EZCORP INC 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 22 Table of Contents Impact of COVID-19 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 Many of these measures have expired or been rescinded, but some are continuing, and others are being considered for reimplementation, as COVID-19 continues to spread at rapid rates in many parts of the U.S. We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 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. 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." Civil Unrest 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. 23 Table of Contents Overview and Financial Highlights EZCORP is a Delaware corporation headquartered in Austin, Texas. We are a leading provider of pawn loans in the United States and Latin America. Our vision is to be the market leader in North America in responsibly and respectfully meeting our customers' desire for access to cash when they want it. That vision is supported by four key imperatives: • Market Leading Customer Satisfaction; • Exceptional Staff Engagement; • Most Efficient Provider of Cash; and • Attractive Shareholder Returns. 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”). The following charts present sources of net revenues, including PSC, merchandise sales gross profit ("Merchandise sales GP") and jewelry scrapping gross profit ("Jewelry scrapping GP"): 24 Table of Contents The following charts present sources of net revenues by geographic disbursement: The following charts present store counts by geographic disbursement: 25 Table of Contents Pawn Activities At our pawn stores, we offer pawn loans, which are typically small, nonrecourse loans collateralized by tangible personal property. We earn pawn service charges on our pawn loans, which varies by state and loan size. 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 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. The gross profit on sales of inventory depends primarily on our assessment of the loan or purchase value at the time the property is either accepted as loan collateral or purchased and our ability to sell that merchandise in a timely manner. As a significant portion of our inventory and sales involve gold and jewelry, our results can be influenced by the market price of gold and diamonds. Growth and Expansion 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. In the current quarter, we have resumed de novo and acquisition activities. Seasonality and Quarterly Results 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). These historical trends have been impacted by COVID-19. However, we expect these historical trends to return in the future. 26 Table of Contents Segments 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. We currently report our segments as follows: U.S. Pawn - all pawn activities in the United States; Latin America Pawn - all pawn activities in Mexico and other parts of Latin America; Lana - our customer-centric digital engagement platform; and Other International - primarily our equity interest in the net income of Cash Converters International and consumer finance activities in Canada. While we expect the operations of the Lana segment to have a positive impact on our pawn loan redemption rates and therefore our pawn service charges and yield, the pawn service charges will all be reported in our pawn segments rather than allocated to the Lana segment. Only discrete revenues related to the Lana segment will be reported in the Lana segment results. As a digital offering, Lana has no separate physical store locations. Leases As of October 1, 2019, we adopted Accounting Standards Codification ("ASC") Topic 842, Leases (Topic 842). Topic 842 required companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. We recorded a net right-of-use asset of $237.5 million and a net lease liability of $246.0 million. Store Data by Segment Three Months Ended June 30, 2020 U.S. Pawn Latin America Pawn Other International Consolidated As of March 31, 2020 512 493 22 1,027 New locations opened — 3 — 3 Locations sold, combined or closed (1 ) — — (1 ) As of June 30, 2020 511 496 22 1,029 Three Months Ended June 30, 2019 U.S. Pawn Latin America Pawn Other International Consolidated As of March 31, 2019 508 466 24 998 New locations opened — 4 — 4 Locations acquired 7 — — 7 Locations sold, combined or closed (1 ) — (2 ) (3 ) As of June 30, 2019 514 470 22 1,006 Nine Months Ended June 30, 2020 U.S. Pawn Latin America Pawn Other International Consolidated As of September 30, 2019 512 480 22 1,014 New locations opened — 16 — 16 Locations sold, combined or closed (1 ) — — (1 ) As of June 30, 2020 511 496 22 1,029 Nine Months Ended June 30, 2019 U.S. Pawn Latin America Pawn Other International Consolidated As of September 30, 2018 508 453 27 988 New locations opened — 12 — 12 Locations acquired 7 5 — 12 Locations sold, combined or closed (1 ) — (5 ) (6 ) As of June 30, 2019 514 470 22 1,006 27 Table of Contents Results of Operations 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. U.S. Pawn The following table presents selected summary financial data for our U.S. Pawn segment: Three Months Ended June 30, Change 2020 2019 (in thousands) Net revenues: Pawn service charges $ 41,069 $ 58,635 (30)% Merchandise sales 116,258 83,904 39% Merchandise sales gross profit 40,420 31,049 30% Gross margin on merchandise sales 35 % 37 % (200)bps Jewelry scrapping sales 17,129 13,889 23% Jewelry scrapping sales gross profit 4,254 2,290 86% Gross margin on jewelry scrapping sales 25 % 16 % 900bps Other revenues 40 34 18% Net revenues 85,783 92,008 (7)% Segment operating expenses: Operations 66,243 65,449 1% Depreciation and amortization 2,749 2,934 (6)% Segment operating contribution 16,791 23,625 (29)% Other segment income 234 4 5,750% Segment contribution $ 16,557 $ 23,621 (30)% Other data: Net earning assets (a) $ 176,866 $ 283,781 (38)% Inventory turnover 3.2 1.9 68% Average monthly ending pawn loan balance per store (b) $ 172 $ 280 (39)% Monthly average yield on pawn loans outstanding 14 % 14 % — Pawn loan redemption rate 88 % 86 % 200bps * Represents a percentage computation that is not mathematically meaningful. (a) Balance includes pawn loans and inventory. (b) Balance is calculated based upon the average of the monthly ending balances during the applicable period. 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. 28 Table of Contents The change in net revenue attributable to same stores and new stores added since the prior-year quarter is summarized as follows: Change in Net Revenue Pawn Service Charges Merchandise Sales Gross Profit Total (in millions) Same stores $ (17.9 ) $ 9 $ (8.9 ) New stores and other 0.3 0.4 0.7 Total $ (17.6 ) $ 9.4 $ (8.2 ) Change in jewelry scrapping sales gross profit and other revenues 2.0 Total change in net revenue $ (6.2 ) 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 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 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 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. Constant currency results reported herein are calculated by translating consolidated balance sheet and consolidated statement of operations items denominated in local currency to U.S. dollars using the exchange rate from the prior-year comparable period, as opposed to the current period, in order to exclude the effects of foreign currency rate fluctuations. 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 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 nine months ended June 30 were as follows: June 30, Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 2020 2019 Mexican peso 23.1 19.2 23.3 19.1 20.8 19.4 Guatemalan quetzal 7.5 7.5 7.5 7.5 7.5 7.6 Honduran lempira 24.4 24.3 24.4 24.2 24.3 24.1 Peruvian sol 3.5 3.3 3.4 3.3 3.4 3.3 29 Table of Contents 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. dollars from its functional currencies noted above under “Results of Operations — Non-GAAP Financial Information." Three Months Ended June 30, 2020 (GAAP) 2019 (GAAP) Change (GAAP) 2020 (Constant Currency) Change (Constant Currency) (in USD thousands) (in USD thousands) Net revenues: Pawn service charges $ 11,391 $ 20,345 (44)% $ 13,302 (35)% Merchandise sales 20,279 19,998 1% 24,024 20% Merchandise sales gross profit 4,258 2,582 65% 5,275 104% Gross margin on merchandise sales 21 % 13 % 800bps 22 % 900bps Jewelry scrapping sales 3,174 4,323 (27)% 3,784 (12)% Jewelry scrapping sales gross profit (109 ) 157 (169)% (56 ) (136)% Gross margin on jewelry scrapping sales (3 )% 4 % (700)bps (1 )% (500)bps Other revenues, net (32 ) 67 (148)% (131 ) (296)% Net revenues 15,508 23,151 (33)% 18,390 (21)% Segment operating expenses: Operations 15,041 18,284 (18)% 17,395 (5)% Depreciation and amortization 1,647 1,626 1% 1,913 18% Segment operating (loss) contribution (1,180 ) 3,241 (136)% (918 ) (128)% Other segment income (a) (442 ) 1,141 (139)% (514 ) (145)% Segment (loss) contribution $ (738 ) $ 2,100 (135)% $ (404 ) (119)% Other data: Net earning assets (b) $ 59,441 $ 82,320 (28)% $ 66,971 (19)% Inventory turnover 2.2 2.3 (4)% 2.2 (4)% Average monthly ending pawn loan balance per store (c) $ 59 $ 93 (37)% $ 66 (29)% Monthly average yield on pawn loans outstanding 12 % 16 % (400)bps 12 % (400)bps Pawn loan redemption rate (d) 77 % 77 % — 77 % — * Represents a percentage computation that is not mathematically meaningful. (a) 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 were nominal and are included in the above results. (b) Balance includes pawn loans and inventory. (c) Balance is calculated based upon the average of the monthly ending balances during the applicable period. (d) Rate is solely inclusive of results from Mexico Pawn. 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 . 30 Table of Contents The change in net revenue attributable to same stores and new stores added since the prior-year quarter is summarized as follows: Change in Net Revenue Pawn Service Charges Merchandise Sales Gross Profit Total (in millions) Same stores $ (9.2 ) $ 1.5 $ (7.7 ) New stores and other 0.2 0.2 0.4 Total $ (9.0 ) $ 1.7 $ (7.3 ) Change in jewelry scrapping sales gross profit and other revenues (0.4 ) Total change in net revenue $ (7.7 ) Change in Net Revenue (Constant Currency) Pawn Service Charges Merchandise Sales Gross Profit Total (in millions) Same stores $ (7.4 ) $ 2.5 $ (4.9 ) New stores and other 0.3 0.2 0.5 Total $ (7.1 ) $ 2.7 $ (4.4 ) Change in jewelry scrapping sales gross profit and other revenues (0.4 ) Total change in net revenue $ (4.8 ) Pawn service charges decreased 44% ( 35% on a constant currency basis). The average ending monthly pawn loan balance outstanding during the current quarter was down 37% ( 29% 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 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. Lana The following table presents selected financial data for the Lana segment: Three Months Ended June 30, Percentage Change 2020 2019 (in thousands) Revenues $ 9 — * Operations expense and other (1,870 ) (1,368 ) 37% Segment loss $ (1,861 ) $ (1,368 ) 36% * 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. 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. 31 Table of Contents Other International 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 June 30, Percentage Change 2020 2019 (in thousands) Net revenues: Consumer loan fees, interest and other $ 884 $ 1,270 (30)% Consumer loan bad debt — (576 ) (100)% Net revenues 884 694 27% Segment operating expenses: Operating expenses 1,060 1,066 (1)% Equity in net income of unconsolidated affiliates 1,183 (1,320 ) (190)% Segment operating (loss) income (1,359 ) 948 (243)% Other segment expense 115 88 31% Segment (loss) contribution $ (1,474 ) $ 860 (271)% 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. 32 Table of Contents Other Items 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 June 30, Percentage Change 2020 2019 (in thousands) Segment contribution $ 12,484 $ 25,213 (50)% Corporate expenses (income): Administrative 14,688 13,685 7% Depreciation and amortization 2,943 2,622 12% Gain on sale or disposal of assets and other 18 22 (18)% Interest expense 5,203 8,265 (37)% Interest income (224 ) (2,796 ) (92)% Other expense (income) 74 (44 ) (268)% (Loss) income from continuing operations before income taxes (10,218 ) 3,459 (395)% Income tax (benefit) expense (4,751 ) 98 * (Loss) income from continuing operations, net of tax (5,467 ) 3,361 (263)% Loss from discontinued operations, net of tax (20 ) (203 ) (90)% Net (loss) income (5,487 ) 3,158 (274)% Net loss attributable to noncontrolling interest — — —% Net (loss) income attributable to EZCORP, Inc. $ (5,487 ) $ 3,158 (274)% * Represents a percentage computation that is not mathematically meaningful. 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 $2.6 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. 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. 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 related impairment of $1.1 million. 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 33 Table of Contents 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. U.S. Pawn The following table presents selected summary financial data for the U.S. Pawn segment: Nine Months Ended June 30, Change 2020 2019 (in thousands) Net revenues: Pawn service charges $ 166,859 $ 184,658 (10)% Merchandise sales 314,059 275,639 14% Merchandise sales gross profit 111,571 102,708 9% Gross margin on merchandise sales 36 % 37 % (100)bps Jewelry scrapping sales 32,905 28,357 16% Jewelry scrapping sales gross profit 7,475 4,677 60% Gross margin on jewelry scrapping sales 23 % 16 % 700bps Other revenues 107 125 (14)% Net revenues 286,012 292,168 (2)% Segment operating expenses: Operations 201,921 200,884 1% Impairment of goodwill and intangible assets 10,000 — * Depreciation and amortization 8,325 8,951 (7)% Segment operating contribution 65,766 82,333 (20)% Other segment expense 234 2,856 (92)% Segment contribution $ 65,532 $ 79,477 (18)% Other data: Average monthly ending pawn loan balance per store (a) $ 248 $ 288 (14)% Monthly average yield on pawn loans outstanding 14 % 14 % — Pawn loan redemption rate 87 % 85 % 200bps * Represents a percentage computation that is not mathematically meaningful. (a) Balance is calculated based upon the average of the monthly ending balances during the applicable period. 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. 34 Table of Contents The change in net revenue attributable to same stores and new stores added since the prior-year is summarized as follows: Change in Net Revenue Pawn Service Charges Merchandise Sales Gross Profit Total (in millions) Same stores $ (19.0 ) $ 7.7 $ (11.3 ) New stores and other 1.2 1.2 2.4 Total $ (17.8 ) $ 8.9 $ (8.9 ) Change in jewelry scrapping sales gross profit and other revenues 2.8 Total change in net revenue $ (6.1 ) 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 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% . 35 Table of Contents Latin America Pawn 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. Nine Months Ended June 30, 2020 (GAAP) 2019 (GAAP) Change (GAAP) 2020 (Constant Currency) Change (Constant Currency) (in USD thousands) (in USD thousands) Net revenues: Pawn service charges $ 50,548 $ 59,640 (15)% $ 52,365 (12)% Merchandise sales 79,036 70,547 12% 82,580 17% Merchandise sales gross profit 19,813 18,295 8% 20,743 13% Gross margin on merchandise sales 25 % 26 % (100)bps 25 % (100)bps Jewelry scrapping sales 8,804 9,516 (7)% 9,408 (1)% Jewelry scrapping sales gross profit 705 548 29% 750 37% Gross margin on jewelry scrapping sales 8 % 6 % 200bps 8 % 200bps Other revenues, net (19 ) 134 (114)% (114 ) (185)% Net revenues 71,047 78,617 (10)% 73,744 (6)% Segment operating expenses: Operations 53,493 54,703 (2)% 55,669 2% Impairment of goodwill and intangible assets 35,936 — * 37,398 * Depreciation and amortization 5,476 4,543 21% 5,736 26% Segment operating (loss) contribution (23,858 ) 19,371 (223)% (25,059 ) (229)% Other segment (income) expense (a) (1,106 ) 1,024 (208)% (766 ) (175)% Segment (loss) contribution $ (22,752 ) $ 18,347 (224)% $ (24,293 ) (232)% Other data: Average monthly ending pawn loan balance per store (b) $ 77 $ 91 (15)% $ 80 (12)% Monthly average yield on pawn loans outstanding 15 % 16 % (100)bps 15 % (100)bps Pawn loan redemption rate 77 % 78 % (100)bps 77 % (100)bps * Represents a percentage computation that is not mathematically meaningful. (a) Fiscal 2020 constant currency amount excludes net GAAP basis foreign currency transaction gains of $0.4 million gains resulting from movement in exchange rates. The net foreign currency transaction gains for fiscal 2019 were nominal and are included in the above results. (b) Balance is calculated based upon the average of the monthly ending balances during the applicable period. 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 . 36 Table of Contents The change in net revenue attributable to same stores and new stores added since the prior-year is summarized as follows: Change in Net Revenue Pawn Service Charges Merchandise Sales Gross Profit Total (in millions) Same stores $ (10.1 ) $ 0.9 $ (9.2 ) New stores and other 1.0 0.6 1.6 Total $ (9.1 ) $ 1.5 $ (7.6 ) Change in jewelry scrapping sales gross profit and other revenues — Total change in net revenue $ (7.6 ) Change in Net Revenue (Constant Currency) Pawn Service Charges Merchandise Sales Gross Profit Total (in millions) Same stores $ (8.3 ) $ 1.9 $ (6.4 ) New stores and other 1.0 0.6 1.6 Total $ (7.3 ) $ 2.5 $ (4.8 ) Change in jewelry scrapping sales gross profit and other revenues (0.1 ) Total change in net revenue $ (4.9 ) 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. Lana The following table presents selected financial data for the Lana segment: Nine Months Ended June 30, Percentage Change 2020 2019 (in thousands) Revenues $ 13 $ — * Operations expense and other (4,297 ) (4,981 ) (14)% Segment loss $ (4,284 ) $ (4,981 ) (14)% * 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 $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. 37 Table of Contents Other International 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: Nine Months Ended June 30, Percentage Change 2020 2019 (in thousands) Net revenues: Consumer loan fees, interest and other $ 3,570 $ 4,274 (16)% Consumer loan bad debt (1,024 ) (1,467 ) (30)% Net revenues 2,546 2,807 (9)% Segment operating expenses: Operating expenses 3,910 6,359 (39)% Impairment of goodwill and intangible assets 1,124 — * Equity in net loss (gain) of unconsolidated affiliates 5,896 (632 ) * Segment operating loss (8,384 ) (2,920 ) 187% Other segment expense 458 20,317 (98)% Segment loss $ (8,842 ) $ (23,237 ) (62)% * Represents a percentage computation that is not mathematically meaningful. 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 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 second quarter of fiscal 2020; and • 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. 38 Table of Contents Other Items 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: Nine Months Ended June 30, Percentage Change 2020 2019 (in thousands) Segment contribution $ 29,654 $ 69,606 (57)% Corporate expenses (income): Administrative 46,797 41,814 12% Depreciation and amortization 8,587 7,430 16% Loss on sale or disposal of assets 1,118 22 * Interest expense 15,695 25,362 (38)% Interest income (1,251 ) (8,411 ) (85)% Other expense (income) 7 (348 ) (102)% (Loss) income from continuing operations before income taxes (41,299 ) 3,737 * Income tax expense 3,757 1,377 173% (Loss) income from continuing operations, net of tax (45,056 ) 2,360 * Loss from discontinued operations, net of tax (67 ) (404 ) (83)% Net (loss) income (45,123 ) 1,956 * Net loss attributable to noncontrolling interest — (1,230 ) (100)% Net (loss) income attributable to EZCORP, Inc. $ (45,123 ) $ 3,186 * * Represents a percentage computation that is not mathematically meaningful. 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 $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 $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; and • $1.6 million to reverse the calculation of certain transaction tax liabilities in prior periods. 39 Table of Contents 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. Liquidity and Capital Resources Cash Flows The table and discussion below presents a summary of the selected sources and uses of our cash: Nine Months Ended June 30, Percentage Change 2020 2019 (in thousands) Cash flows from operating activities $ 56,365 $ 64,977 13% Cash flows from investing activities 110,389 (13,238 ) * Cash flows used in financing activities (7,388 ) (198,101 ) 96% Effect of exchange rate changes on cash, cash equivalents and restricted cash (6,678 ) (294 ) * Net increase (decrease) in cash, cash equivalents and restricted cash $ 152,688 $ (146,656 ) 204% 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 $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 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, 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 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. Given the current uncertainty related to the COVID-19 pandemic, we may adjust our capital or other expenditures. Contractual Obligations 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 40 Table of Contents 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. In the fiscal year ended September 30, 2019 , these collectively amounted to $22.5 million. Recently Adopted Accounting Policies and Recently Issued Accounting Pronouncements See Note 1 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements." Cautionary Statement Regarding Risks and Uncertainties that May Affect Future Results This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements, other than statements of historical facts, regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives are forward-looking statements. These statements are often, but not always, made with words or phrases like "may," "should," "could," "will," "predict," "anticipate," "believe," "estimate," "expect," "intend," "plan," "projection" and similar expressions. Such statements are only predictions of the outcome and timing of future events based on our current expectations and currently available information and, accordingly, are subject to substantial risks, uncertainties and assumptions. Actual results could differ materially from those expressed in the forward-looking statements due to a number of risks and uncertainties, many of which are beyond our control. In addition, we cannot predict all of the risks and uncertainties that could cause our actual results to differ from those expressed in the forward-looking statements. Accordingly, you should not regard any forward-looking statements as a representation that the expected results will be achieved. Important risk factors that could cause results or events to differ from current expectations are identified and described in "Part I, Item 1A — Risk Factors" of our Annual Report on Form 10-K for the year ended September 30, 2019 and "Part II, Item 1A — Risk Factors" of this Report. We specifically disclaim any responsibility to publicly update any information contained in a forward-looking statement except as required by law. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.