in financing activities is primarily the result of a net decrease of proceeds from long-term borrowings of $26.1 million compared to a year ago and a net decrease of $33.3 million in cash provided by short-term borrowings, compared to the same three-month period a year-ago. We did not enter into any long-term loans and paid down a larger portion of our short-term borrowings in the current quarter compared to a year ago.

The following table summarizes the dividends declared and paid during fiscal year 2020 (amounts are per share).

First Payment

Second Payment

Declared

Amount

Record
‎Date

Date
‎Paid

Amount

Record
‎Date

Date
‎Paid

Amount

2/6/2020

0.70

2/15/2020

2/28/2020

0.35

8/15/2020

8/31/2020

0.35

We anticipate the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, the amount of such dividends, and the establishment of record and payment dates is subject to final

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determination by the Board of Directors at its discretion after its review of our financial performance and anticipated capital requirements, taking into account all relevant factors, including, but not limited to, the uncertainty surrounding the ongoing effects of the COVID-19 pandemic on our results of operations and cash flows.

Short-Term Borrowings and Long-Term Debt

Our financing strategy is to ensure liquidity and access to capital markets while minimizing our borrowing costs. The proceeds of these borrowings were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, acquisitions, and repayment of existing debt. Please refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 7 – Debt.”

Derivatives

Please refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 8 – Derivative Instruments and Hedging Activities” for further discussion.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on its financial condition or consolidated financial statements.

Repurchase of Equity Securities and Reissuance of Treasury Shares

At the vesting dates for restricted stock awards to our employees, we repurchase a portion of the shares that have vested at the prior day's closing price per share and apply the proceeds to pay the employees' minimum statutory tax withholding requirements related to the vesting of restricted stock awards. The Company expects to continue this practice going forward. We do not currently have a stock repurchase program.

Shares of common stock repurchased by us are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in our consolidated balance sheets. We may reissue these treasury shares in the future.

We have reissued treasury shares as part of our stock-based compensation programs. During the three months ended November 30, 2020, the Company reissued 96,400 treasury shares.

Critical Accounting Estimates

The preparation of our consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require management to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Management continues to review its accounting policies and evaluate its estimates, including those related to business acquisitions, contingencies and litigation, income taxes, value added taxes, and long-lived assets. We base our estimates on historical experience and on other assumptions that management believes to be reasonable under the present circumstances. Using different estimates could have a material impact on our financial condition and results of operations.

Income Taxes

For interim reporting, we estimate an annual effective tax rate (AETR) pursuant to ASC 740-270 to calculate income tax expense. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of

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significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

We are required to file federal and state income tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax we pay. We, in consultation with our tax advisors, base our tax returns on interpretations that we believe to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which we file our tax returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations we used to calculate our tax liability and, therefore, require us to pay additional taxes.

We accrue an amount for our estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. There were no material changes in our uncertain income tax positions since August 31, 2020.

Tax Receivables

We pay Value Added Tax (“VAT”) or similar taxes, income taxes, and other taxes within the normal course of our business in most of the countries in which we operate related to the procurement of merchandise and/or services we acquire and/or on sales and taxable income. VAT is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is similar to, but operates somewhat differently than, sales tax paid in the United States. We generally collect VAT from our members upon sale of goods and services and pay VAT to our vendors upon purchase of goods and services. Periodically, we submit VAT reports to governmental agencies and reconcile the VAT paid and VAT received. The net overpaid VAT may be refunded or applied to subsequent returns, and the net underpaid VAT must be remitted to the government. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. In most countries where we operate, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit and debit cards directly to the government as advance payments of VAT and/or income tax. This collection mechanism generally leaves us with net VAT and/or income tax receivables, forcing us to process significant refund claims on a recurring basis. These refund or offset processes can take anywhere from several months to several years to complete.

In most countries where we operate, there are defined and structured processes to recover VAT receivables via refunds or offsets. However, in one country without a clearly defined refund process, the Company is actively engaged with the local government to recover VAT receivables totaling $8.4 million and $7.0 million as of November 30, 2020 and August 31, 2020, respectively. In addition, in two other countries where the Company operates, there have been changes in the method of computing minimum tax payments, under which the governments have sought to require the Company to pay taxes based on a percentage of sales rather than taxable income. As a result, we have made and may continue to make income tax payments substantially in excess of those we would expect to pay based on taxable income. The Company had income tax receivables of $10.9 million and $10.4 million and deferred tax assets of $2.9 million and $2.8 million as of November 30, 2020 and August 31, 2020, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests. Similarly, we have not placed any recoverability allowances on tax receivables that arise from payments we are required to make originating from tax assessments that we are appealing, as we believe it is more likely than not that we will ultimately prevail in the related appeals.

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Our policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:

Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where our subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. We also classify as short-term any approved refunds or credit notes to the extent that we expect to receive the refund or use the credit notes within one year.

Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where our subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when we do not expect to eventually prevail in our recovery of such balances. We do not currently have any allowances provided against VAT and income tax receivables.

Long-lived Assets

We evaluate quarterly our long-lived assets for indicators of impairment. Indicators that an asset may be impaired are:

the asset's inability to continue to generate income from operations and positive cash flow in future periods;

loss of legal ownership or title to the asset;

significant changes in its strategic business objectives and utilization of the asset(s); and

the impact of significant negative industry or economic trends.

Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity, which in turn drives estimates of future cash flows from these assets. These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair market value. Loss/(gain) on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance.

Goodwill and Other Indefinite-Lived Intangibles

Goodwill and other indefinite-lived acquired intangible assets are not amortized but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the value of a certain asset may be impaired. Generally, this evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units and other indefinite-lived acquired intangible assets have generated sufficient returns to recover the cost of goodwill and other indefinite-lived acquired intangible assets. Because of the nature of the factors used in these tests, if different conditions occur in future periods, future operating results could be materially impacted. For approximately $45.1 million of certain acquired indefinite-lived intangible assets, the fair value approximated the carrying value; any deterioration in the fair value may result in an impairment charge.

Seasonality

Historically, our merchandising businesses have experienced holiday retail seasonality in their markets. In addition to seasonal fluctuations, our operating results fluctuate quarter-to-quarter as a result of economic and political events in markets that we serve, the timing of holidays, weather, the timing of shipments, product mix, and currency effects on the cost of U.S.-sourced products which may make these products more or less expensive in local currencies and therefore more or less affordable. Because of such fluctuations, the results of operations of any quarter are not indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, there can be no assurance that our future results will be consistent with past results or the projections of securities analysts.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to our operations result primarily from changes in interest rates and changes in currency exchange rates. There have been no material changes in our market risk factors at November 30, 2020 compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2020.

From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. Since fiscal year 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradeable currencies. We are working with our banks in Trinidad and Barbados to source tradeable currencies. We expect the illiquid market conditions in both markets to continue. Refer to “Item 2. Management’s Discussion & Analysis – Factors Affecting Our Business” and “Item 2. Management’s Discussion & Analysis – Liquidity: Financial Position and Cash Flow” for our quantitative analysis and discussion.

Information about the financial impact of foreign currency exchange rate fluctuations for the three month period ended November 30, 2020 is disclosed in “Item 2. Management’s Discussion & Analysis – Other Expense, net”.

Information about the change in the fair value of our hedges and the financial impact thereof for the three month period ended November 30, 2020 is disclosed in “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 8 – Derivative Instruments and Hedging Activities.”

Information about the movements in currency exchange rates and the related impact on the translation of the balance sheets of our subsidiaries whose functional currency is not the U.S. dollar for the three month period ended November 30, 2020 is disclosed in “Item 2. Management’s Discussion & Analysis – Other Comprehensive Loss.”

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ITEM 4. CONTROLS AND PROCEDURES

Limitations on Effectiveness of Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decision regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have investments in certain unconsolidated entities. Because we do not control or manage those entities, our control procedures with respect to those entities were substantially more limited than those we maintain with respect to our consolidated subsidiaries.

Evaluation of Disclosure Controls and Procedures

As required by SEC Rules 13a-15(e) or 15d-15(e), we carried out an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

In the ordinary course of business, we review our system of internal control over financial reporting and make changes to our systems and processes to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems and automating manual processes. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibit 31.1 and 31.2 to this report.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are often involved in claims arising in the ordinary course of business seeking monetary damages and other relief. Based upon information currently available to us, none of these claims is expected to have a material adverse effect on our business, financial condition or results of operations.

On May 22, 2019, a class action complaint was filed against PriceSmart, Inc., as well as certain former and current officers in the United States District Court for the Southern District of California. On October 7, 2019, the Court granted Public Employees Retirement Association of New Mexico’s (PERA’s) Motion for Appointment as Lead Plaintiff. On January 3, 2020, PERA filed a consolidated class action complaint, which alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company intends to vigorously defend itself against any obligations or liability to the plaintiffs with respect to such claims. The Company believes the claims are without merit. During the third quarter of fiscal 2020, the Company filed a Motion to Dismiss the Plaintiff’s Consolidated Amended Complaint and the Plaintiff filed an Opposition to the Motion to Dismiss. During the fourth quarter of fiscal 2020, the Company filed a Reply to the Opposition. The Court has taken the matter under advisement.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I. “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2020. There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None.

(b) None.

Upon vesting of restricted stock awarded by the Company to employees, the Company repurchases shares and withholds the amount of the repurchase payment to cover employees’ tax withholding obligations. As set forth in the table below, during the quarter ended November 30, 2020, the Company repurchased 7,132 shares in the indicated months. These were the only repurchases of equity securities made by the Company during the first quarter of fiscal year 2021. The Company does not have a stock repurchase program.



Period	(a) ‎Total Number ‎of Shares ‎Purchased		(b) ‎Average Price ‎Paid Per Share		(c) ‎Total Number ‎of Shares ‎Purchased ‎as Part of ‎Publicly ‎Announced ‎Plans or ‎Programs		(d) ‎Maximum ‎Number of ‎Shares That ‎May Yet Be ‎Purchased ‎Under the ‎Plans or ‎Programs
September 1, 2020 - September 30, 2020		—	$	—		—		N/A
October 1, 2020 - October 31, 2020		6,773	$	73.87		—		N/A
November 1, 2020 - November 30, 2020		359	$	69.17		—		N/A
Total		7,132	$	73.63		—		—

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

(a) Exhibits:



3.1(1)	Amended and Restated Certificate of Incorporation of the Company.
3.2(2)	Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company.
3.3(3)	Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company.
3.4(4)	Second Amended and Restated Bylaws of the Company.
10.1*	Employment Agreement between the Company and Juan Ignacio Biehl dated March 15, 2018 (including amendments dated June 14, 2018, July 26, 2019, and September 1, 2020).
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Inline XBRL Instance Document
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)


*	Identifies management contract or compensatory plan or arrangement.

**	These certifications are being furnished solely to accompany this Report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of PriceSmart, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

⁽¹⁾Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1997 filed with the Commission on November 26, 1997.

⁽²⁾Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 filed with the Commission on April 14, 2004.

⁽³⁾Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2004 filed with the Commission on November 24, 2004.

⁽⁴⁾Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on July 17, 2015.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PRICESMART, INC.

Date: January 7, 2021	By:	/s/ SHERRY S. BAHRAMBEYGUI
		Sherry S. Bahrambeygui
		Chief Executive Officer
		(Principal Executive Officer)

Date: January 7, 2021	By:	/s/ MICHAEL L. MCCLEARY
		Michael L. McCleary
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)