What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-05-11 · 173 added, 166 removed, 339 unchanged (50% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion in this section contains forward-looking statements that are based on our current expectations.

Actual results could differ materially from those expressed or implied by the forward-looking statements due to a number of risks, uncertainties and other factors, including those identified in "Part I, Item 1A — Risk Factors" of our Annual Report on Form 10-K for the year ended September 30, 2019 , as supplemented by the information set forth in “Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and "Part II, Item 1A — Risk Factors" of this Report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to inform the reader about matters affecting the financial condition and results of operations of EZCORP, Inc.

and its subsidiaries (collectively, “we,” “us”, “our”, "EZCORP" or the “Company”).

The following discussion should be read together with our condensed consolidated financial statements and related notes included elsewhere within this report.

Management’s Discussion and Analysis of Financial Conditions and Results of Operations contain forward-looking statements.

Our actual results could differ materially from those anticipated in these forward-looking statements.

See "Part I, Item 1A — Risk Factors" of our Annual Report on Form 10-K for the year ended September 30, 2019 , as supplemented by the information set forth in “Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and "Part II, Item 1A — Risk Factors" of this Report for a discussion of certain risks, uncertainties and assumptions associated with these statements.

Impact of COVID-19

We began to see the impact of the novel coronavirus disease (“COVID-19”) to our operations in mid-March, which is when the closure of non-essential businesses and the implementation of stay-at-home requirements began in our geographic locations.

We have been able to keep most of our stores open for business and operating under enhanced safety measures and restrictions

on occupancy.

During March, we lost 163 store operating days in U.S.

Pawn as a result of mostly intermittent closures due to local orders or other COVID-19 related issues.

In Latin America Pawn, governmental closure orders have had a more severe impact on our business, particularly in our GPMX unit (Guatemala, El Salvador, Honduras and Peru).

During March, we lost a total of 1,089 store operating days in Latin America Pawn (18 in Mexico Pawn and 1,071 in GPMX).

The store closure orders in GPMX continued into April, but started to ease in the latter portion of the month.

As of the date of this Report, 99% of our stores in U.S.

Pawn and 90% in Latin America Pawn are open for business and serving customers.

Additionally, we have experienced a decline in pawn loan originations and associated loan balances since mid-March, in both the U.S.

and Latin America, as a result of a change in customer borrowing behaviors due to COVID-19.

Pawn loan balances at the end of the second quarter were down $8.6 million (6.6%) in U.S.

Pawn and $4.5 million (10.5%) in Latin America Pawn (up $0.6 million, or 1% on a constant currency basis), compared to the prior-year quarter.

Since March 31, 2020, the decline in pawn loan balances has accelerated and is continuing.

The decline in pawn loan balances will have a negative impact on net revenues and earnings for the remainder of fiscal 2020 and future periods until we are able to rebuild the loan balances.

Offsetting the net revenue losses due to decreased loan originations, we have seen a strong increase in merchandise sales during March and continuing into April.

As a result of this increased sales activity, combined with the decrease in loan originations and our liquidity initiatives described below, our cash balance has grown to $197.7 million at the end of the quarter, further increasing to greater than $250.0 million at the end of April.

In December 2019, a novel strain of coronavirus, ("COVID-19"), was identified in Wuhan, China.

This new coronavirus has caused a global health emergency and was declared a pandemic by the World Health Organization in March 2020.

In an effort to contain and slow the spread of COVID-19, governments have implemented various measures, such as, ordering non-essential businesses to close, issuing travel advisories, canceling large scale public events, ordering shelter-in-place for residents and requiring the public to practice social distancing.

Many of these measures have expired or been rescinded, but some are continuing, and others are being considered for reimplementation, as COVID-19 continues to spread at rapid rates in many parts of the U.S.

We began to see the impact of COVID-19 to our operations in mid-March, which is when the government implemented actions in response to COVID-19.

Since that time and continuing through the third quarter, we have been able to keep virtually all of our stores open for business, although operating under enhanced safety measures and, in some cases, restrictions on occupancy.

We have seen tighter restrictions in our Latin America countries:

In Mexico (367 stores), retail sales in all stores were prohibited by regulators during the last three weeks of May;

in Guatemala (85 stores), regulators imposed country-wide lock-downs on many weekends and 39 mall-based locations were closed for extended periods;

in El Salvador (17 stores), our stores were closed from late March through mid-June;

in Honduras (16 stores), the majority of our stores were closed through mid-April;

and in Peru (11 stores), our stores were closed from mid-March through varying dates through mid-May and mid-June.

Beginning in mid-March and continuing through most of the third quarter, we have experienced a significant decline in pawn loan originations and associated loan balances in both the U.S.

and Latin America, as a result of a change in customer borrowing behaviors related to COVID-19.

Pawn loan balances at the end of the third quarter were down $61.8 million (42%) in U.S.

Pawn and $15.3 million (37%) in Latin America Pawn (down $11.7 million, or 28% on a constant currency basis), compared to the prior-year quarter.

The overall decline in pawn loan balances had a negative impact on our net revenues and earnings for the third quarter and will continue to adversely affect our results of operations for the remainder of fiscal 2020 and future periods until we are able to rebuild the loan balances.

Offsetting the net revenue losses due to decreased loan originations, we have seen a strong increase in merchandise sales during March and continuing into the third quarter.

As a result of this increased sales activity, combined with the decrease in loan originations and our liquidity initiatives described below, our cash balance has grown to $311.1 million at the end of the third quarter.

Sustained lower pawn portfolios lead to less inventory available for sale, which in turn may lead to lower merchandise sales volume in the next fiscal year.

In order to maximize our ability to meet an expected increase in pawn loan originations, we have implemented several measures to increase liquidity.

We have suspended repurchases of shares under our authorized stock repurchase program, have renegotiated certain supplier and vendor agreements, have slowed the pace of de novo store openings in Latin America, have delayed certain capital expenditures and, as a result of The Coronavirus Aid, Relief, and Economic Security (CARES) Act, are able to delay payments of certain taxes.

We have suspended repurchases of shares under our authorized stock repurchase program, have renegotiated certain supplier and vendor agreements, have slowed the pace of de novo store openings in Latin America, have delayed certain capital expenditures and were able to delay payments of certain taxes as a result of the economic relief in the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress in response to COVID-19.

The full extent and duration of the COVID-19 impact on the global economy generally, and on our business specifically, is currently unknown.

We expect, however, that the pandemic will have an adverse effect on our net revenues and earnings in fiscal 2020, and if it continues, it may have an adverse effect on our results of operations, financial position and liquidity in future periods.

The pandemic will have an adverse effect on our net revenues and earnings in fiscal 2020, and we expect that the impact of the pandemic, and the recovery therefrom, will continue to adversely affect net revenues and earnings into fiscal 2021.

A prolonged pandemic and recovery may have an adverse effect on our results of operations, financial position and liquidity in future periods.

See "Part II, Item 1A - Risk Factors."

Goodwill and Intangible Asset Impairment

During the current quarter, we concluded there was an indicator of impairment due to a decline in our market capitalization.

We performed a quantitative analysis as of March 31, 2020 and determined the fair value of each of our reporting units was below its carrying value as a result of the impact of COVID-19, as discussed above.

As a result of this analysis, we recorded an impairment charge of $41.3 million in the current quarter.

We also (a) determined an impairment had occurred in the fair values of acquired trade names of previously acquired entities in our Mexico and GPMX reporting units and recorded a related impairment of $2.9 million and $1.7 million respectively, and (b) determined the carrying amount of certain long-lived asset groups were not recoverable and recorded a related impairment of $1.1 million.

These impairments were recorded under "Impairment of goodwill and intangible assets" in the condensed consolidated statement of operations.

See Note 2 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements."We remain confident in our businesses, as all business units were performing well prior to the COVID-19 related impacts.

In late May and early June, protests and demonstrations in some cities escalated into riots and lootings in neighborhoods where our stores are located.

As a result, 30 stores suffered losses and damages during the riots and looting activity.

A total of 4 stores suffered total losses and we are currently evaluating whether these stores will be re-opened.

We recorded $1.8 million in inventory losses, $0.4 million in loan restitution losses and $0.2 million in property, plant and equipment losses during the quarter.

The inventory losses were recorded under "Merchandise cost of goods sold" in the Company's condensed consolidated statement of operations.

Overview and Financial Highlights

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Attractive Shareholder Returns.

At our pawn stores, we offer pawn loans, which are nonrecourse loans collateralized by tangible personal property, and sell merchandise to customers looking for good value.

The merchandise we sell consists of second-hand collateral forfeited from our pawn lending activities or purchased from customers.

We offer pawn loans at our pawn stores and sell merchandise to customers looking for good value.

Our pawn loans are nonrecourse loans collateralized by tangible personal property.

The merchandise we sell consists of collateral forfeited from our pawn lending activities or merchandise purchased from customers.

We remain focused on optimizing our balance of pawn loans outstanding (“PLO”) and the resulting higher pawn service charges (“PSC”).

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Collateral for our pawn loans consists of tangible personal property, generally jewelry, consumer electronics, tools, sporting goods and musical instruments.

Security for our pawn loans is provided via the estimated resale value of the collateral and the perceived probability of the loan’s redemption.

Security for our pawn loans is provided via the estimated resale value of the collateralized personal property and the perceived probability of the loans' redemption.

Our ability to offer quality second-hand goods at prices significantly lower than original retail prices attracts value-conscious customers.

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Growth and Expansion

Or strategy is to expand the number of locations we operate through opening new (“de novo”) locations and through acquisitions in both Latin America and the United States and potential new markets.

Our strategy is to expand the number of locations we operate through opening new (“de novo”) locations and through acquisitions in both Latin America and the United States and potential new markets.

Our ability to add new stores is dependent on several variables, such as projected achievement of internal investment hurdles, the availability of acceptable sites or acquisition candidates, the alignment of acquirer/seller price expectations, the regulatory environment, local zoning ordinances, access to capital and the availability of qualified personnel.

Given the environment which we currently operate, we have placed all de novo and acquisition activities on hold.

In the current quarter, we have resumed de novo and acquisition activities.

Seasonality and Quarterly Results

Historically, pawn service charges are highest in our fourth fiscal quarter (July through September) due to a higher average loan balance during the summer lending season in the United States and lowest in our third fiscal quarter (April through June) following the tax refund season in the United States.

Merchandise sales are highest in our first and second fiscal quarters (October through March) due to the holiday season, jewelry sales in the United States surrounding Valentine’s Day and the availability of tax refunds in the United States.

Most of our customers in Latin America receive additional compensation from their employers in December, and many receive additional compensation in June or July, applying downward pressure on loan balances and fueling some merchandise sales in those periods.

In the United States, pawn service charges are historically highest in our fourth fiscal quarter (July through September) due to a higher average loan balance during the summer lending season and lowest in our third fiscal quarter (April through June) following the tax refund season and merchandise sales are highest in our first and second fiscal quarters (October through March) due to the holiday season, jewelry sales surrounding Valentine’s Day and the availability of tax refunds.

In Latin America, most of our customers receive additional compensation from their employers in December, and many receive additional compensation in June or July, applying downward pressure on loan balances and fueling some merchandise sales in those periods.

As a net effect of these and other factors and excluding discrete charges, our consolidated profit before tax is generally highest in our first fiscal quarter (October through December) and lowest in our third fiscal quarter (April through June).

We expect the COVID-19 pandemic to negatively impact our financial results for fiscal 2020, and such impact is unknown.

This uncertainty is dependent upon the longevity and severity of the pandemic and the pace of the business reopening and rebound, including the impact of government responses.

The pandemic could also be material to our longer-term financial results and condition based upon the same factors.

During the first quarter of fiscal 2020, we revised the financial information our chief operating decision maker (currently our chief executive officer) reviews for operational decision-making purposes and for allocation of capital to include the separate financial results of our Lana business.

These historical trends have been impacted by COVID-19.

However, we expect these historical trends to return in the future.

During the first quarter of fiscal 2020, we revised the financial information our chief operating decision maker (our chief executive officer) reviews for operational decision-making purposes and for allocation of capital to include the separate financial results of our Lana business.

Our historical segment results have been recast to conform to current presentation.

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Store Data by Segment

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Latin America Pawn

Other International

As of December 31, 2019

New locations opened

As of March 31, 2020

Three Months Ended March 31, 2019

New locations opened

Locations sold, combined or closed

As of June 30, 2020

Three Months Ended June 30, 2019

Latin America Pawn

Other International

As of December 31, 2018

As of March 31, 2019

New locations opened

Locations acquired

Locations sold, combined or closed

As of March 31, 2019

Six Months Ended March 31, 2020

As of June 30, 2019

Nine Months Ended June 30, 2020

Latin America Pawn

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New locations opened

As of March 31, 2020

Six Months Ended March 31, 2019

Locations sold, combined or closed

As of June 30, 2020

Nine Months Ended June 30, 2019

Latin America Pawn

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Locations sold, combined or closed

As of March 31, 2019

As of June 30, 2019

Results of Operations

Three Months Ended March 31, 2020 vs.

Three Months Ended March 31, 2019

These tables, as well as the discussion that follows, should be read with the accompanying condensed consolidated financial statements and related notes.

All comparisons, unless otherwise noted, are to the prior-year quarter.

The following table presents selected summary financial data for the U.S.

Three Months Ended June 30, 2020 vs.

Three Months Ended June 30, 2019

These tables, as well as the discussion that follows, should be read in conjunction with the accompanying condensed consolidated financial statements and related notes.

The following table presents selected summary financial data for our U.S.

Pawn segment:

Three Months Ended March 31,

Three Months Ended June 30,

(in thousands)

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Segment operating expenses:

Impairment of goodwill and intangible assets

Depreciation and amortization

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Balance is calculated based upon the average of the monthly ending balances during the applicable period.

Segment contribution decreased $8.0 million due to the goodwill impairment charge recorded during the quarter.

Excluding that charge, segment contribution increased $1.9 million , or 7.0% , to $30.4 million .

Net revenues increased 2% to $100.8 million while operations expenses were tightly managed and were flat to the prior-year quarter.

Segment contribution decreased $(7.1) million due to a decrease in pawn service charges, partially offset by an increase in merchandise sales gross profit.

Operations expenses remained relatively flat compared to the prior-year quarter.

The change in net revenue attributable to same stores and new stores added since the prior-year quarter is summarized as follows:

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Total change in net revenue

Pawn service charges were flat as a higher yield offset a 3% decrease in average ending monthly pawn loan balances outstanding during the quarter.

We have experienced a substantial decline in new loans activity and associated loan balances since mid-March 2020 and continuing as a result of a change in customer borrowing behaviors due to COVID-19.

See "Impact of COVID-19" above.

Merchandise sales increased 6% with margins down 100 basis points to 36% , the low end of our target range, as we continue to focus on inventory management.

As a result, merchandise sales gross profit increased 4% to $37.2 million .

Jewelry scrapping sales gross profit increased 38% to $1.9 million on higher volume and scrapping margins as a result of increased gold market prices, with margins up 200 basis points to 19% .

Pawn service charges decreased by 30% as a result of lower loan demand and increased loan redemptions believed to be related to federal economic stimulus.

Merchandise sales increased 39% with margins down 200 basis points to 35%.

When losses from looting of $2.2 million are excluded from merchandise cost of goods sold, margins were flat at 37%.

We continue to focus on inventory management and efforts to reduce aged general merchandise.

As a result, merchandise sales gross profit increased 30% to $40.4 million driven by strong retail demand as a result of the government fiscal stimulus response to COVID-19.

Jewelry scrapping sales gross profit increased 86% to $4.3 million on higher volume and scrapping margins as a result of higher gold prices, with margins up 900 basis points to 25% .

Non-GAAP Financial Information

In addition to the financial information prepared in conformity with accounting principles generally accepted in the United States ("GAAP"), we provide certain other non-GAAP financial information on a constant currency basis ("constant currency").

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide certain other non-GAAP financial information on a constant currency basis ("constant currency").

We use constant currency results to evaluate our Latin America Pawn operations, which are denominated primarily in Mexican pesos, Guatemalan quetzals and other Latin American currencies.

We believe that presentation of constant currency results is meaningful and useful in understanding the activities and business metrics of our Latin America Pawn operations and reflect an additional way of viewing aspects of our business that, when viewed with GAAP results, provide a more complete understanding of factors and trends affecting our business.

We believe presentation of constant currency results is meaningful and useful in understanding the activities and business metrics of our Latin America Pawn operations and reflect an additional way of viewing aspects of our business that, when viewed with GAAP results, provide a better understanding and evaluation of factors and trends affecting our business.

We provide non-GAAP financial information for informational purposes and to enhance understanding of our GAAP consolidated financial statements.

We use this non-GAAP financial information to evaluate and compare operating results across accounting periods.

Readers should consider the information in addition to, but not instead of or superior to, our financial statements prepared in accordance with GAAP.

Readers should consider the information in addition to, but not rather than or superior to, our financial statements prepared in accordance with GAAP.

This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.

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We used the end-of-period rate for balance sheet items and the average closing daily exchange rate on a monthly basis during the appropriate period for statement of operations items.

Our statement of operations constant currency results reflect the monthly exchange rate fluctuations and so are not directly calculable from the above rates.

Our statement of operations constant currency results reflect the monthly exchange rate fluctuations and are not directly calculable from the above rates.

Constant currency results, where presented, also exclude the foreign currency gain or loss.

The end-of-period and approximate average exchange rates for each applicable currency as compared to U.S.

dollars as of and for the three and six months ended March 31 were as follows:

Three Months Ended March 31,

Six Months Ended March 31,

dollars as of and for the three and nine months ended June 30 were as follows:

Three Months Ended June 30,

Nine Months Ended June 30,

Guatemalan quetzal

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dollars from its functional currencies noted above under “Results of Operations — Non-GAAP Financial Information."

Three Months Ended March 31,

Three Months Ended June 30,

Change (GAAP)

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Segment operating expenses:

Impairment of goodwill and intangible assets

Depreciation and amortization

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Fiscal 2020 constant currency amount excludes net GAAP basis foreign currency transaction gains of $0.1 million resulting from movement in exchange rates.

The net foreign currency transaction gains for fiscal 2019 of $0.1 million are included in the above results.

The net foreign currency transaction gains for fiscal 2019 were nominal and are included in the above results.

Balance includes pawn loans and inventory.

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Rate is solely inclusive of results from Mexico Pawn.

In the current quarter, our Latin America pawn segment opened nine de novo stores.

Segment contribution decreased $39.6 million , or 419% , to $(30.1) million ( 436% on a constant currency basis) primarily due to the goodwill impairment charges recorded during the quarter.

Excluding those charges, segment contribution decreased $3.7 million , or 39% , to $5.8 million (44% on a constant currency basis) with a net revenue decline of $2.2 million, or 8% ($1.7 million, or 6% , on a constant currency basis), to $25.8 million .

Operations expenses were tightly managed with an increase of $0.2 million, or 1% ($0.8 million, or 4% on a constant currency basis), to $18.5 million .

In the current quarter, our Latin America pawn segment opened three de novo stores.

Segment contribution decreased $2.8 million , or 135% , to $(0.7) million ( 119% on a constant currency basis).

Operations expenses decreased $3.2 million, or (18)% ($0.9 million, or (5)% on a constant currency basis), to $15 million .

The change in net revenue attributable to same stores and new stores added since the prior-year quarter is summarized as follows:

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The average ending monthly pawn loan balance outstanding during the current quarter was down 37% ( 29% on a constant currency basis).

Merchandise sales increased 11% ( 14% on a constant currency basis) with margins down 600 basis point as we continue with efforts to reduce aged general merchandise.

As a result of these factors and foreign currency impacts, merchandise sales gross profit was down 11% to $6.9 million ( 9% to $7.0 million on a constant currency basis).

Jewelry scrapping sales decreased 10% ( 8% on a constant currency basis) as airport closings limited many stores ability to scrap and export their gold, however with a 1,000 basis point increase in margin to 18% as we benefited from an overall increase in gold market prices.

We have experienced a substantial decline in new loans activity and associated loan balances as a result of a change in customer borrowing behaviors due to COVID-19.

Merchandise sales increased 1% ( 20% on a constant currency basis) with margins up 800 basis points.

Merchandise sales gross profit was up 65% to $4.3 million ( 104% to $5.3 million on a constant currency basis) primarily related to a discrete transaction tax adjustment of $(4.6) million in the prior year quarter.

Jewelry scrapping sales decreased 27% ( 12% on a constant currency basis) as airport closures limited many stores' ability to scrap and export their gold.

The following table presents selected financial data for the Lana segment:

Three Months Ended March 31,

Three Months Ended June 30,

Percentage Change

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Operations expense and other

We launched our customer-centric digital engagement platform (“Lana”) in the prior quarter, initially serving customers in selected Florida locations.

Represents a percentage computation that is not mathematically meaningful.

We launched our customer-centric digital engagement platform (“Lana”) in the first quarter of fiscal 2020.

This platform currently offers the ability for customers at selected locations to remotely extend their pawn loans through digital payments using their Lana account, and will allow us to leverage our existing store and pawn customer base to expand customer acquisition and retention and enable rapid deployment of new products.

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Other International

The following table presents selected financial data for the Other International segment after translation to U.S.

The following table presents selected financial data for our Other International segment after translation to U.S.

dollars from its functional currency of primarily Australian and Canadian dollars:

Three Months Ended March 31,

Three Months Ended June 30,

Percentage Change

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Operating expenses

Impairment of goodwill and intangible assets

Equity in net income of unconsolidated affiliates

Segment operating income (loss)

Segment operating (loss) income

Other segment expense

Segment contribution (loss)

Represents a percentage computation that is not mathematically meaningful.

Segment contribution was $(0.9) million , an improvement of $7.3 million from the prior-year quarter primarily due to:

A $6.5 million impairment of Cash Converters International in the prior-year quarter with no impairment in the current quarter;

A decrease in operating expenses of $0.9 million subsequent to the deconsolidation of a previously consolidated variable interest entity ("RDC") in mid-fiscal 2019;

An impairment of $1.1 million of certain long-lived assets in the current quarter.

Segment (loss) contribution

Segment contribution was $(1.5) million , a decrease of $2.3 million from the prior-year quarter primarily due to a:

$1.2 million charge related to our portion of quarterly activity for Cash Converters International.

The following table reconciles our consolidated segment contribution discussed above to net income attributable to EZCORP, Inc., including items that affect our consolidated financial results but are not allocated among segments:

Three Months Ended March 31,

Three Months Ended June 30,

Percentage Change

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Depreciation and amortization

Loss on sale or disposal of assets and other

Gain on sale or disposal of assets and other

Interest expense

Interest income

Other expense (income)

(Loss) income from continuing operations before income taxes

Income tax expense

Income tax (benefit) expense

(Loss) income from continuing operations, net of tax

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Represents a percentage computation that is not mathematically meaningful.

Segment contribution decreased 142% over the prior-year quarter, including the goodwill and intangible assets impairment of $47.1 million recorded in the current quarter and a $6.5 million prior-year quarter impairment related to our investment in Cash Converters International, offset by mixed results in our US Pawn and Latin America Pawn segments partially as a result of the COVID-19 pandemic.

Interest expense decreased $3.1 million, or 37% , primarily due to the reduction of interest expense on our 2.125% Cash Convertible Senior Notes Due 2019 ("2019 Convertible Notes") which were repaid in June 2019.

Segment contribution decreased 50% over the prior-year quarter primarily due to reduced pawn service charges from a decline in new loans activity and associated loan balances as a result of a change in customer borrowing behaviors due to COVID-19, partially offset by increased merchandise sales gross profit.

Interest expense decreased $3.1 million, or 37% , primarily due to the reduction of interest expense on our 2.125% Cash Convertible Senior Notes Due 2019, which were repaid in June 2019.

Prior to repayment, the principal amount of these notes was $195.0 million.

Interest income decreased $2.1 million, or 79% , primarily due to the declining principal balance on the Prestaciones Finmart, S.A.P.I.

de C.V., SOFOM, E.N.R.

("Grupo Finmart") notes receivable as they are repaid in accordance with their agreed amortization schedule, in addition to the reduction of interest earned on outstanding cash balances after our 2019 Convertible Notes were repaid in June 2019.

The March 2020 payment on the Grupo Finmart notes was paid into an escrow account pending resolution of an outstanding indemnity claim for pre-closing taxes.

Income tax expense increased $4.4 million due primarily to a $39 million decrease in income from continuing operations before income taxes offset by a $20 million increase resulting from non-deductible goodwill impairments and $1.6 million to correct the calculation of certain transaction tax liabilities in prior periods.

Interest income decreased $2.6 million, or 92% , primarily due to the declining principal balance on the Grupo Finmart notes receivable as the notes are repaid in accordance with the agreed upon amortization schedule, in addition to the reduction of interest earned on outstanding cash balances after our 2019 Convertible Notes were repaid in June 2019.

Income tax expense decreased $4.8 million primarily due to a $13.7 million decrease in income from continuing operations before income taxes.

Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate.

These items include the net effect of state taxes, non-deductible items and changes in valuation allowances for certain foreign operations.

Six Months Ended March 31, 2020 vs.

Six Months Ended March 31, 2019

These tables, as well as the discussion that follows, should be read with the accompanying condensed consolidated financial statements and related notes.

All comparisons, unless otherwise noted, are to the prior year-to-date period.

Nine Months Ended June 30, 2020 vs.

Nine Months Ended June 30, 2019

Goodwill and Intangible Asset Impairment

During the quarter ended March 31, 2020, we concluded there was an indicator of impairment due to a decline in our market capitalization.

We performed a quantitative analysis as of March 31, 2020 and determined the fair value of each of the Company's reporting units was below its carrying value as a result of the impact of COVID-19.

As a result of this analysis, we recorded an impairment charge of $41.3 million in the prior quarter.

These impairments were recorded under "Impairment of goodwill and intangible assets" in the Company's condensed consolidated statement of operations.

See Note 2 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements." We

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

We further evaluated events and circumstances as of June 30, 2020 and determined there were no impairment indicators.

The tables below and discussion that follows should be read in conjunction with the accompanying condensed consolidated financial statements and related notes.

The following table presents selected summary financial data for the U.S.

Pawn segment:

Six Months Ended March 31,

Nine Months Ended June 30,

(in thousands)

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Balance is calculated based upon the average of the monthly ending balances during the applicable period.

Segment contribution decreased $7.0 million due to the goodwill impairment charge recorded during the quarter.

Excluding that charge, segment contribution decreased $3.1 million , or 6% , to $59.0 million .

While net revenue was flat at $200.2 million , total expenses decreased $3.1 million to $141.3 million due primarily a $2.9 million prior-period recognition of an uncollectible receivable balance from a bankrupt refining partner with no comparable charge in the current period.

Excluding the impairment, operations expenses were tightly managed and were flat to the prior-year six-months

Segment contribution decreased $14.0 million primarily due to the goodwill impairment charge recorded during the prior quarter.

Excluding the goodwill impairment charge, segment contribution decreased $3.9 million , or (5)% , to $75.5 million .

Net revenue decreased (2)% to $286.0 million , total expenses decreased $2.2 million to $210.5 million due primarily a $2.9 million prior-period recognition of an uncollectible receivable balance from a bankrupt refining partner with no comparable charge in the current period.

Excluding the impairment, operations expenses increased 1% compared to the prior-year nine-month period.

The change in net revenue attributable to same stores and new stores added since the prior-year is summarized as follows:

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Total change in net revenue

Pawn service charges were flat as a higher yield offset a 2% decrease in average ending monthly pawn loan balances outstanding during the current six-months.

Pawn service charges decreased (10)% due to a substantial decline in new loans activity and associated loan balances as a result of a change in customer borrowing behaviors as a result of COVID-19.

Merchandise sales increased 14% with margins down 100 basis points to 36% , the low end of our target range, as we continue to focus on inventory management.

As a result of the net impact of the increase in sales offset by decreased margin, merchandise sales gross profit decreased 1% to $71.2 million .

Jewelry scrapping sales gross profit increased 35% to $3.2 million due primarily to higher scrapping margins as a result of increased gold market prices.

As a result of the net impact of the increase in sales offset by decreased margin, merchandise sales gross profit increased 9% to $111.6 million .

Jewelry scrapping sales gross profit increased 60% to $7.5 million due primarily to higher scrapping margins as a result of higher gold prices.

Scrap sales margins increased 700 basis points to 23% .

Latin America Pawn

The following table presents selected summary financial data for the Latin America Pawn segment, including constant currency results, after translation to U.S.

The following table presents selected summary financial data our Latin America Pawn segment, including constant currency results, after translation to U.S.

dollars from functional currencies.

See “Results of Operations — Non-GAAP Financial Information” above.

Six Months Ended March 31,

Nine Months Ended June 30,

Change (GAAP)

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Segment operating (loss) contribution

Other segment income (a)

Other segment (income) expense (a)

Segment (loss) contribution

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Pawn loan redemption rate

Represents a percentage computation that is not mathematically meaningful.

Fiscal 2020 constant currency amount excludes net GAAP basis foreign currency transaction gains of $0.4 million gains resulting from movement in exchange rates.

1 unchanged sentence

Balance is calculated based upon the average of the monthly ending balances during the applicable period.

In the current-year six-months, our Latin America pawn segment opened 13 de novo stores.

Segment contribution decreased $38.3 million , or 235% , to $22.0 million ( 247% on a constant currency basis) primarily due to the goodwill impairment charges recorded during the quarter.

Excluding those charges, segment contribution decreased $2.3 million , or 14% , to $13.9 million (22% on a constant currency basis) with flat net revenue.

Operations expense were tightly managed and increased $2.0 million, or 6% ( 7% on a constant currency basis), to $38.5 million due primarily to new store openings, along with relocations and expansions of existing stores.

In the current-year nine-months, our Latin America pawn segment opened 16 de novo stores.

Segment contribution decreased $41.1 million , or 224% , to $(22.8) million ( 232% on a constant currency basis) primarily due to the goodwill impairment charges recorded during the prior quarter.

Excluding those charges, segment contribution decreased $5.2 million , or 28% , to $13.2 million (32% on a constant currency basis) with net revenue down 10% ( 6% on a constant currency basis).

Operations expense decreased $1.2 million, or 2% (increased 2% on a constant currency basis), to $53.5 million .

The change in net revenue attributable to same stores and new stores added since the prior-year is summarized as follows:

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Total change in net revenue

Pawn service charges were flat (down 1% on a constant currency basis).

The average ending monthly pawn loan balance outstanding during the current-year six-months was down 4% on a GAAP and constant currency basis, offset by the addition of new stores since the prior-year.

Merchandise sales increased 16% on a GAAP and constant currency basis as we continue with efforts to reduce aged general merchandise at a higher cost basis, with an offsetting 500 basis point decline in margins.

As a result of these factors and foreign currency impacts, merchandise sales gross profit was down 1% to $15.6 million ( 2% to $15.5 million on a constant currency basis).

Jewelry scrapping sales increased 8% on a GAAP and constant currency basis, with a 600 basis point increase in margin to 14% as we benefited from an overall increase in gold market prices.

Pawn service charges decreased 15% ( 12% on a constant currency basis).

The average ending monthly pawn loan balance outstanding during the current quarter was down 15% ( 12% on a constant currency basis).

We have experienced a substantial decline in new loans activity and associated loan balances as a result of a change in customer borrowing behaviors due to COVID-19.

Merchandise sales increased 12% ( 17% on a constant currency basis) as we continue with efforts to reduce aged general merchandise at a higher cost basis, with an offsetting 100 basis points decline in margins.

As a result of these factors and foreign currency impacts, merchandise sales gross profit was up 8% to $19.8 million ( 13% to $20.7 million on a constant currency basis).

Jewelry scrapping sales decreased 7% ( 1% on a constant currency basis) as airport closures limited many stores ability to scrap and export their gold.

The following table presents selected financial data for the Lana segment:

Six Months Ended March 31,

Nine Months Ended June 30,

Percentage Change

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Operations expense and other

Represents a percentage computation that is not mathematically meaningful.

Discrete revenues to date are minimal as the product offering launched late in the first quarter of fiscal 2020, and all fees from pawn loan extensions, including those made through the Lana platform, are reported in the pawn segments.

Operations expense decreased $1.2 million from the prior-year six-months primarily as a result of the capitalization of costs related to the Lana platform during and subsequent to the development stage.

Operations expense decreased $0.7 million from the prior-year nine-month period primarily as a result of the capitalization of costs related to the Lana platform during and subsequent to the development stage.

Other International

The following table presents selected financial data from continuing operations for the Other International segment after translation to U.S.

The following table presents selected financial data from continuing operations for our Other International segment after translation to U.S.

dollars from its functional currency of primarily Australian and Canadian dollars:

Six Months Ended March 31,

Nine Months Ended June 30,

Percentage Change

6 unchanged sentences

Impairment of goodwill and intangible assets

Equity in net loss of unconsolidated affiliates

Equity in net loss (gain) of unconsolidated affiliates

Segment operating loss

2 unchanged sentences

Segment loss was $8.8 million , an improvement of $14.4 million from the prior year primarily due to:

A $19.7 million impairment of Cash Converters International in the prior-year with no impairment in the current-year six-months;

A $19.7 million impairment of Cash Converters International in the prior-year with no impairment in the current-year nine-months;

A decrease in operating expenses of $2.5 million related to the deconsolidation of a previously consolidated variable interest entity ("RDC") in mid-fiscal 2019;

An impairment of $1.1 million of certain long-lived assets in the current quarter;

A $7.1 million charge, ($10.1 million, net of a $3.0 million tax benefit) in the first quarter of fiscal 2020 for our share of the Cash Converters International settlement of a class action lawsuit.

An impairment of $1.1 million of certain long-lived assets in the second quarter of fiscal 2020;

A $7.1 million charge, ($10.1 million, net of a $3.0 million tax benefit) in the first quarter of fiscal 2020 for the Company's share of the Cash Converters International settlement of a class action lawsuit.

Six Months Ended March 31,

Nine Months Ended June 30,

Percentage Change

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Interest income

Other expense (income)

(Loss) income from continuing operations before income taxes

Income tax expense

Loss from continuing operations, net of tax

(Loss) income from continuing operations, net of tax

Loss from discontinued operations, net of tax

Net (loss) income

Net loss attributable to noncontrolling interest

1 unchanged sentence

Represents a percentage computation that is not mathematically meaningful.

Segment contribution decreased 61% over the prior-year, primarily related to the goodwill and intangible asset impairment of $47.1 million recorded in the second quarter, mixed results in our US Pawn and Latin America Pawn segments partially as a result of the COVID-19 pandemic, partially offset by a $19.7 million prior-year quarter impairment related to our investment in Cash Converters International.

Administrative expenses increased $4.1 million primarily as a result of higher labor, including severance costs, cloud computing costs and professional fees.

Professional fees include costs related to the remediation of the material weakness in our information technology general controls, fees related to the current quarter adoption of a new lease accounting standard, and other smaller items.

Loss on sale or disposal of assets and other includes $1.1 million due to the termination of non-core software projects.

Interest expense decreased $6.6 million, or 39% , primarily due to the reduction of interest expense on our 2.125% Cash Convertible Senior Notes Due 2019 ("2019 Convertible Notes") which were repaid June 17, 2019.

Segment contribution decreased 57% over the prior-year period, primarily related to the goodwill and intangible asset impairment of $47.1 million recorded in the second quarter of fiscal 2020, reduced pawn service charges from a decline in new loans activity and associated loan balances as a result of a change in customer borrowing behaviors due to COVID-19, partially offset by a $19.7 million prior-year quarter impairment related to our investment in Cash Converters International.

Administrative expenses increased $5.0 million primarily as a result of higher labor costs, including severance costs, cloud computing costs and professional fees.

Professional fees include costs related to the remediation of the material weakness in our information technology general controls, fees related to the current year adoption of the new lease accounting standard, and other smaller items.

Interest expense decreased $9.6 million, or 38% , primarily due to the reduction of interest expense on our 2.125% 2019 Convertible Notes which were repaid June 17, 2019.

Prior to repayment, the principal amount of these notes was $195.0 million.

Interest income decreased $4.6 million, or 82% , primarily due to the declining principal balance on the Prestaciones Finmart, S.A.P.I.

de C.V., SOFOM, E.N.R.

("Grupo Finmart") notes receivable, in addition to the reduction of interest earned on outstanding cash balances after our 2019 Convertible Notes were repaid in June 2019.

Interest income decreased $7.2 million, or 85% , primarily due to the declining principal balance on the Grupo Finmart notes receivable, in addition to the reduction of interest earned on outstanding cash balances after our 2019 Convertible Notes were repaid in June 2019.

Income tax expense increased $2.4 million due primarily to:

A $31 million decrease in income from continuing operations before income taxes offset by a $20 million increase resulting from non-deductible goodwill impairments;

A $45 million decrease in income from continuing operations before income taxes offset by

A $22 million increase in income tax expense resulting from non-deductible goodwill impairments;

A $0.7 million reduction in tax benefit from the December 2019 vesting of restricted stock units compared to the prior estimates of the related tax benefit that was recorded over their 3-year vesting period;

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Liquidity and Capital Resources

The table and discussion below present a summary of the selected sources and uses of our cash:

Six Months Ended March 31,

The table and discussion below presents a summary of the selected sources and uses of our cash:

Nine Months Ended June 30,

(in thousands)

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Effect of exchange rate changes on cash, cash equivalents and restricted cash

Net increase in cash, cash equivalents and restricted cash

Change in Cash and Cash Equivalents and Restricted Cash for the Six Months Ended March 31, 2020 vs.

Six Months Ended March 31, 2019

Net increase (decrease) in cash, cash equivalents and restricted cash

Change in Cash and Cash Equivalents and Restricted Cash for the Nine Months Ended June 30, 2020 vs.

Nine Months Ended June 30, 2019

The decrease in cash flows from operating activities year-over-year was due to $14.4 million of changes in working capital, offset by a $5.7 million increase in net income, exclusive of non-cash items.

Changes in working capital included certain required prepayments and payments of accounts payable, including certain discrete items, accrued as of September 30, 2019.

The increase in cash flows from investing activities year-over-year was primarily due to a $22.0 million net decrease in investment in customer loan growth, partially offset by a $10.6 million net decrease in principal collections on notes receivable.

The decrease in cash flows used in financing activities year-over-year was primarily due to $5.2 million in common stock repurchases.

The net effect of these and other smaller items was a $35.3 million increase in cash on hand during the current year-to-date period, resulting in a $197.7 million ending cash and restricted cash balance.

Of the ending cash balance at March 31, 2020 , $34.9 million was unavailable to fund domestic operations as we intend to permanently reinvest those funds in our foreign operations.

The increase in cash flows from investing activities year-over-year was primarily due to a $93.4 million net decrease in investment in customer loan growth and a $36.3 million increase in the sale of forfeited collateral, partially offset by a $17.9 million net decrease in principal collections on notes receivable.

The decrease in cash flows used in financing activities year-over-year was primarily due to repayment of our $195.0 million 2.125% Cash Convertible Senior Notes Due 2019 in June 2019 in the prior year and $5.2 million in common stock repurchases in the current year

The net effect of cash flows was a $152.7 million increase in cash on hand during the current year-to-date period, resulting in a $315.1 million ending cash and restricted cash balance.

Of the ending cash balance at June 30, 2020 , $49.0 million was unavailable to fund domestic operations as we intend to permanently reinvest those funds in our foreign operations.

Sources and Uses of Cash

In December 2019, our Board of Directors authorized a stock repurchase program that will allow us to repurchase up to $60 million of our Class A Non-voting Common Stock over three years.

In December 2019, our Board authorized a stock repurchase program that will allow us to repurchase up to $60 million of our Class A Non-voting Common Stock over three years.

On March 20, 2020, we suspended the repurchase of shares under the program in order to preserve current liquidity given the uncertainty of the impact of the COVID-19 pandemic to our operations.

The resumption of our stock repurchase program and the amount and timing of purchases will be dependent on a variety of factors.

These factors include the return to normal business conditions, stock price, trading volume, general market conditions, legal and regulatory requirements, the level of cash flows, and corporate considerations determined by management and the Board, such as liquidity and capital needs and the availability of attractive alternative investment opportunities.

These factors include the return to normal business conditions, stock price, trading volume, general market conditions, legal and regulatory requirements, cash flow levels, and corporate considerations determined by management and the Board, such as liquidity and capital needs and the availability of attractive alternative investment opportunities.

The Board of Directors has reserved the right to modify, suspend or terminate the program at any time.

During the three and six months ended March 31, 2020 , we repurchased and retired 800,740 and 943,149 shares of our Class A Common Stock for $4.2 million and $5.2 million , respectively.

We anticipate that cash flow from operations and cash on hand will be adequate to fund any future stock repurchases, our contractual obligations, planned de novo store growth, capital expenditures and working capital requirements through fiscal 2020.

During the nine months ended June 30, 2020 , we repurchased and retired 943,149 shares of our Class A Common Stock for $5.2 million , respectively.

We anticipate that cash flows from operations and cash on hand will be adequate to fund any future stock repurchases, our contractual obligations, planned de novo store growth, capital expenditures and working capital requirements through fiscal 2020.

We continue to explore accretive acquisition opportunities, both large and small, and may choose to pursue additional debt, equity or equity-linked financings in the future should the need arise.

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In "Part II, Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended September 30, 2019 , we reported that we had $631.7 million in total contractual

obligations as of September 30, 2019 There have been no material changes to this total obligation since September 30, 2020 , other than changes as the result of adoption of accounting standards as further discussed in Note 1 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements."

obligations as of September 30, 2019 .

There have been no material changes to this total obligation since September 30, 2019 , other than changes as the result of adoption of accounting standards as further discussed in Note 1 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements."

We are responsible for the maintenance, property taxes and insurance at most of our locations.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis